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184 Cards in this Set
- Front
- Back
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Public company
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shares are bought and sold publicly on a stock exchange
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New York Stock Exchange and Nasdaq
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two most common stock companies in the US
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Public companies must
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report financial statements and other information on a regular basis available to the public
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3 ways businesses can be organized
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sole proprietorship, partnership, and corporation
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Partnerships and sole proprietorships
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have limited liability
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Corporations
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ownership is transferred more easily
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Corporations
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can raise capital giving them access to more funds and allowing them to grow
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Many companies start out as private corporations
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then go public by sharing stock to outsiders
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Basis of public reporting requirements in the US
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the securities act of 1933 and the Exchange Act of 1934
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Securities and Exchange Commission
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created by the exchange act of 1934
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Securities and Exchange Commission
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has broad regulatory authority over public companies and financial markets
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Reports are required so that
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so that investors have information to make decisions regarding a firm’s securities
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Annual Report (10-K)
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contains detailed financial and operating results for the year
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Quarterly report (10-Q)
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Financial and operating results for the quarter
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Report of material events (8-K)
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a report detailing any material event affecting the company (such as bankruptcy, legal proceedings, completing an aquisition and results of stockholder meetings)
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Reports of ownership of securities
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all company officers and directors must report on the number of shares in the company they own
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Proxy statement
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required when soliciting votes from shareholders (minimum of one each year prior to the annual shareholder meeting)
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10-K
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A description of the company’s business including risk factors, properties owned and used, and any legal proceedings involving the company. Market for the company’s common stock. Selected financial data for the last 5 fiscal years. Management discussion and analysis of the company’s financial condition and its operations over the past two fiscal years. Audited financial statements and supplementary data including a statement from the company’s independent auditor. Information on directors and executive officers, including compensation.
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GAAP
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generally accepted accounting procedures
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FASB
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financial accounting standards board
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FASB
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sets, reviews, and modifies GAAP under SEC supervision
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IFRS
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International financial reporting standards
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Accounting entity assumption
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the business is separate from the owners or others businesses; business revenues and expenses should be kept separate from personal ones.
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Going concern assumption
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the business operation will continue indefinitely.
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Historical cost principle
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most accounts are valued at historical acquisition costs.
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Revenue recognition principle
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revenue is recorded when it is realized and earned, not necessarily when cash is received;
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Accrual accounting
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recognizes revenues and expenses when they are incurred, not when cash actually changes hands.
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Matching principle
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expenses are to be matched, whenever possible, with revenues
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Objectivity principle
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financial reports and statements should be based on objective evidence.
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Materiality principle
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the significance of an item should be considered when it is reported.
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Consistency principle
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the company should use the same accounting principles and methods from period to period; changes in accounting principles and methods should be reported and past results adjusted.
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Conservatism principle
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when choosing between allowable methods, the one that has the least favorable impact on net income and financial position should be selected.
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Conservatism example
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if a firm made $500,000 in credit sales to customers in December, and collected on those sales in cash in January, it would record the sales in December if it uses accrual accounting.
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Assets
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Liabilities + Equity
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Left side
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represents what the firm owns or use of funds
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Left side
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assets
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Right side
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represents claims against assets or sources of funds
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Owners (residual claimants or stockholders)
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get equity
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Equity
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Assets – Liabillities
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Equity
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whatever is left over after creditors have been paid
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Transaction
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internal or external event that causes a change in a company’s assets, liabilities, or equity
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Transactions are recorded in
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are recorded in a journal or journal netry
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Transactions are posted to
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are posted to general ledger accounts
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Double – entry bookkeeping
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every transaction creates two entries (a debit and a credit)
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Debit
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increases an asset and reduces a liability
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Credit
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increases a liability and decreases an asset
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3 steps of the accounting cycle
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record transactions, record adjusting entry, prepare financial statements
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Adjusting entries recognize
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revenues earned but not yet received in cash and expenses incurred but not yet paid
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Adjusting entries are made
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at the end of the fiscal period
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Permanent components of accounting
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assets, liabilities, and equity
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Assets, liabilities, and equity
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carry forward to the next year
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Temporary components of accounting
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revenues, expenses, net income, and dividends
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Revenues, Expenses, Net income, and Dividends
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close to retained earnings at the end of the year
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Four financial statements
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income statement, balance sheet, statement of cash flows, statement of stockholder’s equity
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Income statement
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temporary and lists income and expenses over time
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Balance sheet
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the only permanent financial statement
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Balance sheet
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represents what a firm owns and owes (assets and liabilities)
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Assets listed in order of
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listed in order of liquidity
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Claims listed in order
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listed in order due
