Accounting part 2
equity increases when
you make a profit, sell lots of things and borrow
high ROE signifies to capital providers that
they should put more money into that business
Average days in A/P can be
too high: don't want to pay bills late= fees too low: want to earn all the interest you can
ROA detailed equation
(Net income/sales revenue) x (sales rev/avg total assets)
write off
(business) to cancel a debt; to recognize that something is a failure, has no value, etc. --> given up on collecting a receivable
weighted average cost flow
- find cost per unit (total cost of all inv/total units available for sale) - COGS: price per unit x units sold - ending inv: ending inv amount X price per unit
THE FOLLOWING INFOMRATION IS FOR QUESTIONS 102-103 Rodriguez Furniture bought and sold office chairs as shown below. The sales price of each chair was $50. Model UX14 Office Chairs Available and Sold # of Units cost/unit total cost Beginning Inventory 2,000 x. 30 = 6000 3/19 Purchase: 2000 x 32 = 64,000 10/22 Purchase: 4000 x 35 = 140,000 Available for Sale 8000 264,000 Units Sold 7000 Ending Inventory 1000
102 and 103 info
THE FOLLOWING INFOMRATION IS FOR QUESTIONS 99-100 Vernieri Shoe Corporation bought and sold Air Johannson sneakers as shown below: Air Johannson Sneakers Available and Sold # of units. cost per unit total c Beginning Balance. 6000 x 70 = 420,000 Feb 8 purchase 9000 x 80 = 720,000 August 17th purchase 5000 x 90 = 450,000 Available for Sale 20,000 Units sold 18,000 ending inventory 2000
99 and 100 info
107. Assuming a tax rate of 30%, Krishnan's Income Tax Expense will be A. $1,800 higher if they report inventory using FIFO instead of LIFO B. $4,200 higher if they report inventory using FIFO instead of LIFO C. $4,200 lower if they report inventory using FIFO instead of LIFO D. $7,200 higher if they report inventory using FIFO instead of LIFO
A. $1,800 higher if they report inventory using FIFO instead of LIFO
60. (Fun with T-Accounts) The 2021 Statement of Cash Flows for Musketeer Corporation reported "Cash Paid for Salaries" of $100,000. The Liabilities section of Musketeer's 2020 and 2021 Balance Sheets reported the following: 12/31/2021. 12/31/2020 Salaries and Wages Payable 12,000. 15,000 Unearned Revenue. 14,000 10,000 Total Liabilities. 26,000 20,000 What amount of Salaries Expense did Musketeer report on its 2021 Income Statement? A. $97,000 B. $100,000 C. $101,000 D. $103,000
A. $97,000
93. Which of the following is a reason that a company might intentionally overstate bad debt expense in the current year? (Note that this is not ethical behavior!) A. A company had strong performance in the current year and thus can overstate bad debt expense and still meet earnings expectations. By overstating the current year bad debt expense, the company can understate bad debt expense in a future year. B. Overstating bad debt expense results in an allowance for doubtful accounts that is too low, making the company's current balance sheet look stronger. C. A company would never intentionally overstate bad debt expense. D. Fast and Furious 18
A. A company had strong performance in the current year and thus can overstate bad debt expense and still meet earnings expectations. By overstating the current year bad debt expense, the company can understate bad debt expense in a future year.
58. On their 12/31/2020 Balance Sheet, Gow reported a land balance of $100,000. ▪Gow's 2021 Statement of Cash Flows reported cash invested in land of $60,000. ▪Gow's 2021 Statement of Cash Flows reported cash received from the sale of land of $50,000. ▪On their 12/31/2021 Balance Sheet, Gow reported a land balance of $120,000. The journal entry for Gow's sale of land during 2021 includes... A. A gain of $10,000 B. A loss of $10,000 C. A gain of $30,000 D. A loss of $30,000
A. A gain of $10,000
82. Which of the following is correct? A. Bad debt expense is estimated in the year during which the related sales occur. B. Bad debt expense is recorded at the time a company gives up trying to collect from a customer. C. The journal entry to record bad debt expense does not impact Total Assets. D. The journal entry to record bad debt expense does not impact Net Income.
