HBS Core - Accounting, Financial Accounting

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Which balance sheet standard arranges assets/liabilities from least liquid to most liquid?

IFRS

IFRS stands for International Financial Reporting Standards. IFRS are the accounting rules and standards issued by the International Accounting Standards Board (IASB) which are followed in many countries outside the United States (US). In the US companies adhere to a slightly different set of accounting rules and principles, referred to as GAAP (Generally Accepted Accounting Principles) are issued by the Financial Accounting Standards Board (FASB).

Excel Syntax - IRR

IRR(All Cash Flows: Including Initial Cost)

Adjusting journal entries is the method of recording of an ___ transaction

Implicit

Deferred Tax Asset

In cases where a temporary timing difference leads to a higher taxable income in the current period than the financial income reported, then the excess tax paid is recorded and shown in the financial statements as a Deferred Tax Asset. A Deferred Tax Asset reflects a prepayment of taxes that will be due in the future related to activity already reported in the financial statements.

Mature/Steady

In which stage would you typically expect to see large negative Financing Cash Flows? -Startup -Profitable/Growing -Mature/Steady -Decline

Decline

In which stage would you typically expect to see large positive Investment Cash Flows? Startup Profitable/Growing Mature/Steady Decline

Startup Profitable/Growing

In which stages would you typically expect to see large negative Investment Cash Flows? Select all that apply. Startup Profitable/Growing Mature/Steady Decline

-CASH AND CASH EQUIVALENTS -RENT PAYABLE -INVENTORY

Income Statement: Examples of Permanent Accounts

-COST OF GOODS SOLD -SALES REVENUE -RENT EXPENSE

Income Statement: Examples of Temporary Accounts

Equity increases by ___ and decreases by ___

Increased by credits and decreased by debits

Liabilities increase by ___ and decrease by ___

Increased by credits and decreased by debits

Revenues increase by ___ and decrease by ____

Increased by credits and decreased by debits

Assets increase by ___ and decrease by ___

Increased by debits and decreased by credits

Expenses increase by __ and decrease by ___

Increased by debits and decreased by credits

Net Present Value - Formula

Initial Investment + Present Value of Operating Cash Flows

IRR represents the discount rate where the NPV of a project is $___. Any rates greater than the IRR would lead to NPV ____ $0

$0. Less than $0

Retained Earnings - Formula

LY Retained Earnings + TY Net Income

LIFO Inventory Valuation - Definition

Last In First Out. Newest units are the first units sold

What is the equity multiplier?

Leverage

What does it mean for the equity multiplier to be equal to 1?

Leverage = 1 means all assets are funded strictly by equities

Crediting increases which accounts?

Liabilities. Equity. Revenue

Debiting decreases which accounts?

Liabilities. Equity. Revenues

Accounts Payable

Liability account used to show the obligation to pay suppliers who have provided goods or services on credit terms.

Formula: Quick Ratio

(Current Assets - Inventory) / Current Liabilities

Formula: Days Purchases Outstanding

365 / Accounts Payable Turnover

Formula: Average Collection Period

365 / Accounts Receivable Turnover

Liability

A "note payable for a bank loan" is an example of a...

Furniture & Fixtures

A classification of long-lived physical asset.

Accumulated Depreciation

A contra asset account that includes the cumulative total of all depreciation expenses recorded to date for specific assets. The credit balance in this account offsets the debit balance in the asset account which shows the original value of the asset. When the original asset value is netted against the accumulated depreciation for the asset you arrive at the net book value of the asset.

Expense

A cost associated with providing goods or services to a customer.

Patents

A patent is the official document granting an inventor specific rights to an invention, usually for a specific period of time. In accounting, a patent will typically be recorded as an intangible asset only when it is purchased. Any costs associated with developing a patent internally should be expensed as research and development costs.

Discount Rate

A percentage rate determined by a company used to calculate the present value for a stream of future cash flows. The discount rate is somewhat subjective and is meant to take all of the factors that impact the time value of money into account, e.g. opportunity cost, inflation, and risk.

Tangible Asset

A physical asset that you can touch and see.

Asset

A resource that is owned or controlled by a business and is expected to provide some future economic benefit to the business. Examples include cash, inventory, and equipment. The business expects that its assets will help to produce cash inflow in the future.

Service Business

A service business is one which engages primarily in service activities to generate revenue rather than product sales.

Sensitivity Analysis

A very important element in any forecasting exercise that involves evaluating the impact of changing key assumptions used when preparing a financial forecast. Could involve changes to any of the assumptions in the forecast, including changes to revenue or cost elements or to efficiency in managing balance sheet items. Could also involve changing the discount rates applied to the resulting cash flows from a financial forecast to calculate present value amounts.

Accounts Payable Turnover

Accounts Payable Turnover is a ratio that is used to measure how efficiently a business is paying its vendors. It is calculated by dividing the credit purchases for the period by the average accounts payable balance for the period. In the absence of credit purchases information, we may use cost of goods sold as a substitute. The ratio represents how many times the accounts payable turned over during the period. For most ratios in this course, we use averages when calculating ratios with balance sheet numbers, but this is not necessary and some may choose to use beginning or ending balances.

What is the most common type of accrual?

Accounts Receivable

Real Accounts

Accounts that contain cumulative balances since the inception of the business. All asset, liability and equity accounts are real

CAGR

Acronym for Compound Annual Growth Rate. It is a measure of the rate of return of an investment over a given period of time.

EBIT

Acronym for Earnings Before Interest and Taxes. Can be calculated by adding interest and taxes back to Net Income.

EBITDA

Acronym for Earnings Before Interest, Taxes, Depreciation, and Amortization. Used sometimes as a shortcut method to approximate operating cash flows.

Statement of Cash Flows - Investing Activities - Definition

All cash flow activities related to long lived assets (PPE), loans receivable and certain investments securities

Statement of Cash Flows - Operating Activities - Definition

All cash flows associated with the preparing and providing of goods/services to customers

Paid-In Capital

Amounts contributed to (invested in) the business by the owners.

Dividends

Amounts paid to the shareholders of a company, usually in the form of cash.

Contra Account

An account for which the typical balance is contrary to other accounts in its category. Used to adjust the net value of the account to which it relates. An example is Accumulated Depreciation, which is a contra-asset account used to arrive at the net book value of fixed assets.

Contra-Asset

An account that exists to adjust the net value of the asset on the financial records of the company. It is called a contra-asset account because it has a credit balance and its only purpose is to modify the value of the related asset. The contra-asset account is typically shown beneath the related asset in the chart of accounts and in the financial reports. Examples of a contra-asset accounts are Reserve for Bad Debts, which is a contra-asset account related to Accounts Receivable, and Accumulated Depreciation, which is a contra-asset related to Property, Plant, & Equipment.

Current Asset

An asset that will be used or converted into cash within one year or one operating cycle, whichever is longer.

Accumulated other comprehensive income

An equity account that consists of cumulative unrealized gains or losses on line items classified under other comprehensive income. It includes items such as unrealized gains or losses on investments available for sale, foreign currency gains or losses, and pension plan gains or losses.

Transaction

An event or circumstance that impacts the financial position of a business and needs to be recorded in the financial accounts.

Specific Identification

An inventory valuation method in which each specific inventory item is included in the inventory account at its specific cost. Not a common method because of the difficulties tracking specific inventory units. It tends to be most useful for businesses that sell a relatively small volume of unique, high value goods, such as car dealerships or expensive jewelry retailers.

Standard Cost

An inventory valuation method often used in manufacturing companies which values inventory and related cost of goods sold at a calculated standard cost of the units associated with the sale. Methods for calculating standard costs and methods for identifying and reporting variations from the standard are part of cost accounting and are outside the scope of this course.

Last In First Out (LIFO)

An inventory valuation method which determines the value of inventory sold as if the current units sold are the newest units placed into inventory (Last In First Out). In a time of steadily rising inventory costs, this method leaves the lower costs in the inventory account and recognizes the latest, higher costs as an expense in Cost of Goods Sold.

Weighted Average

An inventory valuation method which values inventory and related cost of goods sold at the weighted average cost of the units remaining in inventory at the time of the associated sale.

Annuity

An investment where the purchaser receives the right to receive a fixed amount each year for a lifetime or for a certain number of years.

Retained Earnings

An owners' equity account that reflects the earnings that have been retained in the business to finance growth or future operations. At the end of each accounting period, the net income for the period is closed to retained earnings.

Categorize: Accounts Receivable

Asset

Categorize: Cash

Asset

Categorize: Deferred Tax Asset

Asset

Categorize: Fixed Assets

Asset

Categorize: Goodwill

Asset

Asset Turnover

Asset Turnover is calculated by dividing the total sales for the period by the average total assets. This calculation is used as a measure of efficiency in the DuPont Framework. For most ratios in this course, we use averages when calculating ratios with balance sheet numbers, but this is not necessary and some may choose to use beginning or ending balances.

Contra-Asset

Asset account that adjusts the net value of a depreciating asset. Can only be filled with credits.

Accounts Receivable

Asset account used to show the claim to receive cash at some future date for goods or services that have been supplied to a customer on credit terms.

Deferred Tax Asset - Definition

Asset that reflects the prepayment of future taxes

Fundamental Accounting Equation

Assets = Liabilities + Owner's Equity

Crediting decreases which accounts?

Assets. Expenses.

Debiting increases which accounts?

Assets. Expenses.

Seasonality

At the end of the third quarter, a department store is showing lower cash flows and lower sales on its financial statements compared to the average of the previous four quarters. It also shows an increase in inventory compared to the second quarter. Which of the following options is MOST likely to be the cause? Seasonality Depreciation In Decline Stage Efficiency

Formula: Leverage

Average Assets / Average Equity

Average Collection Period

Average Collection Period is a measure related to accounts receivable turnover that shows the average number of days it took for a business to collect payment from a customer. It can be calculated by dividing the average accounts receivable by the credit sales per day. Alternatively, it can be calculated by dividing 365 by the Accounts Receivable Turnover. For most ratios in this course, we use averages when calculating ratios with balance sheet numbers, but this is not necessary and some may choose to use beginning or ending balances.

