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Class FinSTMT Analys

Class

QuestionAnswer
At the end of the fiscal year, an adjusting entry is made that increases both interest expense and interest payable. This entry is an application for which accounting principle? Matching
Who is responsible for the preparation and integrity of financial statements? Management
objective of the SEC's integrated disclosure system? -To coordinate the Form 10-K requirements with those of the annual report -To expand the management discussion of liquidity, capital resources, and results of operations -To improve the quality of disclosure -To standardize information requirements
types of audit opinions -Unqualified opinion -Qualified opinion -Adverse opinion -Disclaimer of opinion
True stmts about auditor opionions -A qualif. opinion or an adver. opin. may bring into ? the reliability of the fin stmts -A disclaimer of opin. indicates that 1 should not look to the auditor's report as an indication of the reliability of the stmts -Outside accoun. are ass. w/ fin st
In addition to the balance sheet, the income statement, and the statement of cash flows, a complete set of financial statements must include: a note disclosure of such items as accounting policies.
correct stmts concerning summary annual reports? -A sum annual report omits much of the fin info included in annual report. -When a co issues a sum annual report, the proxy materials it sends to shareholders must include a set of fully audited stmts & other required fin disclos -A summary annual repor
true statements relating to the Treadway Commission -Treadway Commission is the popular name for the National Commission on Fraudulent Report -Treadway Commission has released reports detailing internal control sys -Management Report on Internal Control over Fin Report & independent public accounting fro
True smts about JEs -Transactions must be recorded in a journal -All transactions could be recorded in the general journal -Companies use a number of special journals to record most transactions -Special journals are designed to improve record- keeping efficiency
Ture stmts about GL accounts -Asset, liability, and stockholders' equity accounts are referred to as perm accts -Rev, ex, & div accts are described as temp accts -Temp accts are closed @ the end of the period to R/E -B/S will not bal until the temp accts are closed to R/E
type of audit opinion that a firm would usually prefer? Unqualified opinion
Which of the following is a permanent account? Dividends Advertising expense Building Selling expense Insurance expense Building
In terms of D & C which of the foll accts have the same normal bal -A/P, A/R, N/P -Dividends, accounts receivable, notes payable -Advertising expense, selling expense, accounts receivable -Land, building, accounts payable -C/S, notes payable, land Advertising expense, selling expense, accounts receivable
Tiffin Company had retained earnings of $50,000 at the end of last year. For the current year, income was $20,000 and dividends $15,000. What is the balance in retained earnings at the end of the current year? $55,000
Smith Company had retained earnings of $60,000 at the end of the current year. For the current year, income was $30,000 and dividends $10,000. What was the balance in retained earnings at the end of the prior year? $40,000
A disclaimer of opinion is necessary when the exceptions to fair presentation are so material that a qualified opinion is not justified. False
The responsibility for the preparation and integrity of financial statements rests with management. True
The assets for the balance sheet must equal the liabilities and stockholders' equity. True
The balance sheet reports: the financial condition of an accounting entity as of a particular date.
Which of the follow would not appear on a conventional B/S -Income taxes payable -Funds from operations -Incorrect Response -Cash surrender value of life insurance -Appropriation for contingencies (restriction of retained earnings) -Patents Funds from operations
@ begin yr Co had assets $200,000otal liab $110,000 & equity $90,000 For the yr Co earned N/I of $75,000 & declared cash div of $30,000 @ the end yr the co had assets of $300,000 & its equity was at $135,000 @ the end yr Co had total liab of $165,000.
Ownership of debt instruments of the government and other companies that can be readily converted to cash are best reported as: marketable securities.
Tangible assets on the balance sheet should include: equipment. inventory. trademarks. investments. accrued insurance. equipment.
The current asset section of the balance sheet should include: land. trademarks. investment in C Company (for purposes of control). dividends payable. work in process inventory. work in process inventory.
Which of the following is not a current asset? Marketable securities Material inventory Unearned rent income Prepaid interest Accrued insurance Unearned rent income
If a parent has some control over a subsidiary but the subsidiary is not consolidated, the subsidiary is accounted for as: a marketable security. an investment. a liability. a fixed asset. None of the answers are correct. an investment.
Followis not a proper use of notes? -des the nature and effect of a change in account prin like from FIFO to LIFO -indicate the basis for asset valuation -indicate the method of depre -correct an improper fin stmt presen -des a firm's debt To correct an improper financial statement presentation.
A owns shares of B and C STMTS of B are consolidated w/ A STMTS of C are not consolidated A reports Noncontroll Int on its B/S This acct repre A's noncontrol share of B A's noncontrol share C the noncontrol share by o/s owners of A the noncontrol the noncontrolling share by outside owners of the stock of B.
