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115 Cards in this Set
- Front
- Back
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Net Income
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revenue minus expense
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Expense
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expired asset
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Prepaid expense
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paid cash but have not yet received the goods and services
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Unearned revenue (aka customer deposits)
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received cash but have not yet rendered the goods and services
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Depreciation
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allocation of original costs over the estimated useful life of a tangible asset
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Solvency
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capacity to pay bills
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Liquidity
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ability to pay bills
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“Not for profit”
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organization that pays no income tax and is thereby subsidized by tax paying organizations
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calendar year/fiscal year
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accounting year ends December 31/accounting years ends on any other month
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cash discount/trade discount
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prompt payment discount—to get customers to pay faster/reduction from retail price to get wholesale price
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periodic/perpetual
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every so often, i.e daily, weekly, monthly, quarterly, annually/every transaction (i.e. scanner)
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Check and balance
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organizing the work so people naturally check on each other
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Cost of goods sold
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“cost of what is not there”
beginning inventory plus purchases minus ending inventory |
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Dividend/Expense
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distribution to stockholders from retained earnings/expired asset
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Net revenue/ Net income
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top line on the income statement; “what comes in”/ bottom line on the income statement; “what stays in”
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Accrued
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estimated
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Accrual basis/ Cash basis
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accounting based on transactions/ accounting based on cash in/cash out (i.e. real world)
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Why does a company need to make a profit?
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To reward the stockholders for taking the investment risk
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Does a not-for-profit entity need to make a ”profit”?
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Yes, the cash donations to a not-for-profit must exceed the cash paid out for the entity in order to build reserves and to fund future activities.
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What is the purpose of a for profit and a not-for-profit entity?
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Both exist to satisfy a customer demand.
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Who pays the corporation or business entity income taxes?
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The customer pays the taxes. Revenue must cover all expenses which includes taxes. An increase in taxes is an increase in expense which requires an increase in revenue for the company to make a profit.
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Product cost
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cost held in inventory until sold
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Period cost
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expense in period
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Job cost vs process costing
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trace to specific job/product vs average over a batch
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Direct
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directly traceable & easily measure
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Indirect
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not directly traceable or not easily measured
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Manufacturing Overhead
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all indirect costs
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Pre-determined overhead rate
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projected overhead costs divided by expected activity bas ( know formula, be able to calculate)
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Prime Cost
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direct material plus direct labor
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Conversion Costs
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direct labor plus manufacturing overhead
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Cost behavior
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how costs react to changes in the level of activity
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basic assumption of cost accounting
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"linear over the relevant range" allows forecasting of costs
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Anderson’s three rules for cost allocation
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just because you can does not mean that you should
when in doubt do not allocate “what difference does it make?” (in behavior) |
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Sunk cost
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cash already spent; irrelevant to decision making
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Opportunity cost
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the cost of the road not taken
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Inventory accounts
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Raw Materials, WIP (Work in Process), Finished Goods
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Lasagna Theory of Ratio Analysis
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a ratio is one number divided by another number and any number can play. Just because a ratio can be constructed does not give it meaning or utility.
