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Working Capital | Working capital is defined as current assets minus current liabilities. Therefore, a company with current assets of $43,000 and current liabilities of $38,000 has working capital of $5,000. | This is a cheet sheet Question |
Current Assets | Current assets are a company’s resources that are expected to be converted to cash within one year of the balance sheet’s date. (However, in industries having operating cycles that are longer than one year, the current assets are the resources that are expected to be converted to cash within the operating cycle.) Curre... | This is a cheet sheet Question |
Current Liabilities | Current liabilities are the company’s obligations that will come due for payment within one year of the balance sheet’s date. (In industries with operating cycles that are longer than one year, the current liabilities are the obligations that will come due within the operating cycle.) Current liabilities are not listed... | This is a cheet sheet Question |
Operating Cycle | If a company sells goods (products, component parts, etc.) its operating cycle is the time it takes for a company’s money to purchase the inventory items and for the money from their sale to return to the company’s checking account. To illustrate, assume a company purchases goods for inventory and it takes the company ... | This is a cheet sheet Question |
Liquidity | Liquidity refers to a company’s ability to pay its bills as they come due. In accounting terms, we might say that liquidity is a company’s ability to convert its current assets to cash before the current liabilities must be paid. Current assets are reported on a company’s balance sheet in their order of liquidity. Sinc... | This is a cheet sheet Question |
Working Capital Ratios | In addition to calculating the amount of working capital (current assets minus current liabilities), there are two financial ratios directly associated with working capital and liquidity: • Current ratio (sometimes referred to as the working capital ratio) • Quick ratio (also known as the acid-test ratio) The current... | This is a cheet sheet Question |
Accounts Receivable | Accounts receivable result from selling goods (or providing services) and allowing the customers to pay at a later date (perhaps in 10, 30, or 60 days). At the time of the sale, the seller transfers ownership of the goods to the customer and in turn becomes one of the customer’s unsecured creditors until the money is c... | This is a cheet sheet Question |
Accounts Receivable Ratios | There are two ratios/metrics that are calculated for reviewing a company’s success in collecting its accounts receivable: • Accounts receivable turnover ratio (or receivables turnover ratio) • Average collection period (or days’ sales in accounts receivable) The accounts receivable turnover ratio is calculated by div... | This is a cheet sheet Question |
Inventory | If a company sells goods (products, component parts, etc.), it is common for inventory to be its largest current asset. Having sufficient inventory is necessary to serve and retain customers, but too much inventory can result in excessive expenses (including potential losses if any of the goods become obsolete). Slow-m... | This is a cheet sheet Question |
Inventory Ratios | The following ratios are often computed to see how a company has managed its inventory: • Inventory turnover ratio • Days’ sales in inventory The inventory turnover ratio is best calculated by using the following amounts from the most recent year: the cost of goods sold divided by the average balance in inventory. Th... | This is a cheet sheet Question |
Financial Ratios in General | When financial ratios are calculated using the amounts reported on a company’s financial statements, the ratios reflect the transactions that occurred perhaps a year ago. It is possible that today the demand for some products has changed, new competitors entered the market, economic conditions changed, etc. Financial r... | This is a cheet sheet Question |
Cash Flow Statement | Since liquidity depends on a company having the cash to pay its obligations when they come due, insights can be gained from reading a company’s statement of cash flows (SCF or cash flow statement). While the SCF may be difficult to prepare, you can read and understand it with a little coaching. For personal use by the ... | This is a cheet sheet Question |
Cash flows from operating activities | We will focus on the first section of the SCF, cash flows from operating activities, which shows the adjustments made to convert the working capital accounts (except for short-term loans payable). The adjustments involve the changes in the balances at the end of the year minus the balances from one year earlier. Let’s ... | This is a cheet sheet Question |
