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Liquidity Ratios - correct answer measures of a firm's short-term ability to meet its current obligations Profitability Ratios - correct answer measures of a firm's profitability relative to its assets (operating efficiency) and to its revenue (operating profitability) Activity Ratios - correct answer Measure of efficiency of a firm's assets Solvency Ratios - correct answer Measure of a firm's ability to pay its obligations Inventory Turnover - correct answer COGS / avg inventory Receivables Turnover - correct answer revenue / average accounts receivable DSO (Days Sales Outstanding) - correct answer AR/Credit Sales * days in period days in period/receivables turnover A/P turnover - correct answer COGS / Average A/P PPP (payables purchasing period) - correct answer days in period/ Accounts payable turnover Current Ratio - correct answer current assets/current liabilities Quick ratio (acid test) - correct answer Cash and AR divided by current liabilities Gross profit margin - correct answer gross profit/revenue operating margin - correct answer operating profit/revenue net profit margin - correct answer net income/revenue asset turnover - correct answer revenue/ average assets return on assets (ROA) - correct answer Net Income / Average Assets return on equity (ROE) - correct answer net income/ total equity Basic EPS - correct answer (Net Income - Preferred Dividends)/(Weighted Average of Shares Outstanding) Diluted EPS - correct answer diluted net income / weighted average diluted shares outstanding dividend yield - correct answer dividends/net income debt to EBITDA - correct answer Total Debt/EBITDA interest coverage ratio - correct answer EBIT/ interest expense
fixed charge coverage - correct answer (EBIT + Lease charges)/(Interest Payments + Lease charges) Debt to Total Assets - correct answer Total Debt/Total Assets debt to equity - correct answer total liabilities/total equity cash from operations (CFO) - correct answer uses net income as a starting point and converts accrual base net income into cash flow from operations via a series of adjustments cash from investing activities (CFI) - correct answer capital expenditures / asset sales and purchases cash from financing activities (CFF) - correct answer new borrowing / pay down of debt / new issuance of stock / share repurchases / issuance of dividends working capital - correct answer - CFO -increase in current assets = cash outflow -increase in current liabilities = cash inflow asset write downs / impairments - correct answer -added back to CFS via CFO Increases in A/R, inventory, prepaid expenses, other current assets should be net income to get to CFO - correct answer subtracted increases in A/P, accrued expenses, other current liabilities should be net income to get to CFO - correct answer added gains on sale of assets - correct answer subtracted from CFO stock based compensation - correct answer added to CFO Common CFI inflows/outflows - correct answer - capital expenditures
- purchases of intangible assets
- asset sales
- sales of debt/ equity security
- purchases of debt/equity security Common CFS inflows/outflows - correct answer -Issuance / repayment of debt (cash inflow / outflow) -Common stock issued / repurchased (cash inflow / outflow)
Revenue - correct answer Represents proceeds from the sale of goods and services produced or offered by a company Revenue Recognition: Multiple Deliverables - correct answer For sales of bundled products, companies should assign individual values to each of the bundled components Revenue Recognition: Long-term projects - correct answer 1. Percentage Completion Method
- Completed Contract Method Percentage Completion Method - correct answer revenues are recognized on the basis of the percentage of total work completed during the accounting period Completed Contract Method - correct answer allows revenue recognition only once the entire project has been completed (rarely used in the US) COGS - correct answer Represents company's direct cost of manufacture or procurement of a good or service for a company to sell to generate revenue Examples of COGS - correct answer Merchandise inventory Manufactured goods inventory •Raw material costs •Direct labor costs •Factory overhead Shipping and delivery costs Any other costs associated with the generation of revenue Depreciation of fixed assets Gross Profit =------------------------------------ correct answer Net revenue, COGS SG&A - correct answer Operating expenses not covered in COGS Examples of SG&A - correct answer -A store lease expense for a retail business -Salaries and commissions of sales people and cashiers -Marketing and advertising expenses -Administrative, IT, and office support staff -Equipment used for selling (cash register)
-Executive salaries -Legal expenses R&D - correct answer R&D expenses stem from a company's activities that are directed at developing new products or procedures Depreciation Expense - correct answer Quantifies wear and tear of a physical asset through systematic decrease of historical value Useful Life of Fixed Assets (examples) - correct answer Plants and buildings 15-40 yrs Machinery & Equipment 3-20 yrs Furniture & Fixtures 5-10 yrs Computer Software & Hardware 3-5 yrs Is land depreciated? - correct answer no Depreciation is included within depending on whether the asset being depreciated is directly tied with manufacture or procurement or selling or marketing - correct answer COGS or SG&A Depreciation and amortization are a expense - correct answer non-cash Straight Line Depreciation - correct answer Annual depreciation expense = (original cost- salvage value)/useful life Accelerated Depreciation Methods - correct answer -calculates a greater amount of depreciation in early years -declining balance, sum of years digits, units of production Amortization Expense - correct answer Allocation of the cost of intangible assets over the number of years that these assets are expected to help generate revenue for the company Types of Intangible assets - correct answer Customer lists Franchise, membership, licenses Patents and technology Trademarks and good will are because they are considered to have indefinite useful life - correct answer not amoritzed Expenses associated with developing intangible assets are as they are incurred - correct answer fully expensd
