9 10 11 13

What rights do common stockholders have in a corporation?

1. Vote at stockholder's meetings (board, resolutions) 2. share in corporate earnings (dividends) 3. sell or dispose of stock 4. preemptive right - maintain ownership percentage (if new stock issued) 5. share assets upon liquidation (after creditors and preferred stockholders are paid)

What are some of the examples of payroll taxes the employer must pay?

1. employers match of FICA (social security and medicare) 2. Federal unemployment (.8% on employees 1st 7,000) 3. state unemployement (.8 to 5.4% on on 1st $7,000) 4.CA employer traing Tax (.1% of the first &,00 gross pay per employee) 5. Workers Compensation (rates vary per employer)

When is the discount on bonds payable account used? what type of account is it?

1/1debit cash credit bonds payable 6/30 debit interest expense credit cash 12/31/ debit interest expense credit cash when it bond is maturity 1/1 debit bonds payable credit cash

The balance of the Common Stock ($10 par) account was $400,000 for the entire fiscal year. The company had no preferred stock outstanding during the year. Net income for the year was $40,000; 25% of that amount was distributed to stockholders as a cash dividend. The market price of the stock on the last day of the year was $12 per share. The par value of the stock is $10 per share. What was the price-earnings ratio?

12.0 Feedback: The price-earnings ratio is calculated by dividing the market price per common share by the earnings per share. The balance in the common stock account of $400,000 divided by the par value of $10 equals 40,000 common shares outstanding. Net income minus preferred dividends of $40,000 (or $40,000 - $0) divided by the weighted-average common shares outstanding of 40,000 equals earnings per share of $1. The market price of $12 per common share divided by the earnings per share of $1 per share equals a price-earnings ratio of 12. (Learning Objective P3)

The balance of the Common Stock account was $400,000 for the entire fiscal year. The company had no preferred stock outstanding during the year. Net income for the year was $40,000; 25% of that amount was distributed to stockholders as a cash dividend. The market price of the stock on the last day of the year was $12 per share. The par value of the stock is $10 per share. What was the price earnings ratio?

12.0 $400,000 in common stock divided by par value of $10 equals 40,000 shares. Net income of $40,000 divided by 40,000 shares equals earnings per share (EPS) of $1. Since the stock price is $12 per share, the PE is 12 (12/1).

If a company has sales of $500,000, cost of goods sold of $100,000, operating expenses of $100,000, average inventory of $8,000, average accounts receivable of $10,000, and average total assets of $35,000, what is its total asset turnover:

14.29 Feedback: Net sales of $500,000 divided by average total assets of $35,000 equals a total asset turnover of 14.29. (Learning Objective P3)

A change in an account balance from $100 in year one to $250 in year five can be expressed in which way?

150% Feedback: A percent change is calculated as (analysis period amount - base period amount) divided by base period amount x 100. The percent change from $100 to $250 is 150% (or ($250 - $100)/$100 x 100). (Learning Objective P1)

A company has the following data: sales $500,000, cost of goods sold $200,000, operating expenses $100,000, average inventory $8,000, and accounts receivable $10,000. What is its number of days' sales uncollected?

7.3 days Feedback: Accounts receivable of $10,000 divided by net sales of $500,000 times 365 equals the number of days' sales in accounts receivable of 7.3 days. (Learning Objective P3)

Which of the following is not correct?

A)Current ratio - Liquidity and efficiency B)Return on total assets - Profitability C)Profit margin ratio - Profitability D)Equity ratio - Solvency E)Dividend yield - Solvency<<<<<<<<<<<<<<<<

Which ratio is viewed as an indicator of future growth and risk for a stock?

A)Dividend yield B)Earnings per share C)Price-earnings ratio<<<<<<<<<<< D)Return on equity E)Return on assets Feedback: The price-earnings (PE) ratio may be viewed as an indicator of the market's expected growth and risk for a stock. High expected risk suggests a low PE ratio. High expected growth suggests a high PE ratio. (Learning Objective P3)

What is the denominator in the formula to calculate the return on common stockholders' equity?

