Exam 1 Flashcards
1
Q
Financial Statement Analysis
A
applies analytical tools to financial statements and related data for making business decisions
2
Q
Internal Users of Accounting Information
A
manages and operate the company
3
Q
Types of Internal Users
A
- managers
- officers
- internal auditors
4
Q
External Users of Accounting Information
A
NOT directly involved in running the company
5
Q
Types of External Users
A
- shareholders
- lenders
- suppliers
6
Q
Building Blocks of Analysis
A
- liquidity and efficiency
- solvency
- profitability
- market prospects
7
Q
Liquidity and Efficiency
A
ability to meet short-term obligations and to efficiently generate revenues
8
Q
Solvency
A
ability to generate future revenues and meet long-term obligations
9
Q
Profitability
A
ability to provide financial rewards sufficient to attract and retain financing
10
Q
Market Prospects
A
ability to generate positive market expectations
11
Q
Types of General-Purpose Financial Statements
A
- income statement
- balance sheet
- statement of Stockholders’ Equity
- statement of cash flows
- notes to the financial statements
12
Q
Financial Reporting
A
communication of financial information useful for making investment, credit, and other business decisions
13
Q
Standards for Comparison
A
- intracompany
- competitors
- industry
- guidelines
14
Q
Intracompany
A
company’s current performance is compared to its prior performance and its relations between financial items
15
Q
Competitor
A
provides standards for comparisions
16
Q
Industry
A
industry statistics provide standards for comparisions
17
Q
Guidelines
A
(rules of thumb)
standards of comparisons can develop from experience
18
Q
Tools for Analysis
A
- horizontal analysis
- vertical analysis
- ratio analysis
19
Q
Horizontal Analysis
A
comparing the financial condition and performance across time
20
Q
Vertical Analysis
A
comparing the financial condition and performance to a base amount
21
Q
Ratio Analysis
A
measurement of key relations between financial statement items
22
Q
Methods of Horizontal Analysis
A
- Dollar change
- Percent change
- Trend analysis
23
Q
Dollar Change
A
= analysis period amount - base period amount
24
Q
Base period
A
refers to the financial statements used for comparison
25
Analysis Period
refers to the financial statements under analysis
26
Percent Change
= (analysis period - base period) / base period X100
27
Trend Analysis
= (analysis period / base period) X 100
- used to reveal patterns in data across periods
28
Methods of Vertical Analysis
- Common-size statements
29
Common-size Statements
= (analysis amount / base amount) X 100
- used to evaluate individual financial statements items in terms of a specific base amount
30
Depending on the _______ _______, you use a different base amount for Common-size Statemetns
financial statement
31
When using a Balance Sheet for Common-size Statements, what is your base amount
total assets
32
When using a Income Statement for Common-size Statements, what is your base amount
revenues
33
Working Capital
= current assets - current liabilities
- more working capital suggests a strong liquidity position and ability to pay debts
34
Current Ratio
= current assets / current liabilities
- measures the short-term debt-paying ability of a company
- a higher ratio suggest a strong ability to meet current obligations
35
Acid-Test Ratio
= (Cash + Short-term investments + current receivables) / current liabilities
- the most liquid types of current assets
36
What is referred to as Quick Assets
cash + short-term investments + current receivables
37
Accounts Receivable Turnover
= net sales / average accounts receivable, net
- measures how many times a company converts its receivables into cash
38
Average Accounts Receivable
= (Beg Accts. Rec. + End Accts. Rec.) / 2
39
Inventory Turnover
= Costs of Goods Sold / Average Inventory
= measures how long a company holds inventory before selling it
40
Average Inventory
= (Beginning Inventory + Ending Inventory) / 2
41
Days' Sales Uncollected
= (Accounts receivable, net / net sales) x 365
- measures how frequently a company collects its accounts receivable
42
Days' Sales in Inventory
= (ending inventory / costs of goods sold) X 365
- evaluates inventory liquidity
43
Total Asset Turnover
= net sales / average total assets
- measures a company's ability to use its assets to generate sales
- important indication of operating efficiency
44
Average Assets
= (Beginning Assets + Ending Assets) / 2
45
Types of Solvency
- debt ratio
- equity ratio
- debt-to-equity ratio
- times interest earned
46
Debt Ratio
= total liabilities / total liabilities and equity X 100
- shows total liabilities as a percent of total assets
47
Equity Ratio
= total equity / total liabilities and equity x 100
- shows total equity as a percent of total assets
48
Debt-to-Equity Ratio
= total liabilities / total equity
- measures what portion of the company's assets are contributed by creditors
49
Times Interest Earned
= income before interest and taxes / interest expense
- the most common measure of a company's ability to pay interest
50
Income before interest and taxes
= net income + interest expense + income taxes
51
Types of Profitability
- Profit Margin
- Return on Total Assets
- Return on Common Stockholders' Equity
52
Profit Margin
= net income / net sales
