Financial Accounting

Operating Performance ratios are

Profit Margin Ratio (or Return on Sales- ROS) Gross Margin Ratio (GM) Return on Assets (ROA) Return on Equity (ROE) Asset Turnover (AT) Earnings per share (EPS) Price-earnings (P/E) Payout (PO) Times Interest Earned (X/I)

Operating Ratio: Times Interest Earned (X/I)

Profit before taxes and interest/Interest Measures the coverage of interest charges

Name the Three accounting entities

Proprietorship, partnership, Corporation

Debit has a

R hand entry

Statement of Retained Earnings

Reports the way that net income and the distribution of dividends affected the financial position of the company during the accounting period. Equals beginning retained earnings + net earnings - dividends. Can take the form of inventory, accounts receivable, and PP&E

The operating expenses shown on an income statement usually include:

Salaries and Administration

Financial Strength Ratio: Equity to Assets or Equity ratio (E/A)

Total Equity/Total Assets Shows the protection of creditors

true or false revenue and expense accounts are nothing more than temporary accounts

True

Comparative balance sheet

Side-by-side reporting of consecutive fiscal period balance sheets

You receive payment from a debtor (increases or decreases in A, L and OE)

Simultaneous increase and decrease in assets. You are receiving cash and surrendering your account receivable.

Examples of expenses on an income statement

Wages Expense Administration Expense Utilities Expense Depreciation Expense

An increase in assets must

be balanced by an equal and offsetting increase in liabilities and/or equity or a decrease in other assets.

Examples of liabilities include

bonds payable accounts payable

Resources of enterprise

claims on resources

to increase the cash account the bookkeeper will

debit cash

increase in a noncash asset is a source or use of cash

decrease in cash

Indicate the increases/decreases for accounts for this scenario: incur and pay the office employees their weekly salaries

decrease in cash and decrease in owners equity. (paying personnel reduces cash, and the expenses of the office personnel reduce retained earnings which is an OE account).

sources of cash are

decreases in noncash assets increases in liabilities increases in owners equity

As interest rate rises the discount factor

decreases. Because dollars received or paid in the future which could be earning high rates of interest in the intervening time span are worth less.

Tax accounting

help firm file tax returns

Materiality

if an item is not large enough to influence the users of a financial statement, it should not be reported.

Owners Equity

residual claom of the owners on the assets of a firm. Equals the difference between a corporation's assets and its liabilities. Divided into two accounts: capital stock and retained earnings.

Accruals are

revenues earned or expenses incurred which impact a company's net income on the income statement, although cash related to the transaction has not yet changed hands. They also affect the balance sheet as they involve non-cash assets and liabilities.

liquidity

the ease with which assets can be converted into cash. important to creditors and investors.

total debts equal total credits

true

decrease in liability is a source or use of cash

use (decrease) of cash

cash outflows are also known as

uses of cash

Ratio analysis

· Identifies key components of the income statement and the balance sheet and expresses their relationship in ratio form. · Popular because they succinctly summarize important financial statement relationships in a convenient form. · Useful for detecting specific operating results, management policies, or details of financial condition.

What pieces of data do you need to solve for future value?

- Amount of the investment (A) - Interest rate (I) - Number of periods the investment will earn interest (n)

Arial Corporation incorporated on January 1, 2012. The capital stock account at that time was $100K. Losses for 2012, 2013, and 2014 totaled $60K. The retained earnings account at the end of 2014 was

-$60,000

Ann Via founded a business on January 1, 20XY, when she invested $10,000 in cash in the business in exchange for all of the company's common stock. On January 3 she received an additional $20,000 from the local bank on a five-year loan. She bought a warehouse for $120,000 and signed a mortgage loan for the full amount of the building. The building was to last 10 years. Assuming that she had no revenues or expenses in the first month of operations other than depreciation, what was her cash flow from operativng activities for the month of January 20XY?

0 Via's net income for the month was: Sales- 0 Expenses: Depreciation: 1000 Other: 0 Net Loss (1000) Add Non Cash Expenses 1000 Cash Flow from Operations 0

5 steps of accounting cycle

1) After transactions are identified and measured in monetary terms they are entered in a journal. 2) Journal entries are posted to the appropriate ledger accounts in what is often called the general ledger 3) Adjusting transactions are recorded in the ledger accounts to reflect internal transactions 4) A trial balance is prepared using the accounts in the general ledger. 5) financial statements are then prepared from ledger account entries and trial balance.