Indication: Days Inventory

Average number of days inventory is held before it is sold

Indication: Days Purchases Outstanding

Average time it takes for a business to repay its supplier

Weighted Average Inventory Valuation - Definition

COGS of each unit sold is a weighted average of the units remaining in inventory

Formula: Inventory Turnover

COGS/Average Inventory

Net Profit

Calculated by the formula Income before taxes - taxes. A company's total earnings. Also called net earnings, net income, and the bottom line.

Net Income

Calculated by the formula Income before taxes - taxes. A company's total earnings. Also called net earnings, net profit, and the bottom line.

Net Earnings

Calculated by the formula Income before taxes - taxes. A company's total earnings. Also called net income, net profit, and the bottom line.

Statement of Cash Flows - Financing Section - Definition

Cash flow activities related to raising/paying back money to investors and creditors

Company A is paying suppliers at a faster rate than Company B.

Company A has a higher Accounts Payable Turnover Ratio than Company B. Which of the following statements is true regarding these two companies? Company A has a longer Average Collection Period than Company B. Company A has a lower percentage of credit purchases than Company B. Company A is paying suppliers at a faster rate than Company B.

Company A is more efficient in collecting receivables from customers than Company B.

Company A has a shorter Average Collection Period than Company B using the formula 365 / (Credit Sales / Average AR Balance). Which of the following statements is true regarding these two companies? Company A has a lower percentage of credit sales than Company B. Company A is more efficient in collecting receivables from customers than Company B. Company A is more efficient in generating revenue than Company B.

Sales Discounts and Returns are examples of ______ accounts

Contra-Asset

When a business removes an asset, it must also remove the corresponding _____

Contra-Asset Account

Accumulated Depreciation

Contra-Asset account that holds the cumulative total of all depreciation expenses for an asset

Chart of Accounts

List of all of the accounts of a business. This list includes all asset, liability, equity, revenue, and expense accounts. The accounts and naming of accounts can vary from business to business.

Bonds

Long term debt instruments that are issued with a specific rate of interest and maturity date. There are many types of bonds and they are issued by governments, utilities, and public companies to raise funds.

A project will be profitable if the discount rate is ___ than the IRR

Lower

Typically, the higher the discount rate, the ___ NPV is

Lower

The correct answer is: $120,781 It is calculated by multiplying the annual payment by the present value of an annuity factor. $18,000 * 6.71008 = $120,781

Cybertrex, a manufacturing facility, rented a new piece of equipment on January 1st and agreed to pay an annual rental fee of $18,000 at the end of each of the next 10 years. The weighted average cost of capital of the company is 8%. The present value of $1 for 10 years at 8% is 0.46319 The present value of an ordinary annuity of $1 for 10 years at 8% is 6.71008 What is the Present Value of the rental payments over 10 years?

The correct answer is $6,000. The depreciable value of the equipment is $40,000 ($45,000 cost - $5,000 salvage value) and the number of years to be depreciated is 10 years. So the depreciation for 12 months is $4,000 ($40,000 / 10 years). The amount of accumulated depreciation at the end of September, 2015 will be $6,000, which includes $3,000 for the nine months of depreciation in 2014 and $3,000 for the nine months of depreciation in 2015.

Luster Consulting Company purchased a new heating and cooling system for their office building in March, 2014. After installing and testing the equipment, it was put into service on April 1, 2014. The total cost to put the equiptment into service was $45,000; it is expected to have a useful life of 10 years and a salvage value of $5,000. Assuming Luster Consulting Company uses straight-line depreciation, what will the accumulated depreciation be at the end of September, 2015?

Manufacturing Overhead

Manufacturing overhead refers to costs that are necessarily incurred in the process of manufacturing goods, other than the costs of the raw materials or direct labor. Some examples of overhead costs would be rent and utilities for the manufacturing facility. Along with the costs of raw materials and labor, manufacturing overhead costs will be allocated to the goods produced.

Formula: Cash Conversion Cycle

Days Inventory + Average Collection Period - Days Purchases Outstanding

Days Purchases Outstanding

Days Purchases Outstanding is a measure related to accounts payable turnover that shows the number of days it takes a business to pay its vendors. It can be calculated by dividing the average accounts payable by the credit purchases per day. Alternatively, it can be calculated by dividing 365 by the Accounts Payable Turnover.

An increasing in current operating assets ___ cash flows

Decreases

Increasing the discount rate in Gordon's Growth Model, ___ the Terminal Value

Decreases the TV

Taxes Payable > Tax Expense creates a _____

Deferred Tax Asset

Taxes Payable < Tax Expense creates a _____

Deferred Tax Liability

Deferred Revenue

Deferred revenue is a liability that represents the obligation to provide goods or services to a customer in the future. Deferred revenue is recorded when a business receives a payment in advance from a customer, but the business has not yet delivered the good or provided the service. Once the business fulfills its obligation to provide goods or services, the liability is reduced and the revenue is recognized. May also be referred to as unearned revenue. Remember that deferred revenue is NOT revenue.

Depreciation vs Amortization

Depreciation - Tangible Assets (ex. Equipment) Amortization - Intangible Assets (ex. Patents)

Accelerated Depreciation Methods

Depreciation methods that recognize more depreciation expense in the early years and less in the later years. Double-declining balance is an example of an accelerated depreciation method.

Examples of Implicit Transactions

Depreciation. Interest Expense. Amortization of a Prepaid Expense. Recognizing Deferred Revenue. Recognizing Expenses related to a Prepaid Asset

product cost

Direct Labor, Manufacturing Overhead are examples of:

WACC is an estimate for ___

Discount Rate

Internal Rate of Return (IRR) - Definition

Discount rate that sets the NPV of a project equal to 0

Weight Average Cost of Capital - Definition

Discount rate which represents the cost to the business of raising funds. Used in NPV calculations

EBIAT

EBIAT is an acronym for Earnings Before Interest After Taxes. It is a measure of how much income the business has generated while ignoring the effect of financing and capital structure of the business. It is calculated by adding back interest and taxes to net income, and then calculating and subtracting income tax expense based on the earnings before interest and taxes.

Formula: EBIAT

EBIT*(1 - tax rate)

Formula: Interest Coverage Ratio

EBIT/Interest Expense

Definition: EBIAT

Earnings Before Interest After Taxes

Retained Earnings - Definition

Earnings retained in the business to finance growth or future operations

Adjusting (Journal) Entries

Entries made to adjust the balances of asset and liability accounts to reflect changes in their values due to the passage of time or another implicit transaction.

Journal Entry - Definition

Entry made to record a transaction. Always includes at least one debit & credit and total debits must always equal total credits

Categorize: Capital Stock

Equity

Categorize: Common Stock

Equity

Categorize: Paid In Capital

Equity

Categorize: Retained Earnings

Equity

Categorize: Treasury Stock

Equity

Equity is the residual that belongs to the owners of the business. If you add up all the resources of the business (assets) and subtract all the claims that third parties (such as lenders and suppliers) have against those assets, the residual (what is left over) is equity. Equity includes two elements; first, money contributed to (invested in) a business in exchange for some degree of ownership and second, earnings that the business generates over time and retains in the business. Also commonly known as shareholders' equity, stockholders' equity, or owners' equity.

Categorize: COGS

Expenses

Categorize: Depreciation Expense

Expenses

Categorize: Interest Expense

Expenses

Categorize: Rent Expense

Expenses

Matching Principle

Expenses should be recognized in the same period in which the related revenue is recognized rather than when the related cash is paid

Free Cash Flow - Formula

FCF = EBIAT + (Depreciation & Amortization) - Capital Expenditure - delta(Net Working Capital)

Different Types of Inventory Valuation Methods (3)

FIFO. LIFO. Weighted Average

Valuating Assets under Historical Cost Principle

Financial value of assets is shown at historical cost, rather than current market value. Example - Land appreciation

FIFO Inventory Valuation - Definition

First In First Out. Oldest units are the first units sold

Assumption behind Gordon's Growth Model

Fixed growth rate

Conservatism

For revenues and gains it means recording them when they are reasonably certain but for expenses and losses it means recording them when they are reasonably possible. For assets it means recording the lower valuation while for liabilities it means recording the higher possible valuation.

Gross Profit is equal to Sales Revenue minus Cost of Goods Sold, in this case $1,600,000 - $640,000 = $960,000. The Cost of Goods Sold of $640,000 is found by multiplying $1,600,000 by 40%.

For the year 2015, Dark Horse Corp.'s sales revenue was $1,600,000. Cost of goods sold (COGS) was 40% of sales revenue. Their income statement shows that operating expense was $150,000. What was Dark Horse Corp.'s gross profit for 2015?

GAAP

GAAP stands for Generally Accepted Accounting Principles. Often referred to as US GAAP as it is usually associated with accounting rules and standards in the United States (US) issued by the Financial Accounting Standards Board (FASB). Outside the US many countries adhere to a slightly different set of accounting rules and principles referred to as IFRS (International Financial Reporting Standards) which are issued by the International Accounting Standards Board (IASB).

Finished Goods Inventory

Goods at the final stage of the manufacturing process when they are complete and available for sale to customers.

The amount by which the revenue exceeds the cost of goods sold (or cost of sales). Gross Profit = Net Sales - COGS

Gross Profit

Operating Income - Formula

Gross Profit - Operating Expenses

Formula: Gross Profit Margin

Gross Profit/Revenue

If a business is labeled as a going concern, is that business healthy or unhealthy? Why?

Healthy. Going concern means its expected to remain in operation and satisfy all commitments/obligations

Which is healthier - high or low inventory turnover?

High Inventory Turnover. Represents more efficient inventory management

General Ledger

Historically, accounting systems were comprised of books for each accounts, known as ledgers. The general ledger would include all of the balances from all of the accounts or subsidiary ledgers included in the chart of accounts.

