Exam 3 Flashcards
balance sheet (financial condition)
reports the company’s assets, liabilities and owners’ equity as of a specified date
balance sheet date
the specified date of the balance sheet reporting assets and liabilities
asset
anything owned by the company
accounts receivable
amounts due from customers for goods and services the co. has already provided
inventory
merchandise normally available for sale to customers
current asset
an asset expected to be converted to cash within one year
non current asset
an asset expected to be converted to cash in greater than one year - has 2 sub categories
categories of non current assets
fixed and intangible
fixed asset
land, buildings, equipment and other long-term (more than 1 year) assets, are also known as plant assets
intangible asset
sub category of long term assets - include patents, trademarks, copyrights and goodwill
alternate names for fixed assets
PP&E property plant and equipment
accounts payable
amount due to suppliers/distributor for goods and service co has already received
long term liability
a liability expected to be paid in greater than one year
current liability
a liability expected to be paid within one year
OE
indicates the owners’ investment in the business
B2B
Business-to-business is a situation where one business makes a commercial transaction with another.
current + non current assets equal
total assets
current liabilities + long-term debt equals
total liabilities
alt names for balance sheet
statement of financial condition/position
3 examples of intellectual property
patent, copyright, trademark
2 names for reinvested profits
owners equity and retained earnings
accumulated earnings and reinvested profits
who do the profits of the business belong to
the owners
another term for profit
earnings/income
total after expenses
corporations name for owners equity
stockholder/shareholder equity
is preferred stock listed before or after common on the balance sheet
before
income statement
reports the business’s revenues, expenses, and net income for a specified period of time
revenues / top line
total sales
expenses
the cost of operations incurred to generate revenue
bottom line
the net income of a company for a certain period
2 alternate names for income statement
P&L/statement of operations
alternate terms for income
profit, earnings
dividend
a distribution (payment) of a corporation’s net income to its shareholders
what happens to profits not paid as dividends
reinvested and show up as retained earnings on the balance sheet
term for reinvested profits on the balance sheet
retained earnings
capital structure of a business definition
the % of debt and equity financing used to pay for the businesses assets
debt financing + equity financing =
capital structure
how to calculate capital structure
debt financing + equity financing
debt-to-total assets ratio formula
total liabilities / total assets
alt name for debt-to-total assets ratio
debt ratio
debt-equity ratio formula
total liabilities / total equity
alt name for debt-equity ratio
debt to equity ratio
whether a higher debt-to-total assets ratio indicates a greater risk of default, or a smaller risk of default, than a lower debt-to-total assets ratio
greater risk of default
whether a higher debt-equity ratio indicates a greater risk of default, or a smaller risk of default, than a lower debt-equity ratio
greater risk of default
basic accounting equation
A=L+OE
consolidated financial statement
financial statements of a parent company and its subsidiaries
parent company
a company that owns another
subsidiary
a company owned by another company
sister companies
companies that share a parent company
allowance of doubtful account
estimates the percentage of accounts receivable that are expected to be uncollectible
alt names for allowance of doubtful account
estimated uncollectibles
A/R net Formula
gross A/R - estimate of uncollectibles
which is the total amount owed by customers to the company, gross A/R or A/R net
Gross A/R
which is the amount the company actually expects to collect, gross A/R or A/R net
A/R net
which is included in the company’s total assets, gross A/R or A/R net
A/R net
which fixed asset is listed first
Land
which fixed asset does not depreciate
Land
which indicates the total cost of the venture’s fixed assets, gross fixed assets or net fixed assets
historical cost/gross
which is included in the venture’s total assets, gross fixed assets or net fixed assets
net fixed assets
whether a fixed asset’s accumulated depreciation increases over time, or decreases
increases
whether a fixed asset’s net book value increases over time, or decreases
decreases
depreciation
spreading historical cost of a fixed asset over the assets estimated useful life
accumulated depreciation
a fixed assets total depreciation from acquisition to the balance sheet date
market value
price a buyer would pay to an unrelated seller
[liabilities]
debt capital
accrued payables
expenses that have been incurred but not yet paid
3 examples of accrued payables
accrued wages/salaries
accrued interest
taxes payable
2 other terms for contributed capital
invested capital
paid-in capital
retained earnings
reinvested profits
another term for retained earnings
owners equity and retained earnings
accumulated earnings and reinvested profits
dividend
a distribution of profits to the owners
whether the book value of a fixed asset is the same as its market value
it is not the same
what goodwill on the balance sheet indicates
indicates the co has acquired other companies
the type of asset that goodwill is
noncurrent - intangible
whether the par value of stock is the same as its market value
no
who determines if corp will pay dividend
board of directors
role of board of directors
deciding to pay dividends/to protect the interests of the shareholders
formula for ending gross fixed assets
beg gross fixed + historical cost of fixed assets purchased - historical cost of assets sold in period
net book value of a fixed asset
historical cost - accumulated depreciation
amt reported on balance sheet for preferred stock
number of pref shares issued x par value per pref share
amt reported on balance sheet for additional paid in capital preferred
anything contributed above preferred stock par value
amt reported on balance sheet for common stock
number of common shares issued x par value per common share
amt reported on balance sheet for additional paid in capital common
anything contributed above common stock par value
ending retained earnings formula
beg retained earning + net income - dividends
net working capital in dollars
current assets - current liabilities
current ratio formula
current assets/current liabilities
quick ratio formula
(current assets - inventory) / current liabilities
what does net working capital mean
amount of cash that can safely be spent
what does current ratio mean
measures if the firm has the resources to pay debt with cash and assets
what does quick ratio mean
how easily could you pay off liabilities in a very short amount of time (smaller than current ratio)
3 ways to analyze a ventures ratios
compare to competitors
compare to companies in the same stage of life cycle
analyze trends for the company over time (up/down)
3 limitations of financial statements
based on historical actual transactions and do not indicate future prospects
many valuable intangibles can not be recorded as assets on the balance sheet
net book value may be very different than their market value
3 intangibles useful to a venture but cant be on balance sheet
experienced personnel
efficiencies (established procedures)
customer loyalty/reputation (goodwill from owned co.)