Complete set of financial statements should show

1) financial position at end of period 2) cash flows for period 3) Earnings for period 4) Comprehensive income for period 5) Investments by and distributions to owners during period

Analysts usually evaluate the companies in three main areas

1. Operating performance 2. Liquidity 3. Financial strength

the adjusting entry that is made at the end of the accounting period with respect to interest on a note, credits which account?

A liability account

Cash Method of Accounting

Accounting method where revenue is recognized only when cash is received- regardless of when sale was made or services were performed.

Which of the following is a liability: accounts payable inventory investments prepaid insurance

Accounts Payable

Examples of Assets include

Accounts receivable prepaid insurance cash plant and equipment investments

Organizations that develop GAAPs in the U.S.

American Institute of Certified Public Accountants (AICPA), Financial Accounting Standards Board (FASB), Securities & Exchange Commission (SEC), American Accounting Association (AAA)

Capital Stock

Amount that owners have directly invested (OE)

International Accounting Standards Board (IASB)

An accounting standard-setting body that issues standards adopted by many countries outside of the United States. Most important in the world. Works with other countries to adopt their standards.

Who owns a proprietorship?

An individual owns

(increases or decreases in A, L and OE) Sell 100 shares of common stock

Assets increase and OE increases as well.

Trial Balance

At the end of the accounting period the balances in each T account or ledger are entered into a trial balance which is used to confirm that assets are still in balance with liabilities and equity. The trial balance can then create the balance sheet then the income statement. Used to help determine errors in the ledger account entries.

Liquidity ratio: Average Inventory Period (AIP)

Average Invetory/Daily COGS Daily COGS is COGS/365 Measures ability to control inventory

Liquidity ratio: Average Collection Period (ACP)

Average Receivables/Daily Sales Daily sales are Net Sales/365 Measures effectiveness of collections

Liquidity ratio: Operating Cycle (OC)

Average receivables Period + Average Inventory Period Time required from production to cash is a measurement of the average length of time from the point of a sale to the collection of an account receivable. Important in measuring operating efficiency and forecasting the cash requirements of a firm. Includes the average length of time that inventoried merchandise remains in inventory.

Financial analysts interpret historical financial data in order to:

1) Better predict the future performance of the reporting entity 2) To better understand present performance 3) To better predict future performance

Balance sheet AKA statement of financial position

A financial statement that reports assets, liabilities, and owner's equity on a specific date. Reports the financial position of an enterprise at a point in time. Net Worth of a firm is shown on this.

noncurrent or longterm liability

An obligation that extends beyond one year. Mortgage payable.

Liquidity ratio: Current Ratio (Cur.)

Cur. Assets/Cur. Liabilities Measures short run debt-paying ability Indicates how many dollars of current assets exist for every dollar in current liabilities. Most important ratio on the financial statement to a banker. higher the ratio the greater the buffer of assets to cover short-term liabilities.

Profit margin provides the user with a comprehensive profit picture of a firm (true or false)

False

Going Conern

GAAP- A firm has value beyond liquidation value of assets. Financial statements are prepared under the assumption that the entity will continue operations for the foreseeable future.

Revenue/Expense Matching

GAAP- All expenses incurred to generate revenues should be recognized during the same period as those revenues.

ASR Accounting Series Releases

State Standards to be followed by the accounting profession in preparing financial statements

Which of the following statements shows the dividends paid during the accounting period?

Statement of retained earnings.

Financial Strength Ratio: Stockholders' Equity to Assets (S/E)

Stockholders Equity/Total Assets Another way of describing the sources of a company's assets.

Arrow, Inc. was incorporated in 1904. Land was purchased at that time for $10,000. This same land would be carried on the balance sheet of Arrow, Inc. in 2004 as $10,000.

TRUE

The balance maintained in a checking account (also called a demand deposit or D.D.A. account) is considered a part of a company's cash account.

TRUE

What happens when the owner of a proprietorship or one of the partners of a partnership dies?

It ceases to exist

Operating Ratio: Returnon Equity (ROE)

Net Income/Average Owners' Equity Sig: The earning power of owners' equity

Which of the following is an asset? a. Salaries Payable b. Taxes Payable c. Accounts Payable d. None of the above

None of the above

Net Income

Primary standard for evaluating companies. Total revenues minus total expenses for a period.

Horizontal analysis

Shows trends from period to period for an entire statement. Establishes a base year and shows incremental changes in each line item of the income statement or balance sheet. Compares how balance sheet or income statement items change from year to year.