Indication: Interest Coverage Ratio

How capable a business is of making interest payments on its debt

No Impact

How does the following transaction impact cash flow? Recognizing depreciation expense on a piece of equipment purchased six years ago. -Positive (Increase) -No Impact -Negative (Decrease)

No impact

How does the following transaction impact cash flow? Recording an account receivable for the sale of goods to a customer. -Positive (Increase) -No Impact -Negative (Decrease)

liquidity

How quickly and easily an item can be converted to cash is known as:

Depreciation - Definition

Method for recognizing the expense of long-lived physical assets over the life of the asset

Gordon's Growth Model - Definition

Method of calculating terminal value of an indefinite stream of cash flows

If IRR > WACC, then NPV is ___ 0

NPV is greater than 0. Business should go forward with project

If IRR < WACC, then NPV is __ 0

NPV is less than 0. Business should not invest in project

Formula: EBIT

Net Income + Interest Expense + Tax Expense

Formula: Return on Equity (Basic)

Net Income/Equity

Formula: Profit Margin

Net Income/Revenue

Does WACC impact IRR?

Is brand recognition/brand equity recorded as an asset on financial statements?

No - brand equity is an intangible asset

Is a Contra-Asset a liability?

No - it is still an asset account. However, it can only be credited to show the Net Book Value of a depreciating asset

Does recognizing depreciation expense impact cash flows?

No - no impact on cash flows

Temporary Accounts are ___ Accounts

Nominal

Operating or Non Operating Expense? Rental Income

Non Operating

Intangible Asset

Non-physical long-lived assets such as patents, brands, and goodwill.

Gains and loss are not ___ activities, but count as ___ activities

Not operating activities. Count as investing activities

Notes Payable

Notes Payable is a liability that arises when a business receives a promissory note from another business. Essentially, it is a loan recorded from the recipient's point of view. A portion or all of the note payable may be recorded in the current liabilities or non-current liabilities section of the balance sheet, depending on how soon the business expects to settle the note.

Notes Receivable

Notes Receivable is an asset that arises when a business issues a promissory note to another business. Essentially, it is a loan recorded from the lender's point of view. A portion or all of the note receivable may be recorded in the current assets or non-current assets section of the balance sheet, depending on how soon the business expects to settle the note.

Indication: Cash Conversion Cycle?

Number of days between when company pays for inventory purchases and when company collects from customers

Liabilities

Obligations to pay a third party

Look at the investing section in the statement of cash flows

On which financial statements would you be most likely to find information about capital expenditures related to the purchase of equipment during the past year? Look at the ending balance of the PPE account in the balance sheet Look for a large decrease in cash or large increase in accounts payable on the balance sheet Look for a change in the depreciation expense on the income statement Look at the investing section in the statement of cash flows

Credit

One half of an accounting entry. Credits increase the balances in Revenue, Liability, and Owners' Equity accounts. Credits reduce the balances in Asset and Expense accounts. Credits are shown on the right side in journal entries, T-Accounts, and trial balances.

Debit

One half of an accounting entry. Debits increase the balances in Asset and Expense accounts. Debits reduce the balances in Revenue, Liability, and Owners' Equity accounts. Debits are shown on the left side in journal entries, T-Accounts, and trial balances.

Matching Principle

One of the principles behind Accrual Accounting which states that expenses should be recognized in the same period in which the related revenue is recognized rather than when the related cash is paid.

Revenue Recognition

One of the principles behind Accrual Accounting which states that revenues should be recorded at the time that they are both earned and realized or realizable rather than when the related cash is received. When revenue is recognized, it increases owners' equity.

Money Measurement Principle

Only values that can be measured in monetary terms should be recorded in financial accounting records. Intangible assets will not be recorded

Operating or Non Operating Expense? Depreciation

Operating

Operating or Non Operating Expense? General & Admin Expense

Operating

Useful Life

Period of time that an asset is expected to be productive and able to help the business generate revenue.

Impairment - Definition

Permanent reduction in the value of an intangible long term asset

Perpetual vs Periodic Inventory System

Perpetual - Tracks inventory changes in real time Periodic - Only tracks changes for a specified time period

Two Types of Inventory Systems

Perpetual. Periodic

Gordon's Growth Model - Formula

Present Value of Infinite Cash Flows = Cash Flows in the Final Year of Projection / (Discount Rate - Growth Rate)

Terminal Value - Definition

Present value of a stream of funds that extend into the indefinite future

Profit Margin

Profit Margin is calculated by dividing net income by the total sales for the period. This calculation is used as a measure of profitability in the DuPont Framework.

Profitability

Profitability is one of the three components of the DuPont Framework. For the purposes of the DuPont Framework, it is measured using the Profit Margin, but other measures of profitability include the Gross Profit Margin and EBIAT.

Formula: Return on Equity (DuPont)

Profitability x Efficiency x Leverage or Profit Margin x Asset Turnover x Leverage

What increases owner's equity?

Profits

Current asset and liability accounts tend to increase or decrease ____ with revenue. This is the basis for the ____ method.

Proportionately with revenue. Percent of Sales Forecasting

The correct answer is $6,328.75. Under FIFO, the oldest purchased are expensed first as Cost of Sales. In this case, the 4,925 bottles of water sold in May include 1,832 bottles expensed at a cost of $1.00 per bottle (related to February), 1,832 bottles expensed at a cost of $1.25 (related to March) and 1,261 bottles expensed at a cost of $1.75 per bottle (related to April).

Quench, a bottled water supplier, has 5,496 bottles of water in their warehouse at the end of April. One third of the bottles were purchased in February at a cost of $1.00 per bottle. Another third were purchased in the month of March at a cost of $1.25 per bottle. The remaining third were purchased in April at a cost of $1.75 per bottle. The warehouse sold and shipped 4,925 bottles during May. Quench uses FIFO to value their inventory. What was the Cost of Sales related to the bottles shipped in May?

What does the DuPont Framework measure?

ROE - Return on Equity

Indication: Leverage

Ratio of debt compared to other funding sources

Raw Materials Inventory

Raw materials are the components and supplies that a manufacturing business purchases to be used in the production of its inventory.

Permanent Accounts are ___ Accounts

Real

Components of the Accrual Accounting Method (3)

Realization Principle. Matching Principle. Going Concern

Asset - Definition

Resources owned by a business

Categorize: Interest Revenue

Revenue

Categorize: Rent Revenue

Revenue

Categorize: Sales

Revenue

Categorize: Sales Revenue

Revenue

Realization Principle

Revenue can only be recognized when the revenue is both earned and realized/realizable

On the Income Statement, Gains are treated like ___. Losses are treated like ____.

Revenue. Expenses

Formula: Asset Turnover

Revenue/Average Assets

Gross Profit - Formula

Sales - COGS

Debit

Sales Revenue & Deferred Revenue decrease with: Debit or Credit?

Seasonality

Seasonality refers to the fluctuations in a business' performance due to the nature of its business performing differently in different seasons of the year.

Operating Section

Section of the statement of cash flows that includes all cash flows associated the preparing and providing of goods or services to customers, or in other words, the normal operations of the business.

Investing Section

Section of the statement of cash flows that includes all cash flows associated with long-lived assets such as Property, Plant, and Equipment and also includes loans made to another entity and investments in certain types of securities.

Financing Section

Section of the statement of cash flows that includes all cash flows associated with raising and paying back money to investors and creditors, or in other words, financing the business.

Unearned Revenue

See also Deferred Revenue. Unearned revenue (or deferred revenue) is a liability that represents the obligation to provide goods or services to a customer in the future. Unearned revenue is recorded when a business receives a payment in advance from a customer, but the business has not yet delivered the good or provided the service. Once the business fulfills its obligation to provide goods or services, the liability is reduced and the revenue is recognized. May also be referred to as deferred revenue. Remember that unearned revenue is NOT revenue.

Treasury Stock

Shares of the company's own stock that the company buys back and holds. Treasury stock is shown on the balance sheet in the equity section but the account has a debit (negative) balance because it represents a reduction in equity. This makes sense because the company has done the exact opposite of what happens when they issue and sell shares as a way of raising capital. In the case of treasury shares, companies purchase their own shares and reduce their capital.

Cash Equivalents

Short-term, highly liquid investments that can be quickly converted to cash.

Loss

Similar to an expense, a loss reduces owners' equity. However, a loss relates to some activity that is outside the normal operations of the business, such as the sale of a long-lived asset for less than its net book value.

Gain

Similar to revenue, a gain increases owners' equity. However, a gain relates to some activity that is outside the normal operations of the business, such as the sale of a long-lived asset for more than its net book value.

Materiality

Something is considered to be material if it is reasonably likely to impact the decision-making of those who are using the accounting data or financial reports. Businesses are only required to do detailed record-keeping and reporting for items that are material.

Startup Lifecycle Phases

Startup/Fast Growing Profitable/Growing Mature/Steady In Decline

A T-account shows all the activity for a given account for a specific period of time, or in other words, the T-account is the summary of several journal entries.

T-Account

T-accounts are a simplified version of ledger accounts. A T-account shows all the activity for a given account for a specific period of time, or in other words, the T-account is the summary of several journal entries. By convention, all debit activity is shown on the left side of T-accounts and all credit activity is shown on the right side of the T-accounts.

Deductions

Tax term related to amounts that can deducted from "Gross Income" or sales to arrive at taxable income. Deductions are similar to expenses in financial reports but they are not always the same and they are not always identical. Depending on the particular country and its tax code, some expenses may not be deductible and some deductions may not be expenses.

Deferred Tax Asset

Taxable Income exceeds Income Before Taxes due to a temporary timing difference.

Taxes Payable vs Tax Expense

Taxes Payable - What you actually paid the government Tax Expense - What you should have paid the government

Current Ratio

The Current Ratio is a measure of a business' ability to pay its short term obligations. It can be calculated by dividing current assets by current liabilities.

