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accounting
for bus5000
| Term | Definition |
|---|---|
| horizontal analysis | the amount of each line item on the most recent statement is compared with the related item on earlier statements and expressed as a percentage change |
| When horizontal analysis is used to compare data from two or more dates or periods | amounts from the earliest statement are used as the base for computing percentage increases and decreases |
| vertical analysis | the balance sheet is analyzed by stating each asset item as a percent of total assets. Each liability and stockholders’ equity item is stated as a percent of total liabilities and stockholders’ equity |
| Vertical analysis is also useful | in comparing one company with another or with industry averages. Such comparisons are easier to make with the use of common-size statements where all items are expressed as percentages of statement totals |
| Creditors, for example, may be most concerned about an entity’s ability to repay debts | solvency |
| Shareholders may focus on the ability to generate income but will likely be interested in all dimensions of financial performance, including solvency. | profitability |
| financial statement amounts can be scaled so that more meaningful comparisons can be made across entities of different sizes. (blank) also exploits meaningful economic relationships between financial statement items | ratio analysis |
| Analyses used in assessing solvency include the following | Current position or liquidity analysis, Accounts receivable analysis, Inventory analysis, Ratio of fixed assets to long-term liabilities, Ratio of liabilities to stockholders’ equity, Number of times interest charges are earned |
| An analysis of a firm’s current position normally includes | determining the working capital, the current ratio, and the quick ratio |
| The excess of the current assets of a business over its current liabilities, generally expressed as a dollar amount | working capital |
| when working capital is difficult to assess | when comparing companies that are different sizes |
| another way to express the relationship between current assets and current liabilities and assess liquidity by dividing total current assets by total current liabilities | current ratio, also called the working capital ratio or bankers’ ratio |
| why current ratio can be a more useful indicator of liquidity when making comparisons across companies or with industry averages | working capital is an unscaled metric and does not control for size |
| A ratio that measures the “instant” debt-paying ability of a company is called | quick ratio or acid-test ratio |
| cash and other current assets that can be quickly converted to cash. these normally include cash, marketable securities, and receivables | Quick assets |
| what quick ratio is | ratio of the total quick assets to total current liabilities |
| decrease accounts receivable | collections from customers |
| increase accounts receivable | Sales on account |
| Firms that grant long-term credit usually have (blank) accounts receivable balances than those granting short-term credit | larger |
| affect the balance of accounts receivable | Increases or decreases in the volume of sales and changes in credit policies |
| a ratio that expresses the relationship between sales and accounts receivable. It is computed by dividing net sales by the average net accounts receivable | Accounts receivable turnover |
| number of days’ sales in receivables | This ratio is computed by dividing the average accounts receivable by the average daily sales, which is determined by dividing net sales by 365 days |
| problems with excess inventory | ties up funds, increases insurance expense and storage costs, increases risk of loss due to obsolescence or price declines |
| the inventory turnover | The relationship between the cost of the goods (merchandise or inventory) sold and the inventory remaining. It is computed by dividing the cost of goods sold by the average inventory |
| number of days’ sales in inventory | This measure is computed by dividing the average inventory by the average daily cost of goods sold (cost of goods sold divided by 365), a rough measure of the length of time it takes to acquire, sell, and replace the inventory. |
| a solvency measure that indicates the margin of safety for noteholders and bondholders. It also indicates the ability of a business to borrow additional funds on a long-term basis | The ratio of fixed assets to long-term liabilities |
| Claims against the total assets of a business are divided into two groups: | claims of creditors and claims of owners. |
| When the claims of creditors are large in relation to the equity of the stockholders, there are usually(blank) interest payments | significant |
| The relationship between the total claims of the creditors and owners is a solvency measure that indicates the margin of safety for creditors | the ratio of liabilities to stockholders’ equity |
| One way to measure the relative risk of the debt-holders is the (blank). The higher the ratio, the lower the risk that interest payments will not be made if earnings decrease | times interest earned ratio, sometimes called the fixed charge coverage ratio |
| why the amount available to meet interest charges is not affected by income taxes | Because interest is deductible in determining taxable income |
| focuses primarily on the relationship between operating results as reported in the income statement and resources available to the business as reported in the balance sheet | Profitability analysis |
| focuses on how well a company is doing from a financial market perspective. | Market analysis |
| Major analyses used in assessing profitability include the following: | Return on Sales Return on Assets Return on Stockholders’ Equity Return on Common Stockholders’ Equity Earnings per share on Common Stock |
| Analyses regarding the market include the following: | Price-earnings Ratio Dividends per Share Dividend Yield |
| The ratio of net income to net sales is a profitability measure that is is often called | net profit margin. |
| measures the profit generated on investments in assets, without considering how the assets are financed, computed by adding interest expense to net income and dividing this sum by the average total assets | Return on assets |
| is computed by dividing net income by average total stockholders’ equity, this metric emphasizes the rate at which income is earned relative to the amount invested by the stockholders | return on stockholders’ equity |
| For most businesses, return on equity is usually (blank) than return on assets | higher |
| the difference in the rate of return on stockholders’ equity and the rate of return on assets is called | leverage |