Operating Cash Flow Ratio | A financial ratio for assessing a company’s working capital and liquidity that is based on the statement of cash flows is: Operating cash flow ratio = net cash flows from operating activities divided by the average amount of current liabilities throughout the year Since the net cash provided by operating activities is ... | This is a cheet sheet Question |
Reasons Why Liquidity Will Decrease | Below is a list of reasons why a company’s liquidity may decrease. The list is organized according to the three sections of the statement of cash flows. Since these items decrease the company’s liquidity, they can be thought of as being unfavorable or as having a negative effect on the company’s liquidity. They are als... | This is a cheet sheet Question |
Reasons Why Liquidity Will Increase | The following are reasons why a company’s cash and liquidity could increase. The list is also arranged according to the three sections of the statement of cash flows. Since these items are increasing the company’s liquidity, they can be thought of as being favorable or having a positive effect on the company’s liquidit... | This is a cheet sheet Question |
Stockholders’ Equity | A business corporation’s owners are referred to as stockholders or shareholders because they hold stock certificates which provide evidence of their share of ownership in the corporation. Hence, the balance sheet of a business corporation will report the following: Assets = Liabilities + Stockholders’ Equity Stockhol... | This is a cheet sheet Question |
Paid-in Capital or Contributed Capital | Paid-in capital or contributed capital is the first component listed in the stockholders’ equity section of the balance sheet. It includes the amounts that the corporation received from investors when the corporation issued its shares of capital stock. (Capital stock is used to describe both common and preferred stock.... | This is a cheet sheet Question |
Preferred Stock | In addition to common stock, a few corporations also issue preferred stock. These shares have a preferential treatment as far as dividends and liquidation. This means that stockholders of the preferred shares of stock must receive their dividends before the corporation can pay a dividend on its common stock. The divide... | This is a cheet sheet Question |
Par Value or Stated Value | The par value or stated value of shares of stock is a legal amount (based on state laws) that must be recorded and reported separately from the amounts received in excess of the par or stated value. For personal use by the original purchaser only. Copyright © AccountingCoach®.com. The par value of a corporation’s prefe... | This is a cheet sheet Question |
Retained Earnings | Generally, retained earnings are the cumulative amounts of the corporation’s earnings or net income since the corporation began minus the cumulative amounts of dividends that the corporation declared since the corporation began. The amount of retained earnings is reported separately in the stockholders’ equity section ... | This is a cheet sheet Question |
Accumulated Other Comprehensive Income | Accumulated other comprehensive income is a separate line within the stockholders’ equity section of the balance sheet. While retained earnings reports the cumulative amounts of earnings or net income, accumulated other comprehensive income reports the cumulative amount of the other comprehensive income or loss. (Other... | This is a cheet sheet Question |
Treasury Stock | Treasury stock is usually the amount that a corporation has paid to repurchase some of its own shares of stock (and has not reissued or retired the shares). The corporation’s cost is debited to the general ledger account Treasury Stock. This debit balance will appear as a subtraction near the end of the stockholders’ e... | This is a cheet sheet Question |
Cash Dividend | A cash dividend is a distribution of cash by a corporation to its stockholders. The dividend amount will reduce the balance in the account Retained Earnings (as well as reduce the corporation’s cash). In order for a corporation’s board of directors to declare a cash dividend, the Retained Earnings must have a positive,... | This is a cheet sheet Question |
Stock Dividend | A stock dividend is a distribution of additional shares of a corporation’s own shares of stock to its existing stockholders. For instance, if a corporation declares a 5% common stock dividend and the corporation has 100,000 shares of common stock outstanding, the corporation will be issuing and distributing 5,000 addit... | This is a cheet sheet Question |
Stock Split | A stock split reduces the market value per share of common stock by increasing the number of shares outstanding. If the market value of a share of common stock was $60 before a 2-for-1 stock split, the market value per share of common stock should be approximately $30 after the stock split. If the corporation had 300,0... | This is a cheet sheet Question |
