Financial Concepts
Gross Profit Percentage Equation
((Net Sales - Cost of Goods Sold)/Net Sales) x 100
Common Stock's Par value
1. affects how common stock is recorded 2. was introduced to prevent bankrupt companies from unfairly distributing company resources 3. has become less meaningful because states use other means to prevent stockholders from removing capital from financially distressed companies
Supply chain financing involves
A financing company collects the supplier's accounts receivable for a fee (i.e., factors the receivables). The supplier offers longer payment terms to the buyer.
Notes Payable
Amount of loan owed to the bank.
Accounts Payable
Amount owed to suppliers for purchases made on account.
Common Stock
Amount stockholders contributed to the company.
Accounts Receivable is reported on
Balance Sheet
Line items for Retained Earnings
Beginning Balance of Retained Earnings Net Income Dividends ending balance of Retained Earnings
Financing Activities Cash Flows is
Cash activity with stockholders and creditors such as banks
Investing Activities that would be reported as Cash Flows
Cash paid to buy equipment Cash paid to build a new corporate headquarters
Retained Earnings (Earned Capital)
Equity earned by the company
Income Statement has information regarding
Expenses, Revenue, and Net Income
Characteristics needed in order for information to be useful
Faithful representation and relevance
GAAP stands for
Generally Accepted Accounting Principles
IFRS are
International Financial Reporting Standards
IFRS stands for
International Financial Reporting Standards
A balance sheet...
It reports the economic resources and claims on those resources. It is sometimes called the statement of financial position. It reports the assets, liabilities and stockholders' equity at a point in time.
Ratios that measure short-term survival and ability to use current assets to repay current liabilities
Liquidity
Who has primary responsibility for following GAAP
Managers
Net Profit Margin Equation
Net Income divided by Revenues times 100%
Which of the 2 profitability ratios come right from the common size income statement?
Net profit margin Gross profit percentage
If investors are less optimistic about the company's future than previously, which of the following would most likely have decreased?
P/E Ratio
Ratios that measure the company's ability to generate income (in current period)
Profitability
Retained Earnings
Profits that have accumulated in the company over time
Which of these appears on both the statement of retained earnings and the balance sheet
Retained Earnings
Net income appears as a line item on
Retained Earnings and Income Statement
Line items for a statement of retained earnings ending September 30
Retained Earnings, September 30 Add: Net Income Retained Earnings, September 1 Subtract: Dividends
SEC stands for
Securities and Exchange Commission
Horizontal Analysis (aka Time-Series Analysis)
See change over time-- same financial statement
Ratios that measure long-term survival and ability to repay lenders when debt matures and to make required interest payments prior to the date of maturity
Solvency
The ending retained earnings balance appears on the
Statement of Retained Earnings and Balance Sheet
Authorized shares
The maximum number of shares a corporation may issue as indicated in the corporate charter.
Balance Sheet Title
The name of the business The title "Balance Sheet" At December 31, 2020
Accounts Receivable
The right to collect for sales/services provided on account.
reasons for issuing stock dividend
To signal an expectation of significant future earnings To demonstrate commitment to stockholders while conserving cash during difficult times To lower the market price per share
Mega Corporation repurchased 1,000 shares of its $1 par value common stock for $8,000 and recorded the entry with a debit to
Treasury Stock and a credit to Cash of $8,000
The journal entry to record the declaration of a dividend includes
a debit to Dividends a credit to Dividends Payable
Retained earnings are...
all of the company's earnings kept rather than distributed to stockholders sometimes called earned capital decreased by dividends increased by net income
Debt-to-assets increased from 60% to 90%. As a result of this increase, what is likely to occur?
an increase in interest expense an increase risk of default
The effect on the accounting equation of declaring a cash dividend includes
an increase in liabilities a decrease in stockholders' equity
Income Statement
are sometimes called the statement of operations report revenues minus expenses for a fiscal period
Balance sheet is balanced when...