False: This is true for Cash Basis Accounting, but not for Accrual Accounting.

True or False: Transactions are only recorded when there is an exchange of cash

Which balance sheet standard arranges assets/liabilities from most liquid to least liquid?

US GAAP

Statement of Cash Flows - Categorizing Dividends Paid in US GAAP? IRFS?

US GAAP - Financing IFRS - Operating or Financing

Time Value of Money - Concept

Unit of currency received today is worth more than the same received at a future point. The further into the future, the less the unit of currency is worth

Double Entry Accounting

Used across all transaction recording. Puts debits on the left and credits on the right

Payback Period

Used as a way to evaluate a potential investment, Payback Period is a calculation that shows how soon the investors can expect to have their initial investment returned. It is simple to calculate and easy to understand. However, it does not consider time value of money or the amount of funds that the project will generate over and above the initial investment.

It is the amount of cash that a business could be expected to generate from its normal operations.

What is free cash flow?

Assets = Liabilities + Equity

What is the Accounting Equation?

The difference between the revenues/gains and expenses/losses.

What represents the net income/(loss) for the year?

long term liability account

What type of account is 'mortgage payable'?

Credit Terms

When a seller agrees to provide goods or services to a buyer and allows the buyer to remit payment at some future date. The time allowed is typically a specified number of days from the date the goods or services are provided, such as 30 days. May also be referred to as "buying on credit" or "selling on credit."

Subtract depreciation

Which of the following is INCORRECT in determining free cash flows? Adjust net income for interest expense Subtract capital expenditures Subtract depreciation Subtract change in working capital

A positive or negative cash flow from financing activities

Which of the following is a common finding in looking at the statement of cash flows of a declining company? -A positive cash flow from operating activities -A negative cash flow from investing activities -A positive or negative cash flow from financing activities

The return that a business generates during a period on equity invested in the business by the owners of the business.

Which of the following is measured by the DuPont Framework? The return that a business generates during a period on equity invested in the business by the owners of the business. The return or profit received as a result of investing funds. The number of days between when a company pays for inventory purchases and when a company collects from customers. The number of times a company can cover its interest expense only using its earnings before interest and tax.

A higher discount rate results in a higher terminal value.

Which of the following statements is NOT true in relation to the Gordon Growth Model? Terminal value is the present value of infinite cash flows expected in the future. A higher discount rate results in a higher terminal value. The Gordon Growth Model assumes that the growth rate will remain fixed. A higher growth rate results in a higher terminal value.

Profit Margin

Which ratio measures the ability of a company to make a profit relative to revenue generated during a period? Gross Profit Margin Days Sales in Receivable Profit Margin Days Purchases Outstanding

Work in Process (WIP) Inventory

Work in process inventory includes all inventory that is currently in production, somewhere between being raw materials and finished goods. Work in process inventory includes not only the costs associated with the raw materials being used in production, but also the costs of any labor and overhead also contributing to the production.

Straight Line Depreciation - Calculation

Yearly Depreciation = (Gross Book Value - Salvage Value) / Useful Life

For every $100 in sales, $19 ended up in Net Income

You have just reviewed the financial statements of Penelope's Candy Store (PCS). You have determined that PCS has a Profit Margin of 19%. How do you explain this to owner Penelope Hassey? For every $19 in sales, $100 ended up in Net Income. For every $100 in sales, $19 ended up in Net Income. 19% of Net Income was generated by Profit Margin. 19% of sales were generated by Net Income.

Employee Advances

Amounts paid to employees in advance of the employee earning the amount. Equivalent to a loan to the employee. These advances are made at the discretion of the management of the business and they are often repaid by deducting them from subsequent payroll amounts.

Accrued Payroll

An accrued expense recorded at the end of a financial period for amounts of payroll that have been worked but not yet paid. It is a common type of accrued expense. See also Salaries/Wages Payable.

Salaries/Wages Payable

An accrued expense recorded at the end of a financial period for amounts of payroll that have been worked but not yet paid. It is a type of accrued expense.

Taxes Payable

An amount calculated by multiplying a company's applicable income tax rate by its taxable income, which is found on the company's tax return.

Net Working Capital - Formula

Current Assets - Current Liabilities

Components of a Balance Sheet

Current Assets. Non-Current Assets. Current Liabilities. Non-Current Liabilities. Equity

Formula: Current Ratio

Current Assets/Current Liabilities

Leverage

Leverage refers to the use of debt as a funding source. A company that is highly leveraged has a large amount of debt financing compared to other funding sources.

Categorize: Accounts Payable

Liability

Categorize: Accrued Interest

Liability

Categorize: Accrued Taxes

Liability

Categorize: Accrued Wages

Liability

Categorize: Deferred Revenue

Liability

Categorize: Deferred Tax Liability

Liability

Categorize: Interest Payable

Liability

Categorize: Long Term Debt

Liability

Categorize: Notes Payable

Liability

Categorize: Short Term Debt

Liability

Categorize: Taxes Payable

Liability

Categorize: Wages Payable

Liability

Is deferred revenue an asset or liability?

Liability

Current Liabilities

Obligations that will be settled or paid in cash within a year (or within one operating cycle, if the company's operating cycle is longer than one year).

Non-Current Liabilities

Obligations that will not be settled or paid within a year.

Differences between Liabilities and Owner's Equity

Owners have the ability to make decisions about how the business operates. Lenders/suppliers do not

Indication: Inventory Turnover

Number of times average inventory balance is sold or used in a period. Indicator of operating efficiency

Formula: Days Inventory

365/Inventory Turnover

NPV

A CFO of a start-up company is evaluating the timing of a significant capital expenditure. He was previously at a mature company that used a discount rate of 8% so he used the same rate at the start-up company. Which of the following would be impacted if the discount rate were raised to reflect the risk of the start-up company? Internal rate of return Payback period Return on investment Net present value

Entity Concept

A business is a separately identifiable entity. Therefore, accounts of a business should be completely separate from those of owners of the business

On the Books

A colloquial phrase used to indicate that a transaction has been recorded in the financial accounting records of a business.

Double Declining Balance Depreciation

A common accelerated deprecation method of calculating and recording depreciation expense. It recognizes more depreciation expense in the early years and less in the later years compared to straight-line depreciation.

Straight Line Depreciation

A common method of depreciating long-lived assets that spreads the anticipated decline in the value of the asset evenly over the expected useful life of the asset. The yearly depreciation amount is calculated as (Gross Book Value - Salvage Value) / Useful Life

To calculate the projected retained earnings, you add the projected 2015 net income of $22,000 to the beginning balance of $94,000 carried over from 2014. Then you must subtract $70,000 for the dividend of $0.70 per share times the 100,000 shares outstanding. $94,000 + $22,000 - $70,000 = $46,000

A company has retained earnings of $94,000 as of December 31, 2014. The Pro-forma income statement projects net income of $22,000 for 2015. The company expects to declare their annual dividend on March 15, 2015 of $0.70 per share and has a total of 100,000 shares outstanding. What will the projected retained earnings account be as of December 31, 2015?

Going Concern

A company is considered to be a going concern if the entity is expected to remain in operation and be able to satisfy all commitments and obligations and realize the benefits and values of all assets for the indefinite future. If there is evidence to the contrary, the business may no longer be considered a going concern

Going Concern

The company should buy the equipment because the NPV is positive.

A company is considering buying a diagnostic piece of equipment for $250,000. The machine will be depreciated on a straight-line basis for 10 years with a salvage value of $40,000. The company expects the machine to be able to generate after-tax revenues of $33,000 in each of the 10 years, and then it will sell the machine for $40,000 at the end of 10 years. The sum of the undiscounted cash flows is $370,000. The discount rate is 7%. The net present value is calculated to be $2,112. Which of the following statements is true? The company should not buy the equipment because the NPV is less than the annual revenues expected. The company should not buy the equipment because the NPV is less than the initial cost of the equipment. The company should buy the equipment because the sum of the undiscounted cash flows is greater than the initial cost of the equipment. The company should buy the equipment because the NPV is positive.

the company should recognize a gain of $600,000. At the sale date, the building's net book balue was $650,000 ($850,000 original cost less $200,000 accumulated depreciation). Since it was sold for $1,250,000, which is more than the net book value,

A company purchased a building for $850,000 on January 1, 2010. As of December 31, 2014, $200,000 of accumulated depreciation had been recorded related to this building. The building was sold to another party for $1,250,000 on January 1, 2015. On the sale of this building, the company should recognize:

The net book value is calculated by subtracting the accumulated depreciation from the original cost of the asset. $350,000 - $215,000 = $135,000

A company purchased a piece of equipment for $350,000 in 2008. As of 12/31/2015, $215,000 of depreciation expense had been recognized against this piece of equipment. What is the equipment's net book value on 12/31/2015?

Reserve for Bad Debts

A contra asset account that nets against Accounts Receivable. It is generally set up as an estimate of accounts that will ultimately prove to be uncollectible. It is then reduced when accounts are written off. It may be adjusted at period end to reflect any updated estimates. May also be referred to as Allowance for Doubtful Accounts.

Allowance for Doubtful Accounts

DuPont Framework

A framework of ratios that breaks down Return on Equity (ROE) into the three components of Profitability, Efficiency, and Leverage.

Journal Entry

A journal entry is the entry made to record a transaction in the financial records of a business. The information entered will include the accounts impacted, the dollar (or other currency) amounts involved, the date of the transaction, and often some notes explaining the transaction. A journal entry always includes at least one debit and at least one credit, and the total debits must always equal the total credits.

Trial Balance

A list of all of the general ledger accounts of the business and their balances at a point in time. The total amount of the debits must always equal the total amount of the credits.

Manufacturing Business

A manufacturing business is one in which the company manufactures the products it sells.

Gordon Growth Model

A method for calculating the terminal value of an indefinite stream of cash flows. The calculation gives the present value of infinite cash flows by dividing the cash flow in the final year of our projection by the difference between the discount rate and the growth rate.