Declaration Date | The declaration date is the date that the board of directors declares a dividend to the corporation’s stockholders. The declaration date is used to record a credit to the liability account Dividends Payable and a debit to the account Retained Earnings (or the temporary account Dividends). For personal use by the origin... | This is a cheet sheet Question |
Payroll Accounting | Payroll accounting involves the recording of a company’s: • Gross wages, salaries, commissions, bonuses, overtime premium, sick pay, holiday pay, and vacation pay that are earned by the employees • Payroll taxes which include 1) the taxes that are withheld from the employees’ pay, 2) payroll taxes that are paid solel... | This is a cheet sheet Question |
Wages or Gross Wages | Wages or gross wages usually refers to the pay earned by hourly-paid employees. These employees are paid hourly rates of pay for the number of hours worked. If these employees have a work week that begins on Sunday and ends on Saturday, their pay date is typically the Thursday or Friday following the work week. This al... | This is a cheet sheet Question |
Salaries or Gross Salaries | Salaries or gross salaries refers to the pay earned by employees who are paid a fixed or constant amount for each pay period. For example, an office manager that is compensated with an annual salary of $52,000 will have a monthly salary of $4,333; a semi-monthly salary of $2,167; a biweekly salary of $2,000; or a weekl... | This is a cheet sheet Question |
Semi-monthly | Semi-monthly means two times per month. For instance, a salaried employee might be paid on the 15th day of the month and the last day of the month. An employee with an annual salary of $52,000 would have a gross salary of $2,167 for each of the 24 semi-monthly pay periods in the year. | This is a cheet sheet Question |
Bi-weekly | Bi-weekly means every two weeks (such as every other Friday). In most years, there will be 26 bi- weekly pay periods. An employee with an annual salary of $52,000 would have a gross salary of $2,000 for each of the 26 bi-weekly pay periods in a year. | This is a cheet sheet Question |
Overtime | Generally, overtime refers to an employee’s hours that exceed 40 hours in a work week. The hours in excess of 40 hours per week must be compensated for unless the employee is exempt from overtime pay. Merely classifying a low-paid employee as salaried does not eliminate the need to pay overtime pay. As a result, a sala... | This is a cheet sheet Question |
Overtime Premium | Overtime premium is the additional amount per hour that is paid to employees for the overtime hours. To illustrate, let’s assume that a company pays “time-and-a-half” for hours worked that are greater than 40 hours during the work week. If an employee earns $9 an hour (the straight-time hourly rate), the overtime premi... | This is a cheet sheet Question |
Exempt Employee | An exempt employee refers to an employee who is not entitled to receive overtime pay when working more than 40 hours in a work week. For example, a company’s vice president of sales earning $125,000 per year is an exempt employee because the person earns a high salary and the person can control the number of hours work... | This is a cheet sheet Question |
Payroll Withholdings | Payroll withholdings refers to the amounts deducted from an employee’s gross wages, salaries, etc. Examples of payroll withholdings include the employee’s portion of the Social Security and Medicare taxes, personal income taxes, medical insurance contributions, retirement plan contributions, garnishments, etc. | This is a cheet sheet Question |
Net Pay | Net pay is the employee’s gross pay minus the withholdings. Net pay is also known as an employee’s take-home pay or the amount that an employee clears on their paycheck. For personal use by the original purchaser only. Copyright © AccountingCoach®.com. | This is a cheet sheet Question |
Social Security Taxes | Social Security taxes are paid by both the employee and the employer. Usually the rate for each has been 6.2% of the employee’s gross pay. In other words, if an employee earns $100,000 in a year, the employee will have $6,200 of withholding for Social Security tax, and the employer will also incur an expense of $6,200.... | This is a cheet sheet Question |
Medicare Taxes | Medicare taxes are also paid by both the employee and the employer. The basic rate for each is 1.45% of the employee’s gross pay (with no annual ceiling). If an employee earns $100,000 in a year, the employee will have $1,450 of withholding for the Medicare tax, and the employer will also incur an expense of $1,450. Th... | This is a cheet sheet Question |
FICA | FICA is the acronym for Federal Insurance Contributions Act. FICA refers to the combination of the Social Security tax and the Medicare tax. | This is a cheet sheet Question |
Employer’s Tax Guide | Employer’s Tax Guide (also known as IRS Publication 15 or Circular E) is a guide to U.S. payroll taxes. It is published annually by the Internal Revenue Service and it can be downloaded from irs.gov at no cost. For personal use by the original purchaser only. Copyright © AccountingCoach®.com. | This is a cheet sheet Question |