A. Bad debt expense is estimated in the year during which the related sales occur.
65. (Fun with T-Accounts) The 2021 Income Statement for Fedigan Corp. reported sales revenue from account sales of $500,000. The Asset section of Fedigan's 2020 and 2021 Balance Sheets reported the following: 12/31/2021. 12/31/2020 Accounts Receivable $78,000 $50,000 Inventory $40,000 $60,000 Total $118,000 $110,000 What amount of "Cash Receipts from Customers" did Fedigan report on its 2021 Statement of Cash Flows? A. Cash Receipts from Customers = $472,000 B. Cash Receipts from Customers = $492,000 C. Cash Receipts from Customers = $508,000 D. Cash Receipts from Customers = $528,000
A. Cash Receipts from Customers = $472,000
79. Which of the following is considered a liquidity measure? A. Current Ratio B. Market to Book C. Debt to Equity D. Return on Equity
A. Current Ratio
83. The journal entry to record the write off of an Accounts Receivable A. Decreases Accounts Receivable B. Decreases Stockholders' Equity C. Decreases Total Assets D. All of the above
A. Decreases Accounts Receivable
105. Which of the following is correct? A. IFRS prohibits the use of the LIFO inventory cost flow method. B. Almost all US companies use the LIFO inventory cost flow method. C. When the cost of purchasing inventory is rising, the use of LIFO results in a higher current ratio than the use of FIFO. D. All of the above are correct
A. IFRS prohibits the use of the LIFO inventory cost flow method.
69. If a firm's predicts a decrease in ROA and wants to avoid having its ROE decline, then the firm must A. Increase the percentage of total assets that it obtains from borrowing. B. Purchase additional inventory C. Pay its liabilities more quickly D. Decrease its dividend payout
A. Increase the percentage of total assets that it obtains from borrowing.
67. The debt to equity ratio is used to analyze A. Solvency B. Liquidity C. Profitability D. Turnover
A. Solvency
97. Zansky Corporation shipped golf shoes to Victory Golf Corporation on consignment. The Book Value of the shoes is $3,000 and the expected sales price is $4,200. Victory has not yet sold the inventory. A. Zansky Corporation should include the $3,000 in its reported inventory balance. B. Zansky Corporation should report $3,000 Cost of Goods Sold. C. Zansky Corporation should report $4,200 Cost of Goods Sold (Conservatism). D. None of the above
A. Zansky Corporation should include the $3,000 in its reported inventory balance.
Asset efficiency
Asset turnover
Average days in accounts payable
Average Accounts Payable/(Inventory Purchases/365) - purchases per day = inv purchases/365 - measures how quickly a firm pays for its inventory purchases - must solve for inventory purchases- not found on these financial statements
Average Days in Inventory
Average Inventory / (COGS/365) - indicates how quickly the firm sells inventory - COGS per day (COGS/365)
Equity Multiplier
Average Total Assets / Average Shareholders' Equity - Ratio increases above 1 as liabilities increase
Average days in accounts receivable
Average accounts receivable/(sales rev/365)) - sales rev/365 = sales per day - estimates time it takes a company to collect A/R - provides evidence about the effectiveness of credit granting and cash collecting activities