Treasury stock is best classified as: a current asset. a long-term investment. a contra liability. a reduction of stockholders' equity. a reduction of retained earnings. a reduction of stockholders' equity.
Which of the following is not a common characteristic of preferred stock? Voting rights Preference as to dividends Preference in liquidation Callability by the corporation None of the answers are correct. Voting rights
follow is not a problem inherent in B/S pres Most ass. are val. @ cost Varying meth. R used $ ass. val. Not all items of val. 2 firm R included as assets Liab related to contingencies may not appear on the B/S The owners' int will be indicated The owners' interest will be indicated.
true about an ESOP? -ESOP must be a permanent trusted plan for the exclusive benefit of the employees. -plan participants become eligible for fav tax of distri from the plan -Com lend instit, insur co, & mutual fund R permitted an exclusion from income for 50% of int rec
The most popular depreciation method for financial reporting is the following: straight-line.
Which of the following is a current liability? Prepaid insurance Retained earnings Unearned rent revenue Bonds payable Common stock Unearned rent revenue
Which of the following accounts would not be classified as an intangible? Franchises Research and development Patent Trademarks Goodwill Research and development
True about subsequent event to financial statements A major customer declares bankruptcy sub to the B/S date but prior to issuing the stmts This event was not considered on the B/Sdate. A major purchase of a subsidiary to the B/St date, but prior to issuing the stmts Sub debt incurred sub to the B/S
The purpose of a balance sheet is to show the financial condition of an accounting entity for a period of time. False
Deferred taxes are caused by using different accounting methods for tax and financial reporting purposes. True
Gross profit is the difference between: sales and cost of goods sold.
Foll would be included in O/I Interest income for a manufacturing firm Rent income for a leasing subsidiary Gain from sale of marketable securities for a retailer Dividend income for a service firm None of the answers are correct. Rent income for a leasing subsidiary
The following relate to Data Original in 2012. What is the ending inventory? Purchases $540,000 Beginning Inventory 80,000 Purchase Returns 10,000 Sales 800,000 Cost of Goods Sold 490,000 $120,000
Changes in account balances of Multi-Plus Inc. during 2012 were: Increase Assets $420,000 Liabilities 125,000 Capital Stock 100,000 APIC 140,000 R/E Assum that there were no charges to R/E other than div of $62,000, N/I for 2010 was: $117,000
When a company discontinues and disposes of a component segment of its operations, the gain or loss from disposal should be reported as: a special item after continuing operations and before extraordinary items.
Foll would be classified as an extraordinary item on the I/S Loss from a strike Correction of an error related to a prior period Write-off of obsolete inventory Loss on disposal of a segment of business Loss from prohibition of a product Loss from prohibition of a product
If a firm consolidates subsidiaries that are not wholly owned, an income statement item is created that is termed: dividend income. minority share of earnings. equity income. extraordinary. gain from sale of subsidiary. minority share of earnings.
Which of the following will not affect retained earnings? Declaration of a stock dividend Payment of a cash dividend previously disclosed Adjustment for an error of a prior period Net income Net loss Payment of a cash dividend previously disclosed
Anchor Company has 1,000,000 shares of C/S w/ a par value of $5. APIC of $5,000,000 & R?E is $8,000,000. The directors declare a 10% stock dividend when the market value is $15. The reduction of retained earnings as a result of the declaration will be: $1,500,000.
equity of Co @ 9/20/12 is below: C/S, par value $10, authorized 500,000 shares; 200,000 sharesIss $ out. $2,000,000 PIC in Excess of Par 300,000 R/E 1,300,000 $3,600,000 On 10/1/12 the Board of Directors of Anamanda declared a $300,000
Andromeda Industries had 300,000 shares of C/S w/ a $3 par value and R/E of $180,000 at January 1, 2011. In 2011, the stock was split 3 for 1. In 2010, earnings per share were $1.80. Which of the following would not result from the stock split? Retained earnings would be reduced.
true about a stock dividend? With a stock dividend, the firm issues a percentage of outstanding stock as new shares to existing shareholders. The overall effect of a stock dividend is to leave total stockholders' equity and each owner's share of stockholders' equity unchanged.
true about a stock dividend? CONT. In theory, with a stock dividend, total market value considering all outstanding shares should not change. Since the number of shares changes under a stock dividend, any ratio based on the number of shares must be restated.
