Simulation 2 Flashcards
Price-earnings ratio
Profitability ratio.
The P-E ratio equals price per common share divided by the EPS. Profitability ratios measure income on a relative basis.
Debt-to-equity ratio
Leverage ratio.
The debt-equity ratio equals total liabilities divided by total equity. Leverage ratios measure the firm’s use of debt to finance assets and operations.
Basic earnings per share
Profitability ratio.
Basic EPS equals earnings available to common shareholders divided by the weighted-average number of shares of common stock outstanding. Profitability ratios measure income on a relative basis.
Return on assets
Profitability ratio.
Return on assets equals net income divided by average total assets. Profitability ratios measure income on a relative basis.
Debt ratio
Leverage ratio.
The debt ratio equals total liabilities divided by total assets. Leverage ratios measure the firm’s use of debt to finance assets and operations.
Current cash debt coverage ratio
Liquidity ratio.
The current cash debt coverage ratio equals net cash provided by operating activities divided by average current liabilities. Liquidity (solvency) ratios measure the current viability of the business, i.e., the entity’s ability to continue in the near term by paying its obligations.
Fixed asset turnover
Activity ratio.
Fixed asset turnover equals net sales divided by net fixed assets. Activity ratios measure the firm’s ability to generate revenue and income.
The accounting for a hedge of a net investment in a foreign entity.
Reported in other comprehensive income.
Transaction gains and losses on the following are excluded from earnings and are reported in the same way as translation adjustments, that is, in OCI: (a) transactions that are designated and effective as economic hedges of a net investment in a foreign entity and (b) transactions that are in effect long-term investments in foreign entities to be consolidated, combined, or accounted for by the equity method.
Expressing in the reporting currency amounts denominated or measured in different currencies.
Foreign currency translation.
The method used to convert foreign currency amounts into units of the reporting currency is the functional currency translation approach. It is appropriate for use in accounting for and reporting the financial results and relationships of foreign subsidiaries in consolidated statements. This method (a) identifies the functional currency of the entity (the currency of the primary economic environment in which the foreign entity operates), (b) measures all elements of the statements in the functional currency, and (c) uses a current exchange rate for translation from the functional currency to the reporting currency.
The effect of a change in exchange rates between the functional currency and the currency in which the transaction is denominated.
Transaction gain or loss.
A transaction gain (loss) results from a change in exchange rates between the functional currency and the currency in which the transaction is denominated. It is the change in functional currency cash flows (a) actually realized on settlement and (b) expected on unsettled transactions.
The result when an entity acquires or disposes of assets (or incurs or settles liabilities) denominated in a foreign currency.
Foreign currency transaction.
Foreign currency transactions are fixed in a currency other than the functional currency. They result when an entity (a) buys or sells on credit; (b) borrows or lends; (c) is a party to a derivative instrument; or (d) for other reasons, acquires or disposes of assets, or incurs or settles liabilities, fixed in a foreign currency.
Used for remeasurement.
Temporal method.
If the books of a foreign entity are maintained in a currency not the functional currency, foreign currency amounts must be remeasured into the functional currency using the temporal method. They are then translated into the reporting currency using the current-rate method. Nonmonetary balance sheet items and related revenue, expense, gain, and loss amounts are remeasured at the historical rate. Monetary items are remeasured at the current rate.
The currency of the primary economic environment in which the entity operates.
Functional currency.
The functional currency is the currency of the primary economic environment in which the entity operates. Normally, that environment is the one in which it primarily generates and expends cash. For example, the functional currency of a foreign subsidiary is more likely to be the parent’s currency if its cash flows directly and currently affect the parent’s cash flows.
The rate used for foreign currency translation.
Current exchange rate. Assets and liabilities are translated at the current exchange rate at fiscal year end. Revenues, expenses, gains, and losses are translated at the rates in effect when they were recognized. However, a weighted-average rate for the period may be used for these items.