4. Working Capital Ratios: Does the firm efficiently manage its short-term operating cash flows?
Average days in accounts receivable average days in inventory average days in accounts payable cash conversion cycle
103. Assuming a tax rate of 30%, Rodriguez's Operating Cash Flows will be A. $1,500 higher if they report inventory using FIFO instead of LIFO B. $1,500 higher if they report inventory using LIFO instead of FIFO C. $3,500 higher if they report inventory using FIFO instead of LIFO D. $3,500 higher if they report inventory using LIFO instead of FIFO
B. $1,500 higher if they report inventory using LIFO instead of FIFO
90. Review the aging schedule on Slide 86 of the Lecture Notes. Which of the following is correct? A. Dylan is scheduled to pay $96,630 next month and $63,210 the month after. B. Clarkson owes $57,760, none of which is late. C. All else equal, ZZZ is assuming that older A/R are less likely to be collected than A/R from recent sales. D. Both "B" and "C" are correct
Both "B" and "C" are correct
99. What is Vernieri's Ending Inventory under the FIFO inventory cost flow assumption? A. $140,000 B. $180,000 C. $220,000 D. $420,000
B. $180,000
92. Refer to the financial statements for DDD in your slide deck. DDD gave up on trying to collect from some of its account customers during the most recent year. What was the amount that DDD gave up on? A. $186,000 B. $188,000 C. $190,000 D. $192,000
B. $188,000
On 1/1/2021, Morales Corporation had a beginning Accounts Receivable balance of $500,000 and a beginning Allowance for Doubtful Accounts balance of $30,000. During the year, Morales collected $3,000,000 cash from customers and made credit sales of $2,900,000. Also during the year, Morales gave up on trying to collect $26,000 from customers who went bankrupt. Based on an aging schedule, uncollectible amounts are estimated to total $32,000 as of 12/31/2021. Morales uses the Aging Schedule approach to recording bad debt expense. What is Morales' Accounts Receivable Balance as of 12/31/2021? A. $370,000 B. $374,000 C. $570,000 D. $574,000
B. $374,000
84. Mabry Corp. had a beginning Accounts Receivable balance of $400,000 and a beginning Allowance for Doubtful Accounts balance of $26,000. During the year, Mabry made credit sales of $3,000,000 and cash collections of $2,950,000. Also during the year, Mabry wrote off uncollectible accounts receivable totaling $25,000. Mabry uses the percentage of sales method to determine bad debt expense. Mabry estimates that 1% of current year sales will not be collected. What is Mabry's Accounts Receivable balance at the end of the year? A. $420,000 B. $425,000 C. $430,000 D. $445,000
B. $425,000
75. (Fun with T-Accounts) The 2021 Statement of Cash Flows for Shang Corporation reported "Cash Received for Warranties" of $100,000. The Liabilities section of Shang's 2020 and 2021 Balance Sheets reported the following: 12/31/2021 12/31/2020 Salaries Payable $13,000 $15,000 Unearned Warranty Revenue $16,000 $10,000 Total Liabilities $29,000 $25,000 What amount of Warranty Revenue did Shang report on its 2021 Income Statement? A. $92,000 B. $94,000 C. $106,000 D. $108,000
B. $94,000
75. (Fun with T-Accounts) The 2021 Statement of Cash Flows for Shang Corporation reported "Cash Received for Warranties" of $100,000. The Liabilities section of Shang's 2020 and 2021 Balance Sheets reported the following: 12/31/21 12/31/20 Salaries and Wages Payable 13,000 15,000 Unearned Warranty 16,000 10,000 Revenue Total Liabilities 29,000 25,000 What amount of Warranty Revenue did Shang report on its 2021 Income Statement? A. $92,000 B. $94,000 C. $106,000 D. $108,000
B. $94,000
63. ABC company reported a Return on Sales of 0.02%. This suggests that A. ABC's customers rarely return their products for refunds. B. ABC might have a very difficult time withstanding an unanticipated increase in expenses. C. ABC likely has a very high gross margin percentage. D. Scoop-diddy-whoop
B. ABC might have a very difficult time withstanding an unanticipated increase in expenses.
72. Which if the following is correct? All else equal, A. Shareholder wealth is maximized if a company keeps its current ratio extremely high. B. Banks will charge a relatively low interest rate to companies that have a Debt to Equity ratio that is extremely low. C. Creditors want a company's Current Ratio to be extremely low. D. All of the above
B. Banks will charge a relatively low interest rate to companies that have a Debt to Equity ratio that is extremely low.
106. On December 31, Clausel Jewelers had inventory with an historical cost of $18,000. At that time, Clausel estimated the net realizable value of the inventory to be $15,000. Which of the following is correct? A. Clausel will make a 12/31 adjusting journal entry that includes a $3,000 credit to inventory loss. B. Clausel will make a 12/31 adjusting journal entry that decreases total assets by $3,000. C. Clausel will report the inventory on its balance sheet at $18,000. D. Clausel will report an "allowance for doubtful inventory" of $3,000 on its balance sheet.