Foll is not a category w/in AOCI Post retirement commitments on health plans Foreign currency translation adjustments Unrealized holding gains and losses on available-for-sale marketable securities Changes to stockholders equity resulting from Post retirement commitments on health plans
Which of the following is a recurring item? Equity in earnings of nonconsolidated subsidiaries Error of a prior period Discontinued operations Extraordinary gain Cumulative effect of change in accounting principle Equity in earnings of nonconsolidated subsidiaries
foll items on the I/S is not disclos net of tax? Unusual or infrequent item disclosed separately Discontinued operations Extraordinary Loss Cumulative effect of change in accounting principle Unusual or infrequent item disclosed separately Unusual or infrequent item disclosed separately
Which of the following will be disclosed in the reconciliation of retained earnings? Adjustment for an error of a prior period Net income Net loss Dividends All of the answers are correct. All of the answers are correct.
Co has 1,000,000 share of C/S w? a par value of $10. APIC $10,000,000 & R/Eis $12,000,000. The directors declare a 6% stock dividend when the market value is $5. The reduction of retained earnings as a result of the declaration will be: $300,000.
would be classified as an extraordinary item on the income statement? A loss from a flood in a location that would not be expected to flood
Gross profit will be a prominent figure on a single-step income statement. False
Extraordinary items are always presented gross of applicable income taxes. False
Statements in which all items are expressed only in relative terms (percentages of a base) are termed: common-Size Statements.
In financial statement analysis, ratios are: fractions usually expressed in percent or times.
Which of the following can offer a type of comparison in financial statement analysis? Past ratios and figures Industry averages Statistics of competitors All of the answers are correct. None of the answers are correct. All of the answers are correct.
Which of the following is not a source of industry statistics? Annual Statement Studies Mergent Dividend Record Value Line Standard and Poor's Industry Surveys The Department of Commerce Financial Report Mergent Dividend Record
Annual Stmt Studies reported the foll figures for manufacturers of screw machine products for the ratio of current assets to current debt. The foll figures are for a particular industry's current ratio: 1.6; 1.3; 1.2. Which best describes these 3 numbers? The median was 1.3. 1.6 is the figure for the upper quartile; 1.2 is the figure for the lower quartile.
A manufacturing firm will most likely have the heaviest investment in which type of assets? Cash Inventory Accounts receivable Investments Plant, property, and equipment Plant, property, and equipment
A retailing firm has which type of inventory? Raw materials Work in process Merchandise Raw materials and merchandise Raw materials, work in process, and merchandise Merchandise
Which of the following would not be a user of financial statements? Management Bankers Employee unions Investment analysts All of the answers are users. All of the answers are users.
is a government document that provides industry statistics? The Department of Commerce Financial Report
Suppose you are comparing two firms in the steel industry. One firm is large and the other is small. Which type of numbers would be most meaningful for statement analysis? Relative numbers would be most meaningful for both the large and small firm, especially for interfirm comparisons.
foll is not 1 of the tech used in anal 2 emphasize the compar & relative importance of the data presen & 2 eval the position of firm. Ratio anal Common-size anal Theory consistency Exam of relative size among firms Review of descriptive mat Theory consistency
Liquidity ratios can be used: to measure the firm's ability to meet its current obligations.
True about fin analysis ratios A ratio can be computed from any pair of #s Given the large quant of variables included in fin stmts a long list of meaningful ratios can be derived Comparing ratios computed from I/S & B/S #s can create diff. due to the timing of fin stmts Fin
True about Industry Many co will not clearly fit into any 1 industry A fin service uses its best judgment as to which industry the firm best fits
problem with financial analysis? Financial statement analysis is an art; it requires judgment decisions on the part of the analyst. There are as many ratios for financial analysis as there are pairs of figures.
problem with financial analysis? cont. Some industry ratio formulas vary from source to source. Adequate detailed disclosure of how the industry ratios are computed is often lacking.
True about Industry cont. The analysis of an entity's fin stmts can be more meaningful if the results are compared / industry avg & w/resu lts of competitors When using industry avg its often necessary to use an industry that the firm best fits
True about statement as it relates to analysis? Profitability may not be a major consideration as long as the resources for repayment can be projected. Equity capital provides creditors with a cushion against loss.
True about statement as it relates to analysis? cont. There is a difference between the objectives that are sought by short-term grantors of credit and those sought by long-term grantors of credit. The financial structure of the entity is of interest to creditors.
Management is a user of financial analysis. Which of the following comments does not represent a fair statement as to the management perspective? Management is always interested in maximum profitability.
TRue about what management is a user of financial analysis Management is interested in the view of investors. Management is interested in the view of creditors. Management is interested in the financial structure of the entity. Management is interested in the asset structure of the entity.
TRue about NAICS For the NAICS, economic units with similar production processes are classified in the same industry, and the lines drawn between industries demarcate differences in production processes.
