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accounting 305 > Exam 1 > Flashcards

Exam 1 Flashcards

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1
Q

accounting cycle definition

A

procedures involved in recording and preparing financial statements

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2
Q

accounting cycle

A
  1. identification & measurement of transaction and other events
  2. journalization - general journal, cash receipts journal, purchases journal, cash disbursements journal, sales journal, other special journals
  3. posting - general (monthly), subsidiary (daily) ledger
  4. trial balance preparation
  5. adjustments (accruals, deferrals)
  6. adjusted trial balance
  7. statement preparation (income, RE, balance sheet, CFs)
  8. closing entries (nominal accounts)
  9. post closing trial balance (optional)
  10. reversing entries (optional)
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3
Q

when do you make an entry?

A

if it is an event that causes a change in assets, liabilities, or equity

an event that affects the company’s financial position

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4
Q

examples of what to record and what not to record

A

record: sales, purchases

don’t record: hiring someone, signing a contract

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5
Q

standard accounting equation

A

assets = liabilities + SE equity

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6
Q

accounting equation expanded

A

liabilities + Beginning SE + revenues - expenses - dividends

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7
Q

purpose of a journal

A
  1. draft journal entries
  2. see both sides of journal entry
  3. review the journal entry
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8
Q

posting

A

journal –> ledger

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9
Q

ledger

A

place where we accumulate the activities in each account and can easily determine balances or activity for each account when necessary

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10
Q

trial balance

A

list of accounts and their balances at a given time

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11
Q

when do we prepare trial balance

A

at the end of the period (end of month, quarter, year)

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12
Q

why do we prepare trial balances

A
  • make sure debts=credits

- provides us with a nice way to look for unusual balances

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13
Q

deferrals

A

waiting to recognize, haven’t yet incurred

  1. prepaid expenses - expenses paid in cash be (ex: prepaid insurance)
  2. unearned revenues - cash received before services are performed (ex: tickets)
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14
Q

accruals

A
  1. accrued revenues - revenues for services performed buy not yet received in cash or recorded
  2. accrued expenses: expenses incurred but not yet paid in cash or recorded (ex salaries(last 3 days of the year), utilities)
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15
Q

where do we record adjusting entries

A

general journal and general ledger

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16
Q

equation to calculate monthly depreciation

A

(historical cost - salvage value)/useful life

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17
Q

Financial leverage ratios

A

times interest earned

cash coverage

18
Q

times interest earned

A

-financial leverage ratio
-higher is better
-having too low of interest might be a bad thing because we may be leveraging poorly
TIE = EBIT / Interest

19
Q

cash coverage ratio

A

= (EBIT + Depreciation) / interest

-adds depreciation back in TIE

20
Q

Asset management inventory ratios

A
  • inventory turnover

- Days’ sales inventory

21
Q

inventory turnover

A

= COGS / Inventory
- the entire inventory turns over ___ each year
- in general, we’d like a little higher
- too high could mean you don’t have enough inventory, could be missing sales
-

22
Q

Days’ sales inventory

A

= 365 / Inventory Turnover

  • makes the inventory turnover more conceptually understandable
  • I sell my entire inventory every ___ days
  • a good DSI ratio depends on the company, need a higher ratio for a butcher vs someone who sells yachts.
  • must compare ratio to get a feel for good or bad
23
Q

Asset management: Receivables

A
  • Receivables turnover

- Days’ sales in receivables

24
Q

Receivables turnover

A

= Sales / AR

  • tells me that I turn over my receivables __ times per year
  • want a higher number
25
Q

Days sales in receivables

A

= 365 / receivables turnover

  • i collect my receivables every __ days
  • must compare ratio to get a feel for good or bad
  • DSR makes receivable turnover ratio more understandable
26
Q

Asset management: Asset turnover ratios

A
  • total asset turnover

- capital intensity ratio

27
Q

total asset turnover

A

= sales / total assets

  • Dollar of revenue per dollar of assets
  • I have $0.64 of sales for every dollar in assets
  • want higher
  • have to compare to get a feel for good or bad
  • lower can be bad –> PPE tends to be the more expensive assets, assets are listed net of depreciation, older equipment have a smaller impact because they’ve accounted for more depreciation, indicative of older machines which is not always beneficial to a business
28
Q

capital intensity ratio

A

= 1 / Total Asset Turnover

29
Q

Profitability measures

A
  • profit margin
  • ROA
  • ROE
30
Q

profit margin

A

=NI / sales

  • have to compare
  • higher is better
  • can be too high though, if margin is set so high we might be losing out on sales. Might be better to take a lower margin with a higher volume of sales
31
Q

return on assets

A

= NI / Total Assets

  • higher is better
  • could be bad, older equipment?
32
Q

return on equity

A

=NI / Total equity

  • higher is better
  • must compare
  • high can be bad, too much equity could be I’m using too much debt
33
Q

market value measures

A
  • EPS
  • PE ratio
  • price/sales ratio
  • market-to-book ratio
34
Q

earnings perr share

A
  • higher is better

- need to compare to previous periods

35
Q

P/E ratio

A

= Price per share / earnings per share

  • value investors want a lower PE
  • ManagementCEOs want this to be high because that means investors think we’re doing good
36
Q

price/sales ratio

A

= price per share / sales per share

  • value investors want a lower PE
  • Managements wants this to higher
37
Q

market-to-book ratio aka Price/book

A

= price per share / book value per share

  • low P/B stocks have historically returned more
  • want a low P/B from investor standpoint
38
Q

DuPont

A

ROE = PM x TAT x EM
NI / TE = (NI / Sales) x (Sales / Ta) x (TA/TE)
- leverage make good times better and bad times worse
Things that impact ROE:
-PM (ability to control costs)
- TAT (how efficiently we manage our assets (inventory, fixed assets etc.)
- EM (how well we use debt will increase ROE)

*** continued to multiple by 1 and found that essentially everything affected ROE (reason why its such an important ratio)

39
Q

why evaluate financial statements

A

-internal users:
performance evaluation
planning for future

-external users:

40
Q

Benchmarking

A

ratio need to be compared to something

  • ourselves at a different time
  • industry average
  • single competitor
  • sometimes an index
41
Q

Dont worry about EVA

A

ddd

42
Q

problems with financial analysis

A

-conglomerates (no readily available comparables, who do you compare GE to? themselves)
-global competitors
-different accounting procedures
etc.

accounting 305 (2 decks)

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