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86 Cards in this Set
- Front
- Back
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is the amount (a) payable at the maturity of the bond and (b) on which periodic cash interest payments are computed
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bond principal
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another name for bond principal, or the maturity amount of a bond
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par value
face amount |
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the rate of cash interest per period stated in the bond contract
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stated rate
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characteristics of bonds payable
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1. stockholders maintain control
2. interest expense is tax-deductible 3. the impact on earnings is positive |
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major disadvantages associated with issuing bonds
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1. risk of bankruptcy
2. negative impact on cash flows |
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an unsecured bond; no assets are specifically pledged to guarantee repayment
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debenture
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may be called for early retirement at the option of the issuer
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callable bond
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may be converted to other securities of the issuer (usually common stock)
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convertible bond
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a bond contract that specifies the legal provisions of a bond issue
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indenture
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the bond document that each bondholder receives
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bond certificate
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an independent party appointed to represent the bondholders
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trustee
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A financial instrument representing a borrowing evidenced by a bond indenture (contract) with various covenants (terms and restrictions).
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bond
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another name for the stated rate of interest on bonds
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coupon rate
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current rate of interest on a debt when incurred
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market interest rate
yield effective-interest rate |
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the difference between the selling price and par when the bond is sold for more than par
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bond premium
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the difference between the selling price and par when the bond is sold for less than par
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bond discount
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stated rate > market rate
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premium
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stated rate < market rate
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discount
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times interest earned equation
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(net income + interest expense + income tax expense)
-------------------------------------------------------------------------------------- interest expense |
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debt-to-equity ratio
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total liabilities
------------------------------------------------ stockholders' equity |
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measures a company's ability to generate resources from current operations to meet its interest obligations
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times interest earned ratio
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measures the balance between debt and equity. Debt funds are viewed as being riskier than equity funds.
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debt-to-equity ratio
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benefits of stock ownership
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- a voice in management
- dividends - residual claim |
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the maximum number of shares of a corporation's capital stock that can be issued as specified in the charter
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authorized number of shares
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represent the total number of shares of stock that have been sold
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issue shares
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refer to the total number of shares of stock that are owned by stockholders on any particular date
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outstanding shares
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earnings per share equation
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net income
---------------------------------------- avg number of common shares outstanding |
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the basic voting stock issued by a corporation
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common stock
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the nominal value per share of capital stock specified in the charter; serves as the basis for legal capital
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par value
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the permanent amount of capital defined by state law that must remain invested in the business; serves as a cushion for creditors
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legal capital
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capital stock that has no par value specified in the corporate charter
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no-par value stock
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a corporation's own stock that has been issued but subsequently reacquired and is still being held by that corporation
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treasury stock
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the date on which the board of directors officially approves a dividend
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declaration date
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the date on which the corporation prepares the list of current stockholders as shown on its records; dividends can be paid only to the stockholders who own stock on that date
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record date
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the date on which a cash dividend is paid to the stockholders of record
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payment date
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journal entry on declaration date of dividends
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(debit)Retained Earnings xxx
(credit)Dividends Payable xxx |
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journal entry on payment date of dividends
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(debit)Dividends Payable xxx
(credit)Cash xxx |
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two fundamental requirements for payment of a cash dividend
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1. sufficient retained earnings
2. sufficient cash |
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made to earn a return on funds that may be needed for future short-term or long-term purposes
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passive investments
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why would a company buy back its shares?
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- Stock option plans
- Thwart hostile takeover attempts - Buy another company - Raise market price per share - Raise earnings per share |
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investments in debt securities that management has the intent and ability to hold until maturity
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held-to-maturity investments
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reports investments in debt securities held to maturity at cost minus any premium or plus any discount
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amortized cost method
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used to report securities at their current market value (the amount that would be received in an orderly sale)
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fair value method
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why are passive investments reported on the balance sheet?
(two primary factors) |
relevance
measurability |
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amounts associated with price changes of securities that are currently held
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unrealized holding gains or losses
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all investments in stocks or bonds held primarily for the purpose of active trading (buying and selling) in the near future (classified as short term)
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trading securities
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all passive investments other than trading securities and debt held to maturity (classified as short or long term)
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securities available for sale
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what does a company's board of directors do?
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- corporate governance
- audit committee |
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auditor (CPA) does...
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- tests company's systems and records
- renders opinion of fairness of financial information (companies want unqualified opinion) |
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what does SEC do?