TRue about NAICS cont. NAICS provides enhanced industry comparability among the three NAFTA trading partners. NAICS divides the economy into twenty sectors.
TRue about NAICS cont. 3 The North American Industry Classification System (NAICS) was created jointly by the United States, Canada, and Mexico.
In order to determine the meaning of a ratio, some kind of comparison, such as an industry average or trend analysis, is helpful. True
Different accounting methods can cause some ratios to differ substantially. True
following would best indicate that the firm is carrying excess inventory? A decline in sales A decline in the current ratio A decline in days' sales in inventory A stable current ratio with declining quick ratios A rise in total asset turno A stable current ratio with declining quick ratios
Abbott Co presents the follow data for 2012. Rec end yr,less allow for losses & disc. $115,960 $ 2,370,100 Receivables, begin yrless allow for losses & dis $102,330 2,443,140 Net Sales 24,417,090 A/R turnover in times/ yr is 9.7.
Smith Company presents the following data for 2012. Inventories, beginning of year $ 310,150 Inventories, end of year 340,469 Cost of Goods Sold 2,103,696 Net Sales 8,690,150 The number of days' sales in inventory is: 59.1.
Co presents the follow data for 2012 Net Sales, 2012 $3,007,124 Net Sales, 2011 93,247 COGS 2012 2,000,326 COGS 2011 1,000,120 Inven begin 2012 341,169 Invent end of 2012 376,526 merchandise inventory turnover for 2012 is 5.6.
Co had follow in2012 Day sale in rec 38.7 days Accts rec turnover 9.6 times Accts rec turnover day 35.1 days Day sales in inven 68.5 days Merchan inven turnover 5.9 times Inven turnover day 58.7 days est operating cycle for 2012 is 93.8 days.
Typically, which of the following would be considered to be the most indicative of a firm's short-term debt paying ability? Working capital Current ratio Acid test Cash ratio Days' sales in receivables Current ratio
If a firm has pledged its receivables and its inventory, then the best indicator of its short-term liquidity may be indicated by: working capital. current ratio. acid-test. cash ratio. days' sales in receivables. cash ratio.
Which of the following would not be classified as a current asset? Cash Marketable securities Receivables Inventories Investments Investments
Which of the following types of business would normally have the longest operating cycle? A seller of resort property A car dealer A car manufacturer A grocery store A record store A seller of resort property
Which of the following accounts would not be classified as a current asset? Cash restricted for retirement of bonds Cash and equivalents Cash and certificates of deposit Time deposits Cash Cash restricted for retirement of bonds
Prepayments should be reported in the: current assets section of the balance sheet.
Items that bear on the quality of receivables? Shortening the credit terms Lengthening the credit terms Right of return privilege Lengthening the outstanding period
Items to considered in order to explain why the receivables appear to be abnormally high? Sales volume expanded materially late in the year. Receivables have collectibility problems and possibly some should have been written off. The company seasonally dates invoices. Material amount of receivables are on the installment basis.
Which of the following is not an acceptable inventory costing method? Specific identification Last-In, First-Out (LIFO) First-In, First-Out (FIFO) Average cost Next-In, First-Out (NIFO) Next-In, First-Out (NIFO)
reasonable conclusions when comparing LIFO-FIFO under an inflationary condition? LIFO results in a lower profit figure than does FIFO. LIFO would probably be used for inventory that has a high turnover rate because there would be an immaterial difference in the results between LIFO ad FIFO.
reasonable conclusions when comparing LIFO-FIFO under an inflationary condition? CONT. FIFO by the difference in the resulting tax between the two methods. The cash flow under LIFO is greater than the cash flow under FIFO reports a higher inventory ending balance.