Who owns a corporation?

Stockholders own

Discounting

Takes a known future quantity and divides it by an interest rate factor to determine its present value. discounting and compounding are completely reciprocal operations.

Who are large corporations required to send a copy of their financial statements to?

The SEC, their stockholders, and to their creditors are all bodies that _____ are required to send their financial statements to.

The financial position at the end of a period is reflected on the

Balance Sheet

Preferred PP&E listing order

Building Land

Expenses are subdivided into

COGS, Operating Expenses, Interest, and Taxes

Liquidity ratio: Inventory Turnover (I/T)

COGS/Average Inventory tells how fast inventory normally is sold and replaced. is a good indicator of the relative liquidity of inventory. high turnover ratio generally indicates more efficient use of investment inventory. Divide by 365 and get an average of X days before being sold.

Which of the following accounts represents the original investment of the shareholders? a. Capital stock b. Retained earnings c. Liabilities d. Assets e. None of the above

Capital Stock

whitestone collected 10,000 on a credit sale, Lefthand entry would be a debit to

Cash

Examples of current assets

Cash accounts receivable accrued interest receivable office supplies prepaid expenses

Preferred Current Asset Listing Order

Cash certificates of deposit accounts receivable inventory prepaid insurance

(increases or decreases in A, L and OE) Dividend is declared and paid in cash

Cash disbursement uses cash and decreases assets. Disbursement is a distribution of retained earnings therefore owners equity decreases.

Liquidity ratio: Quick Ratio (Quick)

Cash, Marketplace Securities, Account Receivable/Current liabilities Measures short-term liquidity Considered a better measure of immediate liquidity than the current ratio. Creditors prefer a high quick ratio but too high could mean that management is not productively Investing excess cash.

Operating Expenses (or operating costs)

Costs involved in operating a business, such as rent, utilities, and salaries. Interest and income tax are not operating costs.

liabilities, equity, and revenue

Debits = decreased by credit= increased by

Assets and Expenses

Debits = increased by credits = decreased by

Financial Strength Ratios are

Debt to Assets or Debt Ratio (D/A) Equity to Assets or Equity ratio (E/A) Debt to Equity (D/E) Debt to Capitalization (D/C)

(increases or decreases in A, L and OE) Cash settlement of an account payable

Decrease in assets and decrease in liabilities. Disbursing cash decreases the balance of an asset account and using it to pay an account payable decreases your liabilities.

Indicate the increases/decreases for accounts for this scenario: Paid cash for merchandise inventory

Decrease in cash Increase in inventory

Dividends

Distribution of corporate profits to the owners (stockholders). Reward to shareholders for investing in a company. disbursements of dividends are a distribution of retained earnings therefore OE decreases.

Operating Ratio: Payout

Dividends/Net Income Share of earnings that owners received

Liabilities

Economic obligation of a firm. debts of an enterprise. They are the claims by creditors on the resources (assets) of a firm. Almost all of these are to acquire assets. Equals Assets minus owners' equity.

Dividends are distributions of profits to the owners of a corporation, and therefore represent an expense to the firm.

FALSE

Long-term investments in securities are recorded on the balance sheet at their original cost, unless the market value has increased significantly, in which case they should be written up to their fair market value.

FALSE

The capital stock account combined with the retained earnings account reflect the valuation the open market places on the company.

FALSE

Which organization is recognized today as the authoritative voice on accounting principles?

FASB

Capital Stock represents the market value of a company

False

Earnings are always the best measure of evaluating and predicting the performance of a company (true or fals

False

If taxes payable increase from the beginning of the accounting period to the end of the accounting period, this is a use of cash.

False

The statement of cash flows is a substitute for the statement of changes in financial position and is an optional financial statement that may be presented at management's discretion

False

The money used to buy equipment is called an expense (True or false)

False- it is called a capital expenditure. The historical cost of the equipment is reported on the balance sheet under the category Property, Plant, and Equipment.

Allison Corporation had a net income of $18,000 for 2014. At the end of 2014, Allison paid out $10,000 in dividends. This payment left Allison with $8,000 cash in retained earnings. True or False

False- left with $8,000 retained earnings but not necessarily cash. Retained earnings could take the form of inventory, accounts receivable, and PP&E

The statement of retained earnings shows the revenues, expenses, and net income of an enterprise over a period of time (True or False)

False. Income statement shows these.

