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108 Cards in this Set
- Front
- Back
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What is another name for the major productive assets of a company? |
fixed, plan or long-lived assets |
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What is shown on the balance sheet at original cost? |
Productive assets |
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True or false: Land is depreciated |
False |
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What does acquisition cost or historical cost include? |
Purchase price, taxes paid at time of purchase, transportation charges, or installation cost. |
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What should acquisition cost not include? |
Expenditures unrelated to the acquisition (repairs) or costs incurred after the asset was installed and use began |
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What are some assets purchased as a group and what must you do because of it? |
Land and buildings. Separate so you can depreciate. Also allocate the acquisition cost by fair market value. |
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What is the straight-line depreciation method? |
acquisition cost - residual value -------------------------------------------- Life |
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What is the units-of-production depreciation method? |
Acquisition cost - residual value ---------------------------------------------- Total Number of Units in Asset's Life |
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How do you calculate the units-of-production after the first formula? |
Depreciation per unit x units produced in current year. Depreciate for every year until all units are used up. |
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When should the units-of-production depreciation method be used? |
Only if output over the useful life can be estimated with reasonable accuracy |
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What does an accelerated depreciation method do? |
It assumes assets produce more revenue in the earlier years of life, so more depreciation expense is recorded then. |
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What do you not subtract in the double declining-balance method? |
The residual value |
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What is the formula for the double declining depreciation method? |
Asset value ---------------- x 2 x beginning value of asset Useful life |
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What is a capital expenditure? |
a cost that improves the asset and is added to the asset account. Happens when life or productivity is increased |
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What is a revenue expenditure? |
A cost that keeps an asset operating and is treated as an expense. Typically research and development costs |
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What are intangible assets? |
Patent, copyright, brand name, goodwill, logo. Balance sheet reflects their cost but not necessarily true value. |
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What is amortization? |
The allocation of the acquisition cost to the period benefited -very similar to depreciation of property, plant and equipment -must be recognized if intangible asset has a finite life |
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What is a current liability? |
An obligation that will be satisfied within one year or the current operating cycle |
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What is a current liability recorded at? |
face value |
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What is the formula for working capital? |
current assets - current liabilities |
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What is the formula for the current ratio? |
current assets -------------------- current liabilities 2 to 1 is good ratio |
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What is the formula for the quick ratio? |
current assets - inventory ------------------------------------ current liabilities 1.5 to one is good ratio |
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What are accounts payable? |
They are a verbal contract |
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what are notes payable? |
Amount owed represented by a formal contract |
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How does discounting a note work? (EX:2/10 n30) Why do companies do it? What happens? |
It stands for a 2% discount if paid in 10 days, and is due at 30 days. It encourages early payment The lender deducts interest from the face value in advance and the borrower pays the face amount on due date. |
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What is the calculation for interest? |
I= P x R x T |
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What is T if note is paid semi-annually? |
6/12 or 1/2 |
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What does accrue mean? |
you owe it but haven't paid
` |
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What are accrued liabilities besides accounts payable, notes payable, and taxes payable? |
Wages Payable and Interest payable. |
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What is a bond? |
A security or financial instrument that allows firms to borrow large sums of money and repay the loan over a long period of time. |
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What does the borrower do with the bond? |
pays interest usually semiannually or annually and repays principal at maturity or due date of the bond |
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What denominations are bonds normally in |
1000 also called face or par value |
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What does collateral represent? |
The assets that back secured bonds in the event the issuer defaults on principal and interest payments |
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What are serial bonds? |
They do not have all the same due date, a portion is due at each time period |
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What are other names for the nominal interest rate? |
Contract rate, coupon rate or stated rate. DOES NOT CHANGE |
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What is the nominal rate multiplied by in order to determine the interest payments to bondholders? |
