Accounting test 3

deducted

decreases in current operating liabilities are ______

added

decreases in noncash current operating assets are ____

current position (current assets and liabilities), accounts receivable, and inventory

liquidity ratios and measures focus on company's

accounts receivable analysis

ability to collect accounts receivable

Accounts Receivable Turnover and number of days' sales in receivables

accounts receivable analysis includes

common sized statements

all items expressed as percentages, no dollar amounts useful for comparing 1 company with another or for comparing a company with industry averages

compare a company's performance over time and to another

analytical methods and ratios can be used to

analytical methods and ratios

analyze and interpret a company's financial performance & condition

Ratio of Fixed Assets to Long-Term Liabilities ratio of liabilities to stockholders equity times interest earned

analyzing solvency includes

average daily sales = sales / 365 days

average daily sales equation

losses on disposal of assets are added and gains on the disposal of assets are deducted

indirect method step 2

changes in current operating assets and liabilities are added or deducted as follows •increases in noncash current operating assets are deducted •decreases in noncash current operating assets are added •increases in current operating liabilities are added •decreases in current operating liabilities are deducted

indirect method step 3

short-term creditors determine how quickly they will be repaid

information from current position analysis helps

inventory turnover and number of days' sales in inventory

inventory analysis includes

inventory turnover=cost of goods sold/average inventory

inventory turnover

payments to purchase fixed assets, investments, intangible assets

investing activities cash outflows include

$63,000 from investing activities and a deduction from net income of $9,000

A building with a book value of $54,00 is sold for $63,00 cash. Using the indirect method, this transaction should he shown onthe statement of cash flows as an increase of

$(4,500)

A corporation uses the indirect method for preparing the stalement of cash flows. A fived asset has been sold for $25 00 represeninga gain of $4,500. The value in the operaling activities setion regarding this event would be

$25,000

A corporation uses the indirect method for preparing the stalement of cash flows. A fixed asset has been sold for $25000 representing a gain of $4,500. The value in the investing activities setion regarding this event would be

changes in company's long term assets

investing activities show cash inflows and outflows related to

$92,000

Accounts receivable from sales transactions were $51,000 at the beginning of the year and $64,00 at the end of the ear. Net income reported on the income statement for the year was $105,00. Exclusive of the effect of other adjustments, the cash flows from operating activities to be reported on the statement of cash flows prepared by the indirect method would be

cash flows from financing activities

issuing or retiring equity and debt securities is classified under

Ratio of Fixed Assets to Long-Term Liabilities = fixed assets (net) / long term liabilities

Ratio of Fixed Assets to Long-Term Liabilities

added

increases in current operating liabilities are _____

deducted

increases in noncash current operating assets are _____

start with net income

indirect method step 1 a

comparisons over time

The comparison of a financial statement item or ratio with the same item or ratio from a prior period often helps the user identify trends in a company's economic performance, financial condition, liquidity, solvency, and profitability.

$156,000

The following information is avalable from the ourent period financial salements. • Net income $165,000 • Depreciation expense 28,000 • Increase in accounts receivable 16,000 • Decrease in accounts payable 21,000 • The net cash flow from operating activities using the indirect method is

generate cash from operations, maintain and expand its operating capacity, meet its financial obligations, and pay dividends

The statement of cash flows provides information about a company's ability to

Current Ratio

____ _____ is more a reliable indicator of company's ability to pay its current liabilities than working capital, and easier to compare across companies

banks ability to pay current liabilities

_____ are concerned with working capital because it is the company's ______

financing activities

a 10 year bond was issued at par for $250,000 cash. this transaction should be shown on a statement of cash flows under

higher

a ____ accounts receivable turnover ratio is better

higher

a ____ asset turnover ratio is better

higher

a ____ ratio of fixed assets to long term liabilities is better

higher

a _____ inventory turnover ratio is better

lower

a _____ number of days' sales in inventory is better

lower

a _____ number of days' sales in receivables ratio is better

higher

a _____ times interest earned ratio is better

related to changes in company's long term liabilities and stockholders equity

cash flows from financing activities show cash inflows and outflows

selling fixed assets, investments, and intangible assets

cash inflows from investing activities arise from

quick assets

cash, temporary investments, receivables can be easily converted to cash not inventories and prepaid assets

current assets

cash, temporary investments, receivables (ar), inventory, prepaid insurance, prepaid rent

improve company's liquidity provide cash to improve/expand information reduce risk of uncollectible accounts

collecting ar as quickly as possible will

issuing common stock to retire long term debt

company may enter into transactions involving investing and financing activities that do not directly influence cash like

profitability

company's ability to generate earnings

solvency

company's ability to make periodic interest payments and repay face amount of debt @ maturity (interest and principal) pay long term liabilities