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Balance sheet generally represents book or historical amounts not
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represents book or historical amounts not current market values
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Assets
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represent use of funds
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Claims
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represent source of funds
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Statement of Cash flows
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reconciles balance sheet and income statement entries to actual cash flows
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3 parts of statements of cash flows
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operating activities, investing activities, and financing activities
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Total of 3 parts of statement of cash flows represents
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represents change in cash at the end of the period
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Positive number on statement of cash flows
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represents source of cash
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Negative number on statement of cash flows
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represents use of cash
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Statement of shareholder’s equity
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represents the change in stockholder’s equity from the end of one period to the end of the next
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Cash dividends
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decrease equity
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Net income
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increases equity
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Footnotes on financial statements
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list various accounting methods used by the firm and changes to accounting methods used in that period compared to the last
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Footnotes on financial statements
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explain how numbers are calculated and provide additional details on specific accounts
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Details about sources of revenue are found
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in the 10-K annual report to stockholders you find
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Categories of revenue
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product, geographic, and marketing channel
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Product example
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walt Disney
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Geographic example
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Costco is a domestic company not international
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Marketing channel example
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Nike is found both online in stores and in brick
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Gross profit (income)
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revenue – cost of goods
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Depreciation is shown
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on the cash flow statement
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Cost of goods
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beginning inventory + purchases – ending inventory
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3 allowable methods under GAAP
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LIFO, FIFO, and averaged weighted cost
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Total cost
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beginning + purchases
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Number of units
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beginning + purchases
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Average cost per unit
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total cost divided by number of units
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Cost of goods
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unites sold times average cost per unit
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Ending inventory
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total cost – cost of goods sold
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Operating expenses
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selling, administrative, and general expenses
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There is a lot of flexibility
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as far as whether an expense is categorized as operating or cost of goods sold
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Gross profit
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Revenues – cost of goods sold
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Operating income
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gross profit – operating expenses
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Net
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expense
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Negative
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expenses more than income
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Positive
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income more than expenses
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Interest expense
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can be negative or positive
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Taxable income
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operating income – net interest expense + other income expenses
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Taxes on income statement
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not the exact cash paid in taxes
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Deferred taxes (either asset or liability)
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amount due – amount paid
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Net income
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taxable income – provision for income taxes
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Extraordinary income
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changes
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Extraordinary income are
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added (subtracted) from net income
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Cash dividends are
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subtracted from net income
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Net income – cash dividends + retained earnings
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balance sheet formula
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Earnings per share
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net income/number of outstanding shares
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Assets
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probable future economic benefits obtained or controlled by the firm as a result of past transactions or events
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Types of assets
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current or long term
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Assets represent
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represent use of funds
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Current assets
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cash and assets that will be (or are expected to be) converted into cash during the operating cycle or within a year, whichever is longer
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Liquidity
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convertibility into cash
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Major items of current assets
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cash, short term investments, accounts receivable, and inventory
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Cash and equivalents
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negotiable checks, savings accounts, unrestricted balance in checking, money market funds
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Money market funds
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REMEMBER
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Short term investments
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debt or equity issued by other firms and governments
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Temporary surplus of cash is used for
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is used for short term investments
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Book value
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cost – accumulated depreciation
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Accounts receivable
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amounts from credit sales to customers
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Inventory value
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depends on whether the firm uses LIFO, FIFO, or weighted average cost
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Types of inventory
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goods on hand, raw materials, work in process, finished goods
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Long term assets
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land, buildings, machinery, construction in progress
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Land
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carried at acquisition cost; not subject to depreciation, natural resources are depleted (used)
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Buildings
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cost + permanent improvements; depreciated over “useful” life
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Machinery
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acquisition cost + delivery, installation, and permanent imporvements; depreciated over “useful” life
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Construction in progress
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assets under construction; transferred to permanent asset account upon completion
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Depreciation factors
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asset cost, length of the life of the asset, estimated salvage value of asset when retired
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Depreciation methods
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straight line and accelerated
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Book value equation
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cost of the asset – accumulated depreciation
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Depreciation does what for taxes
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reduces taxes
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Depreciation is only relevant if
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if the firm pays taxes