2 examples of assets recorded on the balance sheet at lower than market value (undervalued)
land
buildings
business model
a design/plan for generating revenue, profits, and freecashflow to equity
revenue model
a plan for generating sales
revenues
amounts received or to be received for goods and services
markup model
an amount is added to the venture cost of inventory purchased or made
markup
the amount $ added to the ventures cost of the product
retailer
stores who by product from manufacturer
wholesaler
a middle man who buys from manufacturer and marks it up before selling it to retailers
keystoning
markups = 100% of cost
sales price = cost of inventory x 2
fee for service model
generates revenues by charging customers for each service provided (dentist)
advertising model
generates revenues by providing a platform that promotes other organizations products and services
revs depend on popularity of platform (social media and radio)
subscription model
generates revenue by providing a service for a predetermined cost per period
transaction model
generates revenue by charging for facilitating transactions between parties or providing sales leads
licensing model
generates revenue by granting others the right to use the business name, logo, product, tech or service for a specified price
licensor
the entity granting use of its name, logo, tech or service
licensee
entity authorized to use name, logo, product, tech or service of another
can a venture have revenue without profit
yes
can a venture have profits without freecashflow to equity
yes
freecashflow to equity
the cashflow available to shareholders
used to pay divs and buy back shares
does the licensee or the licensor own the product being licensed
licensor
issue discussed for licensor
maintaining quality control
2 advantages for subscription model over other models
provides stable recurring revenue
facilitates revenue growth over time
disadvantage of transaction model
revenues rely on continually generating new transactions
calc selling price under markup model (markup model formula)
cost of inventory + markup
calc markup percentage
markup/cost
cash basis accounting
revenue is recorded when cash is received
expenses are recorded when cash is paid
accrual basis accounting
revenues are recorded when earned or when services are performed REGARDLESS of when cash received
expenses are recorded when incurred or become liable for them REGARDLESS when cash paid
capitalizing
recording purchases as assets and not as expenses in the current period
expensing
recording purchases as expenses
revenue recognition
recording revenues in the accounting system
revenues
amounts received or to be received for goods and services
expenses
the cost of operations incurred to generate revenue
sales discounts
discounts given to A/R customers for paying early
charge
an expense
is any fee representing the cost of credit or borrowing
sales mix
proportion of total sales from each of the business products and services
is cash basis or accrual basis used for personal taxes
cash basis
is cash basis or accrual basis used in GAAP accounting
accrual
when rev is recorded in cash basis when cust pays by cash
when received from cust
when rev is recorded in cash basis when cust pays by check
date received from customer
when rev is recorded in cash basis when cust pays by card
date funds are received from card processor
when expenses are recorded in cash basis when expenses are paid by cash
when paid by venture
when expenses are recorded in cash basis when expenses are paid by check
date check was mailed by venture
when expenses are recorded in cash basis when expenses are paid by card
date card is swiped
whether capitalizing has an immediate impact on the income statement (and therefore net income), or a delayed impact
delayed
whether expensing has an immediate impact on the income statement (and therefore net income), or a delayed impact
immediate
bottom line
the net income of a company for a certain period
matching principle
expenses are recorded in the same accounting period as the revenues they helped generate
role of the SEC
to regulate US public financial markets with goal of protecting public investors
whether the SEC is part of the U.S. government, state government, or not part of government at all
part of federal govt
who requires public companies to use GAAP
the SEC
2 reasons why a private venture may have to prepare GAAP financial statements
to satisfy lenders
establish credibility with potential investors
2 types of sales
cash and credits (sales on account)
whether the venture’s net income equals its change in cash for the period under accrual-basis accounting
no
the figure that is 100% on a vertical income statement
top line
2 ways to analyze a vertical financial statement (ways such a financial statement is used/analyzed)
trends over time for the venture
comparisons between companies of different seizes
profitability analysis
how well the venture is creating profits
ops expense examples
utilities/salaries/depreciation
alt term for vertical financial statement
common size P&L
multistep income statement
revenues (returns, discounts) --- net sales (COGS) --- Gross profits (ops expense) --- EBIT (aka operating income) (interest expense) --- EBT (taxes) --- net income
calc gross profit margin
gross profit/top line = %
calc net profit margin
net income/top line = %
calc depreciation expense straight line
(historical cost - residual value) / est. useful life
calc total accumulated depreciation
straight line depreciation x number of periods
calc EBITDA
gross profit (ops exp except amort and dep) ------- EBITDA (dep and amort)
3 reasons why a venture’s gross margin can change over time