liquidity

company's ability to turn assets into cash

comparison between companies

comparison of a financial statement item or ratio to another company in the same industry can provide insight into company's economic performance and financial condition to competitors

working capital current ratio quick ratio

current position analysis includes

Current Ratio = Current Assets / Current Liabilities

current ratio equation

expenses that don't affect cash are added (add depreciation expense) -such expenses decrease net income

indirect method step 1 b

cash reported on the company's balance sheet at the end of the year

ending cash on the statement of cash flows equals

number of days' sales in inventory

estimate of the length of time it takes to purchase, sell, & replace the inventory

number of days' sales in inventory

estimate of time (in days) AR has been outstanding often compared with company's credit terms to evaluate efficiency of the collection of receivables

liquidity solvency profitability

evaluate information of general purpose financial statements along what three dimensions

Liquidity Analysis

evaluates ability of company to convert current assets into cash

current position analysis

evaluates company's ability to pay current liabilities

analytical methods

examine changes in the amount and percentage of financial statement items within and across periods

decrease liquidity by tying up funds (cash) in inventory increases insurance expense, property expense, storage costs, and other related expenses increases the risk of losses bc of price declines or obsolescence of the inventory

excess inventory will

ratios

express a financial statement item or set of financial statement items as a percentage of another financial statement item, in order to measure an important economic relationship as a single number

asses a company's profit potential and ability to pay its debt and pay dividends

external users (investors and creditors) use the statement of cash flows to

issuing bonds, note payable, stock, common stock

financing activities cash inflows include

paying cash dividends, repaying long term debt, acquiring treasury stock

financing activities cash outflows include

wide range of potential users economic performance and financial condition

general purpose financial statements distributed to _____ providing each group with valuable information about a company's _______

offer promotion or incentive to salesmen or marketing department

how to lower number of days' sales in inventory

evaluate past operation and plan future investing and financing activities

managers use the statement of cash flows to

Ratio of Fixed Assets to Long-Term Liabilities

measures company's ability to repay face amount of debt at maturity

ratio of liabilities to stockholders equity

measures how much of the company is financed by debt and equity

quick ratio

measures instant debt paying ability of company

Times Interest Earned

measures the risk that interest payments will not be made if earnings decrease

number of days' sales in inventory = average accounts receivable / average daily sales

number of days' sales in inventory

number of days' sales in inventory = average inventory / average daily costs of goods sold

number of days' sales in inventory

Ratio of Fixed Assets to Long-Term Liabilities

provides a measure of how much fixed assets a company has to support its long-term debt.

cash flows from investing activities

purchase and sale of fixed assets (equipment and buildings) is classified under

cash flows from operating activities

purchase and sale of merchandise by retailer or paying interest is classified under

Quick Ratio = Quick Assets/Current Liabilities

quick ratio/acid-test ratio

ratio of liabilities to stockholders' equity = total liabilities/total stock holders equity

ratio of liabilities to stockholders equity

margin of safety for creditors

ratio of liabilities to stockholders equity acts as

ratio of liabilities to stockholders' equity

ratio that focuses on information, high or low does not matter

Statement of cash flows

reports a company's cash inflows and outflows for a period

indirect method

start with net income and adjust for revenues and expenses that do not involve receipt of cash data is readily available and less costly to prepare

higher

the ____ ratio, interest payments are more likely to be paid if earnings decrease

horizontal analysis

the analysis of increases and decreases in the amount and percentage of comparative financial statement items -amount of increase or decrease -percent of increase or decrease -earlier statement is used as a base year

vertical analysis

the percentage analysis of the relationship of each component in a financial statement to a total within the statement -each asset item is stated as a percent of total assets -each liability and stockholders equity is stated as a percent of total -each item stated as percent of sales

Where things are going

the statement of cash flows look at

1. cash flows from operating activities 2. cash flows from investing activities 3. cash flows from financing activities

the statement of cash flows reports cash flows from three types of cash flow activities

times interest earned = income before income tax + interest expense / interest expense

times interest earned

cash flows from investing activities

transactions that affect investment in non current (long term) fixed or intangible assets

cash flows from financing activities

transactions that affect the debt and equity of a company

cash flows from operating activities

transactions that affect the net income of a company

the direct method and indirect method

two alternative methods for reporting cash flows from the operating section

horizontal analysis vertical analysis common-sized statements

users analyze financial statements using

current liabilities

wages payable, taxes payable, accounts payable (anything payable not long term)

offer a discount, shorten amount of time bill is due, check credit scores to ensure payment

ways to shorten period of time when people pay us

short term creditors like banks and financial institutions

who is concerned with liquidity

Investors (stockholders)

who is concerned with profitability

long term creditors (banks/bond holders) loaning money for a long period of time

who is concerned with solvency

would have to go through every transaction not easy to get time consuming because data is not readily available expensive

why is the direct method rare

working capital = current assets - current liabilities

working capital equation