ACC 202 Exam 4 (Final chs 16-17)

Inflow

"Provided by" means _____

Outflow

"Used for" means _____

Common-size Statement

A financial statement that reports only percentages (no dollar amount). Removes dollar value bias when comparing one company to another

Trend Analysis

A form of horizontal analysis in which percentages are computed by selecting a base period as 100% and expressing amounts for following periods as a percentage of the base period amount. (Any period amount/base period amount) X 100.

Direct Method

A format of the operating activities section of the statement of cash flows; lists the operating cash receipts and cash payments.

Indirect Method

A format of the operating activities section of the statement of cash flows; starts with net income and reconciles to net cash provided by operating activities

Working Capital

A measure of a business's ability to meet its short-term obligations with its current assets. Current assets - current liabilities. Positive means more assets than liabilities

Cash Ratio

A measure of a company's ability to pay current liabilities from cash and cash equivalents: (Cash + cash equivalents)/Total current Liabilities. Most conservative valuation of liquidity because it looks at only cash and cash equivalents, leaving out other current assets such as merchandise inventory and accounts receivable. Having this below 1.0 us a goo thing. Above 1.0 might signify that the company has an unnecessarily large amount of cash supply

Profit Margin Ratio

A profitability measure that shows how much net income is earned on every dollar of net sales. Net income/net sales revenue. Strive for high score.

Rate of Return on Total Assets

A ratio that measures the success a company has in using its assets to earn income. (Net income + Interest expense)/average total assets.

Auditor's Report

A report of the independent registered public accounting firm. Attests to the fairness of the presentation of the financial statements and states whether the financial statements are presented in accordance with GAAP. It is prepared by and independent external auditors who has performed an audit on the financial statements

Decrease

Accrued expenses ____ net income, but company has not paid cash if expenses are accrued.

Operating Activities

Activities that create revenue or expense in the entity's business; a section of the statement of cash flows. 1st section and often most important.

Investing Activities

Activities that increase or decrease long-term assets; a section of the statement of cash flows. 2nd category listed

Financing Activities

Activities that increase or decrease long-term liabilities and equity; a section of the statement of cash flows. Last section. Issuing stock, paying dividends, and buying and selling treasury stock.

Rate of Return

Adding interest expense because we want to find operating rate of return on total assets, and interest expense is financing activity (price to borrow money). We want to take interest expense out of the equation, because it reduces net income so we want to add it back in there. Average is of the past year and this year divided by 2. Want to see high results, for every dollar in assets you have, you are generating the percent in net income

Cash

Adjustments to reconcile net income to net ____ provided by operating activities.

Add

Also ____ back any depletion or amortization expenses

Earnings per Share (EPS)

Amount of a company's net income (loss) for each share of its outstanding common stock. (Net income - preferred dividends)/weighted average number of common shares outstanding. Most widely quoted. Only ratio that must appear on financial statement. Most strive to increase this by 10% to 15% annually.

Retained Earnings

Amount of dividend payments can be computed by analyzing ____ ___ account

Vertical Analysis

An analysis of a financial statement that reveals the relationship of each statement item to its base amount, which is the 100% figure. (Specific item/Base amount) X 100.

The balance sheet. The income statement. The statement of stockholders' equity. Statement of Cash Flows

An annual report contains the four basic financial statements. What are they?

Investing

Any long term assets falls into ____ section of statement of cash flows

100

By definition trend % is ___ at the base year

Ratio Analysis

Can be used to provide information about a company's performance. It is used most effectively to measure a company against other companies in the same industry and to denote trends within the company

Stock

Cash flows for financing activities are also determined by analyzing ____ accounts

Cash Flows

Cash receipts and cash payments of a business.

Operating

Current asset or liability, and anything that shows up on income statement.

Increase

Decrease in current assets other than ash causes an ____ adjustment to net income

Decrease

Decrease in current liability causes _____ adjustment to net income

Decreases

Depreciation ____ net income; to go from net income to net cash flows we must remove depreciation by adding it back to net income

Expense

Depreciation is a non-cash ______

Working

Determining a company's ___ capital is a good starting place to evaluate a company's ability to pay its current liabilities

No effect on cash and is not reported in financing activities section of statement of cash flows.

Does stock dividend has an effect on cash?