The statement of financial position shows how well a company has performed over a period of time (true or false)

False. The statement of financial position AKA the balance sheet lists a company's assets, liabilities, and owners' equity. The income statement is used explicitly for the purpose stated.

Large corporations are required to round off their figures to the nearest million dollars on their financial reports (T/F)

False. corporations are not directly told where they have to round off their numbers; rather, they are faced with the concept of materiality which strikes a balance between triviality and accuracy.

A company's property holdings are usually listed at fair market value on the balance sheet (true or false)

False. property, like any asset, is carried on a company's books and is listed on its balance sheet at its original purchase price. This is known as the historical cost or acquisition cost of the asset. Only in those instances where an asset's value has shown material decline in value from it acquisition cost is it proper to adjust the asset value.

Current assets almost always equal current liabilities (true or false)

False. resources of an organization are comprised of both current and noncurrent assets. Claims on those assets are current and noncurrent as well. In total, assets must equal liabilities plus equity.

Retained earnings are the earnings that a company saves and reinvests; they can be used whenever the company needs cash. True or false

False. retained earnings is the total net income of a company since it was incorporated less any dividends paid over that time.

The 10-K is required by the FASB T/F

False; the SEC requires all publicly-traded corporations over a minimum size to file an annual report summarizing the year's financial results

Relevance

Financial Data must also be relevant to a user to be of value. Extraneous information need not appear.

Operating Ratio: Gross Margin (GM)

Formula: Gross profit/net sales significance: relates to goods sold to sales

Operating Ratio: Return on Assets ROA

Formula: Net Income/Average Assets Sig: Measures the earning power of assets

Operating Ratio: Profit Margin Ratio (Return on Sales) ROS

Formula: Net Income/Net Sales Significance: The ability to turn sales into profits

Monetary Concept

GAAP- Economic events must be measured in a common denominator. (ie: Dollars)

Accounting period

GAAP- Results of operations for an entity must be reported on a periodic basis. Usually yearly, often quarterly.

Conservatism

GAAP- better to understate than to overstate economic well-being.

Economic Entity

GAAP- one firm - one set of books. Economic entities do not have to correspond to legal entities.

What is the difference between indirect and direct method of producing statement of cash flows?

In the operating activities section. The indirect method starts with net income. direct method is preferred by FASB and other accounting organizations for various reasons.

Accounting cycle

Income statement, balance sheet, and statement of retained earnings are the end result of a systematic and orderly process known as the accounting cycle.

(increases or decreases in A, L and OE) You get a cash loan at a bank

Increase in Assets and Increase in Liabilities.

(increases or decreases in A, L and OE) Purchase supplies on account

Increase in Assets and Increase in liabilities.

(increases or decreases in A, L and OE) Buy equipment on credit

Increase in assets and Increase in liabilities. Purchase of equipment increases the equipment account (A) and buying on credit increases accounts payable (L)

Indicate the increases/decreases for accounts for this scenario: buy a new office computer to perform bookkeeping using loan from bank.

Increase in notes payable, increase in property, plant and equipment.

T Accounts- in asset accounts- where are increases and decreases?

Increases on L and decreases on R

Understandability

Information presented in a clear and concise fashion so that they are understandable by an educated user of financial information.

Name top three international professional accounting organizations

International Accounting Standards Committee (IASC), International Organization of Securities Commissions & Similar Organizations (IOSCO) and International Federation of Accountants (IFAC)

Name the main users of financial statements

Investors, creditors, and managers

Examples of long-term assets

Land, buildings, manufacturing machines, delivery vehicles, etc., that entities hold for use in the business over several years. Accumulated depreciation is a contra-asset subtracted from its applicable long-term asset account. These long-term assets are also known as Fixed Assets or Property, Plant

Credit has a

Left hand entry

Assets equal

Liabilities + Owners' Equity

Financial Strength Ratio: Debt to Capitalization (D/C)

Long Term Debt/LTD + Owners' Equity Shows percent of permanent debt in the firm

List accounts on a comparative balance sheet statement of cash flows that are Investing Activity accounts

Long-term Investment (A) Net PP&E (A)

Operating Ratio: Price-Earnings P/E

Market Price/Earnings Per Share (EPS) Value of earnings in the marketplace

Operating performance ratios

Measure the efficiency of the firm in generating profits. show how well a firm has performed over a period of time. Looks at a company's profitability, its efficiency in investment in assets, and its efficiency in the use of assets. Investors and suppliers use these.