State Unemployment Tax | State unemployment tax is a tax paid by the employer. However, the amount of the tax is calculated by multiplying the company’s state unemployment tax rate times each of its employee’s annual wages, salaries, etc. up to a ceiling amount which varies from state to state. The unemployment benefit payments to employees ar... | This is a cheet sheet Question |
Federal Unemployment Tax | Federal unemployment tax is a tax paid by the employer. However, the amount of the tax is calculated by multiplying 0.6% (rate depends on credits allowed) times each employee’s annual wages, salaries, etc. up to a ceiling amount of $7,000. | This is a cheet sheet Question |
Worker Compensation Insurance | Depending on the number of employees, companies must provide worker compensation insurance to 1) pay the medical costs for work-related injuries or illnesses, and 2) provide compensation to the employee until the worker is able to return to work. | This is a cheet sheet Question |
Compensated Absences | Compensated absences is a term used by accountants for the paid holidays, paid sick days, paid vacations, etc. provided to employees. For example, a company’s vacation plan may require the company to 1) record and report the vacation expense in the accounting period when the vacation days are earned, and 2) record and ... | This is a cheet sheet Question |
Postretirement Benefits Other Than Pensions | Postretirement benefits other than pensions is a term that is used by accountants to describe the medical, dental, and vision benefits that are provided to retirees. The amounts owed for such commitments must be expensed during the years when the employee earns the benefits. The amount is also recorded as a liability (... | This is a cheet sheet Question |
Accrued Wages | Accrued wages refers to the amounts that a company owes its employees for hours worked that have not yet been recorded in the general ledger accounts. For example, hourly-paid employees often have a work week of Sunday through Saturday and are paid on the following Thursday. On any given day, the company will have a li... | This is a cheet sheet Question |
Inventory | Inventory is usually the most significant current asset of a retailer or manufacturer. Generally, inventory is reported on the balance sheet at its cost (or lower). When the items in inventory are sold, their costs will move from inventory to the cost of goods sold on the income statement. Inventory is important for a ... | This is a cheet sheet Question |
Cost of Goods Sold | For a retailer or manufacturer the cost of goods sold is likely to be its most significant expense on its income statement. When the costs of its items in inventory are continuously increasing (perhaps from inflation or scarcity), a decision must be made as to which of the costs in inventory should become the cost of g... | This is a cheet sheet Question |
Cost Flow Assumptions | When the costs of the items in inventory are changing, a cost flow assumption must be made. If a company elects to first flow the oldest costs to the cost of goods sold, they are choosing the cost flow assumption known as first-in, first-out (FIFO). This means the most recent costs of items remain in inventory. In the ... | This is a cheet sheet Question |
Inventory Systems | For the recording of inventory transactions in the general ledger, there are two main types of inventory systems: • periodic • perpetual When combined with a cost flow assumption, some of the many options for computing the cost of inventory and the cost of goods sold are: • periodic FIFO • periodic LIFO • periodic... | This is a cheet sheet Question |
Periodic Inventory System | Under the periodic inventory system, the general ledger account Inventory will NOT be updated with each transaction. (Neither the cost of goods purchased nor the cost of goods sold are recorded in the inventory account.) Instead, the cost of the inventory items purchased will be recorded in a temporary account entitled... | This is a cheet sheet Question |
Perpetual Inventory System | Under the perpetual inventory system, the general ledger account Inventory will be increased with the cost of each purchase of goods and decreased with the cost of each sale of goods. In other words, the balance in the Inventory account will be perpetually changing. In the perpetual system there will be a general ledge... | This is a cheet sheet Question |
Estimating Ending Inventory | There are occasions when a company needs to estimate the cost of its inventory. Two examples are: • Filing an insurance claim for the inventory that was destroyed by a fire, tornado, etc. • Calculating the estimated cost of its ending inventory for its monthly balance sheets and the related cost of goods for the inco... | This is a cheet sheet Question |
