FAR - Self Study Flashcards
How do you calculate the DuPont return on assets ratio?
DuPont return on assets = Net Profit Margin X Total Asset Turnover
Net Profit Margin = Net Income / Net Sales
Total Asset Turnover = Net Sales / Average Total Assets
How do you calculate the Inventory Turnover Ratio and what does it measure?
Inventory Turnover = COGS / Average Inventory
This ratio measures how quickly inventory is sold. The higher the turnover, the better the performance.
What is the formula for the Accounts Receivable Turnover Ratio?
A/R Turnover = Net Credit Sales / Average Accounts Receivables
What formula is used to calculate the Acid-Test Ratio?
Acid-Test Ratio = (Cash Equivalents + Marketable Securities + Net Receivables) / Current Liabilities
Adjustments made to the operation activities section under the indirect method can be remembered using this mnemonic:
C - Current assets & liabilities
L - Losses and Gains
A - Amortization & Depreciation
D - Deferred items
Using the Direct Method to present the Statement of Cash Flows, what categories are reported to show “net cash flow provided by (used in) operating activities”?
- Cash received from customers
- Interest received (U.S. only)
- Dividends received (U.S. only)
- Other operating cash receipts (insurance proceeds, lawsuit settlement, etc.)
- Cash received from sales of securities classified as trading securities, if Current Assets.
- Cash paid to suppliers & employees
- Interest paid (U.S.)
- Income taxes paid (U.S.)
- Cash paid to acquire trading securities, if Current Assets
- Other operating cash payments (rent, insurance, utilities, marketing, etc.)
CASH for TIES with DOTS =
CASH
Taxes paid (Income)
Interest received/paid
Employee payments
Supplier payments
Dividends received
Other cash receipts/payments
Trading Securities (payments for, receipts from sale of)
How is cash received from customers calculated as reported in the Statement of Cash Flows - Operating Activities using the Direct Method?
= Revenues - Increase in Receivables \+ Decrease in Receivables \+ Increase in unearned revenue - Decrease in unearned revenue
How are bank overdrafts treated in regards to Cash under U.S. GAAP? How are they treated under IFRS
US GAAP:
Bank overdrafts are excluded from cash and are classified as financing cash flows.
IFRS:
Bank overdrafts are included if they are an integral part of an equity’s cash management.
What is the formula for Diluted EPS?
Diluted EPS = [Income available to the common stock shareholder + interest on dilutive securities] / [Weighted-average number of common shares, assuming all dilutive securities are converted to common stock]
How do you calculate the Weighted-average number of Common Shares Outstanding?
“WASCO” =
Shares outstanding at beginning of the period
+ Shares sold during the period (time-weighted)
- Shares reacquired during the period (time-weighted)
+ Stock dividends & stock splits (retroactively adjusted)
- Reverse stock splits (retroactively adjusted)
What is the formula for Basic EPS?
Basic EPS = Income available to common shareholders / Weighted-average number of common shares outstanding
Note: Deduct preferred stock dividend
1) Non-cumulative - dividends declared
2) Accumulative - accumulated, regardless if declared
What is a Large Stock Dividend and how is it treated?
When more than 20-25% of the previously issued shares outstanding are distributed, the dividend is treated as a large stock dividend, as it may be expected to reduce the market price of the stock (similar to stock split).
The Par value of the stock dividend is transferred from Retained Earnings to Capital Stock.
What is a Small Stock Dividend and how is it treated?
When less than 20-25% of the shares outstanding are distributed, the dividend is treated as a small stock dividend because the issuance is not expected to affect the market price of the stock.
Treatment: The FMV of the stock dividend at the date of declaration is transferred from Retained Earnings to Capital Stock and APIC. No change to Stockholder’s Equity.
What is the purpose of a quasi-reorganization?
Purpose:
To restate overvalued assets at their lower fair values (deprecation) and to eliminate a retained earnings deficit (and thus facilitate the declaration of dividends).
How is Book Value per common share calculated?
BV per Common Share = *Common Shareholder’s Equity / Common Shares Outstanding
*Note:
Total Shareholder’s Equity
- Preferred stock outstanding (greater at call price or par)
- Cumulative preferred dividends in arrears
= Common shareholder’s equity
What is Stockholder’s Equity and what are its five major components presented on the balance sheet?
Stockholder’s equity is the owner’s claim to the assets of a corporation.
The stockholder’s equity section of the balance sheet contains:
1) Capital Stock (AKA Legal Capital)
2) Additional Pain-in Capital (APIC)
3) Retained earnings or deficit
4) Accumulated Other Comprehensive Income (AOCI)
Note: Non-controlling interest must be shown in equity on consolidated financial statements.
What is Service Cost in relation to a Defined Benefit Plan?
Service cost is the present value of all pension benefits earned by company employees in the current year.
What is a defined benefit plan?
What is a defined contribution plan?
In a DEFINED BENEFIT PLAN, the benefits that the employee receives at retirement are determined by formula. It is the sponsor company’s responsibility to ensure that contributions to the plan are sufficient to pay benefits as they come due.
In a DEFINED CONTRIBUTION PLAN, the contributions that the sponsor company makes to the plan are determined by formula. The employees’ retirement benefits are based on the amount of funds in the plan.
What steps are taken to combine statements of companies under common management or common control?
(1) All intercompany transactions and balances among the related companies are eliminated
(2) Minority interests are treated as in consolidated financial statements
(3) Equity accounts are added across, not eliminated
(4) Income statement accounts are added across
If the financial statements of the foreign subsidiary are in the subsidiary’s functional currency (foreign currency = functional currency), the financial statements are translated using what method and how?
Translation Method
1) Income Statement
- All items —> weighted average rate
- Transfer net income to retained earnings
2) Balance Sheet
- Assets —> Current / year-end rate
- Liabilities —> Current / year-end rate
- Common Stock / APIC —> Historical Rate
- Retained Earnings —> Roll forward
- Translated Retained Earnings = beginning translated RE + translated Net Income for current period less translated dividends declared for current period.
