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331 Exam 2
2nd Exam
| Term | Definition |
|---|---|
| Long-term solvency | whether a company will be able to ay all its liabilities including its long-term liabilities |
| Short term investments | Investments in stock and debt securities of other corporations that the company has the INTENT and ABILITY to sell within the next 12 months. |
| Investments | Assets that are not used directly in the operations of the business. |
| Goodwill (intangible asset) | Reputation, good location. Can only get by purchasing a preexisting company |
| Summary of Significant Accounting Policies | Conveys valuable information about a company's choices from among various alternative accounting methods. |
| Related-party transactions | Transactions between the company and owners, management, families of owners or management, affiliated parties, etc. |
| Errors and fraud | Misstatements that are unintentional (errors) or intentional (fraud) |
| Illegal Acts | Bribes, kickbacks, illegal contributions to political candidates, etc. |
| Management's Discussion and Analysis (MD and A) | Provides management's INFORMED but BIASED perspectives on significant events, trends, and uncertainties on the buisness. |
| Where is management's discussion and analysis located? | Preceding the financial statements and audit report in the annual report. |
| Sustainability Disclosures | Detail practices and policies related to the sustainability of business operations. (voluntary but expected) |
| Auditors' Report | Auditors examine financial statements and the internal control procedures and attest to the fairness of the statements. |
| Unqualified (type of auditor report) | Best opinion you can get. Has a clean opinion and no corrections. |
| Unqualified with an explanatory or emphasis paragraph (type of auditor report) | Auditor recommended changes to your statements |
| Qualified (type of auditor report) | Issues with following GAAP |
| Adverse (type of auditor report) | More severe issues with GAAP |
| Disclaimer (type of auditor report) | Auditors were not able to evaluate everything |
| Comparative financial statements | Financial statements are presented for the preceding year and often the previous two years |
| Horizontal analysis | each item is presented as a percentage of a base year amount (year you went into business) |
| Vertical analysis | Each item is presented as a percentage of a total. EX: how many current assets out of total assets. |
| Current ratio | (current assets) / (current liabilities) Want it to be greater than 1, less than 1 is bad |
| Acid test ratio (quick ratio) | Quick assets / current liabilities |
| Quick assets | Excludes inventory, prepaids, and restricted cash from current assets |
| Working Capital | Current assets - current liabilities |
| Debt to Equity Ratio | Total liabilities / shareholders' equity want a lower number |
| Times Interest Earned Ratio | (Net income + Interest Expense + Income Taxes) / Interest Expense Want a large number |
| Information about major customers | If 10% or more of the revenue of an entity is derived from transactions with a single customer the entity must disclose that fact. |
| Earnings quality | Ability of reported earnings to predict a company's future earnings |
| Temporary earnings | Arise from transactions or events that are NOT likely to occur again in the foreseeable future |
| Permanent earnings | Arise from operations that are expected to generate similar profits in the future |
| Restructuring costs | Relates to making things more efficient EX: Costs associated with closing facilities (b/c you want one headcoorders) |
| When a company is restructuring over the course of 3 years, when should the costs related to closing be recognized? | In the year(s) the costs are actually incurred. |
| Accounting changes fall into 3 categories: | Accounting principle, estimate, and reporting entity |
| Changes in accounting principle | Refers to changes from one acceptable accounting method to another |
| Retrospective approach | Is applied to all periods (changes past) |
| Voluntary changes in accounting principles | Accounted for retrospectively by revising prior years' financial statements |
| Change in accounting estimates | Changes due to modification of estimates as new information comes to light. Accounted for Prospectively. |
| Modified retrospective approach | Applies to the adoption period only and the prior period is shown as an adjustment. |
| Prospective approach | Change current and future periods |
| Correction of accounting errors in same year | Erroneous journal entry is reversed and the appropriate entry is recorded |
| Correction of accounting errors in subsequent years | Prior period adjustment recorded (if material) |
| Basic EPS | (Net income - preferred stock dividends) / Weighted-average number of common shares outstanding |
| Diluted EPS | (Net income - preferred stock dividends) / (Weighted-average number of common shares outstanding + adjustment for dilutive effect of potential common shares) |
| Comprehensive Income | The total change in equity for a reporting period other than from transactions with owners |
| Operating activities | Inflows and outflows of cash that result from activities reported in the net income (typical business transactions) |
| Direct Method for operating activities | Cash effect of each operating activity is reported directly in the statement |
| Indirect Method for operating activities | Net cash flow is derived indirectly by starting the reported net income and working backwards to convert that amount to cash basis (required by GAAP) |
| Investing activities | Long term assets and investments (buying and selling of PPE) |
| Financing Activities | Long term liabilties, equity ( transactions with owners and creditors) |
| Asset Turnover Ratio | Net Sales / Average Total Assets |
| Receivables Turnover Ratio | Net Sales / Average A/R (Net) |
| Inventory Turnover Ratio | COGS / Average INventory |
| Average collection period | 365 / Receivables turnover ratio |
| Average days in inventory | 365 / Inventory turnover ratio |
| Profit margin on sales | Net income / net sales |
| Return on equity | Net income / Average Shareholders' Equity |
| Return on assets | Net income/ Average Total assets |
Created by:
sekavecr