assets equal liabilities plus stockholders' equity
transactions between stockholders and company affects the
balance sheet accounts only- not income statement
Interest that is calculated using the principal plus any interest not yet paid
compound interest
future value concept is based on
compound interest (interest grows on top of previous interest accrued)
Sea the World Cruises issued 400,000, $1 par value shares of the 1,000,000 shares authorized for $1,000,000. The entry to record the issuance of the stock includes
credit Common Stock $400,000 debit Cash $1,000,000 credit Additional Paid-in Capital $600,000
Common Stock (Paid In Capital)
currency or other resources paid to the organization from owners-- equity paid by stock holders
When a company reissues shares at a price lower than the cost to previously purchase the treasury stock, it records a
debit to Additional Paid-in Capital
Mega Corporation repurchased 1,000 shares of its $1 par value common stock for $8,000. The effect of this transaction on the accounting equation includes a(n)
decrease in stockholders' equity and assets
stock dividend
distributes additional shares of stock to existing stockholders on a pro rata basis at no cost to the stockholders has no effect on total stockholders' equity increases Common Stock decreases Retained Earnings
The US Financial Accounting Standards Board is working with the International Accounting Standards Board to
eliminate differences in financial reporting among countries make financial statements more comparable
Main goal of GAAP and IFRS
ensure that companies produce useful information for capital providers
Financial statement analysis is useful for
evaluating a company's success in meeting challenges
The order in which liabilities are reported on the balance sheet is based on when the liability is....
expected to be paid or settled
The order in which assets are reported on the balance sheet is based on when the asset is...
expected to be used or turned into cash
debt financing
funds provided by lenders (creditors)- must be repaid
=FV(i,n, FV pmt, PV) in excel
future value of a single amount
Where may a user of financial statements determine the accounting methods used?
in the notes to the financial statements
Bonds are attractive to investors because
interest is higher than bank savings accounts they can be traded on established bond exchanges
Advantages of debt financing
interest payments on debt are tax deductible control is not diluted
Days to sell equals 365 divided by the
inventory turnover ratio
Par Value
is an insignificant value per share of capital stock specified in the corporate charter.
Treasury stock on the balance sheet
is subtracted from the total stockholders' equity
Initial Public Offering (IPO) is when
issues shares that are traded on a stock exchange
equity financing
money from stocks
Net Income is reported on...
on both the income statement and statement of retained earnings
Cash Flows activity types
operating, investing, and financing
What does the SEC do?
oversees financial reporting by US public companies oversees the US stock exchanges
Large stock dividends are recorded at _______ and small stock dividends are recorded at ______.
par value; market value
Benchmarks
points of reference against which a company's ratio can be compared. They include competitor ratios, industry averages, and prior year results
Ratio Analysis
relationship between items on different financial statements compare amounts for one or more line items to the amount for other line items in the same year to assess a company's profitability, and solvency
Vertical Analysis
relationship between items on the same financial statement—see the contributions of each item to the overall profit
Contributed capital/paid in capital
reports the amount of capital the company received from investors
Accumulated Other Comprehensive Income (Loss)
reports unrealized gains and losses from temporary changes in the value of certain assets and liabilities the company holds on the balance sheet
Full Disclosure Principle
requires companies to include notes to the financial statements
Profitability Ratio Types
return on equity fixed asset turnover earnings per share Gross profit percentage Net profit margin Price/earnings ratio
equation for the income statement
revenue-expenses = net income
Individual Expenses are accumulated in
separate accounts
A Balance Sheet has information regarding
stockholders' equity, assets, cash, liabilities, retained earnings (Common Stock, Equipment, Notes Payable, Supplies)
present value
the amount of money today that would be needed, using prevailing interest rates, to produce a given future amount of money
Treasury Stock represents
the amount paid for stock reacquired and currently held in treasury a contra-equity account
An income statement is referred to as a single-step income statement because
the format separates total revenues from expenses and reports a single measure of income
Benchmarks can be
the results of prior years averages of others' results in the same industry
Financial information is enhanced when it is
understandable comparable timely verifiable