- measures a company's ability to earn net income from each sales dollar
53
Return on Total Assets
= net income / average total assets
- measures how well assets are utilized by the company
54
Return on Common Stockholders' Equity
= (net income - preferred dividends) / average common stockholders' equity
- indicated how the company's ability to earn income for common stockholders
55
Types of Market Prospects
- Price-Earnings Ratio
- Dividend Yield
56
Price-Earning Ratio
= market price per common share / earnings per share
- measures market expectations for future growth
57
Dividend Yield
= annual cash dividends per share / market price per share
- compares the dividend-paying performance of different companies
58
Sections of Analysis Reporting
- Executive summary
- Analysis overview
- Evidential Matter
- Assumptions
- Key factors
- Inferences
59
Executive Summary
brief analysis of results and conclusions
60
Analysis Overview
background on the company, its industry, and the economy
61
Evidential Matter
Financial statements and information used in the analysis, including ratios, trends, comparisons, and all analytical measures
62
Assumptions
list of assumptions regarding the company's industry and economic environment
63
Key factors
list of favorable and unfavorable factors, both quantitative and qualitative, for company performance
64
Inferences
forecasts, estimates, interpretations, and conclusions of the analysis report
65
Managerial Accounting
provides financial and non-financial information for managers of an organization and other decision-makers
66
Purpose of Managerial Accounting
- determine the costs of an organization's products/services
- planning future activities
- comparing actual results to planned results
67
Planning
process of setting goals and making plans to achieve them
68
Control
process of monitoring planning decisions and evaluating an organization's activities and employees
69
Total Fixed Costs
do not change when activity changes
- remains constant
70
Total Variable Costs
change in proportion to activity changes
71
Direct Costs
traceable to a single cost object
Ex. material and labor cost for a product
72
Indirect Cost
costs that cannot be traced to a single cost object
Ex. maintenance expenditure benefiting two or more departments
73
Product Cost
production costs necessary to create a product and consist of: direct materials, direct labor, and manufacturing overhead
74
Manufacturing Overhead
production costs other than direct materials and direct labor
75
Period Costs
Non-production costs and are usually associated with activities linked to a time period
Ex. salaries, advertising expenses, depreciation
76
Direct Materials Costs
Expenditures for direct materials that are separately and readily traced through the manufacturing process to finished goods
Ex. steal, pedals, brakes, cables
77
Direct Labor Costs
Wages and salaries for direct labor that are separately and readily traced through the manufacturing process to finished goods
Ex. assembly line workers
78
Factory Overhead Costs
all manufacturing costs that are not direct materials/labor and are not separately traced to finished goods
Ex. maintenance, cleaning supplies, factory utility costs
79
Prime Costs
direct material and direct labor
80
Conversion Costs
direct labor and manufacturing overhead
81
Raw Materials Inventory
materials waiting to be processed; direct or indirect
82
Work in Process inventory
partially complete products
83
Finished Goods Inventory
completed products for sale
84
Merchandiser Income Statement
Beg. merchandise inventory + cost of goods purchases - ending merch. inventory = costs of goods sold
85
Manufacturer Income statement
beg. finished goods inventory + costs of goods manufactured - Ending finished goods inventory = costs of goods sold
86
Total Manufacturing Costs
= direct materials use + direct labor + factory overhead
87
Costs of Goods Manufactured
= total manufacturing costs + beginning work in process - ending work in process
88
Trends in Managerial Accounting
- customer orientation
- global economy
- E-commerce
- service economy
- lean practices
- value chain
89
Just-in-time manufacturing
system that acquires inventory and produces only when needed
90
Raw materials Inventory Turnover
= raw materials used / average materials inventory
91
Days' Sales in raw materials inventory
= (ending raw materials inventory / raw materials use) X 365
92
Process Operations
mass production of products in a continuous flow of steps
93
Job Order Production
each customized product is manufactured separately
94
Receiving Report
source document for recording materials received in both a materials ledger card and in the general ledger
95
Materials Ledger Cards
updated when materials are purchased and issued for use in production
96
Predetermined Overhead Rate
estimated overhead costs / estimated activity base**
**direct labor or direct materials
97
Types of Managerial Accounting Decisions
- measure the profitability of an individual store
- estimate product cost for a new line of shoes
- determine the location and size of a new plant
- determine whether to expand into a new market
- evaluate a purchasing department's performance
98
Types of Financial Accounting Decisions
- determine whether to lend to a company
- prepare financial reports according to GAAP
- determine whether to buy another company's stock
