Evaluating Financial Statements Flashcards
Define “nonmonetary items”.
The specific price of nonmonetary items can change.
Define “monetary items”.
The specific price of monetary items cannot change.
Define “purchasing power”.
The purchasing power of an asset is the amount of goods and services that can be obtained by transferring the asset to another party.
Define “specific price change”.
The change in the price of a specific good or service over a period of time.
Define “constant dollars”.
Measurements in the general price level as of a specific date.
Define “nominal dollars”.
Measurements in the price level in effect at a transaction date. These measurements are not adjusted for inflation.
Define “general prices”.
The term general prices refers to a market basket of items that the typical consumer purchases.
Define “inflation”.
It is the increase in general prices for a period of time; deflation is the decrease in general prices.
What is the Management Discussion & Analysis (MD&A) section?
Management Discussion & Analysis: a narrative written by management that is an integral part of the disclosure of the financial statements.
What is included in illegal acts for companies?
Illegal contributions and bribes.
What is the difference between errors and irregularities?
Errors are unintentional, irregularities are intentional.
What are the disclosure requirements for noncurrent liabilities?
Combined aggregate amount of maturities on borrowings 5+ years after balance sheet, sinking fund requirements; the aggregate amount of payments for unconditional obligations to purchase fixed or minimum amounts of goods or services; the fair value of each financial debt instrument in the financial statements or in the notes; the nature of the firm’s liabilities, interest rates and maturity dates, conversion options, assets pledged as collateral, and restrictions.
What is a development stage enterprise?
An enterprise placing substantially all its efforts into the establishment of a new business.
What is presented in the related party transaction disclosures?
Nature of relationship, description of all transactions for years presented, dollar amounts of transactions, and receivables to or from parties.
What does the first footnote typically cover?
Summary of significant accounting policies.
What disclosure is required by firms in hyperinflationary economies under International Financial Reporting Standards (IFRS)?
Disclosure of the impact of inflation on the financial statements is required.
Under International Financial Reporting Standards (IFRS), what should the Summary of Significant Accounting Policies include?
?Judgments and key assumptions made in applying those policies;
?Measurement bases used for recognition (e.g., historical cost, fair value);
?Information enabling an assessment of the estimation uncertainty that could result in a material adjustment to the balances of assets and liabilities, which are point estimates in many cases.
Define “purchasing power loss”.
Losses that result from holding monetary assets during inflationary times or having monetary liabilities during deflationary times.
Define “purchasing power gain”.
Gains that result from holding monetary assets during deflationary times or having monetary liabilities during inflationary times.
Development stage companies have the same disclosure requirements as other companies.
FALSE
The related party footnote must disclose the names of all related parties and affiliates.
FALSE
IFRS footnote requirements require a statement that the financial statements are in compliance with IFRS.
TRUE
Management compensation is not required to be included in the summary of significant accounting policies.
TRUE
Significant accounting policies is not a required disclosure for development stage companies.
FALSE
U.S. and International GAAP require disclosure of the amount of dividends proposed or declared before the statements were authorized for issue.
FALSE
The footnote containing the summary of significant accounting policies is a required disclosure.
TRUE
The footnotes are an integral part of the financial statements.
TRUE
What are the general types of ratios?
?Liquidity/Solvency;
?Operational Activity;
?Profitability;
?Equity/Investment Leverage.
List the formula for working capital.
Current Assets - Current Liabilities.
List the formula for the Acid Test or Quick Ratio.
(Cash + Net Receivables + Marketable Securities) / Current Liabilities.
List the formula for times interest earned.
(Net Income + Interest Expense + Income Tax Expense) / Interest Expense.
List the formula for times preferred dividend.
Net Income / Annual Preferred Dividend Obligation.
What do liquidity (or solvency) ratios measure?
Measure the ability of the firm to pay its debts as they come due.
What is financial statement ratio analysis?
The development of quantitative relationships between various elements of a firm’s financial statements.
List the formula for Number of Days’ Sales in Accounts Receivable (AR).
365/ AR Turnover.
List the formula for inventory turnover.
Cost of Goods Sold (COGS) / Average Inventory.
List the formula for number of days’ supply in inventory.
365/ Inventory Turnover.
What do operational activity ratios measure?
They measure the efficiency with which a firm carries out its operating activities.
List the formula for determining Operating Cycle Length.
Days’ Sales in Accounts Receivable + Days’ Supply in Inventory.
List the working capital ratio formula.
Current Assets / Current Liabilities.
List the Accounts Receivable Turnover ratio formula.
Net Credit Sales / Average Net Accounts Receivable.
List the cash availability or interval ratio formula.
(Cash + Net Receivables + Marketable Securities) / Average Daily Cash Expenditures.
What do profitability ratios measure?
Aspects of a firm’s operating (income/loss) results on a relative basis.
List the return on owner’s equity formula.
Net Income / Average Stockholders’ Equity.
List the return on common stockholders’ equity formula.
(Net Income-Current Period Preferred Dividend Obligation) / Average Common Stockholders’ Equity.
List the return on total assets formula.
(Net Income + Interest Expense (net of tax)) / Average Total Assets.
List the profit margin formula.
Net Income/Net Sales.
List the common stock yield formula.
Dividend per Common Share / Market Price per Common Share.
List the per share common stock dividend pay out rate formula.
Cash Dividends per Common Share / Earnings Per Share (EPS).
List the total common stock dividend payout rate formula.
Cash Dividends to Common Shareholders / Net Income to Common Shareholders.
List the price to earnings ratio formula.
Market Price for a Common Share / Earnings Per Share (EPS).
List the book value per preferred share ratio formula.
Preferred Shareholders’ Equity (including dividends in arrears) / Number of Outstanding Preferred Stocks.
List the book value per common stock ratio formula.
Common Shareholders’ Equity / Number of Outstanding Common Shares.
List the debt ratio formula.
Total Liabilities / Total Assets.
List the owner’s equity ratio formula.
Shareholders’ Equity / Total Assets.
List the debt to equity ratio formula.
Total Liabilities / Total Shareholders’ Equity.
What do equity/investment leverage ratios measure?
Measure relative sources of equity and equity value.