Which of the following current assets will not generate cash in the future? Prepayments Accounts receivable Inventory Marketable securities Notes receivable Prepayments
Which of the following ratios does not represent some form of comparison between accounts in current assets and accounts in current liabilities? Working capital Current ratio Acid-test ratio Cash ratio Merchandise inventory turnover Merchandise inventory turnover
Which of the following ratios would generally be used to evaluate a firm's overall liquidity position? Working capital Current ratio Acid-test ratio Cash ratio Inventory turnover in days Current ratio
To qualify as a marketable security, the investment must be readily marketable and it must be the intent of management to convert the investment to cash within the current operating cycle or a year, whichever is longer. True
In terms of liquidity, it is to management's advantage to show investments under investments instead of marketable securities. False
Quality factors to considers of A/R *Concentration of customers(low concentration means we rely on customer more) *Installment Rec considered lower quality than A/R b/c of the longer time it takes to collect cash
Days sales in receivables Gross Receivables/(Net sales/365) *relates amount of A/R to the average daily sales on account
Days' Sales in Inventory Ending Inventory/(COGS/365) *Indicates length of time needed to sell all inventory on hand
Permanent Accounts *Carry forward to next fiscal period *Represent by Acct equation *Assets, Liabilities, & Equity
Temporary Accounts *Are closed out to R/E @ Yr end *Revs, Ex, G/L, Divs
NAICS North American Industry Classification System *Industry defined as similar production process
Stock Dividend *issuing a % of outstanding stock as new shares to existing shareholders *total equity is unaffected by stock divs
Common-Size Analysis *use of %/absolute amounts *vertical & horizontal analysis
Vertical analysis All amounts of a yr expressed as a percentage of a base amount of the same yr
Horizontal analysis Amounts of comparative yrs are expressed as a % of the base yr amount
Types of Auditors Opinions Unqualified opinion Qualified opinion Adverse opinion Disclaimer of opinion
Unqualified opinion *The Fin stmt presents fairly: fin position, results of operations, & cash flows *Fin smts in line w/ GAAP *For user-highest degree of readability
Qualified opinion Except for the effects to which the qualification relates, the fin smts present fairly: financial position, Results of operations, Cash flows *In line w/ GAAP *For user- determine the significance of exception
Adverse opinion *financial statements do not present fairly: financial position, Results of operations, Cash flows *Fin STMTS not in line W/ GAAP *For the user—reliability of fin stmts need to be seriously questioned
Disclaimer of opinion *Auditor doesn't express opinion b/c: Has not preformed an audit sufficient in scope to form an opinion or Is not independent *For the user—auditor’s statement conveys no indication of fin stmt reliability
Unqualified Auditor Opinion layout *3 paragraphs *1- Fin stmts have been audited, Fin stmts responsibility of management, Auditors has responsibility to express or disclaim opinion *2-audit conducts in accordance w/ PCAOB *3- gives opinion on stmt that is in line w/ GAAP
Problems with Balance Sheet Presentation *Many assets recorded @ cost rather than FV *Varying valuation methods *Not all items of value are listed as assets *Certain contingent liabilities may be excluded
NAICS Facts *created by the U.S., Canada, and Mexico *Industry is defined by similar production processes
The Department of Commerce Financial Report *Publishers: Economic Surveys Division, Bureau of the Census *Coverage: Manufacturing, mining, and trade corporations *Data: B/S & I/S data ratios
Annual Statement Studies *Publishers: Risk Management Association *Coverage: Manufacturing, wholesaling, retailing, service, agriculture, and construction Data: Common-size financial statements and 16 selected ratios *Classification: NAICS or SIC
Standard & Poor’s Industry Surveys *Publisher: Standard & Poor’s *Coverage: North American and global industries *Data: Industry write-ups and statistics
Almanac of Business and Industrial Financial Ratios *Publisher: CCH, Inc. *Coverage: 200 industries *Data: Corporate tax return
Industry Norms and Key Business Ratios *Publisher: Dun & Bradstreet *Coverage: 800 business lines *Data: Condensed financial statements; ratios *Classification: SIC
Value Line Investment Survey *Publisher: The Standard Edition and the Small & Mid-Cap Edition *Coverage: 1 to 97 industries; 1 to 84 industries *Data: Longitudinal financial information
Summary Annual Report *Highly condensed financial information *Must be accompanied by a proxy containing full financial information *Not adequate for reasonable analysis
A/R Turnover Net Sales/ Average Gross Receivables *Indicates liquidity of Rec.