Gross Profit Method of Estimating Ending Inventory | The gross profit method allows you to estimate the amount of ending inventory by using the following information: sales, purchases, and gross profit percentage since the last physical inventory was taken. For example, if the company had sales of $100,000 and its gross profit was 30% the cost of goods sold must have bee... | This is a cheet sheet Question |
Retail Method of Estimating Ending Inventory | The retail method can be used when a company has records showing both the cost and the retail prices of the merchandise. Since there are many variations of the retail method including the FIFO average cost method and the dollar-value retail LIFO method, it is best to study this topic from an intermediate accounting boo... | This is a cheet sheet Question |
Income Statement | The income statement is also known as the statement of income, statement of operations, statement of earnings, profit and loss statement, and P&L. It reports a corporation’s revenues, expenses, gains, losses, and the resulting net income that occurred during the period of time shown in the heading of the income stateme... | This is a cheet sheet Question |
Generally Accepted Accounting Principles | In the U.S., an income statement that is distributed to someone outside of the corporation must comply with generally accepted accounting principles (referred to as GAAP or US GAAP). US GAAP includes basic underlying concepts such as the cost principle and matching principle to some very complex accounting standards de... | This is a cheet sheet Question |
Components or Elements of the Income | Statement 1. Revenues • Operating revenues such as the sale of goods and fees earned from providing services • Nonoperating revenues (or other income) earned from peripheral activities. An example is interest income that is earned by a retailer when it invests its idle cash. 2. Expenses • Operating expenses such a... | This is a cheet sheet Question |
Format of Income Statement | Accounting textbooks often present two types of income statement formats: • Multiple-step. This format has more than one subtraction before displaying the company’s net income. The following is a condensed version of a multiple-step income statement: For personal use by the original purchaser only. Copyright © Account... | This is a cheet sheet Question |
Income Statement | For the Year Ended December 31, 2023 • Single-step. This format has only one subtraction before displaying the company’s net income. In other words, all revenues (operating and nonoperating) minus all expenses (operating and nonoperating) equals net income. The following is a condensed version of the single-step incom... | This is a cheet sheet Question |
Cost of Goods Sold | The cost of goods sold or cost of sales is likely the largest expense on the income statement of a retailer or manufacturer. Since the amount is very significant it is important that the proper costs are matched with the sales revenues. On the internal financial statements of a retailer, the cost of goods sold (COGS) m... | This is a cheet sheet Question |
Gross Profit | Gross profit is the remainder of a company’s net sales minus its cost of goods sold. Gross profit is often expressed as a dollar amount and as a percentage of net sales. The gross profit is also known as gross margin. For personal use by the original purchaser only. Copyright © AccountingCoach®.com. | This is a cheet sheet Question |
Selling, General and Administrative (SG&A) Expenses | Selling, general and administrative (SG&A) expenses are a company’s operating expenses (along with the cost of goods sold). SG&A expenses are not considered to be product costs and therefore are not inventoriable costs. Rather, SG&A expenses are considered to be expenses of the accounting period. | This is a cheet sheet Question |
Inventory Cost Flow Assumptions | When inventory items are purchased at different unit costs during the year, a company must elect a cost flow assumption. In the U.S. the options are 1) first costs in are the first costs out (first-in, first-out or FIFO), 2) last costs in are first costs out (last-in, first-out or LIFO), 3) average costs, 4) specific i... | This is a cheet sheet Question |
Notes to the Income Statement | In addition to the amounts appearing on the face of the income statement, there needs to be a reference such as “See notes to the financial statements.” or “The accompanying notes are an integral part of the financial statements.” The notes to the financial statements are important because a corporation’s net income is... | This is a cheet sheet Question |
Improving Profits | Improving profits or reducing operating losses is likely to require some decisions and some action. Both the decisions and the actions involve the future and may involve: • expanding a product line • eliminating a product line • increasing selling prices • reducing selling prices • reducing advertising expenses • ... | This is a cheet sheet Question |
