Accounting Midterm
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Fundemental Characteristics of Financial Reporting (RF)
1.) Relevance
2.) Faithful Representation

Fundemental Characteristic #1:
2 Aspects of Characteristic (PC)
 Relevance: Can make a difference in a decision
 Predictive Value
 Confirmatory Value

Fundemental Characteristic #2:
3 Aspects of Characteristic (NFC)
 Faithful Representation: Describes events purported to represent
 Neutrality
 Free of errors
 Completeness

Enhancing Charaacteristics (CUTV):
 Comparability
 Understandability
 Timeliness
 Verifiability

Constraints (CM)
 Cost Effective
 Materiality

2 Components of Discontinued Operations:
 Gain/Loss from discontinued segment
 Gain/Loss on sale disposal of segment

Accting for Discontinued Operations:
Insert after 'Income from Continued Operations (posttax)'  NET TAX

2 components of Extraordinary Events:
Example:
Unual AND Infrequent
Example: Disasters

Accting for Extraordinary Events:
Below 'Income from Cont'd Ops' and below 'Discnt'd Ops' (if applicable)

"Other Items" affecting N/I
Example:
Unusual OR Infrequent (not both)
Example: Restructing Costs

Accting for Other Items
Included at end of calc of 'Income from Cont'd Ops (pretax)'

Treatment of corrections or errors in filings
Applied RETROACTIVELY

Treatment of changes in Accouting Principles (Mandatory & Voluntary)
 Mandatory: Per Standard
 Voluntary: Retroactively

Treatment of changes in estimates
Applied PROSPECTIVELY  use new method going forward, no adjustment to previous years.

Compehensive Income =
N/I [Rev  Exps +Gains  Losses] + OCI

Examples of OCI:
 Foreign Currency Transactions Gains/Losses
 Unrealized Gains/Losses on marketable securities
 Exercise of stock options

Why OCI items are not included in N/I
Volatility of earnings from FV accting.

Most common presentation of Comprehensive Income:
S/E Statement, difficult to read and hidden from income statement

Scaling of Financial Statements
Puts numbers into %'s of a total

Income Statements Scaling
Represents all numbers as % of Sales

Balance Sheet Scaling
Puts all numbers as % of Assets

Benchmarks of Financial Analysis
 Histrocial Data
 Industry Performance
 Analysts Expectations
 Absolute Benchmarks

Current Ratio (equation and meaning):
Currents Assets / Current Liabilities
Shows liquidity of firm to pay debts due within 1 year

Quick Ratio (equation and meaning):
(Cash+A/R+Short Term Investments) / Current Liabs.
Ammount of cash that can be generated in short time

Debt to Equity (equation and meaning):
Total Liab / Total S.E.
 Proportion of assets borrowed vs. assets owned.
 Higher Ratio = Higher Leverage = Higher Risk

Times Interest Earned (equation and meaning):
(N/I + Int Exp + Tax) / Int Exp
# of times Interest owed could be paid with current earnings

A/R Turnover Ratio (equation and meaning):
Sales / Avg. A/R
# of times A/R was filled and collected in a year

Inventory Turnover Ratios (equation and meaning):
COGS / Avg Inv.
# of times Inventory was filled and emptied in year

Days To Collect (equation and meaning):
365 / A/R turnover Ratio
Avg. # of days to collect accounts

Days In Inventory (equation and meaning):
365 / Inv. Turn. Ratio
# of days inventory on hand

Assets Turnover (equation and meaning):
Sales / Avg. Tot. Assets
How much sales are generated from assets owned

Profit Margin (equation and meaning):
N/I / Sales
How much of each $1 in sales is kept as profit

Return on Assets (equation and meaning):
N/I / Avg. Tot. Assets
FIRM PROFITABILITY
How much every dollar of assets contributes to profits

Return on Equity (equation and meaning):
N/I / Avg. Tot. S.E.
 SHAREHOLDERS PROFITABILITY
 Share of profits from owners contributions

Leverage (Equation and Meanings):
Avg. Tot. Assets / Avg. Tot. S.E.
Proportion of total asets owned by firm

Dupont Analysis
ROE = Profit Margin X Asset Turn X (1+Leverage)

Income Statement:
Sales
(COGS)
___________
(Operating Expenses)
+/ Other Items
___________
+/ Other Rev & Exps
___________
(Tax Expense)
Income From Cont'd Ops (posttax)
+/ ___________
+/ ___________
= Net Income
 Sales  COGS = Gross Margin
  Oper Exps  Other Items = Operating Income
 +/ Other Rev & Exp = Income from Con't Ops
  Tax Expense = Inc from Cont'd Ops (posttax)
 +/ Discontiued Operations
 +/ Extraordiary Events = Net Income


Firm Value =
NPV of future Cash Flows

Cash Flow (Operating)
 Cash Recieved From Customers
 (Cash Paid for Expenses)
 = Cash Flow From Operations

Cash Flow (Investing)
 ( Cash paid for Long Term Assets)
 = Cash Flow From Investing Activities

Cash Flow (Financing)
 Cash contributed by owners
 Cash Received from Loans
 = Cash Flow from Financing Activities

Cash Flow Statements
__________
.
.
Cash Flow From ___________ Activies
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_______
.
.
Cash Flow From ______________ Activies
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_____________
.
.
Cash Flow From ______________ Activies
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Total Cash Flow XX
____Bal XX
______ Bal XX
 Operating
 Investing
 Financing
 Total Cash Flow
 Beg Bal
 Ending Bal