Avg. Rec. Turnover in Days' Average Gross Receivables/ (Net Sales/365) *Should reflect firm’s credit and collection policies
Relative size of firm *Absolute numbers amplifies comparison difficulty *Common-size analysis help to eliminate some of the difficulty *Percent of market helps to define relative size
ESOP Employee stock ownership plans *A qualified stock-bonus plan, or a combination of stock-bonus and money-purchase pension plan *Tax benefits for the employer and employee *Unearned compensation decreases stockholders’ equity
ESOP CONT. *must be a perm trusted plan 4 benefit of employee *Commercial lending, insurance,& Mutual funds get to exclude 50% income
Advantages of ESOP *A means to buy the stock from a major shareholder or possibly an unwanted shareholder *Help in financing a leveraged layout *Reduction of potential of an unfriendly takeover *Help N creating a market for Co stock
The SEC’s Integrated Disclosure System *Form 10-K: Fin stmts, bus. info, market info, MDA, Disc. foreign pretax income *Form 10-Q: quarterly unaudited *Form 8-K: material changes/events
Proxy *Notice and authorization of shareholder voting rights on corporate actions *Content and form governed by the SEC
Treadway Commision *Voluntary private sector organization*Sponsors COSO *Need for internal control *Independent auditor’s opinion on management’s assessment of internal control is required
Loss on disposal of equipment shows up on 1.) B/S 2.) I/S 3.) Reconciliation of R/E I/S
Unrealized exchange gains or losses show up on 1.) B/S 2.) I/S 3.) Reconciliation of R/E B/S
Equity in net income of affiliates 1.) B/S 2.) I/S 3.) Reconciliation of R/E I/S
Cumulative effect of change in accounting principle 1.) B/S 2.) I/S 3.) Reconciliation of R/E Reconciliation of R/E
For the issuing firm, redeemable stock should be classified where for the analysis purpose? -Marketable security -Long-term investment -Intangible -Liabilities -Shareholders' equity Liabilities
Which of the following is a current liability? -Unearned rent income -prepaid interest -land -common stock -none of the above Unearned rent income
True about IFRS -Do not require a standard format for the B/S -usually non concurrent assets are presented first, followed by current assets
True about IFRS CONT. -Liabilities, Equity, capital & listed reserves R usually listed 1st, then non current liabilities, & then current liabilities last. -The reserves section of capital and reserves would not be part of U.S. GAAP
True about IFRS CONT. 3 -When using Local laws or securities regulations may specify disclosures in addition to those required by IFRS -IAS intoduced a # of terminology changes, The new titles for the fin stmts are not mandatory
True about IFRS CONT. 4 -under IFRS, non-controlling interests are usually presented as the last item in total equity
In terms of debits & credits, which accts have the same normal bal? -Divs, R/E, Liabilities -Capital stock, Liabilites, expenses -Revs, capital stock, expenses -epenses, assets, divs -divs, assets, liabilities -Divs, R/E, Liabilities
Items that the 10-k and shareholders reports must include *company fin stmts(audited 2 yr B/S & 3 yr I/S & cash flows) *Info on the market for holders of C/S & related sec including high & low sales price, frequency & amount of divs & #of shares
Items that the 10-k and shareholders reports must include CONT. MD&A of fin condition & results of operations *Disclosure of the domestic & foreign components of pretax income *5 yr summary of selected fin data
Accounting principles that have substantial authoritative support GAAP
A task force of representatives from the accounting profession created by the FASB to deal with emerging issues of financial reporting Emerging Issues Task Force (EITF
A proposed Statement of Financial Accounting Standards Exposure Draft (ED)
Issued by the Accounting Standards Division of the AlCPA to influence the development of accounting standards Statements of Position (SOP)
Represent views of the Accounting Principles Board but not the official opinions Accounting Principles Board Statements (APBSs)
This Board issues four types of pronouncements: (1) Statements of Financial Accounting Standards, (2) Interpretations, (3) Technical bulletins, and (4) Statements of Financial Accounting Concepts Financial Accounting Standards Board (FASB)
Governs the Financial Accounting Standards Board Financial Accounting Foundation (FAF)
These statements are issued by the Financial Accounting Standards Board and establish GAAP for specific accounting issues Statements of Financial Accounting Standards (SFASs)
Statements issued by the Financial Accounting Standards Board to provide a theoretical foundation on which to base GAAP; they are not part of GAAP Statements of Financial Accounting Concepts (SFACs)
Serves as the official voice of the AlCPA in matters relating to financial accounting and reporting standard Accounting Standards Executive Committee (AcSEC)
Presents all known facts and points of view on a topic; issued by the FASB Discussion Memorandum (DM)
Responsible for advising the FASB Financial Accounting Standards Advisory Council (FASAC)
Represented official positions of the APB Accounting Principles Board Opinions (APBOs)
An accountant who has received a certificate stating that he or she has met the requirements of state law Certified public accountants (CPAs)
Issued by the SEC and give the SEC's official position on matters relating to financial statements Financial Reporting Releases (FRRs)
Adopts auditing standards Public Company Accounting Oversight Board (PCAOB)
According to SFAC in order to recognize an item on Fin STMTS must meet 4 criteria 1.) Definition(Item fits 1 of 10 elements) 2.) Measurability 3.) Relevance 4.) Reliability
10 Fin Acct elements 1.) Assets 2.) Liabilities 3.) Equity 4.) Contributions 5.) Distributions 6.) Gains 7.) Losses 8.) Comprehensive Income 9.) Revs 10.) Expenses
A full set of FIn STMTS should include these 5 items: 1.) Fin Position @ end of period 2.) Earnings (N/I) 3.) Comprehensive Income 4.) Cash Flows during period 5.) Investments by & distributions to owners during the period
The SEC requires Co to file annual report on their internal control systems that consist of: - stmt of managements respnsibilities to estab. & maintain sys. -identify internal controls -stmt regarding internal controls effective @ yr end -disclosure of any material weakness in sys -stmt auditors issued an audit report on managements assess.