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Straight line is best for
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public reporting because it maximizes reported earnings
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Accelerated depreciation is best for
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tax purposes
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Deferred taxes
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the difference between what a firm reported that it paid in taxes – from the income statement- and what it actually paid
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Deferred taxes is reported as
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is reported on the balance sheet as a liability
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Capital leasing
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long term, asset earns revenue, recorded as long term asset and long term liability
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Operating leasing
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short term, asset doesn’t earn revenue, not reported on balance sheet
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Long term investments
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debt or equity securities
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Debt securities
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held to maturity and carried at amortized cost
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Equity securities
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carried at market value
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Intangible assets
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goodwill, patents, trademarks, and copyrights
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Goodwill
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one company buys another company for more than their market value
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Liabilities definition
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probable future sacrifices of economic benefits arising from present obligations of a particular entity to transfer assets or provide services to other entities in the future as a result past transactions or events
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Liabilities represent
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monies borrowed from investors, financial institutions, other firms and perhaps the government
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Current liabilities definition
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obligations whose liquidation is reasonably excepted to require the use of existing current assets or the creation of other current liabilities
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To qualify as a current liability
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due within one year or the operating cycle, whichever is longer
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Accruals
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expenses incurred but not yet paid
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Payables
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short-term obligations created by the acquisition of goods or services on credit
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Examples of current liabilities
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short term loans and commercial paper outstanding or current portion of long term debt (principal due within 12 months)
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To qualify as a long-term liabilities
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due in a period beyond one year or the operating cycle
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Long term liability examples
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bonds
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Examples of stockholder’s equity
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preferred stock and common stock
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Preferred stock
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non-voting, pays a fixed dividend, have a senior claim to assets
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Common stock
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preemptive and voting rights; residual claimants and legal owners of a corporation
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Retained earnings
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earnings not paid to shareholders in dividends; carries over from year to year
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Treasury stock
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shares repurchased; “negative equity”
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Qualifies as cash
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cash on hand, cash on deposit, short term investments, other items (debit and credit card statements awaiting settlement)
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Internal users
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determine the dividend policy, evaluate cash generated by operations, and review investing and financing policy
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External users
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***** firm’s ability to increase dividends, ability to pay debt from operations, and relationship of cash from operations to total cash
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Change in cash =
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cash flows from investing activities + cash flows from financing activities
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Ending cash balance =
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change in cash + beginning cash balance
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Operating activities definition
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cash effects of transactions and other events that enter into the determination of net income
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Operating cash inflows come from
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sale of goods or services, returns on loans and other entities (interest), and return on equity securities of other firms (dividends)
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Operating cash outflows come from
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payments for acquisitions of inventory, payments to employees, payments for taxes, payments for interest, and payments for other expenses
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Investing activities definition
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lending money and collecting on those loans and acquiring and selling investments and productive long-term assets
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Investing cash inflows come from
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sales of debt or equity securities and sales of plant, property, and equipment (fixed assets)
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Investing cash outflows come from
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investment in debt or equity securities and purchase of plant, property, and equipment
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Financing activities definition
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borrowing and repaying long-term loans; issuing equity securities; payment of dividends to shareholders
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Financing cash outflows come from
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cash dividends, repurchase of stock, and repayment of bank loans, bonds, and other forms of debt issued by the firm
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Financing cash inflows come from
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new bank loans by the firm and sale of new debt and equity securities by the firm
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Direct method
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presents the income statement on a cash basis; supplemental information required is reconciliation of net income to cash provided by operations
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Indirect method
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adjusts net income for items that affected net income but did not affect cash; supplemental information required is cash paid for income taxes and interest
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The same in both indirect and direct methods
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the bottom line
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Shareholders equity today=
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shareholders equity last year + net income today – dividends today + sale of new shares – repurchase of existing shares + or – other items
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Net change in stock=
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(Equity of today – equity of last year) – (net income – dividends)
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If the change in common stock is greater than 0
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it is a source
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If the change in common stock is less than 0
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it is a use
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Cash flow from operating expenses should be
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cash flow should be positive for
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The largest single source of cash should be
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net income should be the
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Cash flow from investing activities should be
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a net use of cash
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Cash flow from financing activities should be
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depending on the firm
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Younger, faster growing firms should have financing cash flow that is
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a net source of cash for financing
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More mature, slower growing companies should have financing cash flow that is
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a net use of cash for financing
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Sources of funds
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net income, depreciation, increases in liabilities, and sale of new shares
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Uses of funds
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cash dividends, capital expenditures, and increases in assets
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Sources will always equal
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uses will always equal
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Net fixed assets formula
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beginning net fixed assets + capital expenditures – depreciation – sale of exsiting assets
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Equity formula
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beginning equity + net income – cash dividends + sale of new shares – repurchase of existing shares
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