| focuses only on the profits earned on the amount invested by common stockholders, residual claim on earnings when preferred and common stock are outstanding | Return on common equity |
| computed by subtracting preferred dividend requirements from net income and dividing this amount by average common stockholders’ equity | return on common equity |
| If a company has only one class of stock outstanding, earnings per share is computed by dividing net income by the number of shares of stock outstanding. if preferred and common stock are outstanding net income is first reduced by preferred dividends | earnings per share |
| computed by dividing the market price per share of common stock at a specific date by the annual earnings per share | price earnings ratio |
| Dividends per share | computed by dividing the dividends distributed to common stockholders during the period by the number of common shares outstanding |
| Dividends per share can be reported along with (blank) to indicate the relationship between dividends and earnings | earnings per share |
| on common stock - is a profitability measure that shows the rate of return to common stockholders in terms of cash dividends, computed by dividing the annual dividends paid per share of common stock by the market price per share on a specific date | The dividend yield |
| usually affect the choice of metrics used for financial analysis | The type of industry, the capital structure, and the diversity of the business’s operations |
| All publicly held corporations are required to have a (blank) of their financial statements | independent audit by certified public accountants |
| is a required disclosure within the annual report filed with the Securities and Exchange Commission | The Management Discussion and Analysis (MD&A) |
| Capital investment analysis (or capital budgeting) | the process by which management plans, evaluates, and controls investments in fixed assets |
| Capital investment evaluation methods can be grouped into the following categories: | Methods that do not use present values Methods that use present values |
| Two methods that do not use present values are (blank). These methods are often used to initially screen proposals and are useful for proposals with relatively short useful lives because the timing of cash flows is less important. | the average rate of return method and the cash payback method |
| The two methods that use present values are (blank). These methods consider the time value of money. The time value of money concept recognizes that an amount of cash invested today will earn income and, therefore, has value over time. | the net present value method and the internal rate of return method |
| focuses on accounting income rather than cash flows, numerator is the average of the annual income expected to be earned from the investment over the investment life, The denominator is the average book value of the investment over the investment life | The average rate of return method |
| the midpoint of the depreciable cost of the asset, determined by adding the original cost of the asset to the estimated residual value and dividing by two. | The average investment |
| a measure of the average income as a percent of the average investment in fixed assets | The average rate of return/accounting rate of return |
| If the average rate of return (blanks) the minimum rate, the analysis suggests the machine should be purchased or further analyzed by applying additional methods. | equals or exceeds |
| The expected period of time that will pass between the date of an investment and the complete recovery in cash (or equivalent) of the amount invested is the (blank) | cash payback period |
| net cash flow | The excess of the cash flowing in from revenue over the cash flowing out for expenses |
| The time required for the net cash flow to equal the initial outlay for the fixed asset | the payback period. |
| If annual cash flows are not equal, the cash payback period is determined by | adding the annual net cash flows until the cumulative sum equals the amount of the proposed investment |
| A disadvantage of the cash payback method | it ignores cash flows occurring after the payback period and the time value of money. |
| Present value of an amount: | If you were given the choice, would you prefer to receive $1 now or $1 three years from now? |
| An annuity | a series of equal cash flows at fixed time intervals |
| the present value of an annuity | the amount of cash that could be invested today to yield a series of equal net cash flows at fixed time intervals in the future |
| The net present value method/discounted cash flow method | analyzes capital investment proposals by comparing the initial cash investment with the present value of the expected net cash flows generated by the investment |
| The present value index | calculated by dividing the total present value of the net cash flow by the amount to be invested. |
| An advantage (blank) is that it considers the time value of money. A disadvantage is that the computations are more complex than those for the methods that ignore present value | of the net present value method |
| The internal rate of return method/time-adjusted rate of return method | uses present value concepts to compute the expected rate of return for capital investment proposals |
| factors that affect the outcome of a capital investment decision | Income tax Proposals with unequal lives Lease versus capital investment Uncertainty Changes in price levels Qualitative considerations |
| Capital rationing | the process by which management makes choices and allocates available funds among competing capital investment proposals |
| A financial accounting system is designed | to collect and record data from economic transactions and produce financial statements |
| All basic financial statements are interconnected. Accountants refer to this connection between financial statements as | the articulation of financial statements. |
| (1) standards for determining what, when, and the amount that should be recorded for economic events, (2) a framework for preparing financial statements, and (3) controls to determine whether errors may have arisen in the recording process | The basic elements of a financial accounting system include |
| the standards for determining what, when, and the amount that should be recorded for an entity's economic events are derived from concepts that form the foundation for | Generally Accepted Accounting Principles (GAAP) |
| version of GAAP for companies domiciled in other countries | International Financial Reporting Standards (IFRS) |
| business transactions are recorded when the economic effect occurs regardless of the timing of the related cash flows, think credit cards | accrual accounting |
