Advanced Concepts of Financial Accounting & Financial Statement Analysis Flashcards
The two main types of pension plans are:
1) Defined Contribution plan
2) Defined benefit plan
Is a type of retirement plan to which an employer makes periodic contributions of assets to be se aside for employees’ future benefit
Pension plan
The employer’s only obligation is to make periodic deposits of the amounts defined by the plan’s formula in return for the services rendered by employees. Thus, the employer does not guarantee the amount of benefits that the employee will receive during retirement.
Defined contribution plan
Defines an amount of pension benefit to be provided to each employee. The employer is responsible for providing the agreed benefits and, therefore, bears actuarial risk and investment risk.
Defined benefit plan
Is the actuarial present value of all benefits attributed by the pension benefit formula to employee service rendered prior to that data.
Projected benefit obligation (PBO)
Is recognized in the employer’s year-end balance sheet if the PBO exceeds the fair value of plan assets.
Pension liability
Is recognized if the fair value of plan assets exceed the PBO
Pension asset
The lessee recognizes in its financial statements the leased asset and a leased liability at an amount equal to the present value of the minimum lease payments.
Capital lease
Accounted for as a long-term rental contract
Operating lease
A lease agreement transfers substantially all the benefits and risk of ownership of the asset of the lessee if at least one of the following criteria is met:
1) The lease provides for the transfer of ownership of the leased property
2) The lease contains a bargain purchase option (BPO)
3) The lease term is 75% or more of the estimated economic life of the leased property
4) The present value of the minimum lease payments is at least 90% of the fair value of the leased property.
Involves uncertainty as to possible loss or gain
Contingency
A contingent liability and a loss contingency are recognized when
A loss contingency is probable and can be reasonably estimated
A gain contingency is recognized in the financial statements
Only when it is realized
Foreign currency initial transaction measurement must be
In the reporting entity’s functional currency
A foreign currency transaction gain or loss results from a change in the exchange rate
1) Between the date the transaction was recognized,
2) The financial statements date, and
3) The date the transaction is settled.
Investment in common stock: when the investor has little or no influence over the investee (holds less than 20% of the voting interests), the investment is measured
At fair value
Investment in common stock: When the investor has significant influence over the investee (holds between 20% and 50% of the voting interests), the investment in equity securities is accounted for using
The equity method
Investment in common stock: When an acquirer obtains control of one or more business (acquires more than 50%of the voting interest), the transaction is a business combination and
The acquisition method must be used
Regardless of the percentages of ownership, when one entity (parent) controls another (subsidiary),
Consolidated financial statements must be issued by the parent
Contributed capital, treasury stock, retained earnings, and all items included in accumulated other comprehensive income are considered:
Equity accounts
Is an entity’s ability to pay its current obligations as they come due and remain in business in the short run.
Liquidity
Current assets minus Current liabilities
Working capital
Current assets divided by Current liabilities
Current ratio
( Cash and equivalents plus Marketable securities plus Net receivables) divided by Current liabilities
Quick (acid-test) ratio
Reflect how quickly major noncash assets are converted to cash.
Activity ratios
Net credit sales divided by Average balance in receivables
Accounts receivable turnover
Days in year divided by Accounts receivable turnover ratio
Days’ sales in receivables
Cost of goods sold divided by Average balance in inventory
Inventory turnover
Days in year divided by Inventory turnover ratio
Days’ sales in inventory
Days’ sales in inventory plus Days’ sales in receivables
Operating cycle
Average collection period plus Days’ sales in inventory minus Average payables period
Cash conversion cycle
Total purchases divided by Average balance in accounts payable
Accounts payable turnover
Days in year divided by Accounts payable turnover
Average payable period
Net total sales divided by Average total assets
Total assets turnover
Net total sales divided by Average net fixed assets
Fixed assets turnover
Is an entity’s ability to pay its noncurrent obligations as they come due and remain in business in the long run.
Solvency
Total liabilities divided by Total assets
Debt ratio
Total debt divided by Stockholders’ equity
Debt to equity
Earnings before interest and taxes (EBIT) divided by Interest expense
Time-interest-earned
Fixed costs divided by Total costs
Operating leverage
Total assets divided by Total equity
Financial leverage
Is a broad concept for measures that reflect how efficiently an entity is using the resources contributed by its shareholders to generate a profit.
Return on investment (ROI)
Operating income divided by Average invested capital
Return on investment (ROI)
Net income divided by Average total assets
Return on assets (ROA)
Net income divided by Average total equity
Return on equity (ROE)
Gross profit divided by Net Sales
Gross profit margin
Operating income divided by Net sales
Operating income margin
Net income divided by Net sales
Net income margin
(Net income - Preferred dividends) divided by Weighted average number of common shares outstanding
Basic earnings per share (EPS)
(Total equity - Liquidation value of preferred stock) divided by Common stock outstanding
Book value per common share
Market price of share divided by Earnings per share (EPS)
Price-earnings
Dividend paid per share divided by Earnings per share
Dividend payout ratio
Dividends per share divided by Market price per share
Dividend yield ratio