Trading on the Equity

Earning more income on borrowed money than the related interest expense, thereby increasing the earnings for the owners of the business.

Earnings per share

For every $1, a certain number is generated per share. Want to see it high

Removed

Gain or Loss must be ____ from net income on statement of cash flows so that the total cash receipts from sale of asset can be shown in investing activities section

Increase

Gains _____ net income, so must be subtracted

Cash Equivalents

Highly liquid investments that can be converted into cash in three months or less.

Adverse Opinion

If the auditor finds that the financial statements are not represented fairly, this is given

Paid

In order for cash dividends to be reported on statement of cash flows, the company must have ____ the dividend

Decrease

Increase in current asset other than cash causes ____ adjustment to net income

Increase

Increase in current liability causes ____ adjustment to net income (added)

Operating

Investing activities are reported after what section?

Non-cash Investing and Financing Activities

Investing and financing activities that do not involve cash. Appear either as separate schedule at bottom of statement or in notes to financial statement

Decreases

Loss ____ net income, so amount must be added

Asset Turnover Ratio

Measures how efficiently as business uses its average total assets to generate sales. Net sales revenue/average total assets. Normally, companies with high gross profit percentages will have low these. Companies with low growth profit percentages will have high these.

Current Ratio

Measures the company's ability to pay current liabilities from current assets. Total current assets/total current liabilities. High this indicates the business has sufficient current assets to maintain normal business operations (around 1.50).

Qualified Opinion

Might be issued if the financial statements include a departure from GAAP.

Predict future cash flows. Evaluate management. Predict ability to pay debts and dividends

Name three things the statement of cash flow helps.

%

Often it is more relevant to know the ___ rather than the dollar increase

Operating

Only the ____ activities section is presented different between the indirect and direct methods

Vertical Analysis

Provides a way to compare different companies

Horizontal Analysis

Provides a year-to-year comparison of a company's performance in different periods

Annual Report

Provides information about a company's financial condition. Helps investors make informed investment decisions.

Statement of Cash Flows

Reports on a business's cash receipts and cash payments for a specific period. Reports on cash flows of business. Reports why cash increased or decreased. Covers span of time and is dated the same as income statement

1

Score higher than __ in current ratio means that the company has enough in current assets to pay the current liabilities

Financing

Section dealing with equity

Rate of Return on Common Stockholders' Equity

Shows the relationship between net income available to common stockholders and their average common equity invested in the company. (Net income -Preferred dividends)/average common stockholders' equity. Shows how much income is earned for each $1 invested by the common shareholders.

Cash Flows

Statement of ____ ____ reports only activities that involve either the receipt of cash or the payment of cash

Cash

Statement of cash flows explains why net income as reported on net income statement does not equal the change in _____ balance. There is a link between accrual-based income statement and cash reported on balance sheet

Net income

Statement of cash flows operating activities begins with ____ _____ because revenues and expenses produce cash receipts and cash payments

Acid Test

Stricter test than current ratio because we are eliminating the less liquid current assets

Notes

The ___ to the financial statement include a summary of significant accounting policies and explanations of specific items on the financial statements.

Free Cash Flow

The amount of cash available form operating activities after paying for planned investments in long-term assets and after paying dividends to stockholders. Net cash provided by operating activities - cash payments planned for investments in long-term assets - cash dividends. Used to estimate the amount of cash that would be available for unexpected opportunities

Dollar Value Bias

The bias one sees from comparing numbers in absolute (dollars) rather than relative (percentage) terms

Unqualified Opinion

The financial statements are presented fairly, in all material aspects

Benchmarching

The practice of comparing a company's performance with best practices from other companies

Acid-Test Ratio

The ratio of the sum of cash, cash equivalents, short-term investments, and net current receivables to total current liabilities. The ratio tells whether the entity could pay all its current liabilities if they came due immediately. (Cash including cash equivalents + short-term investments + net current receivables)/total current liabilities. Score of .90 to 1.00 is acceptable in most industries.

Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A)

The section of the annual report that is intended to help investors understand the results of operations and the financial condition of the company. Written by company and could present a biased view of company's financial condition and results. It is the company's attempt to explain its financial statements and to discuss its performance. Presents information not found in financial data. Forward-looking information that can be useful to investors who are trying to estimate what future earnings will be for the company

Horizontal Analysis

The study of percentage changes in line items from comparative financial statements. (Dollar amount of change/base period amount) X 100.