Periodic Inventory System

A method of determining the ending value of inventory and cost of goods sold in which detailed inventory transactions are not recorded on a regular basis. Instead, a physical count of inventory is performed periodically, and the cost of goods sold for a period are determined by subtracting the value of counted inventory from the goods available for sale (calculated as beginning inventory plus inventory purchases during the period). Due to modern technology, the periodic inventory system has been replaced in most cases by the perpetual inventory system. However, most businesses still perform periodic inventory counts, even if they use a perpetual inventory system.

Perpetual Inventory System

A method of inventory tracking in which all inventory purchases and movements are recorded when they occur. The transactions are typically entered into an inventory tracking system which is integrated with the accounting system. At any point in time, including at a period end, the amount and value of inventory is available and can be reported by the system. However, most businesses still perform periodic inventory counts, even if they use a perpetual inventory system.

Impairment

A permanent reduction in the value of an asset due to technological or market factors that cause the asset to have less value than it currently has in the accounts of the business. Impairment typically applies to intangible assets such as goodwill or patents.

Prepaid Expense

A prepaid expense is an asset that represents the right to receive goods or services in the future. Some common examples are prepaid rent or prepaid insurance, where a company pays for rent or insurance in advance of the coming month or year. At the time of the payment, the transaction is recorded as an asset, and as time passes, the asset is reduced and the expense is recognized. Remember that prepaid expenses are NOT expenses.

Circularity

A problem with two variables in which the value of each variable impacts the value of the other variable so that changing either value impacts the other value.

Retail Business

A retail business is one in which the company primarily purchases the products it sells and sells it to the end consumer.

Accrual

A revenue amount that is recorded after the revenue is earned but before the payment is received or an expense amount that is recorded after it has been incurred but before the payment has been made. In either case, for an accrual the exchange of cash is expected at some future point after the initial revenue or expense is recognized.

Preferred Stock

A special class of stock that differs from common stock in some ways. Often, preferred shares may have a preference in their claim on profits of the business which calls for a certain percentage of dividends to be paid to preferred shareholders before any can be paid to common shareholders. Offsetting this preferential treatment, preferred shareholders may sacrifice certain rights, such as the right to vote for directors or other issues raised by the board of directors. The particular benefits and restrictions of any preferred shares can differ from company to company but they are spelled out in detail for any particular class of preferred shares issued by a company.

Depreciation Expense

A temporary account that shows the depreciation for the current accounting period. It's an expense reported on the income statement.

Accounts Receivable Turnover

Accounts Receivable Turnover is a ratio that is used to measure how efficiently a business is collecting receivables from its customers. It is calculated by dividing the credit sales for the period by the average accounts receivable balance for the period. In the absence of credit sales information, we may use total sales as a substitute. The ratio represents how many times the accounts receivable turned over during the period. For most ratios in this course, we use averages when calculating ratios with balance sheet numbers, but this is not necessary and some may choose to use beginning or ending balances.

Nominal Accounts

Accounts that are reset to zero at the end of each accounting period. Nominal accounts include all revenue and expense accounts, and may also be referred to as temporary accounts or Income Statement accounts. The net balance of nominal accounts is transferred to retained earnings at the end of each accounting period.

Nominal Accounts

Accounts that reset to zero at the end of each accounting period. All revenue and expense accounts are nominal

Real Accounts

Accounts which contain cumulative balances since the inception of the business. The balances in these accounts flow from one accounting period to the next. Real accounts include all asset, liability, and owners' equity accounts and may also be referred to as permanent accounts or Balance Sheet accounts.

What is a Trial Balance used for?

Create financial statements

Consistency

Although accounting guidelines allow some degree of discretion in how transactions are recorded, the consistency principle requires that the methods be consistently applied by the company over time in recording and reporting unless there is a sound reason to change them. Consistency refers only to consistency over time; it does not imply consistency across accounts. For example, a company may properly choose to use LIFO for US inventory valuation and FIFO for international inventory valuation, and this is not a violation of the consistency principle.

Realization

An amount is realized when the cash (or claim to cash) is received, and an amount is realizable when receipt of payment (or claim to cash) is reasonably certain. The realization principle is important because revenue can only be recognized once the revenue is both earned and realized or realizable.

Free Cash Flow

An amount meant to represent the cash flows that a company could be expected to generate from its normal operations for a given period without considering the impact of how the business is financed. In this course we use the following formula to calculate free cash flows: FCF = (1-t) x EBIT + Dep - Capx - D NWC where t is the tax rate, Dep is depreciation expense, Capx is capital expenditures and D NWC is the change in net working capital.

Deferral

An amount that is recorded when payment is received for revenue that is yet to be earned (such as deferred revenue/unearned revenue) or when payment has been made prior to an expense being incurred (such as prepaid insurance). In either case, for a deferral the exchange of cash takes place before the actual revenue or expense is recognized.

Deferred Expense

An asset account that records amounts paid towards expenses not yet recognized on the income statement. Note: Deferred expenses are not expenses, rather they are assets.

Accrued Revenue

An asset account that records revenue that has been earned and recognized on the income statement but not yet paid for by the customer. At the time of the accrual, we debit the receivable account and credit the appropriate accrued revenue account. When the cash transfer ultimately occurs, we debit the cash account and credit the receivable account.

Level of long-term debt

An automotive parts company that sells to automotive manufacturers is forecasting revenue as part of its internal budgeting and planning process. Which of the following is LEAST likely to be important in its forecasting assumptions? Expected number of customers Customer acquisition and retention rates Profitability of customer orders Level of long-term debt

First In First Out (FIFO)

An inventory valuation method which determines the value of inventory sold as if the current units sold are the oldest units remaining in the inventory (First In First Out). In a period of steadily rising inventory costs, this method leaves the higher costs in the inventory account and recognizes the older, lower costs as an expense in Cost of Goods Sold.

Liability

An obligation that a company has incurred to pay another entity, such as amounts owed to banks, vendors, the government, or employees, or the obligation to provide goods or services in the future.

Categorize: Interest Receivable

Asset

Categorize: Inventory

Asset

Categorize: Investments

Asset

Categorize: Notes Receivable

Asset

Categorize: Other Intangible Assets

Asset

Categorize: Other Prepaid Expenses

Asset

Categorize: Prepaid Insurance

Asset

Categorize: Prepaid Rent

Asset

Categorize: Property, Plant & Equipment

Asset

Accounting Equation

Assets = Liabilities + Owners' Equity. This equation is fundamental and must always be true in double entry accounting.

Inventory

Assets that are manufactured or purchased for the purpose of being sold to customers. In its final form, inventory is the product that is being sold and when it is sold, the cost of the inventory that was sold is recognized as an expense as Cost of Goods Sold. For a manufacturing company, the inventory may be found in various stages of completion, known as raw materials inventory, work in process inventory, and finished goods inventory. The valuation of inventory is the subject of cost accounting and it is a crucial element of accounting for and managing any manufacturing business.

Non-Current Assets

Assets that the business will likely hold in their current form for more than a year.

Long-Lived Assets

Assets which are expected to provide value to the business for periods in excess of one year. Can be physical assets, such as buildings, vehicles, or machines, or can be intangible assets, such as patents or goodwill. Long-lived physical assets are sometimes referred to as fixed assets.

Formula: Accounts Payable Turnover

Credit Purchases/Average Accounts Payable or COGS/Average Accounts Payable

Formula: Accounts Receivable Turnover

Credit Sales/Average AR

Financial report that shows the financial position of a company at a specific point in time; a snapshot of the resources that are owned or controlled by company, and how those resources were financed. The balance sheet shows the balance of all asset, liability, and equity accounts as of a given date.

Balance Sheet

Real Accounts are part of which financial statement?

Balance Sheet

Which statement show's the company's financial position at a specific date?

Balance Sheet

67.6

Bob's Burgers has an Inventory Turnover of 6.0, an Accounts Receivable Turnover of 8.5, and an Accounts Payable Turnover of 10.1. What is the length of their Cash Conversion Cycle? 4.4 139.8 67.6 54.0

What does a positive cash conversion cycle indicate?

Business collects cash from customers after supplier payments are due. In order to get more inventory, the business will need outside funds

What does a negative cash conversion cycle indicate?

Business collects cash from customers before supplier payments are due. Business won't need outside funds because it can rely on credit terms from suppliers

Indication: Current Ratio

Business' ability to pay short term obligations

Indication: Accounts Payable Turnover

Business' efficiency in paying its suppliers/vendors

Net Present Value (NPV) - Definition

Calculation of the present values of all the cash flows and outflows of a project. Singular number that indicates the worth of an investment.

Capital

Capital can have different meanings depending on its context. In many contexts, it refers to wealth of a business, whether accumulated in money or property. This wealth may be used to grow the wealth of the business by investing in projects or other companies; hence the terms, capital expenditures and capital budgeting. In other contexts, capital refers to the money invested in a business, almost synonymous with equity.

Current Assets

Cash and other assets that are expected to be converted into cash within a year (or within one operating cycle, if the company's operating cycle is longer than one year).

Cash Conversion Cycle

Cash conversion cycle is a measure of how long it takes a business from the time it has to pay for inventory from its suppliers until it collects cash from its customers. It can be calculated as the Days Inventory, plus the Average Collection Period, minus the Days Purchases Outstanding.

Capital Expenditure - Definition

Cash flow related to the purchase of PPE regardless of when depreciation is recognized

Free Cash Flow - Definition

Cash flows that a company could be expected to generate from normal operations

Free Cash Flows

Cash flows that are free, or available, to distribute to investors or to reinvest in the business after the business has covered all its expenses. FCF does not consider the impact of how a business is financed. Calculated by the formula: FCF = (1-t) * EBIT + Depreciation - Capital Expenditures - Change in Net Working Capital.