The bond principle (face value) |
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What interest rate on a bond can change? |
Effective interest rate, aka yield or market rate |
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What is a premium? |
Paying higher than the market rate |
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What is a discount? |
paying lower than the market rate |
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What is debt financing? |
borrowing from a bank or creditors |
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What is equity financing? |
the issuing of stock |
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What are advantages of issuing stock? |
flexibility, provides a higher return to investors, dividends can be adjusted |
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what are disadvantages of issuing stock? |
Control of company is more widely distributed since stock has voting rights Existing shareholders may not wanna share Tax disadvantage, dividends aren't tax deductible Can decrease earnings per share ratio |
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What are the two parts of stockholder's equity? |
contributed capital and retained earnings |
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What is contributed capital? |
amount the corporation received from the sale of stock to the stockholders |
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What are retained earnings? |
-Income retained in the corporation and not paid out in dividends -Links income statement with balance sheet |
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What are the two types of stock? |
Common stock - votes to elect officers, more than one class often Preffered stock |
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What are authorized shares? |
Max number of shares corporation may issue |
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What are issued shares? |
number of shares sold or distributed, may be different from currently owned |
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What are outstanding shares? |
Number of shares in the hands of stockholders. Repurchases of stock by a company are NOT outstanding. issued - treasury = outstanding |
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What is treasury stock? |
Shares repurchased (include in shares issued but not shares outstanding) |
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What is par value? |
An arbitrary amount stated on the face of the stock certificate and represents the legal capital of the corp. Generally very low. Stock account recorded at: # of shares issued x par value per share |
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What is additional paid in capital? |
Amount received for stock in addition to par value, aka paid-in capital excess of par or premium. |
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What value is stock issued for cash reported at? |
Par value |
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When stock is issued for non cash assets, how is it calculated? |
Fair market value of the stock or assets. |
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Why may a company repurchase treasury stock? |
As bonused to employees, maintain favorable market price, improve ratios, maintain ownership and control. |
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How do you calculate noncumulative stock dividends? |
They only receive the dividends of the current money cycle, and preferred gets them first. |
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What does cumulative calculation for dividends do? |
They receive dividends in arrears, aka any previous year where the company did not pay or distribute dividends. Preferred receives first |
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Why might a company do a stock split? |
To increase the # of shares, reduce market price per share, reduce stock price to make it more accessible to investors. |
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What is the formula for stocks being issued? |
# of shares x par value |
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What is the date of declaration? |
the promise to pay cash dividends, creates a liability |
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What are requirements to give dividends? |
Sufficient cash and positive retained earnings |
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What is the dividend payout ratio? |
annual dividend amount ------------------------------------- annual net income =% of earnings paid as dividends |
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Do stock splits affect S.E.? |
Nope |
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What is the book value per share? |
total S.E. ------------- # of shares of common stock outstanding |
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What are the three kinds of cash flows? |
Operating, investing and financing |
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What are examples of operating activities? |
CURRENT ASSETS & LIABILITIES Acquiring & selling products & services, accounts receivable, accounts payable, pay taxes, pay wages |
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What are examples of investing activities? |
LONGTERM LIABILITIES ASSETS, AND S.E. Sale of PP&E or another company, large payments for large things (capital expenditures) |
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What are examples of financing activities? |
Repayment in the form of debt and equity, ISSUE STOCK (not acquire), bonds, bank notes, paying dividends. |
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What is the direct method? (affects operating) |
reports major classes of gross cash receipts and payments. (never net income/depreciation) |
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What is the indirect method? |
Adjusts net income to remove the effect of all accruals and deferrals, and adds back depreciation and net income. |
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Is depreciation or amortization a source of cash? |
Yes. Increase in property before depreciation is a use of cash however |
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In rules for cash flows, how does current assets and current liabilities affect cash flow? |
