FSA-Unit 2 Flashcards
Discontinued Operations
a disposal of a business unit that represents a strategic shift that has or will have, a major effect on the company’s financial results
Discontinued (Two components) on the income statement:
- New income / loss from the business prior to sale
- any gain or loss on the actual sale of the business
Treat Discontinued Operations as Operating or Non-operating?
operating - subsidiary has historically been treated as an operating asset.
non-operating - the subsidiary ceases to be part of the company’s operations once the decision is made to dispose of it
Balance sheet shows A, L, & SE at a _____. Accounts are __________ accounts.
point in time, permanent accounts
Accounting Equation
A = L - SE
Assets confers expected _____ _____ _____
future economic benefits
Asset must have the following:
- owned or controlled by company
- arise from past transaction or event
current assets
cash, cash equivalents, short-term investments, accounts receivable (net), inventories, prepaid expenses
long term assets
PPE (NET - post accumulated depreciation subtracted, long-term investments, intangible and other assets
Most assets are reported at ______ cost
historical
(can’t value asset with relative certainty doesn’t recognize it on the balance sheet. Therefor significant “assets” not reflected, like knowledge-base assets - management team/supply chain/superior technology)
liabilites are future _____ _____
economic sacrifices
liability must have 2 characteristics:
- unavoidable obligation
arise from past transaction or event
Liability can be _____ bearing (bank loan) or _______ bearing (vendor/partner)
interest
non-interest
stockholder’s equity
capital that has been invested by the stockholders.
Directly - via purchase of stock
Indirectly - retained earnings, reinvested into the business.
Current Liabilites
accounts payable, accrued liabilities (accrued expenses), unearned revenues (deferrred revenues), short-term debt, current maturities or long-term debt (current portion)
Net Working Capital Formula
NWC = current assets - current liabilities
Net working capital required to conduct business depends on the company’s ______ ______
operating cycle
operating cycle (cash cycle, cash conversion cycle, CCC)
time btwn paying cash for goods and receiving cash from customers
Noncurrent Liabilities
long-term debt (bonds, notes, debentures, mortgages, other loans), other long-term liabilities (pension, long-term tax liabilities)
common stock
par value received from the original sale of common stock to investors
Common Size Balance Sheet (Vertical analysis or Right-sizing)
expressed balance sheet in % by dividing every line by total assets
Why do a common size BS?
compare company across years, to another comapny, or to industry
Book value vs. Market value
SE (Book value, BV of Equity) - the “value” of the company per GAAP
Market value- # of common shares outstanding x company’s stock price
Differences:
1. GAAP reports historical cost of A & L, market estimate fair values.
- GAAP excludes assets not reliably measured
- Maket value adjusts for market characteristics
- GAAP doesn’t consider expected future performance
Income Statement Equation
Net Income = Revenues - Expenses
Income Statement Strucutre
Revenue - COGS = Gross Profit
- Operating expenses = Operating Profit
-&+Nonoperating expenses
- income tax expense =
Net Income
Accrual Accounting
revenues and expenses recognized are based on the foundation of - revenue recognition principle & expense recognition principle (NOT when cash received or paid)
Expense Recognition Principle (Matching principle)
recognize when expenses incurred
revenue recognition principle
record when performance obligation done or customer obtins control. Revenue amount company expects to receive.
Gross Profit Margin
[ (Rev - COGS)/Rev ] x100
operating expense margins
analysis of operating expenses over time and compared with peer companies
Common Size Income Statements (Vertical Analysis or Right-sizing)
everything divided by total revenue (in % terms)ou
common stock and addition paid-in capital _______ by the proceeds from the sale of stocl
increase
retained earnings increase by
net income and decrease by dividends and by stock repurchased and retired.
retained earnings formula
RE = Beginnning Period RE + Net Income - Dividends
accumulated other comprehensive income increases and decreses by changes in ….
asset and liabiity fair values that are not reported in the income statement. (unrealized gains and losses that are reported in the equity section of the balance sheet.)
The income statement meausre income using GAAP principles and provides information about the economic viability of the company’s _____ and _____.
The Statement of cash flows provides information about the company’s ability to generate _____ from those same transactions
products and services
cash
cash flows from operating activities
from operations
cash flows from investing activities
from acquisitions and divestitures of investments and long-term assets
Cash flows from financing activities
from issuances of and payments toward borrowing and equity
also review …
strucutre of each statement & linkage diagram
4 step Accounting cycle
- record tranactions
- accounting adjustments (events occured but not yet recorded)
- construct financial statements
- close the books
Each transaction ask:
- What accounts are affected?
- What is the direction of the effect?
- What is the amount of the effect?
Failure to recognize the wages owed would ______ ______ and would _______ ____ _________ for the period
understate liabilities (wages payable too low)
Overstate net income (wage expense too low)
So accounting adjustment NEEDED
4 Types of Accounting Adjustments
- prepaid (deferred) expenses
- unearned (deferred) revenues
- accrued expenses
- accrued revenues
prepaid (deffered) expenses
advance cash payments that will ultimately become expenses (look at trans. on Mod 2)
unearned (deffed) revenues
cash received from customers before any services or goods are provided
accrued expenses
expenses incurred and recognized on the income statement even though cash has not been paid yet
accrued revenues
revenues earned and recognized on the income statement even though cash is no received yet
Prepare Fin Stat. in this order.
- Income Statement
- Statement of Stockholders’ Equity
- Balance Sheet
- Statement of cash flows
closing process
“zeroing out” of the temporary accounts by transferring their ending balances to retained earnings
revenues, expenses, and dividens are ______ accounts becayse the balance at the stat of each accounting period is $0
temporary
Study FSET
onenote reference
Form 10-K/ 10Q
annual/quarterly report
Form 20-F
Non-GAAP or IFRS companies annual report, provides a table that reconciles net income as reported to US GAAP net income
Form 40-F
same as 20-F but for Canada
Form 8-K
Wide range of corporate events, reported within 4 days.
equity analyst reports
sell-side analysts provide clients with: objective analysis of company activities, forecasts for revenues and EPS, stock price target
credit reports
credit rating agencies provide: objective credit analysis that evaluates a company’s creditworthiness, credit rating
data services
a number of companies supply financial statement data in eay-to-download spreadhseet formats
depletion
is the process of allocating a natural resource’s cost over the period of its extraction. (similar to depreciation). Computed for a period is first added to inventory and then expensed when the inventory is sold.