A)Net sales B)Average total assets C)Total equity D)Total contributed capital E)None of the above<<<<<<<<< Feedback: The return on common stockholders' equity formula is calculated by dividing (Net Income - Preferred Dividends) by Average Common Stockholders' Equity. (Learning Objective P3)

Which of the following is not correct?

A)Total asset turnover = net sales/average total assets B)Profit margin ratio = net income/net sales C)Return on total assets = net income/average total asset D)Equity ratio = total liabilities/total assets<<<<<< E)Current ratio = current assets/current liabilities Feedback: The return on total assets equals net income/average total assets. The equity ratio equals total equity/total assets. (Learning Objective P3)

Number of times A/R collected each year.

A/R Turnover

Sales generated by the firm's assets.

Asset Turnover

What is the difference between authorized, issued and outstanding stock?

Authorized stock: Maximum amount of stock a corporation is allowed to issue (sell) as authorized by corporate charter. Issued Stock: total number of shares the corporation issued or sold (includes treasury stock) Outstanding stock: number of shares held by stockholders.

Measures ability to pay short term obligations.

Current Ratio

What journal entry is required when a company offers a warranty on the products it sells?

Debit Warranty Expense credit estimated warranty liability debit estimated warranty liability credit cash

Shows proportion of creditor financing or leverage.

Debt Ratio

Which of the following ratios are solvency ratios (select all that apply)?

Debt Ratio Times Interest Earned

What are dividends? who declares the dividends?

Distribution to stockholders on a pro rata basis. if own 10% shares you'll get 10% of the dividend. to pay cash dividend corporation needs -retained earnings -adequate cash -board needs to declare dividends dividend forms cash property script (promissory note to pay cash) stock

Which is not true of common-size comparative statements?

Dollar amounts are generally not shown. Feedback: Total assets are used as a total against which all balance sheet accounts are measured on a common-size comparative balance sheet. The dollar amount of each item is shown, along with the percentage each item represents of some common base. (Learning Objective P2)

What are the advantages of issuing stock rather than bonds?

Dont lose control of corporation (bondholders dont have voting rights) tax savings (deduct intrest payments but not dividends) earnings per share may be higher.

What are the main probability ratios? to whom are these most important? list the main profitability?

Effects: liquidity position, ability to obtain debt and equity financing ability to pay dividends & grow Gross profit (margin): sales - COGS/ net sales Profit Margin: net income generated by each dollar of assets Return on stockholders equity: shows probability of common stockholders investment

Measures how productive a company was in using its assets

Efficiency Ratios

Which of the following are goals of the Sarbanes-Oxley Act?

Ensure adequate accounting disclosure Strengthen corporate governance Feedback: Two of the goals of SOX are to ensure adequate accounting disclosure and strengthen corporate governance. (Learning Objective P3 Decision Insight)

If total assets increased from $60,000 to $90,000 during one year, the percent change would be 33.33%.

False

Liquidity is the ability to generate future revenues and meet long-term obligations.

False

The debt ratio is calculated by dividing total liabilities by total equity.

False

FavorableIf Your Co's gross margin increased from 30% to 32%, is that favorable or unfavorable?

Favorable

If Your Co's asset turnover is 8 and the industry average 10, is that favorable or unfavorable?

Favorable

If Your Co's current ratio increased from 0.8 to 1.2, is that favorable or unfavorable?

Favorable

Which type of analysis is a comparison of a company's financial condition and performance across time?

Horizontal analysis

what do efficiency ratios measure? to whom are these most important? list the main efficiency ratios

How productive a company was in using assets. assets turnover: sales generated by firms assets inventory turnover: number of times inventory sold during year days sales in inventory: days it takes to sell inventory A/R turnover: number of times A/R collected each year Days sales uncollected: days it takes to collect A/R Most important to: investors (stock and bondholders)

What are Schilit's 5 warning signals of financial shenanigans?