Net Working Capital - Definition

Cash tied up in a business' operations

The correct answer is $68,280. Under LIFO, the most recent purchases are expensed first as cost of sales. In this case, the 2,198 skillets sold at the end of August include 2,000 expensed at a cost of $17 per skillet (related to August) and 198 expensed at a cost of $15 per skillet (related to July). This means that the remaining balance of inventory is related to the skillets purchased in July and June. (3,552 * $15 per skillet) + (1,250 * $12 per skillet) = 68,280

Chrissie's Cooking Supply Company has 5,000 skillets in their warehouse at the end of July. One quarter of these skillets were held over from the month of June at a cost of $12 per skillet. The remaining skillets were purchased in July at a cost of $15 per skillet. At the beginning of August they received another 2,000 skillets at a cost of $17 per skillet. The warehouse sold and shipped 2,198 skillets during August. Chrissie's Cooking Supply Company uses LIFO to value their inventory. What would be the remaining balance of skillets in the inventory account at the end of August?

Common Size Financial Statements

Common size financial statements divide each number on the balance sheet by total assets, and each number in the income statement by sales. This converts the financial statement items into ratios that help us see trends and can easily be compared from one company to another.

The correct answer is an outflow of $300,000. The company would need to make a cash investment (outflow) of $300,000 to increase their net working capital from the $300,000 needed to support $1 million of sales to the $600,000 needed to support $2 million of sales.

Company A estimates that it needs 30% of sales in net working capital. In year 1, sales were $1 million and in year 2, sales were $2 million. Associated with the change in net working capital from year 1 to year 2 is a cash:

Company A is more efficient in using its inventory to generate revenue.

Company A has a higher Inventory Turnover Ratio than Company B. Which of the following statements is true regarding these two companies? Company A has a lower average inventory level than Company B. Company A has more inventory than Company B. Company A is more efficient in using its inventory to generate revenue.

Owner's Equity

Contributions from the owners' of a business. Assets - Liabilities

Decrease

Cost of Goods Sold, Accounts Receivable, Cash: Increase or Decrease with a Credit

Expense Account

Cost of Goods Sold, Rent Expense, and Wages Expense are examples of what type of account?

Formula: Revenue

Cost of Sales + Gross Profit

Expenses

Costs associated with providing goods or services to customers.

Days Inventory

Days Inventory is a measure related to inventory turnover that shows the average number of days the inventory is held before it is sold. It can be calculated by dividing average inventory by the COGS per day. Alternatively, it can be calculated by dividing 365 by the Inventory Turnover.

A decrease in current operating liabilities ___ cash flows

Decreases

Deferred Taxes

Deferred Taxes arise from a temporary difference in the timing between recognizing the tax expense for a given period on the financial records compared to actually filing and paying the taxes per the tax records. There are many valid reasons that the two amounts may differ. Some examples include differences in depreciation methods, differences in bad debt estimates and actual write offs, tax-loss carry-forwards, and some pension payments and expenses. Deferred taxes can be either an asset or a liability, and can be either current or non-current, depending on when the temporary timing difference is expected to reverse. At a given point in time, a balance sheet may show both a deferred tax asset and a deferred tax liability.

Financial Leverage

Financial Leverage is one of the three components of the DuPont Framework. For the purposes of the DuPont Framework, it is measured using the Leverage Ratio, also referred to as the Equity Multiplier, but another measure of leverage is the Debt to Equity Ratio.

Pro-Forma Financial Statements

Financial Statements forecasted for future periods. May also be referred to as a financial forecast or financial projection. In this course, we use pro-formas as a depiction of what the financial statements for the business will look like over a certain period of time, if the assumptions made when preparing them hold true.

Balance Sheet

Net Book Value

GBV - Accumulated Depreciation

How to adjust the Operating Activities for gains? Losses

Gains - Subtract gain from Net Income in Operating Section Losses - Add losses back into Net Income in Operating Section

Goodwill

Goodwill is the excess of the amount paid to acquire a business over the fair market value of the business' net assets. It is called Goodwill because this excess is often associated with the assumed value of the otherwise undefined intangible aspects of the business. Although a company may feel that it has value in its brands and name, goodwill is only recorded as the result of an acquisition. Self-generated brand value is not recorded as goodwill.

Gross Profit Margin

Gross Profit Margin is calculated by dividing the gross profit by the total sales for the period, and is used as a measure of profitability. It tells us what percentage of our revenue is left to cover other expenses after the cost of goods sold is subtracted. May also be referred to as Gross Profit Percentage.

What are the measures listed on the income statement? (4)

Gross Profit. Operating Income. Income before Taxes. Net Income

Gross Book Value

Historical cost of an asset. Amount at which asset is recorded in the financial books

Ledger

Historically, accounting systems were comprised of books for each accounts, known as ledgers. Ledger accounts exist for each account in the Chart of Accounts and show the activity for accounts.

Liquidity

How quickly and easily assets and liabilities can be converted to cash. For example, accounts receivable are more liquid than inventory because the inventory must be sold to become a receivable and then the receivable must be collected to become cash. Hence, the receivable is one step closer to being converted to cash than the inventory and is, therefore, more liquid.

Goods available for sale

In a retail business, goods available for sales can be calculated as beginning inventory plus purchases of additional inventory in the period. This calculation can be useful in determining cost of goods sold, because at the end of a period, the goods available for sale during the period with either remain in inventory or be moved to cost of goods sold. This calculation is often used when using a periodic inventory system.

Mark to Market

In contrast to the Historical Cost principle, mark to market refers to the accounting method in which the recorded value of certain assets and liabilities are revised to reflect their current market value. While accounting standards require many assets to be recorded at historical cost, some accounting standards now allow, or even require, the values of certain assets and liabilities to be "marked to market", or adjusted to reflect the current market value. This is also known as fair value accounting.

Net Income

Income Before Taxes - Taxes

Nominal Accounts are part of which financial statement?

Income Statement

Which financial statement requires two trial balances? What trial balances do you need to create the statement?

Income Statement. Need trial balance at the start of the period and trial balance at the end of the period

A decrease in current operating assets ___ cash flows

Increases

An increase in current operating liabilities ___ cash flows

Increases

Depreciation and Amortization ___ cash flows

Increases

Indication: Accounts Receivable Turnover

Indication of a business' efficiency in collecting receivables from customers

Net Present Value - Excel Formula

Initial Investment Cost + NPV(Discount Rate, Cash Flow from Non-Zero Periods)

Inventory Turnover

Inventory Turnover is a ratio that is used to measure how efficiently a business is managing its inventory levels. It is calculated by dividing the Cost of Goods Sold for the period by the average inventory for the period and represents how many times the inventory turned over during the period.

Accrued Expenses

Liability account used to record amounts at the end of an accounting period to recognize expenses that were incurred in the period but for which no invoice has yet been received nor payment has yet been made. Examples are salaries/wages payable, accrued rent expense, accrued legal fees. When the accrual is made, the debit is to the appropriate expense account (payroll expense, rent expense, legal expense) and the credit is to the accrued expense account, which is a liability because it represents an obligation which will need to be paid in the future. Remember accrued expenses are NOT expenses.

Accrued Liability

Liability accounts that record expenses that have been recognized on the income statement but have not yet been paid. Similar to accrued expenses.

Deferred Tax Liability - Definition

Liability that reflects the future obligation to pay current taxes

Deferred Revenue - Definition

Liability that represents the obligation to provide future goods/services

Leasehold Improvements

Long-lived (multiple year) improvements made to a leased property by the tenant in order to make the property better serve the tenant's needs. The value of these improvements is treated as a long-lived asset (Property, Plant & Equipment, or PP&E) and is depreciated over the life of the asset or the life of the lease, whichever is shorter.

Fixed Assets

Long-lived physical assets which are expected to provide value to the business for periods in excess of one year. Examples include buildings, vehicles, or machines. Also referred to as Property, Plant, & Equipment (PP&E).

If a project cannot return more than the WACC, the business will ___ money on the investment

Lose

The correct answer is $3,000. The depreciable value of the equipment is $40,000 ($45,000 cost - $5,000 salvage value) and the number of years to be depreciated is 10 years. So the depreciation for 12 months is $4,000 ($40,000 / 10 years). Since the equipment was put into service on April 1, 2014, the amount of depreciation expense at December 31, 2014 will only be for 9 months.

Luster Consulting Company purchased a new heating and cooling system for their office building in March, 2014. After installing and testing the equipment, it was put into service on April 1, 2014. The total cost to put the equipment into service was $45,000; it is expected to have a useful life of 10 years and a salvage value of $5,000. On December 31, 2014, assuming Luster Consulting Company uses straight-line depreciation, what will be the amount of depreciation expense on the books?

Nominal Accounts

Operating or Non Operating Expense? Income Tax Expense

Non Operating

Operating or Non Operating Expense? Interest Expense

Non Operating

Operating or Non Operating Expense? Interest Income

Non Operating

Operating or Non Operating Expense? Loss on Disposal

Non Operating

Operating or Non Operating Expense? Loss on Foreign Currency

Non Operating

Operating or Non Operating Expense? Marketing Expense

Operating

Operating or Non Operating Expense? R&D/Marketing

Operating

Operating or Non Operating Expense? Rent Expense

Operating

Operating or Non Operating Expense? Salaries & Wages

Operating

Operating or Non Operating Expense? Utilites

Operating

Cash Flow Characteristics of a Business in the Startup Stage

Operating - Negative Investing - Negative Financing - Positive

Cash Flow Characteristics of a Business in In Decline

Operating - Negative Investing - Positive Financing - Positive/Negative

Cash Flow Characteristics of a Business in the Profitable/Growing Stage

Operating - Positive Investing - Negative Financing - Positive/Negative

Cash Flow Characteristics of a Business in the Mature Stage

Operating - Positive Investing - Slightly negative Financing - Generally negative

Sections of a Statement of Cash Flows

Operating Activities. Investing Activities. Financing Activities

Indication: Asset Turnover

Operating Efficiency

Operating Efficiency is one of the three components of the DuPont Framework. For the purposes of the DuPont Framework, it is measured using the Asset Turnover, but other measures of efficiency include Inventory Turnover, Accounts Receivable Turnover, and Accounts Payable Turnover.

