Lec 2 Accounting Flashcards
What is the formula and meaning of Working Capital (WC)?
WC = Current Assets - Current Liabilities. Measures funds available for short-term operations.
What is the formula and meaning of Current Ratio (CR)?
CR = Current Assets / Current Liabilities. Indicates short-term financial stability (should be above 2.8).
What is the formula and meaning of Quick Ratio (QR)?
QR = Liquid Current Assets / Current Liabilities. A stricter liquidity measure (should be above 1.0).
What is the formula and meaning of Debt Ratio (DR)?
DR = Liabilities / (Shareholders’ Equity + Liabilities). Shows company’s dependency on creditors.
What is the formula and meaning of Equity Ratio (ER)?
ER = Shareholders’ Equity / (Liabilities + Shareholders’ Equity). Reflects financial strength.
What is the formula and meaning of Debt to Equity Ratio (D/E)?
D/E = Long-term Debt Liabilities / Shareholders’ Equity. Compares long-term debt to equity capital.
What is the formula and meaning of Times Interest Earned Ratio (TIER)?
TIER = (Before Tax Profit + Interest Expenses) / Interest Expenses. Measures the ability to pay interest on long-term debt.
What is the formula and meaning of Inventory Turnover Ratio (ITR)?
ITR = Cost of Goods Sold / Average Inventory. Indicates how quickly inventory is utilized.
What is the formula and meaning of Average Collection Period (ACP)?
ACP = Average Accounts Receivable / Average Daily Credit Sales. Measures how fast a company collects receivables.
What is the formula and meaning of Fixed Asset Turnover (FAT)?
FAT = Net Sales / Average Net Fixed Assets. Reflects sales-generating capacity of fixed assets.
What is the formula and meaning of Total Asset Turnover Ratio (TAT)?
TAT = Net Sales / Average Total Assets. Measures how efficiently assets generate sales.
What is the formula and meaning of Operating Cost Ratio (OCR)?
OCR = Total Operating Expenses (excluding interest & debt) / Net Sales. Indicates the cost of generating one dollar of sales.
What is the formula and meaning of Profit Margin (PM)?
PM = 1 - Operating Cost Ratio. Represents the before-tax profit-generating capacity per dollar of sales.
What is the formula and meaning of Net Profit Ratio (NPR)?
NPR = Net Profit / Net Sales. Measures the final profit-generating capacity per dollar of sales, including all expenses.
What is the formula and meaning of Return on Total Assets (RTA)?
RTA = Net Profit / Average Total Assets. An accounting measure of return on investment.
What is the formula and meaning of Return on Equity (ROE)?
ROE = (Net Profit - Preferred Dividends) / Average Common Shareholders’ Equity. Measures return on equity investment.
What is a Balance Sheet (B/S)?
A Balance Sheet (B/S) is a financial statement that reports a company’s assets, liabilities, and shareholders’ equity at a specific point in time.
What are the main components of a Balance Sheet (B/S)?
The main components of a Balance Sheet are Assets, Liabilities, and Shareholders’ Equity.
What is an Income Statement (I.S.)?
An Income Statement (I.S.) is a financial statement that reports a company’s revenues, expenses, and net income over a specific period.
What is included in an Income Statement (I.S.)?
An Income Statement includes Revenue, Cost of Goods Sold (COGS), Operating Expenses, Depreciation, Interest, Taxes, and Net Income.
What is the formula for Profit?
Profit = Revenue - Operating Expenses
What is Operating Profit?
Operating Profit is the revenue remaining after subtracting operating expenses, but before deducting taxes and interest.
What is the formula for Net Income (NI)?
Net Income (NI) = Taxable Income - Taxes
What does the Statement of Earned Surplus show?
The Statement of Earned Surplus shows changes in Accumulated Retained Earnings (ARE) from one period to the next.
Earned surplus Y1
+ NI y2
- div
= Earned Surplus Y2
What is the formula for Book Value Per Share (BVPS)?
BVPS = (Shareholders’ Equity - Preferred Stock) / Number of Common Shares
What does Book Value Per Share (BVPS) represent?
BVPS represents the theoretical value of each common share based on the company’s book value.
What is the formula for Market Price per Share?
Market Price per Share = Market Capitalization / Total Number of Shares
What is the purpose of a Cash Flow Statement (CFS)?
A Cash Flow Statement (CFS) shows how cash is generated and used over a period of time.
What are the three main types of cash flows in a Cash Flow Statement (CFS)?