changes in selling price
change in cost of merchandise
change in sales mix
SEC
securities and exchange commission
EBITDA
Earnings before interest, taxes, depreciation and amortization
GAAP
Generally Accepted Accounting Principles
is gross margin a measure of
liquidity
profitability
asset utilization
profitability
is net profit margin a measure of
liquidity
profitability
asset utilization
profitability
is inventory turnover a measure of
liquidity
profitability
asset utilization
liquidity
is total asset turnover a measure of
liquidity
profitability
asset utilization
asset utilization
is fixed asset turnover a measure of
liquidity
profitability
asset utilization
asset utilization
does accumulated depreciation increase or decrease over time
increase
does net book value increase or decrease over time
decrease
what asset utilization (asset management) refers to in the context of financial statement analysis
how well a firm is using assets to produce revenue
3 potential solutions for a co. with a low inventory turnover
stronger sense of what customers want
better marketing strategy
better sales force
3 higher costs that result from a low inventory turnover
storage costs
higher product obsolescence
higher interest costs if capital is used to buy inventory
how older equipment affects the fixed assets turnover
make asset turnover greater/better
deduction
expense
write-off
deduction
election
option to change from s to c corp
accelerated depreciation
more depreciation in early life that slows as the asset ages
phantom income
income that must be on tax return even if taxpayer did not receive cash (reinvested profits)
name of the federal tax law
Internal Revenue Code
who writes federal tax law
Congress
3 common circumstances that require a business to obtain an EIN, as discussed in class
business has employees
business is a corporation
business is a partnership
the 2 taxes referred to in the expression, “double taxation of corporate profits”
corporate income tax
individual income tax on divs paid to shareholders
type of business (legal form) that most public companies are
C corps
1 tax advantage of C corporations, as discussed in class
corporate income tax may be lower than pass through entity or sole proprietorship
3 disadvantages of C corporations, as discussed in class
losses in first year do not produce tax savings for owners (not deductible)
double taxation of corp profits
payroll tax responsibilities even if owners are the only employees
3 payroll tax responsibilities of a business that has employees, as discussed in class
withhold tax from employees
remitting withheld tax to IRS and state
pay business portion of payroll tax
whether shareholders who work in their corporations are employees of the corporation, or are not employees of the corporation
are employees and must be paid salary for tax purposes
4 payroll taxes employers are required to pay, as discussed in class
Social security 6.2
Medicare 1.45
Fed unemployment tax
state unemployment tax
whether Social Security and Medicare taxes are paid by the employer, the employee, or both
both
whether federal and state unemployment taxes are paid by the employer, the employee, or both
employer only
who an entrepreneur files articles of incorporation with
the state opening in born as C corp
who an entrepreneur files an election to have the corporation treated as an S corporation with
IRS
is S or C corp referred to as regular corporation
C
does S or C corp have a max number of shareholders
S - 100 (family counts as 1)
types of businesses to which pass-through taxation applies
S-corp
partnership
LLC
do pass through entities pay income tax
no
do pass through entities file a return with the IRS
yes
the name of the tax form (schedule) that pass-through entities must furnish each year to their owners
K-1
2 disadvantages of pass-through entities, compared to a C corporation, as discussed in class
possibility of phantom income
the owners individual tax rate may be higher than rate on C corp profits 21%
2 advantages of pass-through entities, compared to a C corporation, as discussed in class
no double tax, S-corp business dont pay income tax
Losses can offset the owners taxable income, which saves on taxes
be able to indicate whether a business owner should expect to be able to immediately deduct all expenditures
not able to immediately deduct
when the cost of merchandise is deducted
when it is sold
whether self-employment tax is paid in addition to income tax, or instead of income tax
in addition
whether self-employment tax is paid in addition to Social Security and Medicare taxes, or instead of Social Security and Medicare taxes
can pay self employment instead of SS and medicare
whether self-employment tax is paid when the business has a loss
not paid on a loss
what do sole proprietors pay self-employment tax on
proprietorships profit
what does a partner in a partnership pay self-employment tax on
partners share of partnership profit
what does an LLC member pay self-employment tax on
members share of the LLC profit
calc cost savings from a deduction
amount of deduction x tax rate
calc after tax cost of deductible item in 2 ways
historical cost of item - tax savings
historical cost of item x (100% - tax rate)
IRS
Internal Revenue Service
administers and enforces tax law
IRC
Internal Revenue Code
EIN
Employer Identification Number
federal tax ID number
LLC
limited liability company
difference between S and C corp
tax rules
depreciation expense
depreciation for a stated period
if asset is owned less than half a month how much depreciation is recorded
none
if asset is owned more than half a month how much depreciation is recorded
full month
