Chapter 3 Flashcards
What is under asset section of the B/S?
(1) Current assets
(2) Non-current assets
What does one year count as?
January 1st to December 31st
What is the current ration?
current assets/current liabilities
What does the short-term liquidity ratio tell you?
Allows you to examine whether the firm is likely to meet its current obligations
What is working capital?
Current assets minus current liabilities
Equation for working capital
current asset - current liability (dollar amount instead or ratio)
In 2010, Blockbuster Inc.’s current ration was 2/3, which is less than 1. What happened to blockbuster afterward?
Less than one which is sign of trouble and the company went bankrupt.
What is the benchmark for current ration that indicates that the company has good liquidity?
1.5 or 2
In air canada what is thought to the be the same as gift card liability
advanced ticcket sales
What is solvency (leverage) ratio?
Solvency, or long-term liquidity, refers to the company’s ability to pay its obligations in the long term
Debt to asset ration equation?
Total liabilitiies/current assets
If all else is equal, which is generally better? High or low debt to asset ratios?
Low.
If your purly focus on bankrupcy risk then a low ratio is preferred
Is there a company with zero long-term debt?
Yes
examples = american express, master card, apple, amazon (2012 data)
What is weird about mastercard having no long term debt?
The fact that credit card companies normally want you to have debt but do not have long-term borrowing debt in their books
What defines a highly leveraged firm?
One with a large debt to asset ratio
What is earnings per share?
Profit available to common shareholders (share capital) divided by weighted average number of common shares
Equation for profitability (EPS)
Net Income/#shares
Definition of longterm ?
More than one year
What is the P/E (price-earnings) ratio?
Price divided by EPS
What does the P/E ratio tell you?
For one dollar earnings how much are investors willing to pay for the share
What does the P/E ratio tell you?
For one dollar earnings how much are investors willing to pay for the share
If company A has P/E 2 and company B has P/E 4 and all else is equal which stock would you want to buy (EPS the same in both cases)?
We consider the EPS to be the “happiness”. Since it is the same we would choose the one that is priced lower for us, so the one with the lower P/E hence we would pick company A
What does a lower P/E indicate IF all else is REALLY equal?
That stock is cheaper (undervalued)
Is all else equal in reality?
No. There must be reasons why investors are willing to pay higher prices, such as higher-growth potential and higher-quality top management that is not captured in accounting numbers
Assuming that it is the first year of operation, Accounting equation (A = L + E)? can be expressed as…
Assets + expenses + dividend = liabilities + share capital + revenues
Equation for end revenue?
Beginnign revenue + (revenue - expenses)/Net income = dividends declared
What is an account?
An individual accounting record of increases and decreases in a specific item in asset, liabilities, or shareholder’s equity (e.g., cash, A/R, Inventory, etc.)
What is the difference between B/S and I/S accounts?
Unlike B/S accounts, I/S accounts are temporary because they will be reset to zero after each fiscal year
What is a T account?
left you have debit and right you have credit
What side is normal balance for cash on?
The debit side
What does debit mean?
Put some numbers on the left hand side
What does credit mean?
Put some numbers on the right hand side
When does debit/credit mean increase or decrease?
For cash, debit means increase and credit means decrease
For bank loan debit means decrease, and credit means increase
What is declared as debit?
Normal ending balance fo assets, expenses, and dividend
What is declared as credit?
Normal ending balance for liabilities, share capital, revenues
What is journalizing?
An accounting record in which transactions and events are originally recorded in chronological order.
What is normal balance about?
Which sidebetween left and right should increase when a specific account increases
Definition of current asset?
Assets that will be turned into cash or consumed in the next year
Definition of non-current asset?
Assets that will be turned into cash or consumed beyond one year
Definition of current liabilities?
Debts payable within the next year
Definition of non-current liabilities?
Debts payable beyond one year
definition of accounting transaction?
Has to affect asset, liability or equity
Long equation for assets?
Assets = liabilities + share capital + retained earnings
Where do you put numbers when there is increase in asset?
Lefthand side
Where do you put numbers when there is increase in liability?
Righthand side
What does on account mean?
Non-cash transaction so it is actually credit
What is included in equity?
Share capital and retained earnings
How does net income change equity?
(1) Increase in revenue increases net income which increases equity
(2) increase in expenses reduces net income and reduces equity
What does dividend declared do?
Reduced retained earnings so reduces equity
Does dividend declared affect income statement?
No
Where is ending balance?
Left hand side for where debit increases and right hand side for where credit increases