Weighted average presentation - correct answer weighted average of amount of shares outstanding during the period of the income statement Diluted EPS will almost always be than basic EPS - correct answer smaller What CFO's do with net income/profit? - correct answer 1. Make distributions to shareholders via dividends
- Keep profits and reinvest in the business
- Pay down any existing debt obligations or other liabilities
- Sit on it and grow a pile of cash EBIT - correct answer earnings before interest and taxes EBITDA - correct answer Earnings before interest, taxes, depreciation, and amortization Balance Sheet - correct answer Reports the company's resources (assets) and how the resources are funded (liabilities and shareholder's equity) on a particular date Assets = - correct answer Liabilities + Equity Requirements of an asset - correct answer The company must own the resource The resource must be of value The resources must have a quantifiable, measurable cost Common Types of Assets - correct answer -Cash: money held by the company in its bank accounts -Marketable Securities: Debt or equity securities held by the company -Accounts Receivable (A/R): payment owed to a business by its customer for goods and services already delivered to them -Inventories: unfinished or finished goods that are waiting to be sold, and the direct costs associated with production of the goods -Prepaid Expenses: when a company prepays for things such as utilities, insurance, and rents, the rights to the future services become assets -PP&E: land, building, machinery used in the manufacture of the company's services and products -Intangible Assets and Goodwill: non-physical assets such as patents, trademarks, and goodwill acquired by the company that have value based on the rights belonging to the company
Requirements for a liability - correct answer -must be measurable -must be probable Common Liabilities - correct answer -Accounts Payable: company's obligations to suppliers for services and products already received but not yet payed for -Accrued Expenses: expenses like employee compensation that the company has incurred, but has not paid -Short Term Debt: due in less than 12 months -Long Term Debt: debt whose maturity exceeds 12 months Equity - correct answer source of fund through equity investment and retained earnings Common Equities - correct answer -Preferred Stock: stock that has special priority and rights over common stock -Common Stock: represents capital received when a company issues shares -Treasury stock: Common stock that has been reissued and then repurchased -Retained earnings: Total company earnings/losses since its inception minus all the dividends The Accounting Equation - correct answer Every single transaction has two sides: a source of funds and a use of funds -use of funds will always equal source of funds Buying a plant - correct answer Cash is the source of funds Funds used to build the plant Buying inventory on credit from the seller - correct answer -The source of funds is a new liability -The use of funds is buying inventory Issuing stock - correct answer -The additional equity investors are the source of funds -The funds were used to add cash Double Entry Accounting - correct answer Every transaction is recorded through the use of a "credit" (source of funds) and an offsetting "debit" (use of funds) such that total debits always equal total credits in value Debit - correct answer -Increases in assets
I/S impact on the B/S: Non-operating expenses; Income statement impact on the B/S: Tax expense - correct answer debit > equity > retained earnings credit > asset > cash Assets are presented in descending order of liquidity - correct answer 1. cash first
- A/R, inventory, easily converted assets
- PP&E, intangible assets --> bottom Current Assets - correct answer Can be converted to cash within 12 months Liabilities are presented in order of when they are to be paid - correct answer -Liabilities like short term debt and accounts payable are to be paid within 12 months and are labeled "current" -Long term liabilities (such as long-term debt) are not due within the year. Cash equivalents - correct answer -extremely liquid assets ie Treasury bills -Marketable securities (debt or equity investments held by the company) Accounts receivable (A/R) - correct answer -sales that a company has made on credit -Linked to revenues on the income statement Impact of A/R on the B/S - correct answer -Debit > asset > cash > revenue -Debit > asset > A/R -Credit > retained earnings (revenue) Prepaid expenses - correct answer When a company prepays for things like utilities, insurance and rents, cash is reduced, but the expense is not yet recognized on the I/S -an asset is created to reflect that the company now has the right to the future services Impact of prepaid expenses on B/S: on the day of payment - correct answer -Debit > Asset > prepaid expenes -Credit > Asset > cash Impact of prepaid expenses on B/S: 1/2 of the period has passed - correct answer -Debit > Equity > Retained Earnings -Credit > Asset > prepaid expenses