Income Before Taxes - Formula

Operating Income - Non Operating Expenses

Operating Income

Operating Income is the amount that remains after the operating expenses are deducted from the gross profit.

Why is $1 today worth more than $1 received a year from now?

Opportunity Costs. Inflation. Risk of not receiving currency in the future.

All revenues and expenses are considered to be part of _____

Owner's Equity

Owners' Equity

Owners' Equity is the residual that belongs to the owners of the business. If you add up all the resources of the business (assets) and subtract all the claims that third parties (such as lenders and suppliers) have against those assets, the residual (what is left over) is Owners' Equity. Owners' Equity includes two elements; first, money contributed to (invested in) a business in exchange for some degree of ownership and second, earnings that the business generates over time and retains in the business. Also commonly known as shareholders' equity, stockholders' equity, or equity.

Excel - Present Value

PV(Discount/Interest Rate, # of Periods, Future Cash Flow)

Present Value - Formula

PV=FV/(1+r)^n

Real Accounts

Implicit transaction This is an implicit transaction because there is not a specific event that triggers the recording of the transaction.

Recognizing impairment on an intangible asset is an example of what type of transaction?

explicit transaction This is an explicit transaction because the inventory being sold is the trigger for recording the transaction.

Recognizing the revenue for inventory sold is an example of what type of transaction?

Indirect Method

Refers to the method of reporting the cash flow from operating activities on the statement of cash flows by using net income and adjusting for non-cash items such as depreciation, adjusting for non-operating items such as gains and losses, and adjusting for changes in current asset and current liability accounts. The method starts with net income and adjusts it by the amounts accruals changed during the period to arrive at the increase or decrease in cash from operations during the period. Essentially, it is akin to de-accruing the income statement.

Direct Method

Refers to the method of reporting the cash flow from operating activities on the statement of cash flows by using transactional data. Lists all cash collections and disbursements relating to operating activities in the period to arrive at the increase or decrease in cash from operations during the period.

Relevance vs Reliability

Relevance - Info is useful and capable of influencing the decision of those using financial statements Reliability - Info faithfully represents the underlying economics.

Relevance

Relevance means that the information is useful and capable of influencing the decision of the users of the financial statements.

Relevant Cash Flows

Relevant cash flows are those future cash flows that would occur only if the potential project or investment being evaluated were to be implemented. In other words, they are the incremental cash flows related to the potential project or investment.

Reliability

Reliability means that the information faithfully represents the underlying economics. The three dimensions of reliability are validity, verifiability, and unbiasedness.

Return on Investment (ROI)

The financial return or profit received as a result of investing funds. Calculated by dividing the profit related to the investment by the amount of the investment.

Invoice

The formal document given from the selling company to the buying company indicating that goods or services have been rendered and that payment for those goods or services is due.

-Nominal accounts are reset to zero. -Net income is transferred to the retained earnings account on the balance sheet.

Steps of Closing Process include:

Straight Line vs Double Declining Depreciation

Straight Line spreads the depreciation evenly across the life of the asset. Double Declining recognizes more depreciation upfront and less later than Straight Line

Indication: Quick Ratio

Stricter version of Current Ratio, using only highly liquid assets

Income Statement

Summarizes the earnings of a business (revenues minus expenses) over a designated period of time. Shows activity during the period for all nominal accounts.

Trial Balance

Summary of T-accounts

T Accounts - Definition

Summary of journal entries for a time period.

Debt to Equity Ratio

The Debt to Equity Ratio is calculated by dividing the total liabilities by the total equity. It is a common measure of leverage.

FASB

The Financial Accounting Standards Board (FASB) is the governing body that issues accounting rules and standards in the United States. These rules and standards are often referred to as generally accepted accounting principles, or GAAP.

Interest Coverage Ratio

The Interest Coverage Ratio is a measure of a business' ability to make interest payments on its debt. It can be calculated by dividing Earnings Before Interest and Taxes (EBIT) by the interest expense for the period. It may also be referred to as Times Interest Earned, as it measure the number of times the amount of interest is earned during the period.

IASB

The International Accounting Standards Board (IASB) is the governing body that issues accounting rules and standards known as International Financial Reporting Standards, or IFRS. IFRS are commonly used throughout the world.

Leverage Ratio

The Leverage Ratio is calculated by dividing the total assets by the total equity. This calculation is used as a measure of financial leverage in the DuPont Framework. It may also be referred to as the Equity Multiplier.

ROE = (Net Income / Sales) X (Sales / Assets) X (Assets / Equity) If a company has no debt, then their equity multiplier is 1. (25,000/55,000) * (55,000/115,000) * 1 = 21.7%

The Peach Pit, a restaurant, has Net Income of $25,000, Sales of $55,000, Assets of $115,000, and no debt. What is their ROE? 21.7% 4.29% 2.17% 42.9%

Quick Ratio

The Quick Ratio is a measure of a business' ability to pay its short term obligations that is a more stringent test than the current ratio. It can be calculated by subtracting inventory from current assets, then dividing the result by current liabilities.

Statement of Cash Flows

The Statement of Cash Flows is one of the three primary financial statements. It shows the net change in cash during the year and includes three sections: cash flows from operating activities, cash flows from investing activities, and cash flows from financing activities.

Credit

The accounts increase with a debit or credit: Sales Revenue, Deferred Revenue

Gross Book Value

The amount at which an asset is recorded in the financial records of the business. When an asset has just been purchased, this is normally the price that was paid to purchase the asset plus any costs to prepare the asset for service in the business. These extra costs may include delivery, installation, and testing.

Gross Profit

The amount by which the revenue exceeds the cost of goods sold (or cost of sales).

Income Tax Expense

The amount determined by multiplying the applicable income tax rate by the income before taxes (or pretax profit) on the Income Statement.

Income Taxes Payable

The amount determined by multiplying the applicable income tax rate by the taxable income on the income tax return.

Taxable Income

The amount on an income tax return after all deductions and adjustments. Taxable income is the amount against which the tax rate will be applied and the taxes payable for the period will be determined.

Income Before Taxes

The amount shown on the Income Statement after all expenses have been taken away from the revenue for the period but before any tax expense for the period. May also be referred to as Pretax Profit.

Fair Market Value

The amount that an asset could be sold for on the market at a given point in time; may not correspond to the value of the asset recorded in the financial records at any point in time.

Capital Expenditures

The cash flow related to the purchase of property and equipment. Capital expenditures is part of the free cash flow equation.

Net Working Capital

The cash that is tied up in a business' operations. Usually calculated as current assets less current liabilities. The change in net working capital is part of the free cash flow equation.

Time Value of Money

The concept that a unit of currency (such as a dollar) received today is worth more than the same unit of currency received at some future point. Furthermore, the further into the future, the less the unit of currency is worth. This is because of three factors; the opportunity cost of not having the currency to invest, the impact of inflation, and the risk of not receiving the unit of currency in the future.

Opportunity Cost

The cost of foregoing the next best alternative. For example, the opportunity cost of investing in one project is the amount that would have been received for investing in the next best alternative project.

Operating Expenses - Definition

The costs that a business incurs to run its normal operations

Operating Expenses

The costs that a business incurs to run its normal operations. Operating expenses include items such as sales and marketing expenses, research and development expenses, and general and administrative expenses. Within those categories are costs such as payroll costs for employees in those departments, advertising costs, legal fees, and other cost items.

Internal Rate of Return (IRR)

The discount rate that sets the net present value (NPV) of a project equal to zero. The IRR allows us to find the percentage rate that would be earned for a given set of cash flows.

Weighted Average Cost of Capital (WACC)

The discount rate which represents the cost to the business of raising funds. This rate will vary from one business to the next, but is the discount rate that many companies use in the NPV calculation. If a project or investment cannot return more than the WACC, the company would lose money on the investment.

Entity Concept

The entity concept refers to the fact that a business is a separately identifiable entity. Thus, the accounts of a business should be separate and distinct from the accounts of the owners and managers of the business. In addition, financial records should be kept and reported for each separate entity, especially in the case of multi-national companies and large companies with subsidiaries.

Cost of Goods Sold (COGS)

The expense corresponding to the cost of the inventory that is sold to customers. May also be referred to as COGS or Cost of Sales.

Cost of Sales

The expense corresponding to the cost of the inventory that is sold to customers. May also be referred to as Cost of Goods Sold (COGS).

Historical Cost

The historical cost principle refers to the fact that transactions are recorded at the cost that existed at the time the transaction occurred. In the case of assets, it means that their value in the financial records is shown at historical cost, rather than current market value. When combined with the principle of Conservatism, it means that an asset's value may be reduced if it is deemed to have permanently lost value but it cannot be increased if it is deemed to have gained value.

Financial performance over a given period of time

The income statement reflects a company's:

Amortization

The method for recognizing the expense of long-lived intangible assets such as patents, copyrights, and brands, over the life of the assets. Amortization is usually calculated similar to straight-line depreciation. Some companies use an accumulated amortization account, while other companies may directly reduce the value of the associated asset.

Depreciation

The method for recognizing the expense of long-lived physical (tangible) assets over the life of the assets. Common methods include straight-line depreciation and double-declining balance depreciation but other methods can also be used.

Money Measurement Principle

The money measurement principle refers to the fact that only values that can be measured in monetary terms should be recorded in the financial accounting records.

Revenue

The money that a business brings in from its customers for providing goods or services related to its normal operations.

Common Stock

The most typical stock or share type representing an ownership interest in the business. Although there can be different classes of common shares, owners of these shares usually have certain rights including the right to share proportionately in the profits of the business and the right to elect directors and vote on proposals made by the directors to the shareholders.

Net Revenue

The net amount of revenue less any contra-revenue accounts. Contra-revenue accounts may include sales returns and allowances, cash discounts or warranty reserves, all of which are accounts with debit balances that reduce gross revenue to a net revenue amount. Some companies report net revenue as the top line on their income statements rather than gross revenue, implying that contra-revenue accounts exist but are not material.

