ACCTG 471 Chapter 3 n 4 Flashcards
balance sheet
assets, liabilities, equity at a point in time (snapshot) of a company’s financial position at the end of the day
how does balance sheet work?
lists assets and liabilities that are classified according to common characteristics
provides information about liquidity and long-term solvency
liquidity
company’s ability to convert assets into cash to pay current liabilities
long-term solvency
assesses whether a company can pay ALL it’s liabilities
financial flexibility
ability to alter cash flows in order to take advantage of unexpected investment opportunity
book value
reported assets minus liabilities in balance sheet
does not directly measure value of company
market value
represented by companys share price
multiply share price by outstanding shares
long term assets are measured at historical cost, not price that they could be sold at
why market value is a better measure of a company’s value
long term assets are measured at historical cost, not price that they could be sold at
resources like people are represented by share price
current assets
assets that could readily be converted to cash within one year or one operating cycle
cash and cash equivalents
cash listed first
includes cash and bank items that are readily convertible (bank draft’s, cashier’s check, money orders)
cash equivalents
short-term investments, maturity date is no longer than 3 months from date of purchase
all current assets
cash and cash equivalents
short term investments (sell within a year)
accounts receivable (usually due within 30-60 days)
inventory
prepaid expenses (incurs cost in one period, wont be expensed until future period)
long-term assets
converted/consumed in more than one year
investments
PPE
intangible assets
investments
not directly used in operations
investments in debt and equity in securities
land for speculation
long term receivables
intangible assets
assets that lack physical substance
patents
copyrights
franchises
goodwill
current liabilities
expected to be satisfied within one year or one operating cycle if longer
payables
deferred revenues
accrued liabilities
current maturities of long-term debt
long term liabilities
liabilities that are due to be settled or have a contractual right by the borrowing company
shareholder’s equity
paid in capital
retained earnings
retained earnings
cumulative net income minus dividend distributed
accumulated lifetime profits that have not been distributed to shareholders
called accumulated deficit account if profit is negative
retained earnings usage
profits not paid to shareholders can be used to develop product, buy inventory, pay liabilities
balance sheet presentation: GAAP
no minimum requirement for items presented
current assets/liabilities before noncurrent
balance sheet presentation: IFRS
minimum list of items presented
noncurrent assets/liabilities before current
disclosures
public companies required to give shareholders a report, includes financial statements
provide info to help investors understand company’s performance or financial health
disclosure notes
explain allowance for uncollectible accounts and common stock
include summary of accounting practices, description of subsequent events, and third party transactions
summary of significant accounting policies
part of disclosure notes
explains companies accounting method choices
defines securities it considers cash equivalent
defines timing of recognizing revenues and estimated useful lives
subsequent events
part of disclosure notes
significant event that happens after a company’s fiscal year-end but before financial statements issued
events that have material affect on operations
noteworthy events and transactions
important in evaluating company’s financial statements
possible error, fraud, and illegal act
related party
transactions should be disclosed, including dollar amounts involved
fraud
intentional misinterpretation of financial statements
illegal acts
bribes, kickbacks, illegal campaign contributions
MD&A (management discussion and analysis
biased but informative perspective of a company
managements responsibilities
executives must certify financial statements
proxy statement
disclosure for directors and executives compensation
invites shareholders to annual meeting
auditors report
examination of internal controls and reporting
make opinion to fairness of financial statements
unqualified audit opinion
financial statements conform to GAAP
unqualified with explanation audit opinion
conforms to GAAP, needs more information for users
qualified audit opinion
audit process was limited or doesn’t conform to GAAP
does not invalidate statement
adverse audit opinion
auditor thinks statements are severely misstated
disclaimer audit opinion
auditor doesn’t have enough info to certify statements are in compliance with GAAP
default risk
company can’t pay its obligations
operational risk
adeptness of a company to withstand events that impact profit earnings
comparative financial statements
financial statements accompanied by previous year or twos statements
horizontal analysis
items compared to previous years numbers (base year) and turned to a percentage
vertical analysis
items compared to an appropriate corresponding total in the same year (base amount) and turned to a percentage
ratio analysis
items turned to ratios measure performance
current ratio
current assets/current liabilities
working capital
difference between current assets and current liabilities
acid-test ratio
current assets - inventory - prepaid items divided by current liabilities
debt to equity ratio
total liabilities divided by total shareholders equity
times interest earned ratio
net income + interest expense + taxes divided by interest
financial leverage
going into debt with an investment in hopes to gain a profit on the debt and interest
income statement
measures activity over time
reports revenues, expenses, gains, losses
gains/losses
increases/decreases in equity from transactions not classified as revenue or expenses and do not involve owners
do not reflect normal operations
income from continuing operations
revenues/expenses/gains/losses from future operations that are likely to continue
operating income
nonoperating income
income tax expense
operating income
related to primary revenue generating activities
nonoperating income
not related to primary revenue generating activities
income tax expense
reported in seperate line in income statement
single step income statement
formats revenue/gains and expenses/losses together
multistep income statement
subtotals like gross profit, operating income, income before taxes
separately lists operating and non operating items
IFRS vs GAAP income statement
IFRS requires minimum info listed, expenses listed by function or natural description, bottom line is profit/loss
GAAP has no minimum info requirement, expenses listed by function, bottom line is net income/loss
earnings quality
ability of income to predict future earnings
restructuring cost
reorganization to get better efficiency
recognized in period incurred
Non GAAP earnings
exclude certain expenses and sometimes revenue
can be misleading, provided voluntarily
discontinued operations
companies get rid of component of business
reported separately in income statement
formatted differently to help users understand which parts of net income will continue
discontinued operations sold before period end
income/loss of operations from beginning of period to disposal date reported
gain or loss on disposal
prior period adjustment
adjusting retained earnings due to a period in a prior period
earnings per share (EPS)
net income a company generates to the number of shares outstanding
basic EPS
net income divided by shares outstanding
diluted EPS
incorporates dilutive effect of all potential common shares in EPS
transactions with owners
changes in equity through stock exchanges
transactions with nonowners
revenues and gains increase equity, expenses and losses decrease equity
comprehensive income
total change in shareholders equity due to nonowner transactions
net income + other comprehensive income
statement of cash flows
summarizes transactions that occurred in a period
operating activities
changes in cash flow entering net income
direct method
cash effect of each item is reported directly
indirect method
starting with reported net income working backwards to convert that amount to a cash basis
investing activites
acquisition or sale of
long term assets used in business
nonoperating investment activities
cash outflows for investing
purchase of long term assets or securities of other entities
cash inflows for investing
sale of long term assets and securities
financing activities
cash flow from transactions with creditors
financing inflows
owners have shares sold to them
cash is borrowed
financing outflows
cash paid to owners through dividends
cash paid to owners for reaquisiton of shares sold
asset turnover ratio
net sales/average total sales
measures efficiency in turning assets to sales
receivables turnover ratio
net sales/average accounts receivable
quickness of collecting accounts receivable
inventory turnover ratio
COGS/average inventory
ability to manage efficiency of investments with inventory
return on equity
net income/average shareholder equity
profit generated from shareholders equity
profit margin on sales
net income/net sales
amount of net income per dollar of sales
return on assets
net income/average total assets
profitability compared to resources
dupont framework
analysis based on profitability, activity, financial leverage