Inventory - correct answer represent goods waiting to be sold, and direct and (sometimes indirect) costs associated with the production or procurement of these goods Inventory cycles out of the B/S and into the I/S as - correct answer COGS Before inventory get expensed as and are matched to the revenues they help generate (matching principle), they are part of the company's - correct answer COGS, Inventories Ending Inventory = - correct answer Beginning Inventory + Net Purchases - Cost of Goods Sold Impact of inventory on the balance sheet: selling inventories - correct answer Debit > equity > retained earnings (COGS) Credit > Asset > inventory First In, First Out (FIFO) - correct answer The cost of the inventory first purchased (first in) is the cost assigned to the first inventory to be sold (COGS -first out). Remaining inventory reflect the latest costs Last In, First Out (LIFO): - correct answer The items purchased last (last in) are the first to be sold (COGS - first out). Therefore, the cost of inventory most recently acquired (ending inventory -last in) is assigned to COGS (first out). Ending inventory reflects cost of the first purchased inventories Average Cost - correct answer COGS and ending inventory are calculated as: COGS/Total number of goods COGS are using LIFO vs. FIFO in periods of rising inventory prices - correct answer higher Net income is using LIFO vs FIFO - correct answer lower The of LIFO accounting is what makes it preferable for many U.S. companies over FIFO accounting in periods of rising inventory prices - correct answer tax benefit LIFO Reserve = - correct answer FIFO inventory - LIFO inventory LIFO inventory + LIFO Reserve = - correct answer FIFO Inventory FIFO COGS + LIFO Reserve = - correct answer LIFO COGS The lower of cost-or-market (LCM) rule dictates that - correct answer if market inventory falls below historical cost, they must be written down to market value
The lemon squeezer has a net book value of $10 at the end of 2014, comprised of the original purchase price (gross PP&E) of $15k, less accumulated depreciation of $5k. On January 1, 2015 the squeezer is sold for $12k - correct answer During 2014: -Debit > Asset > PP&E -Debit > Equity > Retained earnings (depreciation) -Credit > Asset > cash -Credit > asset > PP&E (depreciation) At sale: -Debit > asset > cash -Credit > equity > retained earnings (gains from sale) -Credit > asset > PP&E (sale) Intangible Assets - correct answer -Non-physical acquired assets -linked to amortization on I/S Goodwill - correct answer amount by which the purchase price for a company exceeds its fair market value (FMV) Goodwill impairment - correct answer -goodwill is not amortized but tested annually for loss of value -goodwill can only be written down not up If the value of the previously acquired company declines, goodwill is , with a corresponding reduction to via the , by the amount of the - correct answer reduced, retained earnings, income statement, impairment Accounts payable (A/P) - correct answer A current liability representing amounts owed by the company to suppliers for prior purchases or services Accrued expenses - correct answer expenses that have already been incurred but not yet paid Suppose you didn't actually pay the $12.6k in taxes that you owe, but were planning to pay it on April 15 2015 (next year). In addition, let's say that of the $15k in salary owed to the cashier, you paid $13k, but you hadn't come around to paying the remaining $2k and were planning on paying it in January of 2015 - correct answer Credit > asset > cash Debit > retained earnings (SG&A)
Debit > equity > retained earnings (Taxes) Credit > Liability > Accrued expenses Deferred (unearned) revenue - correct answer Revenue received for services not yet provided by the company Deferred revenue is a liability if the revenue is expected to be recognized within the year, otherwise, it is a liability - correct answer current, long-term Suppose your lemonade stand offered a gift card letting customers prepay for 10 cups of lemonade at a discount and that you sold $3k such contracts during the year, of which $1k were immediately redeemed for lemonade - correct answer Debit > Asset > cash Credit > Liability > deferred revenue Credit > equity > retained earning (revenue) Current portion of long-term debt - correct answer Portion of long-term debt which is due within 1 year Impact of Long Term Debt: Initial borrowing - correct answer Debit > asset > cash credit > liability > long term debt Impact of Long Term Debt: Interest Payment - correct answer Debt > Equity > retained earnings (interest expense) Credit > asset > cash Finance leases - correct answer Recognizes the lease as debt and the underlying asset as PP&E on the lessee's balance sheet Companies have to estimate the initial liability as the value of all lease payment, using a - correct answer present, future, discount rate assumption On the income statement both and an reduces
- correct answer depreciation expense, implied interest expense, net income Finance lease accounting wants us to break up the lease payments into two components: - correct answer interest and depreciation fees the overall depreciation + interest expense will be early in the lease and later in the lease - correct answer higher, lower Operating lease accounting is supposed to apply to leases where - correct answer the lessee really doesn't have economic ownership of the lease
OCI includes....... - correct answer gains and losses from foreign currency translations, unrealized gains and losses on available for sale securities, etc