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All ratios must be interpreted where they SIT
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seasonality, industry, and trend. It is the trend in the values of the ratios over successive accounting periods that give ratios their greatest utility
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Assets
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something of future economic value
Are all assets shown on the balance sheet? If not, why not? |
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Liability
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something owed
Are all liabilities shown on the balance sheet? If not, why not? |
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Stockholder’s Equity
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capital plus retained earnings
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Capital
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investment by the stockholders
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Retained Earnings
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earnings retained in the business = cumulative NIAT minus dividends
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Dividend
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distribution of retained earnings to stockholders
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Accounting process
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recording, classifying, reporting, interpreting
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Chart of Accounts
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“Accountant’s Bible” or “Index”--list of the names and account numbers for all accounts
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General Journal
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“Book of Original Entry”--shows the debits and credits for all accounting transactions
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General Ledger
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list of all transactions for the accounting period sorted by account number
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Debit
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entry on the left side of a general ledger account
(expense & asset) |
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Credit
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entry on the right side of a general ledger account
(revenue, equity, & liabilities) |
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Trial Balance
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list of all accounts showing that the total debits equals the total credits
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Income Statement
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matches revenue with expense over a period of time
(financial video) |
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Balance Sheet
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shows assets equals liabilities plus stockholders equity at a point in time (financial snapshot)
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Statement of Changes in Cash Position
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differences between two balance sheets expressed in cash
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Contra account
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account used to keep the balance in another account visible
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Current
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within 12 months or one operating cycle
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Current assets
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assets: assets that will be used up or converted to cash within one year
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Current liabilities
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liabilities which are due within one year
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Fixed (plant) assets (aka PPE—property, plant, and equipment)
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assets with a life of more than one year
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Long term liabilities
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liabilities due over more than one year
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Book value of an asset / market value of an asset
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original cost minus accumulated depreciation/ value paid by a willing buyer and willing seller
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Book value of a company / market value of a company
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common stockholders equity/ value paid by a willing buyer and willing seller
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Sales vs. revenue
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there is no difference
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Revenue
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rendered goods or services with the expectation of payment
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Gross revenue vs. net revenue
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Gross revenue (i.e. P x Q)
(Sales returns and allowances) (Sales discounts) Net revenue |
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Gross accounts receivables vs net account receivables
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Gross accounts receivable
(Allowance for doubtful accounts) Net accounts receivable |
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Net Income
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revenue minus expense
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Expense
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expired asset
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Prepaid expense
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paid cash but have not yet received the goods and services
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Unearned revenue (aka customer deposits)
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received cash but have not yet rendered the goods and services
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Depreciation
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allocation of original costs over the estimated useful life of a tangible asset
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Solvency
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capacity to pay bills
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Liquidity
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ability to pay bills
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“Not for profit”
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organization that pays no income tax and is thereby subsidized by tax paying organizations.
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Fiscal year vs. calendar year
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calendar year: accounting year ends December 31
fiscal year: accounting years ends on any other month |
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Cash discount vs. trade discount
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cash discount: prompt payment discount—to get customers to pay faster
trade discount: reduction from retail price to get wholesale price |
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Freight
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normal assumption--buyer pays freight: FOB; prepaid vs. collect
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Periodic vs. perpetual inventory
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periodic: every so often, i.e daily, weekly, monthly, quarterly, annually
perpetual: every transaction (i.e. scanner) |
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Dividend vs expense
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Dividend: distribution to stockholders from retained earnings
Expense: expired asset |
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Net revenue vs net income
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Net revenue: top line on the income statement; “what comes in”
Net income: bottom line on the income statement; “what stays in” |
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Accrued
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estimated
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Non-cash charges
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deduction on income statement but no cash paid out (e.g. depreciation, amortization, depletion, bad debts under the allowance method)
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Accrual Basis vs. Cash Basis: how can a company “make” money and not have any cash?
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Accrual basis: accounting based on transactions
Cash basis: accounting based on cash in/cash out (i.e. real world) |
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Why does a company need to make a profit?
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To reward the stockholders for taking the investment risk
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Does a not-for-profit entity need to make a ”profit”?
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Yes, the cash donations to a not-for-profit must exceed the cash paid out for the entity in order to build reserves and to fund future activities.
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What is the purpose of a for profit and a not-for-profit entity?
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Both exist to satisfy a customer demand.
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Who pays the corporation or business entity income taxes?
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The customer pays the taxes. Revenue must cover all expenses which includes taxes. An increase in taxes is an increase in expense which requires an increase in revenue for the company to make a profit.
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Product cost
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cost held in inventory until sold
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Period cost
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expense in period
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Job cost vs process costing
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trace to specific job/product vs average over a batch
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Direct
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directly traceable & easily measure
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Indirect
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not directly traceable or not easily measured
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Manufacturing Overhead
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all indirect costs
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Pre-determined overhead rate
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projected overhead costs divided by expected activity bas ( know formula, be able to calculate)
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Prime Cost
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direct material plus direct labor
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Conversion Costs
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direct labor plus manufacturing overhead
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Cost behavior
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how costs react to changes in the level of activity
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Return on Sales
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NIAT/Net Sales. Measure of efficiency: how much of the net revenue is getting to the stockholders via net income. Range for best managed companies is 5% to 10%. Sometimes called the key profitability ratio: ability to attract and retain investment capital.
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Return on Equity
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NIAT/Total Stockholders Equity. Measure of efficiency: what are the stockholders getting on their (accounting) investment. Range 15% to 20% and above would be a very well managed company. Influenced heavily and favorably by the amount of debt.