Net Present Value (NPV)

The net present value is a calculation of the present values of all the cash inflows and outflows of a project or investment. The result is a single number that gives a good indication of what a business or a particular investment is worth today.

Net Book Value

The net value of the equipment account (gross book value) and the accumulated depreciation account. May also be referred to as book value or carrying value.

Sales General and Administrative Expenses

The operating expenses of a company that relate to selling expenses and general and administrative expenses (such as rent, electricity, salaries of non-sales personnel). Also called SG&A.

Accounting Period

The period of time for which the financial results are reported; typically either a month or a quarter or a year.

Operating Cycle

The period of time from the initial outlay of cash for the main business activity to the completion of the sale and collection of cash for the same business activity. For manufacturing companies, it is the time from the purchase of raw materials to the collection of cash from the sale of the finished product. Most businesses have operating cycles of less than one year. However, for a business like a distillery, the operating cycle could be longer than one year.

Capitalization

The practice of recording the cost of the purchase as an asset, rather than recording it as an expense when an item is purchased. For example, when a long-lived asset is purchased, such as a machine, the cost of the machine is said to be capitalized because it is recorded as an asset in the accounts. In contrast, something small and immaterial, such as pens and pencils, may be expensed immediately.

Terminal Value

The present value of a stream of funds that extend into the indefinite future. See also Gordon Growth Model for a formula that may be used to calculate terminal value.

Principal

The principal amount of a loan is the initial amount borrowed that will need to be repaid. This is often accounted for separately from the interest on a loan.

future losses; future gains

The principle of Conservatism, says that a company should choose measurement methods that anticipate and record _____________ but don't anticipate and record _____________.

Return on Equity (ROE)

The return that a business generated during a period on the equity invested in the business by the owners of the business. Calculated by dividing net income by average total owners' equity. For most ratios in this course, we use averages when calculating ratios with balance sheet numbers, but this is not necessary and some may choose to use beginning or ending balances.

What does an NPV of 0 mean?

The sum of discounted cash inflows is less than the sum of discounted cash outflows. Business should not continue with said project

Double Entry Accounting

The system of accounting that requires that every transaction be entered using both debits and credits and that the value of the debits must equal the value of the credits.

Materiality The concept of materiality states that a business is not required to report information on financial statements that would not impact the decision-making of the users of the financial statements.

The trial balance for a business at a given point in time typically has much more detailed information than what is depicted on the financial statements. What is the accounting concept that allows for the information from the trial balance to be condensed to what is displayed on the financial statements?

Fiscal Year

The twelve month period over which the financial results of a company are reported. For many companies, the fiscal year equals the calendar year with the last day of the fiscal year being December 31. However, for other companies, the fiscal year may end on June 30 or on the last Friday in September or on some other date that is chosen by the company. For some companies, it can be 52 or 53 weeks with the year ending on a slightly different date each year depending on when the week ends.

Future Value

The value at a specified future date of an amount or a series of amounts invested at a given discount rate. The future value will typically be higher than the present value because it will be increased by the discount rate. While present value looks at how much a future amount would be worth in today's currency units, the future value looks at how much an amount in today's currency units would be worth in future currency units if invested at the applicable discount rate.

Present Value

The value in today's currency of a future amount or a series of future amounts which have been converted into today's currency value using the discount rate. Can be found using Present Value tables, calculators, or software programs with Present Value functions. Also can be calculated using the following formula for any given amount in the future: PV = FV*(1/(1+i)n) where PV equals the present value, FV equals the future value that is being converted to its present value, i equals the discount rate, and n is the number of periods into the future that the future value exists. There are also tables and functions that can be used to find the present value of an annuity.

Debit

These accounts increase with a debit or credit: Cash, Depreciation Expense, Prepaid Rent

Accrual Accounting Method

This is the accounting method taught in this course, followed by most companies, and required under US GAAP and IFRS. The method follows the revenue recognition principle, which says that revenue should be recognized in the period in which it is earned and realizable, not necessarily when the cash is received and the matching principle which says that expenses should be recognized in the period in which the related revenue is recognized rather than when the related cash is paid.

Conservatism

This principle recognizes that there are some estimates involved in accounting and says that accounting should reflect the more cautious estimated valuation rather than the more optimistic one. For assets it means recording the lower valuation while for liabilities it means recording the higher possible valuation. For revenues and gains it means recording them when they are reasonably certain but for expenses and losses it means recording them when they are reasonably possible.

Formula: Debt to Equity Ratio

Total Liabilities/Total Equity

Accrual - Definition

Transaction where cash changes hands after the revenue/expense is recognized

Deferral - Definition

Transaction where cash changes hands before the revenue/expense is recognized

Historical Cost Principle

Transactions are recorded at the cost that existed when the transaction occurred.

Implicit Transactions

Transactions that do not involve a specific triggering activity, event, or exchange of resources from one party to another, and that are not accompanied by an invoice or other paper documentation.

Implicit Transactions

Transactions that do not involve a specific triggering activity, event, or exchange of resources from one party to another, and that are not accompanied by an invoice or other paper documentation. Often, implicit transactions represent changes in value related to the passage of time, such as depreciation, interest expense, and the amortization of a prepaid expense. Implicit transactions are often recorded using adjusting journal entries.

Explicit Transactions

Transactions that involve some activity, event, or exchange of resources from one party to another. Explicit transactions are often accompanied by invoices or other paper documentation that initiates the recording of the transaction.

Statement of Cash Flows - Categorizing Dividends Received in US GAAP? IRFS?

US GAAP - Operating IFRS - Operating or Investing

Statement of Cash Flows - Categorizing Interest Received in US GAAP? IRFS?

US GAAP - Operating Section IFRS - Operating or Investing

Statement of Cash Flows - Categorizing Interest Paid in US GAAP? IRFS?

US GAAP - Operating Section. IFRS - Operating or Financing

Cash Accounting Method

Under the cash accounting method, a business records revenues and expenses only when cash is received or disbursed. Although this method is used by some small, private businesses, it is not an acceptable method under GAAP for publicly held companies.

Dimensions of Reliability (3)

Validity. Verifiability. Unbiasedness

Discounted Cash Flow

Valuation methodology that takes a company's projected free cash flows and discounts them to arrive a present value.

Present Value - Definition

Value in today's currency of a future amount that has been converted by using the discount rate

Salvage Value - Definition

Value of an asset after it is no longer used by the business to generate revenue

Salvage Value

Value of an asset after it is no longer used by the business to generate revenue. Sometimes also called scrap value. For the purposes of calculating depreciation, salvage value is subtracted from the gross book value.

A lower net income and a higher accumulated depreciation. Using an accelerated depreciation method as compared to the straight-line method means that a higher depreciation expense will be recognized in the early years so the company will have a lower net income and a higher accumulated depreciation.

West Corp. purchased a piece of equipment in January 2014. The accountant of West Corp. decided to use double declining balance method to depreciate this equipment. For 2014, compared with using straight-line depreciation method, the company will have:

Materiality

What Accounting Principle Does the Following Represent: A microfinance institution has been relying on government collateral subsidies to finance start-ups in rural areas. However, the government has cut the program recently. The company reports this situation in its financial statements as this might affect the decisions of stakeholders.

"Going Concern" Concept

What Accounting Principle Does the Following Represent: AQG Industries purchases $20,000 of product on credit from RSI Manufacturing. AQG records the purchase as an increase in inventory and an increase in accounts payable. AQG feels that they will be able to realize the value from the inventory and settle the obligation to RSI in the weeks to come.

Historical Cost Principle

What Accounting Principle Does the Following Represent: Real Estate prices in Orderville have increased dramatically over the last five years. Although the land under Chad's office building is currently believed to be worth $500,000, it is recorded at $250,000 because that is the price he paid for it.

Deferred Tax Liability

When a temporary timing difference results in lower taxable income in the current period than the financial income reported, then there is an amount of tax that is going to be due in the future related to income reported in the current period. This amount is shown in the financial statements as a Deferred Tax Liability. A Deferred Tax Liability reflects an obligation to pay taxes in the future related to the income already reported in the financial statements.

Interest Expense

When projecting financial statements, which of the following accounts is difficult to forecast using the percent of sales method? Accounts Receivable Accounts Payable Interest Expense Cost of Sales

The cash inflows expected as a result of the project Investment needed to be made by the company to undertake the project

Which of the following cash flows should be used in an NPV calculation to determine which project to pursue? (Select all that apply.) The cash inflows expected as a result of the project Recurring cash flows from ongoing current operations Investment needed to be made by the company to undertake the project Capital expenditures related to upkeep of existing equipment

discount retailer

Which of the following companies is most likely to have a negative Cash Conversion Cycle? A discount retailer A farmer who grows corn and sells to a distributor A manufacturer who makes high-quality steam evaporators for nuclear power plants A car dealership that provides their own in-house financing

Company C with Net Income of $100,000, Interest Expense of $25,000, and Tax Expense of $20,000

Which of the following companies would likely have the LEAST difficulty making the interest payments on its debts? Company A with Net Income of $100,000, Interest Expense of $25,000, and Tax Expense of $15,000 Company B with Net Income of $100,000, Interest Expense of $30,000, and Tax Expense of $10,000 Company C with Net Income of $100,000, Interest Expense of $25,000, and Tax Expense of $20,000

Debt to Equity Ratio

Which of the following items is NOT related to a company's ability to pay off its debts? Current Ratio Quick Ratio Debt to Equity Ratio

Retained Earnings

Which of the following items would NOT be shown on a statement of cash flows created using the indirect method? -Net Income -Retained Earnings -Cash, beginning of year -Cash, end of year

Days Sales in Accounts Receivable

Which of the following measures does not reflect a company's profitability? Gross Profit Margin Days Sales in Accounts Receivable EBIAT Profit Margin

HBS Core - Accounting, Financial Accounting

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