Operating Ratio: Earnings per Share (EPS)

Net Income/Average # Shares Outstanding Amount of earnings per share of stock

Operating Ratio: Asset Turnover (A/T)

Net Sales/Average Assets Measures the productivity of assets

Liquidity ratio: Receivables Turnover (R/T)

Net Sales/Average Receivables Indicates how fast AR are normally converted into cash high turnover ratio means that receivables will be converted into cash relatively quickly. To answer how quickly- divide this ratio by 365 to equal once every X days.

Which of the following accounts represents the market valuation of the company? Assets, liabilities, net assets, retained earnings, none of the above.

None of the above.

List accounts on a compartive balance sheet statement of cash flows that are financing activity accounts

Notes Payable (L & OE) Common Stock (L&OE) Retained Earnings (L & OE) - also OA

What is the difference between notes payable and accounts payable?

Notes payable represents a loan from a bank or any other finance institution against a security or a personal guarantee. Accounts payable refers to the amount of money which is owed by a business to its supplier.

Gross Margin

On the income statement and equals net sales minus COGS.

Generally Accepted Accounting Principles (GAAP) highest order of principles

Overseen by FASB and SEC. collection of accounting standards and conventions that has evolved over the years to govern the profession. GAAP pervasive principles include: Economic Entity, Going Concern, Monetary Unit, Accounting Periods, Revenue/Expense Matching, Conservatism

FASB (Financial Accounting Standards Board)

The primary accounting standard-setting body in the United States.

Accounting

The process of recording, classifying, and communicating financial information concerning the economic activity of an enterprise.

Bob purchased machinery for his auto shop at a cost of $5,000 with a note from the bank. What happens to Assets and Liabilities accounts?

They both increase by $5,000

Financial Strength Ratio: Debt to Assets or Debt Ratio (D/A)

Total Liabilities/Total Assets Shows percent of assets financed by debt Provides a clear picture of the financial leverage of a firm. higher the D/A the greater the risk of potential bankruptcy

Financial Strength Ratio: Debt to Equity (D/E)

Total Liabilities/Total Equity Relationship between borrowing and capital Relates how much debt a company has in proportion to its equity. Provides a clear picture of the financial leverage of a firm.

Retained Earnings

Total cumulative amount of earnings that the company has retained and reinvested in operations. When a company becomes incorporated its retained earnings account is zero. Total net income of company since it was incorporated.

When the bookkeeper or accountant of a business entity records an economic event, it is called a:

Transaction

Depreciation is added back to net income because deprecitaion is a noncash expense (T/F)

True

If a company collects less than it bills customers, cash will decrease (t/f)

True

Increasingly, financial analysts are using cash flow analysis to evaluate and predict the performance of companies

True

Net Income includes any gains from the sale of equipment (T/F)

True

Noncash expenses include the amortization of intangibles

True

True or False: an accounting entity is considered to be any organization for which separate accounting data is gathered and processed

True

True or false, statement of cash flows is considered a "funds statement"

True

Depreciation can be considered an allocated cost of using an asset with a life of more than one year. True or false.

True. Depreciation is a process of systematically and rationally allocating the cost of an asset over its useful life.

The "Net worth" of a firm is shown on the company's balance sheet (true or false)

True. Net worth is synonymous with owners' equity, therefore it is on the balance sheet.

One application of the conservatism principle is that inventory is valued on the balance sheet at either its original cost or market value, whichever is lower.

True. This practice is known as valuing inventories at the lower of cost or market (LCM)

FASB qualities that make accounting information useful

Understandibility, relevance, reliability, comparability and consistency, materiality, cost effectiveness

Liquidity Ratios are

Working Capital (WC) Current Ratio (Cur.) Quick Ratio (Quick) Receivables Turnover (R/T) Average Collection Period (ACP) Inventory Turnover (I/T) Average Inventory Period (AIP) Operating Cycle (OC)

Comparability and Consistency

a company's information must be presented with the same consistent method from year to year, in order for it to be useful for analytical purposes for different periods.

What kind of entity separates the individual from the entity both legally and with respect to accounting

a corporation

Income Statement

a financial statement showing the revenue and expenses for a fiscal period. used to show how well the firm has performed. Prepared on an accrual basis. Revenues minus expenses = net income.

If income tax is negative on an income statement it should be considered what kind of revenue?

a non-cash revenue because no cash is immediately collected as a result of tax loss.