Howard Schilit would send out a newsletter to companys to give warnings to account problems to companys. Cash flow from operations (CFFO) does not exceed net income. sell off assets/cash flow from operations is smaller then their net income. borrowing cash. shuffling their numbers. receivables are growing faster than sales selling stuff to people that dont have proper credit bad oemin Profit margins rise and fall quickly can signal manipulation Profit margin (sales - costofgoodsold) usually stays steady over time. A change of more than 2 percentage points from year to year merits another look. it could mean company is using another revenue such as asset sales or write-offs and restructings to juice profits sunbeam reported 10% jump in gross margin before it was nailed by the SEC Proxy Statement hint at ethics problems Can you trust the company leaders proxy statements will disclouse compensation deals for top execs. "If you were reading enrons statements you knew that Ken Lay had received 4 million line of credit from the company. If it made you uncomfortable you could walk away" Checkers appointed his two 20 year old sons to the board Schilit warned it was bad news. Two years later the firm was choking on its debt load stock fell 85% and the whole family stepped down. Footnotes reveal many changes to assumptions and accounting methods when companys change their accounting assumptions to make their numbers look better then they often bury the news in the footnoes of quarterly reports changing inventory methods counting pension fund earnings as income or extending the depreciable life assets are often done to mask problems.

Number of times inventory sold during the year.

Inventory Turnover

If Your Co's debt ratio decreased from 60% to 50%, is that more risky or less risky?

Less Risky

Name a few limitations of financial statement analysis?

Limitations of financial Statement Analysis Technological changes industry trends changes within the firm: boss quits consumer tastes economic factors analysts should work beyond the ratios Alternative Accounting Methods One company may use the FIFO method, while another company in the same industry may use LIFO. If the inventory is significant for both companies it is unlikely that their current ratios are comparable. In addition to differences in inventory costing methods, differences also exist in reporting such as items as depreciation, depletion and amortization.

What are the advantages and disadvantages of the corporate entity form?

Limited Liablity- shareholders can only lose investment in corporation not personal assets (unless corporate veil pierced) Ablity to raise capital - due to limited liablity and easy transfer of ownership continuous life- as a seperate legal enity corporation not affected by withdrawl, death or incapacity of stockholders double taxation- corporate earnings taxed and stockholder's dividends taxed management- owners dont run the compnay, president and officers manages day to day affairs of the company.

Measures ability to meet short term obligations and unexpected cash needs.

Liquidity Ratios

What do valuation ratios measure? list the main valuation ratios

Market prospect valuation ratios assets market's explanations of markets Price to earnings (PE) ratio: shows market explantation of markets market value and compare it to another value shows the inverstors if it is a bargen or a price value price to sales price to cash flow price to book divided yield: percentage terms

what do solvency ratios measure? to whom are these most important? list the main solvency ratios

Measure the ability to survive over the long-run debt ratio: shows creditor financing or leverage (total debts liabilities/total assets)= debit to equity ratio: proportion of financing from borrowing vs stock or ownership. (total liability/ total equity) times interest earned: shows ability to make interest payments as they come due. Most important to: long-term creditors

what do liquidity ratios measure? to whom are these most important? list main liquidity ratios

Measures ablility to pay short term debt and meet unexpected cash needs 1. current ratio 2. acid-test (quick) ratio: more stringent measured of liquidity (uses only cash, Sort Term investments & A/R - not all current assets) Most important to: short-term creditors (suppliers. etc) goods and services without payment upfront

Measures investors expectations of growth.

PE Ratio (pice to earnings)

What is the par value of common stock? is there any relationship between par value and market value?

Par Value An arbitrary value assigned to each share of stock in the corporate charter (no relationship to market value) Historically used to determine amount of capital that must be kept in the business to protect creditors. Usually low (rebok $.01 per share) because: Companies want to minimize legal capital. Some states levy a tax based on par value. Today most states use another means to determine legal capital to protect creditors

What is a contingent liability and what determines whether it is recorded, disclosed or ignored?

Potential future obligations (pending lawsuits, credit guarentees, warranty liablities.) accounting treatment depnds upon likelihood of event weather amount is estimable

Net income generated by each dollar of sales.

