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zAccounting > Chapter 13 Powerpoint > Flashcards

Chapter 13 Powerpoint Flashcards

1
Q

Authorized shares

A

The board of directors can issue this amount of shares

The maximum amount that can be issued

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2
Q

Issued shares

A

Shares that are owned by the company (Treasury Stock) and owned by the stockholders

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3
Q

Outstanding Shares

A

Shares that are owned by the stockholders only

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4
Q

Sustainable Income notes

A

Income that is the most likely level of income to be obtained in the future

Determined by removing irregular items from net income (net of income taxes)

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5
Q

Irregular Items include:

A

Discontinued Operations

Extraordinary Items

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6
Q

Discontinued Operations

A

A disposal of a significant component of a business

ex. Elimination of a Major class of Customers

*The income statement should recognize a gain (or loss) from discontinued operations, net of tax

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7
Q

Extraordinary items:

A

Extraordinary items should be recognized when meet two conditions:

  1. Unusual in Nature
  2. Infrequent in Occurrence

*The company must consider the environment in which it operates

**These amounts are reported net of income taxes on a seperate section of the income statement, below discontinued operations

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8
Q

Unusual in Nature

A

The item should be abnormal and only incidentally related to the customary activities of the entity

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9
Q

Infrequent in Occurrence

A

The event or transaction should not be reasonably expected to recur in the foreseeable future

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10
Q

Effects of major natural casualties, if rare in the area

A

Yes - extraordinary

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11
Q

Write-down of inventories or write-off of receivables

A

No - not extraordinary

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12
Q

Expropriation (takeover) of property by a foreign government

A

Yes- extraordinary

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13
Q

Losses attributable to labor strikes

A

No - not extraordinary

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14
Q

Gains or losses from sales of property, plant, or equipment

A

No - not extraordinary

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15
Q

Significant damage resulting from a hurricane in Florida

A

No - not extraordinary

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16
Q

Significant loss in derivative instruments due to unexpected financial collapse

A

No - not extraordinary

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17
Q

Changes in Accounting Principle

A

Users expect financial statements to be prepared on a basis consistent with the preceding period

When management can show that the new principle is preferable to the old principle, accounting rules permit a change

It is important that most changes in principle are reported retroactively

  • this treatment improves comparability
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18
Q

A change in accounting principle occurs when:

A

The principle used in the current period is different from te one used in the previous period

ex. Change in Inventory Costing Methods - FIFO vs. LIFO

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19
Q

We know that most revenues, expenses, gains, and losses are included in net income. However, _____________________

A

certain gains and losses are not

ex. Unrealized Gain / Loss on an AFS Security

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20
Q

Comprehensive income includes _____________________

A

all changes in stockholders’ equity except:

  • Changes resulting from Stockholder Investments
  • Changes resulting from distributions to Stockholders

*This measure provides a more comprehensive measure

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21
Q

Three types of comparisons to improve the decision usefulness of financial information:

A
  1. Intracompany Basis - Historical Trend Analysis
  2. Intercompany Basis - Direct Comparison to Competitor
  3. Industry Averages - Relative Position within Industry
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22
Q

Three basic tools to highglight significance in financial statement data

A
  1. Horizontal Analysis - Trend Analysis
  2. Common-Size Analysis
  3. Ratio Analysis
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23
Q

Horizontal Analysis

A

A technique for evalutaing a sries of financial statement data over a period of time to determine increase or decrease

*commonly applied to the balance sheet and income statement

**expressed in dollar amounts and percent change

e. 2006 current assets = $10; 2007 current assets= $15

Percent = 50%

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24
Q

Vertical Analysis

A

A “common-size analysis”

A technique that expresses each financial statement item as a percent of a base amount

Commonly applied to the balance sheet and income statement

ex. Current assets = 25%, Property assets = 25%, Other assets = 50%, Total assets = 100%

25
Q

Liquidity

A

Measures short-term ability of the company to pay its maturing obligations and to meet unexpected needs for cash

