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