B. Clausel will make a 12/31 adjusting journal entry that decreases total assets by $3,000.
76. All else equal, a company should have a higher Dividend Payout ratio than its competitors if it A. Has a higher debt to equity ratio than the industry average B. Has fewer opportunities for growth than its competitors C. Has lower liquidity than its competitors D. All of the above
B. Has fewer opportunities for growth than its competitors
56. During the most recent year, Hawkins Corp. reported salaries expense of $200,000 and cash paid for salaries of $190,000. Which of the following is correct? A. Hawkins' will report an ending balance of $10,000 for Salaries Payable. B. Hawkins will report an ending balance for Salaries Payable that is $10,000 greater than the beginning balance in Salaries Payable C. Hawkins' will report an ending balance of $200,000 for Salaries Payable. D. None of the above
B. Hawkins will report an ending balance for Salaries Payable that is $10,000 greater than the beginning balance in Salaries Payable
77. Earnings per share appears on the... A. Balance Sheet B. Income Statement C. Statement of Cash Flows D. Statement of Shareholders' Equity
B. Income Statement
74. If Bartley Company desires to reduce the cash conversion cycle for the upcoming year, Bartley can A. Give customers a longer time to pay their bills B. Take longer to pay its accounts payable C. Rent a warehouse in order to store more inventory D. All of the above
B. Take longer to pay its accounts payable
96. Tropeano Corp. shipped inventory to a customer "FOB Shipping Point." The responsible party had to pay the trucking company $1,000 for shipping the goods. Which of the following is correct? A. Tropeano Corp. reports the $1,000 as part of "Cost of Goods Sold." B. The buyer includes the $1,000 as part of the buyer's inventory. C. The buyer records the $1,000 as an expense. D. None of the above
B. The buyer includes the $1,000 as part of the buyer's inventory.
71. All else equal, if a company has a higher Current Ratio than the industry average, then the company... A. most likely charges customers higher prices than other companies in its industry. B. is more likely to be able to pay its short-term debts than other companies in the industry. C. will most likely have a higher return on equity than other companies in its industry D. None of the above
B. is more likely to be able to pay its short-term debts than other companies in the industry.
71. All else equal, if a company has a higher Current Ratio than the industry average, then the company... A. most likely charges customers higher prices than other companies in its industry. B. is more likely to be able to pay its short-term debts than other companies in the industry. C. will most likely have a higher return on equity than other companies in its industry D. None of the above
