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72 Cards in this Set
- Front
- Back
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Advantage of issuance of bonds
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keep control of company
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Risk of issuing bonds
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Risk of going bankrupt
Reduction in flexibility due to restrictive debt covenants |
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Does money gain or lose value over time
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Lose
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Present value of money
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What a future amount of money is worth today
Generate it through tables |
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Stock prices
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Higher future values= higher present values
Higher discount rates= Lower present values (riskier buy) |
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Picking stock prices
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choose one with lower rate of return, higher constant, one that is growing at highest rate in earliest years
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Discount formula for issuance of bonds
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(1) principal= 1000 (issuance price) X Table 2 of value
(2) amount of interest payments= (issuance price X rate X amount of payment per year) X (Table for of value) |
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Discount vs Premium
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discount indicates the bond will sell for less than face
Premium means the bond with sell for more than face value |
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Your rate of return= 10%
Bonds stated return= 8% Discount or Premium? |
Discount
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Corporation
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an entity whose existence is seperate from its owners
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Disadvantage of corportation
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double taxation
gov regulation more difficult to raise debt capital |
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Outstanding stock
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stock owned outside company
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Common stock vs Preferred Stock
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common has voting rights, preferred does not
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Par value of stock
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legal capital, serves little purpose, just a number given to stock when it starts
does not = market value (Stock Price) |
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What is credited under common stock when we issue 10 shares of $1 par value for $5
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$10 (10X1)
rest is credited under APIC |
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Liabilites vs SE claims
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Liab= claim by creditors
SE= claims by owners |
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Dividends
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payments to stockholders
reduce value of company |
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What do we debit when we declare div payable
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RE
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Treasury Stock
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stock purchased by company
contra equity gain/loss on treasury stock is not reported in income statement |
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Treasury stock and assets
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Decreases assets
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Stock ownership
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0-20%= insignificant (fair value)
20-50%=Significant (Equity) 50-100%= control company (consolidation) |
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Only time we record good news
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when we have an unrealized holding gain on a stock price at END OF YEAR
Ex: buy 10 shares at $5, starts selling for $10 Credit cash for $50 |
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Cash Flows vs Net Income short run vs long run
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in short run they will differ
in long run will = this is bc we have acct rec until it is paid off, acct rec when cash flows are not affected but the net income is |
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Indirect method for operating activities
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we use reconciliaton method
done for things that do not represent inflows or outflows of cash (depreciation) and do not relate to operating activities but affect net income (gains/losses) |
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Indirect Method Formula
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Net Income
+Deprecitaton +Loses -Gains +Decrease in operating assets -Increase in operating assets +Increase in operating liab -Decrease in operating liab =Net Operating Cash Flows |
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Gain= debit or credit?
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credit
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Loss=debit or credit?
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debit
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How do we get net cash from operating activities
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Use reconciliation method
Ex:=+Depr; -Gain ect. |
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Investing Cash Flows
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Lending money and collecting loans
Buying and selling long term assets Short term assets and long term investments |
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Financing Cash Flows
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borrowing money and repaying debt
obtaining resources from owners (issuing stock) paying dividends |
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Summary of financing cash flows
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long term liabilities and equities
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Current assets, liabilities=
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operating activites
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Long term assets=
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Investing activities
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Long term liab, owners equity=
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Financing activies
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What happens to accounting equation when we sell treasury stock for less than it is worth
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Goes up because we gain money even though we were expecting more
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Advantage of corporate form of business
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Easy transfer of ownership (shares)
Limited liab stockholders are not responsible easy capital (inverstors are attracted to corporate) separation of owners (1 stockholder cannot jepordize company) |
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Disadvantage of Corporate business
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Double taxation
Government Regulation More difficult to raise debt capital |
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Advantages of debt to equity
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Expansion of company w/out losing control
Div payable are not tax deductible, interest is |
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Disadvantages of debt to equity
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Risk of going bankrupt goes up
Lose flexibility |
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Purchasing/Selling a patent=
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investing activity
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Purchasing with note and the indirect method
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Dont record anything bc there was no cash flow
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What ratios compare
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company to company
1 company over time 1 company to industry average Shows risk and profitability of a company |
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Vertical Analysis
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express each item as a % of a base amount (more of a 2 company comparison)
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Horizontal Analysis
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trend in financial statement data for a company over time
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Receivable turnover ratio
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Frequency of cash collections
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Inventory turnover ratio
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frequency of selling inventory
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Current ratio
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ability to pay current debt
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Debt to equity ratio
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ability of debt holders to force bankruptcy
only ratio we want want low higher ratio=more risk |
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Gross profit ratio
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portion of each dollar of sales above its cost of goods sold
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Return of assets
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earning on each dollar invested
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Profit margin
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earning on each dollar of sales
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Assets turnover
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sales volume in relation to investment in asset
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Aggressive v Conservative Style
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aggressive appears more profitable bc they record less bad debt, lcm, ect
appear less risky bc will record nothing for court cases |
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Lower of cost or market is example of
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conservatism
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What goes into gross profit?
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Rev
COGS Sales returns and allowances |
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The value of a gain/loss
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Sale price - Book Value
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Book Value=
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Original Cost - Accum Depr
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When do we record an impaired loss
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When BOOK VALUE is greater than cash flows
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Net revenue
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Total Rev - Sale returns, allowances, discounts
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Creditors claims to companys resources
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Liabilites
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Owners claims to companys resources
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SE
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What do we debit when bad debt actually occurs
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Allowance for uncollectables
Does not have any effect on accounting equation though |
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When COGS is stated to high
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A= L + SE = RE + NI + COGS
practice equation |
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Closing entries
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Rev,exp,div
Pushes all into RE (credit account) |
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A dividend receivable is what kind of actiity
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operating
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Repayment of long term debt is what kind of activity
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Financing
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When BONDS are issued at premium
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their % is higher than that of investors
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When INVESTORS are issued at premium
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their % is higher than that of bonds
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Interest paid from long term borrowing is what kind of activity
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operating
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Retirment of long term debt is what kind of activity
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Financing
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Goodwill
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is not a current asset
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Cash
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current asset
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