Beginning Balance

To complete the statement of cash flows, net change in cash and its effect on _____ cash _____ must be shown. It represents the total change in cash for the period and reconciles the statement of cash flows.

The income statement for the current year, the balance sheets from the current and prior years, and to review the transactions for some additional information

To prepare the statement of cash flows, what do you need?

Overview

Typical annual report begins with ____ of the business

Profit Margin

Want to see this number as high as possible. Out of every dollar's worth of sales, how much do you get to keep in form of net income

Base

We call the earlier period the _____ period

Can be used by small business owners to measure performance, by financial analysts to analyze stock investments, by auditors to obtain an overall sense of a company's financial health, by creditors to determine credit risk, or by any other person wanting to compare financial data in relevant terms

What are some purposes of analysis?

Indirect method and Direct method

What are the 2 ways to format the operating activities section of the statement of cash flows?

Step 1: Complete the cash flows from operating activities section using net income and adjusting for increases and decreases in current assets (other than cash) and current liabilities. Also adjust for gains or losses from long-term assets and non-cash expenses such as depreciation expense. Step 2: Complete the cash flows from investing activities section by reviewing the long-term assets section of the balance sheet. Step 3: Complete the cash flows from financing activities section by reviewing the long-term liabilities and equity sections of the balance sheet. Step 4: Compute the net increase or decrease in cash during the year. The change in cash is the key reconciling figure for the statement of cash flows and must match the change in cash reported on the comparative balance sheet. Step 5: Prepare a separate schedule reporting any non-cash investing and financing activities.

What are the 5 steps to prepare the statement of cash flows?

Operating. Investing. Financing

What are the three basic types of cash flows activities?

Horizontal analysis. Vertical analysis. Ratio analysis

What are the three main ways to analyze financial statements?

Against a key competitor. Against the industry average

What are the two main types of benchmarking in financial statement analysis?

Divide assets by total assets. Divide liability and stockholder equity by total liability and stockholder equity

What are the two rules of vertical analysis?

Compute the dollar amount of the change in a line item from the earlier period to the later period. Divide the dollar amount of change by the earlier period amount, and multiply by 100 (we call the earlier period the base period)

What are the two steps of horizontal analysis?

Net income. Paid dividends

What are the two things that will affect Retained Earnings?

Debts (borrow cash from creditor to purchase assets). Equity (receives cash or other assets from stockholders).

What are two ways that a company can finance assets?

It is not sustainable in the long-run

What happens if net sales revenue is increasing faster than cost of goods sold?

Non-cash Investing and Financing activities section (it appears as a separate schedule of statement of cash flows or in notes to financial statement)

What is the last step in preparing a statement of cash flows.

To explain the difference in those numbers using the three categories

What is the point of the cash flow statement?

From year to year. With a competing company. With the same industry as a whole.

What three ways are there to compare financial performance in a company?

Comparative

When a ____ balance sheet for 2 periods is presented, it shows whether cash increased or decreased but doesn't show why

Reduce

When we have an increase in non-cash assets, it will _____ cash

Asset Turnover

X is a multiplier. Want to see it as high as possible, for every dollar worth of asset how much income are we generating. Similar to rate on return

Investing

___ activities affect long-term assets. They often use T-accounts

Trend

___ analysis is widely used to predict the future health of a company

Cash

___ ratio is the most strict of ratios for current liabilities. Above .5 is comfortable, means you can pay liabilities with cash.

Common Size

____ ___ income statement means all items expressed as a percentage of net sales. To get this, you have to perform vertical analysis. Only percentages appear so you can compare companies of various sizes

Operating. Investing. Financing

____ activities affect current accounts. ____ activities affect long-term assets. ____ activities affect long-term liabilities and equity

Financing

____ activities affect long-term liability and equity accounts

Horizontal. Trend

____ analysis allows a company to see the percentage change from one year to the next. _____ analysis shows the percentage change from a base year forward to determine whether the trend in net sales revenue, for example, is positive or negative over a longer period of time

Vertical

____ analysis does not tell us why its change but it shows us by how much

Operating

_____ activities section always starts with accrual basis net income

Non-cash Investing and Financing

______________ are reported in a separate part of the statement of cash flows