B. is more likely to be able to pay its short-term debts than other companies in the industry.
100. What is Vernieri's Cost of Goods Sold under the LIFO inventory cost flow assumption? A. $1,370,000 B. $1,410,000 C. $1,450,000 D. None of the above
C. $1,450,000
70. (Fun with T-Accounts) Excerpts from the financial statements of Rabbit Corporation are below Prepaid Insurance as of December 31, 2020 $20,000 Prepaid Insurance as of December 31, 2021 $26,000 Insurance Expense on the 2021 Income Statement $200,000 What amount of cash did Rabbit pay for insurance during 2021? A. $174,000 B. $194,000 C. $206,000 D. $226,000
C. $206,000
102. Assuming a tax rate of 30%, Rodriguez's Net Income will be A. $1,500 higher if they report inventory using FIFO instead of LIFO B. $2,000 higher if they report inventory using FIFO instead of LIFO C. $3,500 higher if they report inventory using FIFO instead of LIFO D. None of the above
C. $3,500 higher if they report inventory using FIFO instead of LIFO
108. Assuming a tax rate of 30%, Krishnan's Ending Inventory will be A. $4,200 higher if they report inventory using FIFO instead of LIFO B. $4,200 higher if they report inventory using LIFO instead of FIFO C. $6,000 higher if they report inventory using FIFO instead of LIFO D. $6,000 higher if they report inventory using LIFO instead of FIFO
C. $6,000 higher if they report inventory using FIFO instead of LIFO
95. (same info as above question) The journal entry to record the sale of land during 2021 includes... (Make the full journal entry for practice!) A. A debit to "loss on sale of equipment" of $50,000 B. A debit to "loss on sale of equipment" of $80,000 C. A credit to "gain on sale of equipment" of $30,000 D. A credit to "gain on sale of equipment" of $80,000
C. A credit to "gain on sale of equipment" of $30,000
59. Suppose that on December 31, 2021, Alpha agreed to ship inventory (historical cost = $15,000) to a customer for $22,000 on account. - Alpha did not actually ship the inventory, however, until January 4, 2022. - Alpha recorded the following journal entries on December 31, 2021 and January 4, 2022: 12/31/2021 Accounts Receivable 22,000 Sales Revenue 22,000 1/4/2022 Cost of Goods Sold 15,000 Inventory 15,000 A. Alpha's 2022 Net Income will be understated by $7,000. B. Alpha's 2022 Net Income will be overstated by $7,000. C. Alpha's 2022 Net Income will be understated by $22,000. D. Alpha's 2022 Net Income will be overstated by $22,000.
C. Alpha's 2022 Net Income will be understated by $22,000.
66. Return on Assets (ROA) can be viewed as a function of Return on Sales times A. Return on Equity B. Gross margin % C. Asset turnover D. Equity Multiplier
C. Asset turnover
72. Which if the following is correct? All else equal, A. Shareholder wealth is maximized if a company keeps its current ratio extremely high. B. Creditors want a company's Current Ratio to be extremely low. C. Banks will charge a relatively low interest rate to companies that have a Debt to Equity ratio that is extremely low. D. All of the above
C. Banks will charge a relatively low interest rate to companies that have a Debt to Equity ratio that is extremely low.
110. The Inventory T-Account is credited by.. A. Cost of Goods Sold B. Inventory Impairment Losses C. Both "A" and "B" D. Neither "A" nor "B"
C. Both "A" and "B"
73. If Corr has too low of an average days in inventory then there is a risk that A. Corr may have too much working capital tied up in inventory. B. Corr may not be collecting its account receivable quickly enough. C. Corr may not have enough inventory to meet the needs of customers. D. None of the above