Profit Margin

Financial statement analysis focuses on one or more elements of a company's financial condition or performance. Our textbook emphasizes four areas of inquiry with varying degrees of importance. Which area of inquiry relates to the company's ability to provide financial rewards sufficient to attract and retain financing?

Profitability Feedback: Solvency ratios measure a company's ability to generate future revenues and meet long-term obligations. Profitability ratios measure the ability to provide financial rewards sufficient to attract and retain financing. (Learning Objective C1)

Measures company's operating success

Profitability Ratios

What does the debt to equity ratio indicate? is higher or lower more risky?

Proportion of financing from debt vs. owners. total liabilities/total equity Higher the number, the greater the risk

What does the times interest earned ratio indicate? is higher or lower better?

Provides an indication of company's ability to meet interest payments as they come due. become before interest exp. & income taxes interest expense higher the number is better! - i can pay my interest 10x more over

Ratio analysis: Determination of key relations among financial statement items

Ratio Analysis: starting point for questions, management, press releases reduce your holdings in a particular company singe ratior by itself is not very meaningful your ratios

Which of the following is the measurement of key relationships between financial statements?

Ratio analysis Feedback: Ratio analysis focuses on identifying key relationships between financial statement items. (Learning Objective P3)

Net income generated by each dollar of assets.

Return on Assets

What is the difference between a secured and debenture bond?

Secured bonds - have specific assets pledged as collateral for bonds debenture (unsecured) bonds -issued against the general credit of the borrower.

What does it mean that a corporation is a separate legal entity?

Separate legal entity means separate and distinct from owners -may buy, own, sell property -borrow money -enter into legally binding contracts -may sue or be sued -pay taxes

Which of the following would be considered an external user of accounting information?

Shareholder (or stockholder) Feedback: External users include shareholders, lenders, directors, customers, suppliers, regulatory agencies, and brokers. Budget managers and internal auditors are examples of internal users. (Learning Objective C1)

Measures company's ability to survive over the long-run.

Solvency Ratios

If stock is issued for more than par value, what does the journal entry look like?

Stock issued above par Paid-in Capital in excess of par value- new equity account If hydro-slide, Inc., issues an additional 1,000 shares of the $1 par value common stock for cash at $5 per share, the entry is? 8/5 Debit cash 5,000 credit common stock 1,000 credit paid in capital excess par 4,000

Indicates a company's ability to make interest payments as they come due.

Times Interest Earned

Which of the following ratios would be of the most interest to the long-term creditor of the business?

Times interest earned

where does treasury stock go on the balance sheet why?

Treasury stock is a contra-equity account. when you buy back stock it reduces the equity treasury stock is recorded at cost on 2/1 yoko acquires 4,000 shares of its stock at $8 per share. its par value was $2 per share debit treasury stock 32,000 credit cash 32,000

What is treasury stock and why does it exist?

Treasury stock/treasury department When a corporation buys back its own stock to hold treasury for future use. Increase earnings per share and stock price by reducing number of shares outstanding. Reissue to officers and employees under bonus and stock compensation plans. Use in acquisition of other companies. prevent a hostile takeover.

A vertical analysis is also called a common-size analysis.

True

If a firm's times interest earned increased from 15.1 in one year to 20.5 in the next, analysts would view this as a favorable trend.

True

Inventory turnover is calculated by dividing the cost of goods sold by the average inventory.

True

The profit margin indicates the amount of net income each dollar of sales generates.

True

The tools for analysis include horizontal analysis, vertical analysis, and ratio analysis.

True

If Your Co's inventory turnover decreases from 12 to 10, is that favorable or unfavorable?

Unfavorable

Measures markets expectations of growth and worth.

Valuation Ratios

What is a convertible bond?

can be turned/converted into stock on the discretion of the bond holder

The declaration date

date the board of directors declares the dividend commits the corporation to paying dividends debit retained earnings credit dividends payable

What account is debited when an employer incurs payroll taxes?

debit payroll tax expense add up all liabilities credited FICA payable SUTA payable FUTA payable

stock split

decision to increase the number of shares outstanding 2 for 1 split - if you own 400 shares valued at $100 per share you'd get another 400 shares for a total of 800 shares worth $50 each. purpose -increase the marketability of the stock by lowering the stock price per share.