26
Q

Solvency

A

Measures the ability of the company to survive over a long period of time

27
Q

Profitability

A

Measures the income or operating success of a company for a given period of time

28
Q

Woring capital

A

Current assets - Current liabilties

29
Q

Current Ratio

A

Current assets

Current liabilities

30
Q

Current cash debt coverage ratio

A

Cash provided by operations

Average current liabilties

31
Q

Inventory turnover ratio

A

Cost of goods sold

Average Inventory

32
Q

Days in inventory

A

365 days

Inventory turnover ratio

33
Q

Receivables turnover ratio

A

Net credit sales

Average net receivables

34
Q

Average collection period

A

365 days

Receivables turnover ratio

35
Q

Debt to total assets ratio

A

Total Assets

Total Liabilities

36
Q

Cash debt coverage ratio

A

Cash provided by operations

Average total liabilities

37
Q

Times interest earned ratio

A

Net income + Interest expense + Tax expense

Interest expense

38
Q

Free cash flow

A

Casy provided by operations - Capital expenditures - Cash dividends

39
Q

Solvency ratios

A

Debt to total assets ratio

Cash debt coverage ratio

Times interest earned ratio

Free cash flow

40
Q

Liquidity ratio

A

Working capital

Current ratio

Current cash debt coverage ratio

Inventory turnover ratio

Days in inventory

Receivables turnover ratio

Average collection period

41
Q

Earnings per share

A

Net income - Preferred stock dividends

Average common shares outstanding

42
Q

Price-earings ratio

A

Stock price per share

Earnings per share

43
Q

Gross profit rate

A

Gross profit

Net sales

44
Q

Profit margin ratio

A

Net income

Net sales

45
Q

Return on assets ratio

A

Net income

Average total assets

46
Q

Asset turnover ratio

A

Net sales

Average total assets

47
Q

Payout ratio

A

Cash dividends declared on common stock

Net income

48
Q

Return on common stockholders’ equity ratio

A

Net income - Preferred stock dividends

Average common stockholders’ equity

49
Q

Profit Margin x Asset turnover ratio =

A

Return on assets ratio

50
Q

Profitability ratios

A

Earnings per share

Price-earnings ratio

Gross profit rate

Profit margin ratio

Return on assets ratio

Asset turnover ratio

Payout ratio

Return on common stockholders’ equity

51
Q

Quality of Earnings

A

A company that has a high quality of earnings provides full and transparent information that will not confuse or mislead users

*It is increasingly important because of recent accounting scandals involving earnings management

52
Q

Issues relating to quality of earnings:

A
  1. Alternative accounting methods
  2. Pro Forma Income
  3. Improper Recognition (Channel Stuffing)
53
Q

Explain why the municipalities may be reluctant to disclose the additonal pension obligations on their balance sheets?

A

These municipalities may be reluctant to disclose these additional obligations, as this could potentially lead to credit rating downgrades, thus making it more difficult for the municipality to borrow funds in the future. Also, additional debt would make the balance sheet look worse and could spark a negative reaction from taxpayers.

54
Q
  1. Although currently allowable by US GAAP for government organizations, what qualitative accounting characteristic do government organizations violate by not including information on pension obligations in their financial statements and why?
A

Transparency or Faithful Representation. Both emphasize giving a clear, concise, and balanced view of a company’s financial situation to its shareholders. The stakeholders in this situation are not only debt holders, but also taxpayers. Government organizations do not provide their stakeholders a clear image of their financial position.

55
Q
  1. If government organizations are required to recognize these additional obligations, what is the effect on the balance sheet? Name 2 financial ratios that would be affected. Would these ratios be better or worse?
A

Disclosing the additional obligations would add more debt to the balance sheet.

Each of the following ratios would look worse as a result of disclosing additional obligations:

Solvency: Debt to Total Assets Ratio (Total Liabilities/Total Assets); Cash Debt Coverage Ratio (Cash Provided by Operations/Average Total Liabilities)

56
Q
  1. As an investor considering investing in municipal bonds, how would the exclusion or inclusion affect your decision to invest?
A

Exclusion: Need to estimate pension obligation and the municipality’s ability to make pension payments as they come due, then assess the risk that the municipality may not be able to repay debts from bonds as they come due

Inclusion: Increases relevance of reported financial information. Increases faithful representation. Provides more information about pension obligation and the government’s ability to make pension payments as they come due, which reduces the risk that your estimation of the pension obligation is not accurate. Then more likely to invest, or require a lower rate of return on investment, than if obligation is excluded.

57
Q
  1. How would recognition of pension obligations better align the actions of state and local government officials with the interests of taxpayers?
A

Provides more and better information to the public about the performance of government officials. Creates incentive for government officials to better fund pension plans to improve the funded status of plans in financial statements.

58
Q
A

zAccounting (31 decks)

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