C. Corr may not have enough inventory to meet the needs of customers.
57. "Deferred Revenues" appear in the A. Operating Income section of the Income Statement B. Non-operating Income section of the Income Statement C. Liabilities Section of the Balance Sheet D. Shareholders' Equity section of the Balance Sheet
C. Liabilities Section of the Balance Sheet
61. Linley company reported the following information (in millions): Net Sales: $11,000 Beginning Total Shareholders' Equity: $4,200 Net Income: $260 Ending Total Shareholders' Equity: $5,000 Return on Equity = Net Income / Average Total Shareholders' Equity. Based on this formula, A. Linley's Return on Equity = 4.19% B. Linley's Return on Equity = 5.20% C. Linley's Return on Equity = 5.65% D. Linley's Return on Equity = 6.19%
C. Linley's Return on Equity = 5.65%
Form 10-K
business section, audit reports, significant transactions, footnotes, risk factors/legal matters, management's discussion & analysis
81. Why do businesses often sell items or provide services on account (rather than for cash)? A. To increase liquidity B. Tor reduce liquidity C. To increase revenues D. To increase days in accounts payable
C. To increase revenues
journal entry for sale of building or equipment
Cash Accum dep building gain/loss on sale
94. (Fun with T-Accounts) JME Corporation reported "Cash Paid for equipment" of $200,000 and Depreciation Expense of $140,000 during 2021. JME also sold equipment for $70,000 cash during 2021. JME's 2020 and 2021 Balance Sheets reported the following: 2021 2020 Equipment. 1,050,000 1,000,000 Accumulated dep $430,000 400,000 Net equipment 34,000 25,000 The journal entry to record the sale of land during 2021 includes... (Make the full journal entry for practice!) A. A credit to equipment of $40,000 B. A credit to equipment of $70,000 C. A credit to equipment of $80,000 D. A credit to equipment of $150,000
D. A credit to equipment of $150,000
Allowance for Doubtful Accounts
contra-asset account containing the estimated uncollectible accounts receivable
80. (Fun with T-Accounts) The 2021 Statement of Cash Flows for Harrington Corporation reported "Cash Paid to Suppliers" of $200,000. The Liabilities section of Harrington's 2020 and 2021 Balance Sheets reported the following: 2021 2020 Unearned revenue. 14,000 10,000 Accounts Payable. 20,000 15,000 Total Liabilities 34,000 25,000 What amount of inventory did Harrington purchase during 2021? A. $195,000 B. $199,000 C. $201,000 D. $205,000
D. $205,000
101. Assuming that inventory prices are rising, using LIFO instead of FIFO will result in A. higher Cost of Goods Sold B. lower Net Income C. lower Income Tax Expense D. All of the above
D. All of the above
to shorten cash conversion cycle to free up cash
buy more inventory and then sell more inventory to make more cash, increases Net income
85. Mabry Corp. had a beginning Accounts Receivable balance of $400,000 and a beginning Allowance for Doubtful Accounts balance of $26,000. During the year, Mabry made credit sales of $3,000,000 and cash collections of $2,950,000. Also during the year, Mabry wrote off uncollectible accounts receivable totaling $25,000. Mabry uses the percentage of sales method to determine bad debt expense. Mabry estimates that 1% of current year sales will not be collected. What is Mabry's balance in the Allowance for Doubtful Accounts at the end of the year? A. $25,000 B. $27,000 C. $29,000 D. $31,000
D. $31,000
On 1/1/2021, Morales Corporation had a beginning Accounts Receivable balance of $500,000 and a beginning Allowance for Doubtful Accounts balance of $30,000. During the year, Morales collected $3,000,000 cash from customers and made credit sales of $2,900,000. Also during the year, Morales gave up on trying to collect $26,000 from customers who went bankrupt. Based on an aging schedule, uncollectible amounts are estimated to total $32,000 as of 12/31/2021. Morales uses the Aging Schedule approach to recording bad debt expense. What is Morales' balance in the Allowance for Doubtful Accounts as of 12/31/2021? A. $26,000 B. $28,000 C. $30,000 D. $32,000
D. $32,000
68. Which of the following statements is correct? A. Debt can be too high or too low B. All else equal, a lower Debt-Equity ratio suggests lower financial risk C. Creditors can think of Shareholders' Equity as a "safety net." D. All of the above
D. All of the above
98. Semi-fresh Supermarket tries to sell older perishable goods before newer ones. For example, Semi-fresh places older gallons of milk in front of newer ones in its refrigerators. Which of the following inventory cost flow methods is Semi-fresh allowed to use in creating its financial statements in accordance with GAAP? A. FIFO B. LIFO C. Weighted Average D. All of the above
D. All of the above
62. Oberdorfer Corp. reported Net Income of $10,000,000. Shareholders' of Oberdorfer should be... A. Pleased B. Displeased C. Indifferent D. Cannot tell from the information given
D. Cannot tell from the information given
78. FFF Corporation and GGG Corporation are both clothing retailers. One corporation sells a low volume of luxury items at significant markups. The other sells lower quality clothing at a high volume, and makes a smaller profit on each sale. Dividend payout. ROS. Asset turnover FFF Corp. 0.15 0.07 1.0 GGG Corp. 0.10 0.05 1.6 Based only on the above, which of the following is correct? A. FFF is the high volume retailer and has a higher Return on Assets than GGG B. FFF is the high volume retailer and has a lower Return on Assets than GGG C. FFF is the luxury retailer and has a higher Return on Assets than GGG D. FFF is the luxury retailer and has a lower Return on Assets than GGG
D. FFF is the luxury retailer and has a lower Return on Assets than GGG
64. (Fun with T-Accounts) The inventory T-account is debited by A. Cost of Goods Sold, which is found on the income statement. B. Cost of Goods Sold, which is not shown on financial statements. C. Inventory Purchases, which can be found on the Statement of Cash Flows. D. Inventory Purchases, which is not shown on financial statements.
