financial accounting Flashcards
bond purchasers perpsective
investment (specifically a debt security investment)
what do people obtain from bonds
interest revenue
own 20-50% of a company’s stock
significant influence
when you have controlling influence what method do you use?
consolidate method
what do you do in the consolidate method
absorb financial statement into mine
debt securities
investing in bonds
when you have significance influence what method is used?
equity method
what do you do in the equity method?
% of net income into my financial statement
primary reason to invest into equity sequrity
receive dividend payment
how do we account for equity securities
depends on the degree and level of influence
future value
what an amount will grow to be
annuity
series of equal payment
bond issuers perspective
liability
own 0-20% of stock in another company
insignificant influence
own 50% or more of the stock
controlling influence
why do we invest in bonds
to get interest revenue
equity securities
owning stock of another company
why do we have equity securities
to earn money from dividend and buy low/ sell high
earnings quality
the ability of reported net earnings (NI) to predict a company’s future earning
compound interest
interest earned on previous interest and principle
liquidity
ability to pay short term debt/liab, most common
horizontal analysis
trends/changes for one specific company over time
formula for horizontal analysis
(current year - prior year) / prior year
when do you use vertical analysis
comparing one company to another regardless of size
conservative accounting practice
more expenses, Less net income… less assets, more liabilities
earnings persistance
items that won’t continue/persist over time
future value
how much an amount today will grow to be in the future
present value
the value today of receiving some amount in the future
aggressive accounting practice
less expenses, more net income … more assets, less liabilities
3 ways to analyze a financial statement
vertical, horizontal, ratio
vertical analysis in the balance sheet
express everything as a % of total assets
vertical analysis in the income statement
express everything as a percent of sales
example of earning persistence
companies net income increasing due to them selling land
simple interest
interest only earned on the principle
definition of current ratio
companies ability to pay short term debt
which ratio is the most common
current ratio
current ratio equation
current assets / Current liabilities
what does the gross profit ratio indicate?
the portion of each dollar of sales above the cost of goods sold
what does the debt to equity ratio relate to
relates to the solvency or a company’s ability to pay its long term liabilities
debt to equity ratio
total liabilities / SHE
what does price earnings ratio do?
compares a companys share price with its earnings per share
gross profit ratio
gross profit / net sales
one way to think of the price to earnings ratio
the investors expectation of earning growth
price earnings ratio
stock price / earnings per share
what method is used when you have insignificant influence
fair value method
On equity securities, how can you earn returns?
through capital appreciation of the stock and receiving dividends
On debt securities how can you earn returns
through periodic interest payments and receiving the principal payment at maturity
In the SHE how do you find Total PIC
Preffered stock + Common stock + ADPIC
How do you find ending retained earnings
Beginning RE + Net income - Dividends
How do you find total SHE
Total PIC + End RE - Treasury Stock
How do you find Net sales
Sales Revenue - Sales discounts - sales returns - sales allowance
how do you find Gross profit
Net sales - Cost of goods sold