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- regulates public companies (reviews, analyze), stock exchanges, and CPA firms
- oversees FASB (GAAP) - 10-K (annual), 10-Q (quarterly), 8-K, etc. - can stop trading, prosecute for fraud |
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public corporation
management is responsible for |
- hiring independent CPA
- creating and dissemination financial statements and info (including press releases) - CEO and CFO must sign statements taking responsibility for into (no significant weaknesses) |
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financial intermediaries
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- News services (e.g., Dow Jones, Bloomberg, Reuters)
- Analysts (EPS forecasts and buy/sell/ hold recommendations) |
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decision makers
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- Institutional investors
- Private investors - Creditors - Others |
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Private companies that want to obtain large sources of capital to expand often go public --> IPO – Initial Public Offering
What does a company have to do in order to go public? |
Must submit very complex documents with SEC (S-1 Registration)
Use an underwriter (e.g., Goldman Sachs) for advice and to sell shares Hire a law firm experienced in securities law Hire an independent CPA firm Expensive (often hundreds of thousands of dollars) Ongoing costs once registered [including 10-K (audited annual), 10-Q (unaudited quarterly, 8-K (current events), plus others] |
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In financial reporting to external users, information is useful if it is:
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- relevant: Can influence a decision (timely and has predictive and feedback value)
- reliable: Represents what it is supposed to, and is unbiased and verifiable - consistant: Similar accounting methods over time - comparable: Comparable across businesses |
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Exceptions to measurement rules for A, L, SE, R, and E:
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cost-benefit
materiality conservatism industry practices |
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cost-benefit
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Benefits of measuring and reporting information should outweigh costs
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materiality
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Amounts are large enough to influence a decision (if applying appropriate rules would not, then account for item in least costly way)
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conservatism
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When no one measurement rule is better than another, choose the one that has the least favorable impact so as not to overstate assets/revenues or understate liabilities/expenses
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industry practices
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can be GAAP
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income statement
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Purpose: Report financial performance over period of time
Classified: Operating income (may also have gross margin subtotal) and other items |
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balance sheet
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Purpose: Report financial position at a point in time
Classified: Current vs noncurrent assets and liabilities; new SE accounts |
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statement of cash flows
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Purpose: Report sources and uses of cash over a period of time
Classified: Operating, investing, and finance cash flows sections |
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statement of stockholders' equity
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Purpose: Connect I/S and B/S
Classified: Usually in columns showing changes in SE accounts |
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List the three types of notes to the statements.
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1. Summary of significant accounting policies
2. Detailed support of numbers in statements - Accrued expenses, property, plant, & equipment, debt, etc. 3. Additional information of financial relevance - Commitments, leases, pensions, litigation, stock option plans |
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Auditor’s Opinion
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Based on independent CPA investigating (testing and analyzing) a client’s (company’s) controls and numbers on statements
- Indicates if auditor applied Generally Accepted Auditing Standards [GAAS] - That the company’s financial statements are or are not presented fairly - And that the company followed Generally Accepted Accounting Principles [GAAP] |
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net profit margin equation
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Net income / Net sales
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what does net profit margin measure?
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How well mgmt controls revenues and expenses during period.
(Profitability measure) |
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total asset turnover equation
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Net sales / Avg Tot A
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what does total asset turnover measure?
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How well mgmt uses assets to generate revenues.
(efficiency measure) |
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financial leverage formula
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Avg Tot A / Avg Tot SE
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what does financial leverage measure?
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how well management utilizes debt and equity financing
(solvency measure) |
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what does return on equity measure?
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How well mgmt has used stockholders’ investment during the period.
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return on equity formula
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Net income / Avg SE
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DuPont Model
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helps us analyze the profitability of a business and demonstrates that a variety of strategies can result in high levels of profitability
return on equity = net profit margin X asset turnover X financial leverage |
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The mission of the ____ is to protect investors and maintain the integrity of the securities market
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U.S. Securities and Exchange Commission (SEC)
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elected by the stockholders to represent their interests, is responsible for maintaining the integrity of the company's financial reports
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board of directors
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an auditor's statement that the financial statements are fair presentations in all material respects in conformity with GAAP
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unqualified (clean) audit opinion
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accurate, unbiased, and verifiable
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reliable information
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can influence a decision; it is timely and has predictive and/or feedback value
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relevant information
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suggests that care should be taken not to overstate assets and revenues or understate liabilities and expenses
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conservatism
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amounts that are large enough to influence a user's decision
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material amounts
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contributed capital less the par value of the stock
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additional paid-in capital
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return on assets equation
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net income / avg total assets
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In general, return on assets measures...
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how much the firm earned for each dollar of investment
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ROA =
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ROA = Net profit margin X total asset turnover
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