| reports the resources, obligations, and claims of owners on a particular date, is organized to reflect the accounting equation, i.e., assets equal the sum of liabilities and stockholders’ equity | The balance sheet |
| explains the changes in cash occurring over the financial statement period. It reports the cash balance at the beginning of the period, sources and uses of cash during the period, and the cash balance at the end of the period. | The statement of cash flows |
| explains the changes in retained earnings over the financial statement period | The statement of retained earnings |
| The accounting equation is expressed as follows: | Assets = Liabilities + Stockholders’ Equity |
| is a liability or a claim on assets that a company must satisfy (pay) in the future | The note payable |
| Dividends are not a (blank) since they do not represent assets consumed or services used in the process of earning revenues | expense |
| capital stock is increased by | stockholders investments and revenues |
| retained earnings are increased by | revenues |
| retained earnings are decreased by | expenses and dividends |
| order that financial statements are prepared in | income statement, retained earnings statement, balance sheet, statement of cash flows |
| To illustrate an accounting system, we use an _____________ approach. This approach facilitates analyzing, recording, and summarizing transactions by expanding the accounting equation | integrated financial statement |
| requires companies to maintain strong and effective internal controls over recording transactions and financial statement reporting, requires independent accountants to report on effectiveness of those controls | Sarbanes-Oxley Public Company Accounting Reform and Investor Protection Act |
| This framework has become the standard by which companies design, analyze, and evaluate internal control. | Committee of Sponsoring Organizations (COSO) framework |
| what controls the COSO framework provides reasonable assurance of | (1) financial and nonfinancial reporting is reliable, timely, and transparent; (2) assets are safeguarded and operations are effective and efficient; and (3) employees comply with laws and regulations. |
| five elements of internal control to meet the three internal control objectives | the control environment risk assessment control procedures monitoring information and communication |
| The COSO Framework identifies the following four principles related to an entity’s risk assessment process | specifying objectives with clarity identifying and analyzing risks related to objectives how to manage them considering the potential for fraud identifying and assessing changes that could affect the system of internal control. |
| is a set of procedures for authorizing and recording liabilities and cash payments. A voucher is any document that serves as proof of authority to pay cash or issue an electronic funds transfer | A voucher system |
| analysis of the items and amounts that cause the cash balance reported in the bank statement to differ from the balance of the cash account in the company’s ledger in order to determine the proper (adjusted) cash balance | bank reconciliation |
| A bank reconciliation is usually divided into two sections | bank section and company section |
| for a business to write checks to pay small amounts | petty cash fund |
| example of a special purpose cash fund | payroll bank account |
| (1) establishing specific goals for the overall entity and its units, (2) executing plans to achieve the goals, (3) periodically comparing actual results with the goals, and (4) considering appropriate actions in response | budgeting involves |
| (1) a budget goal is unachievable (too tight), (2) a budget goal is very easy to achieve (too loose), or (3) budget goals of the business conflict with the objectives of employees (goal conflict) | Employee behaviors may not maximize odds of achieving the organization’s goal if |
| setting goals that are far below what is possible | budgetary slack |
| Two examples of budget periods that do not have a fixed length include | life-cycle budgeting and continuous budgeting |
| a variation of fiscal-year budgeting that maintains a rolling 12-month period | Continuous budgeting |
| the full length of a project defines the budget period. | In life-cycle budgeting |
| a base budget amount is established for specific items, and budgeting more than this amount requires justification | minimum level approaches |
| activities that incur costs are identified, costs drivers are established for the various activities, and these are used to compile budgeted amounts based on expected activity levels. | activity-based approaches |
| zero-based budgeting | requires managers to estimate sales, production, and other operating data as though operations are being started for the first time |
| zero-based budgeting is a variant of what type of budgeting approach? | minimum level approach |
| static budget | Once the budget is determined, it is not changed, even if a unit’s level of activity changes |
| show the expected results of a responsibility center for several activity levels, is thus a series of static budgets for different levels of activity | flexible budgets |
| factors expected to affect future sales | Backlog of unfilled sales orders Planned advertising and promotion Expected industry and general economic conditions Productive capacity Projected pricing policy Findings of market research studies |
| summarizes the estimates of all phases of operations. This allows management to assess the effects of the individual budgets on profits for the year | the budgeted income statement |
| presents expected cash receipts (inflows) and cash payments (outflows) for a period of time. | cash budget |
| depreciation must be (blank) from all budgeted amounts, since depreciation is a noncash expense that should not be included in the cash budget | excluded |
| estimates an entity’s financial condition at the end of the budget period | The budgeted balance sheet |
| Accounting systems that use standards foreach of the three manufacturing costs: direct materials, direct labor, and factory overhead are called | standard cost systems |
| approach where Ideal standards can be achieved only under perfect operating conditions, such as no idle time, no machine breakdowns, and no materials spoilage, used to motivate improvement | kaizen costing |
| compares the actual performance against the budget | budget performance report |
| A (blank) cost variance occurs when the actual cost is less than the standard cost (at actual volumes) | favorable |
| examples of nonfinancial performance measures | Inventory turnover, On-time delivery, Elapsed time between a customer order and product delivery, Customer preference rankings compared to competitors |
Created by:
bitchalaureateofscience
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