The three main types of cash flows are Operating Cash Flow (OCF), Investing Cash Flow (ICF), and Financing Cash Flow (FCF).
What are examples of cash inflows in a Cash Flow Statement (CFS)?
Examples of cash inflows: Net Income, Depreciation, Borrowing, Selling Assets, Issuing Shares.
What are examples of cash outflows in a Cash Flow Statement (CFS)?
Examples of cash outflows: Buying Equipment, Paying Dividends, Repurchasing Shares, Paying Off Debt.
What is Gross Cash Flow?
Gross Cash Flow = Total cash spent to acquire new assets.
How does Depreciation impact Cash Flow Statements?
Depreciation is a non-cash expense, so it is added back to OCF to reflect the actual cash position.
What is the formula for Total Depreciation Claimed (TDC) for accounting
TDC = Initial Cost (IC) - Salvage Value (SV)
How is depreciation calculated for tax purposes?
For tax purposes, depreciation is calculated based on IC, so the full cost of the asset is written off.
How is depreciation calculated for accounting purposes?
For accounting purposes, depreciation is calculated based on IC - SV to maintain a salvage value.
What is the formula for Terminal Book Value (TBV) under tax purposes?
Under tax purposes, TBV = 0 since the full cost is depreciated.
What is the formula for Terminal Book Value (TBV) under accounting purposes?
Under accounting purposes, TBV = Salvage Value (SV) as the asset retains a book value.
What happens if declared TDC exceeds (IC - SV) at disposal?
If declared TDC exceeds (IC - SV), the excess is taxed because too much depreciation was claimed.
What happens if declared TDC is less than (IC - SV) at disposal?
If declared TDC is less than (IC - SV), the difference is written off as a tax loss.
What is Accumulated Depreciation Charge (ADC)?
Accumulated Depreciation Charge (ADC) is the total amount of depreciation recorded over the life of an asset.
What are the different depreciation methods?
Depreciation methods include Straight-Line Depreciation (SLD), Declining Balance Depreciation (DBD), Sum-of-the-Years-Digits Depreciation (SOYD), and Unit of Production Depreciation (UPD).
What is the formula for Straight-Line Depreciation (SLD)?
SLD Formula: Depreciation = (Initial Value - Salvage Value) / Useful Life
What is the formula for Declining Balance Depreciation (DBD)?
DBD Formula: Depreciation = (Initial Value) * (Depreciation Rate) * (1 - Depreciation Rate)^(n-1)
What is the formula for Sum-of-the-Years-Digits Depreciation (SOYD)?
SOYD Formula: Depreciation = (Remaining Life / Sum of Years’ Digits) * (Initial Value - Salvage Value)
What is the formula for Unit of Production Depreciation (UPD)?
UPD Formula: Depreciation = (Initial Value - Salvage Value) * (Actual Usage / Estimated Total Usage)
Shareholder Equity
SHE = assets - liabilities Net worth of the business to its owners after obligations payed off. Includes : Capital Stock, Preferred Stock and Accumulated retained earnings
Assets
Goods owned by the business
Liabilities
elements owned by the business
Capital Expenditures
Expense associated with the purchase of non-consumables
Accumulated Retained Earnings
Net Income - Dividends Payed
Fixed Assets vs. Fixed assets at cost
Net Fixed Assets = Fixed Assets - Total Depreciation
OCF whats included
A/R, A/P, NI, Inv, Dep Source
ICF whats included
NFA, Dep use = FA purchase
FCF whats included
N/P, C/S, Div paid, LTD
what does loan and withdrawal do to CF
Loan source
Withdrawal USE
Both FCF
What CF does income taxes payable fall into
OCF
Current assets vs fixed
Cash/Cash equivalents
AR
Inv
Fixed:
Land
Equipment
Current Liabilities vs Long-term
Current:
Accounts payable
Long-term
Mortage, loans
When they just say fixed assets what is usually meant
Net fixed assets (FA cost - Dep)
Typical liquid current assets
AR,
Cash
Securities
Common Shareholders’ Equity
SHE - PS
Book value
SHE - PS
B/S
Current assets (Cash, INv, A/R)
Net Fixed Assets
Lia (current: debt, Long-term: loan mortage)
SHE
PS
CS
ARE
ROE ROA Debt ratio relation
ROE=ROA×(1/( 1−Debtratio))
return on total assets
Total operating expenses for profit margin
Op Ex -Dep (no LTD and taxes)
-»> EBIT