D. Inventory Purchases, which is not shown on financial statements.
109. On December 31, Pullman Electronics had inventory with a historical cost of $80,000 and a net realizable value of $92,000. The necessary December 31 adjusting entry will... A. decrease Total Assets by $12,000 B. increase Total Assets by $12,000 C. increase Total Assets by $92,000 D. No adjusting entry is necessary for this inventory item.
D. No adjusting entry is necessary for this inventory item
104. Which of the following is correct? A. Compared to FIFO, LIFO provides a balance sheet amount that more closely approximates the true value of the inventory. B. Most U.S. firms use LIFO when completing tax returns, but FIFO when preparing financial statements. C. Under US GAAP, Grocery chains are required to use the FIFO inventory cost flow method. D. None of the above
D. None of the above
two ways owners can invest in firms*
buying stock and investing
5. Other
Dividend payout EPS Market to Book (= market value/shareholder's equity)
Dividend Payout
Dividends Declared/Net Income - what portion of NI is being paid out in dividends
3. Liquidity
Does the firm have sufficient assets to satisfy short-term obligations? - current ratio
2. Leverage (solvency)
Does the firm rely too much or too little on debt? - debt to equity - equity multiplier
who has a better balance sheet
FIFO - higher current assets= high current ratio --> illusion that you're better able to pay bills
who has a higher NI
FIFO - less expense (sold cheap stuff) = higher NI
FIFO
FIFO - sell old cheap stuff first, left with expensive stuff
best place to learn about a company
Form 10-K
Gross Margin %
Gross Margin / Sales - Measures the percentage of each dollar of revenue that remains after COGS is deducted.
Margins
Gross margin % Return on sales (ROS) -- also called profit margin
Inventory (T-Account)
Increases when we purchase inventory (normally bought on account); decreases when we sell inventory - remember to solve for inventory purchases (COGS + (BB-EB)) --> debit this
Cash Conversion Cycle
Inventory Days + A/R Days - A/P Days - companies pay cash to suppliers, sell inventory, and eventually receive cash from customers
who pays less taxes
LIFO
which provides more of a benefit to shareholders
LIFO - don't want to pay extra taxes to gov't HOWEVER - some are starting to say FIFO bc shareholders want company to look good at critical times
who has a better income statement
LIFO - more conservative - look worse, but less taxes - gives a COGS that better approximates the true economic cost of selling inventory - if 2 companies have same NI, LIFO company is doing better bc they're more conservative
Return on Assets (ROA)
Net Income/Average Total Assets - measures the profits generated from each dollar of assets (i.e., profits relative to firm investments)
Return on Sales
Net Income/Sales - Of the revenue earned from profitable activities, how much is left for shareholders after expenses
Return on Equity (ROE)
Net Income/Shareholder's Equity - measures the return to shareholder's based on the capital they invested in the firm
91. All else equal, which of the following might lead to an increase in Nelson Corporation's reported bad debt expense for the year? A. Nelson increased the required credit score that customers must have in order to make purchases. B. One of Nelson's largest customers became insolvent at the end of the year. C. Both "A" and "B" are correct D. Neither "A" nor "B" is correct
One of Nelson's largest customers became insolvent at the end of the year.