Example of a nontangible asset

a patent

A CPA is

a professional certified to attest to the fairness and validity of the financial data of a business entity

A balance sheet is also called

a statement of financial position

Analysts often take a short cut in estimating a firm's cash from operations: they just add depreciation back to net income. What is the greatest shortcoming of this approach?

a. Changes in working capital elements are disregarded in this approach. Often, the changes in a firm's working capital can have resounding effects on the cash position of a company. As sales expand, accounts receivable and inventory necessarily increase commensurately. Ignoring this consequence by using the shortcut can result in grossly underestimating a firm's cash needs.

Company A and Company B both report net income for the year 20XY of $100,000. On January 1, 20ZXY, both Company A and Company B purchased conveyor systems for $30,000. Company A set up depreciation for the conveyor over a five year life, while Company B estimated that conveyor would last 10 years. Which company has a higher cash flow from oprations for 20XY?

a. Company A i. Operating cash flow is calculated by adding non-cash expenses to net income. Company A depreciation = 30,000/5 = 6000 + 100,000= 106,000. Company B depreciation = 30,000/10 = 3000, + 100,000 = 103,000.

Current assets are a firm's resources that are expected to be converted into cash within a year. The basis of this rule is

accounting convention which dictates the categories on the balance sheet.

Preferred current liabilities listing order

accounts payable wages payable income tax payable interest payable

Current liabilities with regards to cash flow are

accounts payable or accrued expenses or taxes

Current assets with regards to cash flows include

accounts receivable and inventory

The retained earnings account could take the form of:

accounts receivable, inventory, and plant and equipment. As a company generates earnings, these earnings can take the form of investments by the company.

Examples of current liabilities

accrued rent payable accrued salaries payable trade payables

How do you calculate operating cash flow?

add non-cash expenses to net income

amortization

an accounting technique used to periodically lower the book value of a loan or intangible asset over a set period of time. (ie: process of paying off debt through regular principal and interest payments over time.)

What is the simplest form of "payment streams" to analyze?

annuity, a fixed sum of money paid each year for an established number of years.

Reliability

assures that information is reasonably free from error and bias an faithfully represents what it purports to represent

Financial reporting has three statements:

balance sheet, income statement, and statement of retained earnings

blackstone inc purchased inventory for 60,000. if bs paid in cash, the the right hand entry would be a credit to

cash

In the statement of cash flows "funds" are usually described as

cash and cash equivalents

Current assets

cash and other assets expected to be exchanged for cash or consumed within a year. usually listed in order of liquidity.

Cash flow from financing activities

cash inflows and outflows related to external sources of financing (owners and creditors) for the enterprise such as issuance and repayment of debt, issuance and repurchase of stock, and payment of dividends.

Cash flow from investing activities

cash inflows or outflows of PP&E and other noncurrent assets such as long-term investments.

what is the most important figure on the statement of cash flows?

cash provided by operating activities because it should be the largest source of cash for a company over the long term.

other adjustments that affect cash flow are

changes in company's noncash assets and liabilities when noncash assets decrease or liabilities increase cash is flowing into the business.

One purpose of the statement of retained earnings is to show

claims on the company's resources. The statement of retained earnings reconciles the increases and decreases in the retained earnings account over a period of time. Retained earnings increases as a result of the profitable operation of a business during a period. it decreases due to operating losses and distributions to stockholders in the form of dividends.

Liquidity ratio: Working Capital (WC)

current assets - current liabilities amount of excess funds available Is a form of funds. The more working capital the more liquidity. one gauge of a company's ability to meet its short term obligations.

As length of discounting period extends the present value interest factors (increase or decline)

decline commensurately.

Indicate the increases/decreases for accounts for this scenario: record depreciation expense

decrease in OE and decrease in PP&E

BOD declares and pays a dividend to stockholders

decrease in OE and decrease in cash

Indicate the increases/decreases for accounts for this scenario: pay off the note payable to the bank

decrease in cash, decrease in notes payable, decrease in accruals.

Indicate the increases/decreases for accounts for this scenario: record salary expenses but haven't written payroll checks

decrease in owners equity increase in accruals

Coleman method: Bought and manufactured less than the cost of goods shipped, as shown in inventory

decreasing

Coleman method: Collected more than it billed customers, as shown in receivables

decreasing

Coleman method: paid out more than income tax incurred, as shown in income liabilities

decreasing

Coleman method: paid out more than the costs it incurred as shown in payables and accruals

decreasing

Future Value

describes the projected value of a given amount of money after a specific increment of time, taking into account the time value of money.

