Accounting I Exam Iii

Front 1

Includes examination and testing (this stage involves numerical computations of dollar figures, percentages, ratios, etc. using financial information)

Back 1

Analysis

Front 2

Means understanding what you see (do the calculations paint the business in a favorable or unfavorable light)

Back 2

Interpretation

Front 3

Making judgments and decisions about possible courses of actions based on analysis and interpretation (Which firm's most significant problem areas? What should management do to correct these problems?)

Back 3

Evaluation

Front 4

Factors to consider before analysis

Back 4

1) Audited financial statements provide "reasonable assurance" that the figures are fairly presented under generally accepted accounting principles.

2) Financial statements being compared should be dated at the same point in time during the year, if possible.

3) Financial data being compared should have been generated using similar accounting methods.

4) Evaluation involves many factors. No single computation can provide sufficient information to judge the overall performance of the firm.

Front 5

Trend Index Formula

Back 5

(Dollar Amount in Year You Are Studying/

Dollar Amount in Base Year) x 100

Front 6

How do you determine common size/vertical analysis?

Back 6

Set total assets to 100% and determine the percentage of all assets. Do the same for total liabilities and equity.

Front 7

5 Types of Ratios

Back 7

Liquidity

Activity

Leverage
Profitability
Market Value

Front 8

Analyzes firm's ability to meet short-term obligations.

Back 8

Liquidity

Front 9

Analyzes efficiency or productivity with which assets are managed

Back 9

Activity

Front 10

Analyzes extent to which debt is used to finance assets

Back 10

Leverage

Front 11

Analyzes firm's ability to generate profits

Back 11

Profitability

Front 12

Analyzes value placed on the company by investors.

Back 12

Market Value

Front 13

Bank lenders and creditors focus much on _____________ and ____________ ratios. Stockholders and potential investors focus much on ______________ and ______________ ratios.

Back 13

Liquidity and Leverage

Market Value and Profitability

Front 14

Limitations of Financial Analysis

Back 14

1) Assumes one can predict the future using past data.

2) Uses historical cost info (neglects inflation)

3) Uses year-end data that may not be representative of the company's usual financial status

4) Allows companies in the same industry to be compared when they are not really comparable

5) Fails to recognize that a substantial amount of important information is not included in a companies financial statements.

Front 15

The most liquid asset. Always reported first on the balance sheet.

Back 15

Cash

Front 16

Items that make up cash include:

Back 16

Coins and Currency

Debit Cards

Travelers Checks

Checking Accounts
Cashier Checks

Front 17

We report on the balance sheet current assets in order of ________________.

Back 17

Liquidity

Front 18

Almost cash but not.

EX: money market fund

Back 18

Cash Equivalents

Front 19

Cash listed on the balance sheet does NOT include:

Back 19

IOU

Certificates of Deposit
NSF Check

Postage Stamps

Front 20

Held in bank accounts are cash, but are classified as non-current assets rather than current assets. These balances are not available to pay the daily bills!!

Back 20

Compensating Balances

Front 21

Examples of Cash Equivalents:

Back 21

Money Market Fund

US Treasury Bills

Savings Accounts

Front 22

Most balance sheets and statements of cash flows report "Cash and cash equivalents". This includes not only cash, but certain investments. Those investments must be highly liquid (meaning that they can easily be converted to cash without the risk of loss of value). To satisfy this requirement these investments must have original maturities of _________________________.

Back 22

90 Days or Less!!!

Front 23

Part of running a business always involves asking three questions:

Back 23

-What can go wrong? (Risk)

-How much damage could be caused? (Impact)

-How likely is it to occur? (Probability)

Front 24

-All the policies and procedures management uses to protect a firms assets and to ensure the accuracy and reliability of the accounting records.

-It also includes controls that deal with operating efficiency and adherence to managements policies.

Back 24

Internal Controls

Front 25

Control Procedures (7):

Back 25

Authorization

Recording Transactions

Documents and Records

Limited Access

Periodic Independent Verification

Separation of the Duties

Sound Personal Procedures

Front 26

Consists of the claims against others for money, goods or services that arise from trade.

Usually classified with current assets, because they are expected to be collected within one year or the operating cycle.

Back 26

Accounts Recievable

Front 27

The amount of accounts receivable that is eventually collected.

Back 27

Net Realizable Value

Front 28

Recognize bad debt expense and reduction of receivables, when management realizes the amount is uncollectible.

This method is NOT GAAP, because it violates the matching principle: The uncollectible expense is not recorded in the same period as the sale.

Back 28

Direct Write Off

Front 29

Recognize bad debt expense in the period that is particular sale was recognized. Since uncollectibility of receivable is usually not known during that period, it must be estimated based on prior experience.

Back 29

Allowance Approach

Front 30

The guidelines a business has on setting customer charge accounts

Back 30

Granting Credit

Front 31

Reduce Bad Debt, Reduce Sales

More Bad Debt, More Sales

Back 31

Tough Policies

Easy Policies

Front 32

Customer Incentives for Early Payment:

Back 32

-Offer cash discount for early payment.

-Offer short credit period before charging late interest.

-Charge high interest rate on amounts paid after the credit period.

Front 33

Pledging.

Pledge receivables as collateral for a loan.

Back 33

Collateral for a loan.

Front 34

Assignment.

More Formal arrangement where rights to receivables are assigned to bank in exchange for cash.

Back 34

Assign Specific Accounts Receivable

Front 35

Factoring.

Outright selling your receivables for cash.

Back 35

Outright Sell

Front 36

(Debt or liability of the latter corporation)

In exchange for cash received from the investor the corporation promises to pay periodic interest and to pay back the face amount (maturity value) at the end of the bond term.

Back 36

Bonds

Front 37

Bond Investment is rewarded with income from:

Back 37

-the periodic interest payments

-sell the bond for more than its cost

Front 38

(Equity of the latter corporation)

Represents proportional rights: the right to share in ownership of the company.

Back 38

Investment in Stock

Front 39

Stock Investment is rewarded with income from:

Back 39

-if the company pays dividends

-sell stock at a higher price than you payed for it

Front 40

Investment classifications are based on what?

Back 40

Frequency and likelihood of sale of the investment.

Front 41

Stocks/bonds bought and held principally for selling them in the near term.

Back 41

Trading Securities

Front 42

Bonds purchased with intent and ability to hold until maturity date.

Back 42

Hold to Maturity Securities

Front 43

Stocks/bonds not held for immediate trading, but also not with intent to hold to maturity.

Back 43

Available for Sale Securities

Front 44

A frequent trader wants to know what?

Back 44

The current market value of the investment and how much they could receive now.

Front 45

If you hold bonds til maturity, why would you care about what the current price is?

Back 45

You are not going to sell it anyway so current value doesn't mean anything.