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Debt/Equity Ratio
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Total Liabilities/Total Equity. Measure of risk. Who is more at risk--stockholders or creditors? Stockholders want greater than 1; creditors want less than 1. Much greater than 2 can mean trouble servicing debt. May be higher due to seasonality and type of business
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Current Ratio
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Current Assets/Current Liabilities. Measure of short term solvency (i.e. capacity to pay bills). Assets expected to turn to cash in the next year compared to liabilities due within that year. Want 1 to 2. May be higher depending on season of the year. Much above 2 may mean dead inventory or uncollectible accounts in current assets. If cash, pay dividend or buy productive assets.
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Quick Ratio
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(Cash + Investments + A/R)/Current Liabilities). Measure of liquidity. How fast can raise cash. Generally less than 1 in companies with significant inventories but the closer to 1 the better. Higher than 1even better.
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Days Sales in Receivables (AKA “DSO” and/or Average Collection Period)
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Average Net Receivables Outstanding for Period/Average Daily Net Sales for Period. Measure of liquidity: how fast sales are turning into cash. Should not be much more that 1.5 times credit terms. Should be calculated on a rolling 12 month basis. Calculation of ratio on less than 12 months data may be distorted by seasonality factors. (A/R Turn = 365/Days Sales in Receivables = Net Revenue/Ave A/R)
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Days Sales in Inventory
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Average Inventory for Period/Average Daily Cost of Goods Sold for Period. Measure of liquidity: how fast turning inventory into cash. Should be as low as possible but not so low that goods are out of stock. Ideally, inventory should be sold before it is paid for. (Inventory Turnover = 365/Days Sales in Inventory = Ave cost of goods sold/Ave inventory)
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Gross Profit Percentage
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Gross Profit/Net Revenue. Applies to companies with inventory or an identifiable cost of goods sold. Reflects pricing policy. Look for trends over time. Varies by company within industry and across all industries
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EBITDA
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Earnings Before Interest, Taxes, Depreciation, and Amortization. Sometimes called “Operating Cash Flow”--shows cash generated by the core business. Quick estimate of company worth since it shows how much a cash the core business is generating. “Rule of Thumb” look to buy companies that are selling for 4 or less times EBITDA; look to sell companies at 5 or more times EBITDA.
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Book Value and Book Value per Share
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Stockholders Equity less Preferred Stock; Stockholders Equity less Preferred Stock/Number of Common Shares. The value of the company according to the accounting books. Accountants measure of value. Historic “Rule of Thumb”: value of stockholders equity when all assets sold and all liabilities paid will be 1 to 2 times book value. Currently, the S&P 500 stocks trade at about 3 times book value.
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Net Cash Flow (NCF)
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Net Income After Tax plus Non-Cash Charges (e.g. Depreciation, Depletion, Amortization). Tells how much cash the income statement is generating by assuming the income statement reflects a cash basis not an accrual basis. Starting point for the Statement of Changes in Cash Position. Very important in capital budgeting.
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Free Cash Flow (FCF): (There are actually several formulas for this concept depending on what the analyst is trying to get out.)
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Net Income After Tax plus Non Cash Charges Less Capital Expenditures Less Increases in Working Capital Less Required Dividends Less Principal Payments on Debt Plus New Debt. Shows cash available to stockholders after funding capital requirements, working capital needs and debt financing.
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Return on Assets
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NIAT/Total Assets. Measure of efficiency: how well are assets being used to generate net income. Should be at least the current market rate of interest (otherwise stockholder better off owning “safer” bonds than stock in this company). Depends heavily on type of business. Important ratio for banks and insurance companies.
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Working Capital
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Current Assets Minus Current Liabilities. Popular term. Want to be greater than 0.
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Earnings per (Common) Share
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(NIAT-Preferred Stock Div)/Number of Common Shares Outstanding. The amount of after tax income that each shareholder has earned on their share of stock. Historically, EPS for the S&P 500 is around 15.
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Payout Ratio
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Dividends per share/earnings per share. The percentage of earnings paid out as dividends each year.
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Yield
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Dividends per Share/Current Stock Price. Effectively, the current return on the investment value.
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ratios
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Ratios values should not be carried out much further than one decimal place. “Close enough for government work.”
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