Accounting convention

dictates the categories on a balance sheet. This idea of cash conversion within a year is an accounting convention, not a GAAP.

A classified balance sheet shows

each category in order of liquidity.

A well-presented statement of cash flows can provide all of the information found in a balance sheet and income statement (true or false)

false

The statement of cash flows as presented under FASB statement No 95 is the only measure of a company's cash flow (true or false)

false

debits always increase an account while credits decrease

false

true or false credit entries to the cash account increase the account similar to your bank statement

false

Dividends can be paid to stockholders only following a year in which a company has generated a net income. (true or false)

false. A company can pay dividends any time its BOD so chooses. The only restriction is that retained earnings cannot become negative in order to pay the dividend.

True or false: the statement of cash flows reports the financial position of a company at year end

false. the balance sheet does.

Presenting an asset in the balance sheet at its historical cost less accumulated depreciation is an example of

financial accounting

Managerial Accounting

geared for users inside the firm

Financial Accounting

geared for users outside the firm

Congress has authorized the SEC to

govern the financial reporting of public corporations

noncash revenues

include accrued revenues that have not been collected during a prior period. not as common but examples include gains from sale of assets, premium or discount amortization, adjustments from longterm contracts or accruals, or writing off a previously expnesed reserve account.

noncash expenses

include the amortization of intangibles, depreciation of plant assets and depletion of natural resources. Most companies' biggest noncash item is depreciation expense.

If a company bought and manufactured more than the cost of goods shipped, the inventories would:

increase

current assets: inventory (indicate what happens to cash if it increases or decreases)

increase = use of cash (production or purchase of inventory exceeded sales. use of cash which has been invested in inventory) decrease= source of cash

Indicate the increases/decreases for accounts for this scenario: The firm has incurred an expense for interest on its bank loan but hasn't paid it yet.

increase in accruals and decrease in OE

Indicate the increases/decreases for accounts for this scenario: receive cash from the customer who previously purchased merchandise on an account

increase in cash and decrease in accounts receivable

Indicate the increases/decreases for accounts for this scenario: Sale of additional stock

increase in cash increase in capital (common stock)

current liabilities: accounts payable or accrued expenses. indicate what happens to cash if it increases or decreases

increase= source of cash. company is borrowing from suppliers and employees decrease= decrease in cash (repayments exceeded borrowings)

uses of cash are

increases in noncash assets decreases in liabilities decreases in owners equity

T Accounts- in liabilities and OE accounts where are the increases and decreases

increases on the R and decreases on the L

capital stock (indicate what happens to cash when it increases and decreases)

increases= source of cash. stockholders have invested more and those investments are sources of cash. decreases= use of cash. retirement of stock by a company is a use of cash.

Coleman method: Collected less than it billed customers, as shown in receivables

increasing

Coleman method: bought and manufactured more than the cost of goods shipped, as shown in inventory

increasing

Coleman method: paid out less than income tax incurred, as shown in income liabilities

increasing

Coleman method: paid out less than the costs it incurred as shown in payables and accruals

increasing

Corporation

large businesses owned by many individuals who are usually not active in their management. They are legal entities created in accordance with state laws. ownership is divided into shares. Owners are shareholders. Can be private or public.

Current Liabilities

liabilities due within a short time, usually within a year

What do investors focus on in financial statement analysis and why

liquidity and financial strength o Try to predict an expected return on their investment and assess the risks involved with the investment. The ROI in the stock of a company can take the form of dividends or capital gains. o To help predict probable return, investors would be most concerned with evaluating past operating performances and estimating future profitability of the company.

Three types of ratio analysis are

liquidity ratios operating performance ratios financial strength ratios

Liquidity ratios

measures short-term financial position of a firm. Examine the adequacy of the firm in meeting its future obligations. Bankers and Creditors use these.

Owners Equity is also called

net assets, stockholders equity, or net worth

(increases or decreases in A, L and OE) Management agrees to paint the store red

no transaction has occurred until an economic event has passed.

Example of long-term liability

notes payable

What do creditors focus on in financial statement analysis and why

o Main concern is that they will be able to pay back its obligations. o Long-term creditors are concerned with the borrowers' long-term financial performance and financial strength. o Short-term creditors are concerned with near-term solvency of the company and would tend to look at the company's liquidity.