% diff measurement attributes currently in practice -Historical cost -Current cost -Present Value -Current market value -NRV
Methods of recognizing revenues - Point of Sale -Receipt of cash -End of production - During Productions - Cost recovery
R/E Prior earnings - prior dividends
Accounting Cycle Recording Transactions Recording adjusting entries Preparing Financial statements
Some of the reasons for private companies to follow the law are -owners hope to sell the Co or take it public -Director who sit on public Co boards see the law's benefits -Execus believe strong internal control will improve efficie -customer require strong internal controls -lenders are more likely to app. loans
form 8-k due 15 days after the special event
The 4 tables disclosing executive compensation: -CEO and 4 most highly paid executives for the last 3 yrs -2 tables detailing options & stock appreciation rights -A long-term incentive plan award table
10 essential values can be considered central to relationships between people Caring, Honesty, Accountability, Promise Keeping, Pursuit of excellence, Loyalty, Fairness, Integrity, Respect for others, Responsible citizenship
Reasons for business combinations many possible reasons. Some are: -achieving economies of scale, savings of time, entering a new market, *purchase method must be used
Who must declare dividends before they are paid The board of directors
Loss from discontinued operations pose a prob for fin stmt anaysis -an inadequate disclosure of data related to the discontinued operations in order to remove B/S accts ass. w/ dis ops -the lack of past profit & loss data ass. w/ dis ops *best analy would remove the I/S & B/S items that relate to dis. items
Comprehensive Income required disclosures -Comprehensive Income -each category of other compre income -reclass. adjustments for categories OCI -tax effects for each category of OCI -bal for each category of AOCI
How comprehensive income must be disclosed under GAAP -a single stmt reporting N/I & comprehensive income -report comprehensive income in a separate stmt immediately following the stmt of income *not required under GAAP
borrowing capacity(leverage) ratios measures the degree of protection of suppliers of long term funds
Profitability ratios measure the earning ability of a firm
Cash flow ratios can indicate liquidity, borrowing capacity, or profitability
Ratios are interpretable in comparison with (1) prior ratios, (2) ratios of competitors, (3) industry ratios, and (4) predetermined standards. The trend of a ratio and the variability of a ratio are important considerations.
The use of percentages is usually preferable to the use of absolute amounts
When performing year-to-year change analysis, follow these rules -When an item has value in the base yr & none in the next period the decrease is 100%. - a meaningful % change can't b computed when 1 #is positive & the other # is negative. -No %change is computable when there is no figure for the base year.
SIC Standard Industrial Classification
NAICS divides the economy into how many sectors? Industries within these sectors are grouped according to the production criterion. Four sectors are largely goods-producing, and 16 are entirely services-producing industries.
Annual Statement Studies is one of the most extensively used sources of industry data because of its: Because of the combination of common-size statements, selected ratios, and comparative historical data
Standard & Poor’s Industry Surveys contains information of particular interest to investors
Solvency ratios used in the Industry Norms and Key Business Ratios Solvency Quick Ratio (Times) Current Ratio (Times) Current Liabilities to Net Worth (%) Current Liabilities to Inventory (%) Total Liabilities to Net Worth (%) Fixed Assets to Net Worth (%)
Efficiency ratios used in the Industry Norms and Key Business Ratios Efficiency Collection Period (days) Sales to Inventory (times) Assets to Sales (%) Sales to Net Working Capital (times) Accounts Payable to Sales (%)
Profitability ratios used in the Industry Norms and Key Business Ratios Profitability Return on Sales (%) Return on Assets (%) Return on Equity (%)
Analysis of ratios that have negative numerators or denominators is meaningless, and the negative sign of the ratio should simply be noted
Comparisons of firms of different sizes are difficult These differences can be seen by looking at relative sales, assets, or profit sizes
Standard & Poor’s Reports covers companies on the New York Stock Exchange, American Stock Exchange, NASDAQ stock market, and regional exchanges
managerial intent To qualify as a marketable security, the investment must be readily marketable, and it must be the intent of management to convert the investment to cash within the current operating cycle or one year, whichever is longer.
It is to management’s advantage to show investments under marketable securities, instead of long-term investments, because this classification improves the liquidity appearance of the firm.