++ ^ CA = v $$ -- -- v CA = ^ $$ ++ ++ ^ CL = ^ $$ ++ -- v CL = v $$ -- Current assets going up/down have opposite effect on cash. Current liabilities going ^/v have the same effect on cash. |
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Is net income a source of cash? (not a current asset, it's the final result; it is cash) |
yes |
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Are net losses a use of cash? (not a current liability) |
yes |
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Are proceeds from the sale of stock a source of cash? |
yes, treasury stock is a use however, as are dividends |
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Why are cash flows important? |
Stockholders need assurance there is cash for dividends, creditors want their loans paid back |
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If a company decreases in cash is it having a terrible year? |
Not necessarily because net income is normally accrual and reflects events of the operating activities |
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What does the statement of cash flows do? |
it summarizes an entity's cash receipts and payments during the period from operating, investing and financing activities. It reports changes in cash and explains the changes. |
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What cash flow activity does purchasing raw material, having cash from sales go into? |
operating |
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What activity does paying for PP&E, selling long-term assets, buying another company's stock/bonds go into? |
investing |
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What activity is issuing stock & borrowing long-term debt a part of? |
financing |
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Does exchanging stock for an asset affect cash flow? |
nope |
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Does accounting standards require significant non cash transactions to be reported in a separate schedule or note in the statement? |
yep |
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What do you do in the direct method? |
Examine each item in the income statement and decide how much cash it either generated or used. |
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A net increase in accounts receivable being deducted from sales to calculate the cash is an example of what method? |
direct method |
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How is cash outflow calculated in the direct method? |
deducting any increase in liability accounts from the expense |
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What does the indirect method do? |
adjusts net income to remove the effect of all deferrals of past operating cash receipts and payments and all accruals of future operating cash receipts or payments |
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Deducting an increase in accounts receivable indicates the company sold more during the period than it collected in cash is an example of what method? |
indirect |
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What is a horizontal financial analysis? |
Comparison over a PERIOD OF TIME? |
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What is a vertical financial analysis? |
shows items as a percentage and allows comparisons for companies of different sizes. |
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What is a Liquidity analysis? |
Highlights the nearness to cash and ability to pay debts when due. Includes working capital, current ratio, and inventory turnover ratio. |
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What is the inventory turnover ratio? |
Cost of goods sold --------------------------- Average inventory want high # :) the number of times inventory is sold over a period |
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What is the solvency analysis? |
Ability to stay in business for a long time -Debt to equity ratio -Debt service coverage (meet total debt) -Times interest earned (ability to meet interest payments -Cash flow from operations to capital expenditures (finance longterm asset acquisition) |
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What is the debt to equity ratio? |
Liabilites ------------ S.E. want it low |
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What is the profitability analysis? |
-Rate of return on assets -Rate of return on common stockholders -earnings/share -dividend ratio -price/earnings ratio ALL PROFIT NET ASSETS = S.E. |
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What ratio do creditors rely on? |
debt-to-equity ratio |
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What is the accounting principle that relates expenses to the revenues of a particular income statement period? |
Matching principle |
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What other word goes with the recognition principle? |
recording |
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Goods available for sale during a period become which 2 items at the end of the year? |
ending inventory and cost of goods sold |
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An oven was acquired for a cost of $22k. Current book value is #12k. If she sells it for 10k, what will her loss be? |
2k loss |
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What is the cost of goods sold equation? |
inventory + purchases - ending |
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What is the depreciable base for a truck that was bought for 15k and has a residual value of 3k? |
12k |
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A note paid semi annual at 14% interest rate for 5k will pay how much in interest every 6 months? |
I=P x R x T I=5k x .14 x 6/12 I=$350 |
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A land is purchased for 800k, cleared for 30k, paved for 40k and lit for 20k, what is land improvements and land acquisition? |
Land improvements: 60k Land acquisition: 830k |
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What is the additional paid in capital for 20k shares bought for 6$/share when par value is .50$? |
6-.50 = 5.50 5.50 x 20k = 110. |
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A company reacquired 4000 shares at $50 each, what is the treasury stock spent? |
20k |
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There are net wages, purchase equipment, bonds, dividends and notes payable, which are financing operations? |
The last three. |