Amounts witheld from employees paychecks are recorded in what type of accounts? why?

employer must withhold payroll taxes from employees paychecks fica taxes withheld social security (6.2%) medicare (1.45%) feeral income taxes State income taxes (if applicble) CA disablity insurace 1.1% in 2009 401 union dues Its a payable because it is a liability to the employer

how is preferred stock different from common stock?

entitled to dividends before common stockholders. may have cumulative dividend rights -entitled to prior years' unpaid dividends before common stockholders may get dividends do NOT get right to vote debit cash credit peferred stock credit paid capital excess per

bonds payable

groups of interest-baring notes issued by corporations, universities and gov't agencies the bond certificate states -interest rate -dates interest payments due (semiannual most common, but monthly and annual also used? -date principal due

when is the discount on bonds payable account used? what type of account is it?

if contract (coupon) rate is more or less than market (effective) interest rate you'll have a discount or premium. Discount- receive less than face value because market rate is greater than contract rate. $100,000 of bonds issued at 98 means 98% or $98,000 received but have to pay back the $100,000 contract (coupon or stated) rate less than market Discount on bonds Discount on bonds payable is a contra liablity account amortize discount over term of the bond discounts considered additional cost of borrowing. longterm liabilities bonds payable - discount bonds payable

the record date

if you own shares if you happen to buy them after the record date. If you own shares on record date, you receive the dividend no entry necessary

What is a collable bond?

issuer may retire at a stated dollar amount prior to maturity att issues bonds but have cash early then expected so they can pay off their bonds early with this term.

what is horizontal analysis? How do you come up with the percentage change

look at the trend over time/ net sales comparing performance over time each year. Percent change% = analysis period amount - base period amount/ base period amount x 100

disadvantages of bond financing over common stock.

must make payments in good and bad times if you are having a rough year your shareholders might be mad if your not paying your bond holders they can take you to court.

How is bonds payable different from notes payable?

notes payable is a liability it borrows signing the promissory note. 6/15 debit cash credit note payable 8/23 debit interest expense debit note payable credit cash

stock dividend

pro rata distribution of corporation owns stock to stockholders often issued by companies that don't have cash doesn't effect ownership percentage or total value of stock -if you own 20 of 1,000 outstanding shares in my corp. you have a 2% ownership interest. -with 10% stock dividend. 100 shares would be issued (1,000 x 10%) and you get 2 of them (2% of 100) -you have more shares, but your wonership interest wouldn't change 22/ 1,100 shares = 2% -price of shares would drop slightly as the company is still worth same amount, but more shares of ownership.

When is the premium on bonds payable account used?

receive more than face value because contract rate greater than market value 1000,000 of bonds issued at 103 means 103% or 103,000 received but pay back $100,000 contract (coupon or state) rate greater than market premium bonds payable- adjunct liability account amortize discount over term of bond premiums considered a reduction in cost of borrowing. long-term liablities bonds payable + premium bonds payable = more

Sales tax collected by a merchant is credited to which account? why?

sales tax is ALWAYS A LIABILITYS because merchant collects on behalf of the state. Sales tax payable NEVER sales tax expense Sales and sales tax payable is credited to the merchant

Sales tax is generally due on what type of items?

selling tangible personal property NOT services or unprepared foods

what is vertical analysis? what are the most common bases?

shows the proportion of financial statement items to base amount (net sales or total assets). - total assets the base for vertical analysis of balance sheet -net sales the base for vertical analysis of income statement Vertical analysis: Comparison of a company's financial condition and performance to a base amount base amount is net sales or total assets current assets/ total assets = percentage

the payment date

the date dividend checks are mailed. debit dividends payable credit cash

How are corporations organized?

the shareholders elect the board of directs and then board of directors then hires the president.

How are discounts and premiums treated over the life of the bond

when bonds retired before maturity it is necessary to: 1. eliminate the carrying value of the bond at the redemption date 2. record the cash paid 3 recognize the gain or loss on redemption