Examples of marketable securities include treasury bills, short-term notes of corporations, government bonds, corporate bonds, preferred stock, and common stock. Investments in preferred stock and common stock
The stipulated rate of interest (A/R not paid) is presumed to be fair, except when -No int is stated -he stated rate of in is clearly unreasonable -The face value of the note is materially different from the cash sales price of the property, goods, or services, or the market value of the note at the date of the transaction.3
The analyst should make special note of this when making comparisons with competitors. For example, a retail company that has substantial installment receivables is not comparable to a retail company that does not have installment receivables
how days’ sales in receivables will tend to be or overstated understated when a company uses a natural business year? understated
The liquidity of a company that uses a natural business year tends to be overstated or understated? overstated
If a company closed during peak activity, the days’ sales in receivables would tend to be overstated/understated and the liquidity overstated/understated? -overstated -understated
the following reasons to explain why the days’ sales in receivables appears to be abnormally high: -Sales volume expands materially late in the yr -Rec Runcollectible &should have been written off -The co seasonally dates invoices. (Ex: would be a toy manufac ships in Aug w/ the rec due @ the end of Dec. --large portion of rec R on the install. basis
Assuming that the distortion is not from a seasonal situation or the company’s use of a natural business year, the following should be considered as possible reasons why the days’ sales in receivables appears to be abnormally low: -Sales volume decreases materially late in the yr -A material amount of sales R on a cash basis -The company has a factoring arrangement in which a material amount of the rec is sold. (W/ a factoring arrangement, the rec Rsold to an outside party.)
The company with the natural business year tends to overstate/understate its accounts receivable turnover, thus overstating/understating its liquidity? overstate & overstate
Accounts Receivable Turnover in Days Average Gross Receivables/ Net Sales-365
Accounts Receivable Turn Net Sales / Average Gross Receivables
Days’ Sales in Receivables Gross Receivables /Net Sales-365
LIFO is not as popular during times of relatively low inflation
During times of relatively high inflation LIFO becomes more popular because LIFO matches the latest costs against revenue
LIFO results in tax benefits because of the matching of recent higher costs against revenue.
Caution is particularly necessary when one of the firms is using the LIFO method because LIFO may prove meaningless with regard to the firm’s short-term debt-paying ability.
This summary assumes that the entity faces a period of inflation. 1. LIFO generally results in a lower profit than does FIFO, as a result of a higher cost of goods sold. This difference can be substantial.
This summary assumes that the entity faces a period of inflation. CONT 2 Generally, reported profit under LIFO is closer to reality than profit reported under FIFO because the cost of goods sold is closer to replacement cost under LIFO. This is the case under both inflationary and deflationary conditions.
This summary assumes that the entity faces a period of inflation. CONT 3 3. FIFO reports a higher inventory ending balance (closer to replacement cost). However, this figure falls short of true replacement cost.
This summary assumes that the entity faces a period of inflation. CONT 4 The cash flow under LIFO is greater than the cash flow under FIFO because of the difference in tax liability between the two methods; this is an important reason why a company selects LIFO.
This summary assumes that the entity faces a period of inflation. CONT 5 Some companies use a periodic inventory system, which updates the inventory in the general ledger once a year. Purchases made late in the year become part of the cost of goods sold under LIFO. If prices have increased during the period, the cost of goods
This summary assumes that the entity faces a period of inflation. CONT 7 7. LIFO would probably not be used for inventory that has a high turnover rate because there would be an immaterial difference in the results between LIFO and FIFO.
This summary assumes that the entity faces a period of inflation. CONT 8 LIFO results in a lower profit figure than does FIFO, the result of a higher cost of goods sold.
good lifo fifo note A firm using LIFO must disclose a LIFO reserve account, most often in a note to the fin stmt Usually, the amount disclosed must be +to invent 2 approx. the invent @ FIFO An invent @ FIFO is usually a reasonable approx. of the current replace cost of inven
historical cost approaches FIFO, LIFO, average, and specific identification
LCM rule, inventories can be written down below cost but never up above cost
The LCM rule is consistent with both the matching and the conservatism assumptions.
market is defined in the United States in terms of current replacement cost
Inventory Turnover in Days Average Inventory /Cost of Goods Sold-365
Operating Cycle Accounts Receivable Turnover in Days + Inventory Turnover in Days
Acid-Test Ratio Current Assets-Inventory /Current Liabilities or more conservative calc Cash Equivalents+ Marketable Securities+ Net Receivables /Current Liabilities
adequate acid test ratio number Some industries find that a ratio less than 1.00 is adequate,
adequate current ratio number 2
Cash Ratio Cash Equivalents + Marketable Securities /Current Liabilities
Created by: tiffany17ann
 

 



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