In general, investors and creditors use financial statement analysis to help predict companies' :

operating performance, liquidity, and financial strength

Three sections in statement of cash flow

operating, investing, and financial activities

What are the two major forms of financial statement analysis

percentage and ration comparisons

Depreciation

process of systematically and rationally allocating the cost of an asset over its useful life. An allocated cost of using an asset with a life more than a year. A cost allocation scheme made at end of accounting period. Considered a noncash expense.

Retained Earnings Balance

profits that a company has earned to date, less any dividends or other distributions paid to investors. Formula: Beginning retained earnings +Profits/Losses - Dividends = Ending retained earnings

Financial strength ratios

provide insight into a firm's long-term capitalization. Indicate the stability of the long-term capital structure of a firm. Capital markets use these.

Accounting assists corporations in making major decisions by

providing relevant economic information on costs and expected profits.

List the accounts on a comparative balance sheet statement of cash flows that are Operating Activities Accounts

receivables (A) inventories (A) prepayments (A) Payables (L & OE) Accruals (L & OE) Taxes Payable (L & OE) Retained Earnings (L & OE) - but also part of Financial activities as well.

Accrual Method of Accounting

recording revenue when it is earned regardless of when cash is received

Current assets: accounts receivable (what does it represent and indicate what happens to cash if it increases or decreases)

represents an investment in cash. if declines= source of cash if increases= use of cash

Vertical analysis

requires that a significant element be measured as a percentage of a base to which it is related. For Example- the various components of an income statement might be measured as a percentage of sales. Compares the components of the balance sheet with a base item, usually total assets, expressing various components as a percentage of the base. Can also compare components of the income statement with net sales, which is usually a base item. Compares individual line items such as expenses to a common factor such as sales. Items are calculated as a percentage of the base amount.

define gains

result from the sale of an asset (other than inventory). A gain is measured by the proceeds from the sale minus the amount shown on the company's books. Since the gain is outside of the main activity of a business, it is reported as a non-operating or other revenue on the company's income statement.

yellowstone inc paid salaries of $5000. debit entry is to

retained earnings

Examples of Owners Equity include

salaries expense capital stock COGS retained earnings interest expense sales

Retained Earnings T account

sales and other increases in equity value are recorded on the right and decreases on the left

Increase in a liability is a source or use of cash

source (increase) of cash

depreciation is a source or use of cash

source of cash. while the amount of depreciation expense is not a source of cash it does reduce a corporation's taxable income.

cash inflows are also known as

sources of cash

cash flow

sum of net income + noncash expenses - noncash expenses = ?

Cost Effectiveness

the benefits of providing a certain level of accounting information must outweigh the costs. Consideration of the costs and value of information.

Assets

the economic resources of a firm and they are generally used to help produce either directly or indirectly future cash inflows for the firm.

Cash flows from operating activities use information from:

the income statement and the current acounts from the balance sheet

cash flow analysis complements financial statement analysis by showing

the major sources and uses of cash

Cash flows from investing activities use information from

the noncurrent asset section of the balance sheet

Institute of Management Accountants (IMA)

the professional organization that promotes the advancement of the management accounting profession

A corporation's fiscal year does not always coincide with the calendar year. The most common reason for that disparity is

to favorably present the results of operations of seasonable enterprises. The fiscal year is chosen by its management or BOD for any number of reasons but the most common being tax considerations.

Comparative balance sheets do not show the liquidity effects of a company's operations during a period (true or false)

true

companies are required to present a reconciliation of net income to cash provided by operating as part of the statement of cash flows (true or false)

true

financial statement analysis provides the tools for evaluating liquidity and operating performance (true or false)

true

liquidity has become a major concern to managers and investors of volatile interest rates and uncertain economy (true or false)

true

An increase in cash is good (true or false)

true or false could be correct. cash can be increased by operating, investing, or financing activities. Increases from operating activities are usually desirable. Consistent increases in cash resulting from the issuance of new long-term debt would be undesirable.

Partnership

unincorporated business organization owned by two or more individuals. Business is considered an accounting entity SEPARATE from the owner. Ceases to exist when one owner dies.

Proprietorship

unincorporated business organization with one owner. The business is considered an accounting entity SEPARATE from the owner. No legal distinction between business and owner. Usually small retail or service.

Ledger Accounts

used to systematize the accumulation of transactions. each account corresponds to a balance sheet item (cash, inventory, etc.) Accounts help summarize all of the changes in each balance sheet item.

cash flows from financing activities

uses information from the statement of retained earnings and long-term debt and stockholders' equity sections of the balance sheet.