1. Profitability Ratios
Overall performance, margins, asset efficiency
to calculate cumulative sum of all NI amounts
RE + dividends
DuPont Analysis
ROA x Equity Multiplier = ROE (net income/sales rev x sales rev/avg total assets)= ROA (Avg total assets/avg s. equity)= multiplier product= NI/avg equity = ROE
ROA vs. ROE
ROE is from the Shareholder's Perspective, while ROA is not
Overall performance
Return on Equity (ROE) Return on Assets (ROA)
Asset Turnover
Sales Revenue/Average Total Assets - measures how much sales the firm generates for each dollar invested in sales - all else equal, asset turnover can provide information about a firm's pricing strategy (ex: Walmart wins based on volume when compared to Nordstrom)
Income Smoothing
The practice of carefully timing the recognition of revenues and expenses to even out the amount of reported earnings from one year to the next. - makes it look like an upward linear trend
describe reasoning behind requiring firms to report inventory losses
conservatism: report whatever makes you look worse
insolvent
assets<liabilities solution: try to sell stock
Current Ratio
current assets/current liabilities - measures extent to which current assets will satisfy short-term obligations (what position are you in to pay your bills) - can be too high or too low (happy medium is greater than or equal to 2)
Measures of leverage
debt to equity and equity multiplier (closely related) - debt to equity is most commonly cited - equity multiplier often is used to examine the relationship of leverage to ROE
a change in cash or dividends
doesn't by itself indicate whether a company is creating wealth
Bad Debt Expense
expense associated with estimated uncollectible accounts receivable - selling on account is costly: giving up some of my collections
current ratio too low
get equity- sell stock or get government investments
Accumulated Depreciation (T-account) -- building
goes up when current year expense is added; contra-asset = show on the right side - solve for accumulated depreciation of buildings sold (already had depreciation before selling them) - where to find numbers:
Accounts Payable (T-account)
goes up when we buy inventory (or other things) on account; decreases when we pay cash to suppliers - use number found for inventory purchases to credit accounts payable
Debt can be too high or too low
high debt = risk to stakeholder's, but also want some to borrow from bank, pay interest, and keep what profit you make.
Debt to Equity
total liabilities/shareholders equity - shows where you stand in most cases
if ROA is too low,
we're not selling enough stuff
when does the cost of inventory become an expense?
when it is sold
Land (T-account)
increases when we buy more land; decreases when we sell land -remember to solve for historical cost of land, that's what you will credit when selling)
Accounts receivable (T-Account)
increases when we provide sales and services on account; decreases when we collect cash from customers
Building (T-account)
increases when you buy more buildings, decreases when you sell them - remember to calculate historical cost of buildings sold and credit that
companies that have a much lower profit per sale
must make up for it in volume (ex: walmart vs. nordstrom)
Earnings Per Share (EPS)
net income/average number of common shares outstanding - shown after Net income on the income statement - measures profitability per share
you should be paying dividends when
not growing, high liquidity, low debt overall
FOB shipping point
ownership of the goods passes to the buyer when the public carrier accepts the goods from the seller
FOB destination
ownership of the goods remains with the seller until the goods reach the buyer
current ratio too high
put money into business so it can be used = too many assets - solution: dividends (don't want money sitting around doing nothing)
Matching Principle
recognize expenses in the same period as the revenues they help to generate
lower average says in inventory by
reducing inventory (must consider the risk of stock outs) - would rather have too much than too little = happy customers - but, also want as little around as possible without running out
LIFO
sell expensive stuff first, left with old cheap stuff
creditors think of ______ as a safety net
shareholder's equity (can help you pay off debt, bank is more likely to loan to you if you have a large safety net of SE)
if a company has a significant margin (compared to other competitors)
something is special about that brand
The higher the ROS
the more likely the firm can withstand unanticipated risks such as a sudden increase in costs, price wars, etc.