Past Amounts Are Not Relevant | The enormous number of transactions that a company has experienced can be found in the company’s accounting records. However, those transactions are from the past. As a result, they are not relevant for today’s decisions or future decisions. Management accounting textbooks describe these past historical transactions as... | This is a cheet sheet Question |
Future Amounts That Will Be the Same Are Not Relevant | In making a decision between two alternatives, the costs and/or revenues that will be the same under both alternatives are not relevant and therefore can be omitted from the analysis. For example, if the management’s total compensation will be the same whether or not the company expands into ten additional states, the ... | This is a cheet sheet Question |
Alternatives Are Relevant | In order to make the best decisions, management accountants must work to identify, predict and estimate the relevant future amounts. However, only the future costs and future revenues that will be different will be relevant. | This is a cheet sheet Question |
Accountants Must Be Careful | Accountants might be the most knowledgeable about a company’s past costs and past revenues. However, when it comes to decision making, management will need information on the future costs and future revenues. Accountants must realize that their familiarity with numbers does not necessarily translate into an ability to ... | This is a cheet sheet Question |
Future Value of a Single Amount | The future value of a single amount is also known as the future value of 1. The amount is a single, one-time deposit made at time period 0, which is also the beginning of period 1. It is assumed that the interest earned is added at the end of each time period. | This is a cheet sheet Question |
Compounding of Interest | In the future value of a single amount, it is assumed that the interest added at the end of a time period will earn interest in the next time period. When the amount of interest earns interest, it is known as the compounding of interest. A single deposit that remains invested for many years at a high rate of interest w... | This is a cheet sheet Question |
Rule of 72 | The rule of 72 is a quick way to approximate either: • the number of years needed for an amount to double, or • the interest rate needed in order for an amount to double For personal use by the original purchaser only. Copyright © AccountingCoach®.com. Example 2. To illustrate how to approximate the number of years n... | This is a cheet sheet Question |
Future Value of 1 Tables | In a classroom setting, future value of 1 (FV of 1) table which displays the future value factors is often used for instruction purposes. For instance, if you looked at an FV of 1 table, under the column with the heading of 10% and selected the row where the number of periods is 7, you would see the factor “1.94872”. T... | This is a cheet sheet Question |
Frequency of Compounded Interest | If the compounding of interest is done quarterly (instead of annually) for 7 years, the annual rate of 10% would be restated to be 2.5% per quarterly period; and the 7 annual periods will be restated to be 28 quarterly periods. The more frequent the compounding, the greater will be the future value. | This is a cheet sheet Question |
Calculators | Instead of using a future value table or the rule of 72, it will be more precise and faster to use an online financial calculator. Electronic handheld financial calculators are also available. For personal use by the original purchaser only. Copyright © AccountingCoach®.com. | This is a cheet sheet Question |
Annual Financial Statements | The financial statements that are to be included as a complete set when a U.S. corporation distributes them to people outside* of the corporation are: *Examples of people outside of the corporation that are likely to receive these external, general- purpose financial statements include investors, lenders, government ag... | This is a cheet sheet Question |
Notes to Financial Statements | For the financial statements to be complete, they must be accompanied with notes to the financial statements. The notes are usually referenced at the bottom of each of the financial statements with wording such as “See notes to the financial statements.” or “The accompanying notes are an integral part of the financial ... | This is a cheet sheet Question |
Generally Accepted Accounting Principles | The external financial statements must be in compliance with generally accepted accounting principles, which are commonly referred to as GAAP or US GAAP. GAAP includes basic underlying principles, official accounting standards issued by the Financial Accounting Standards Board (FASB), and industry-specific requirements... | This is a cheet sheet Question |
Accounting Periods | Often U.S. corporations have accounting years that end on December 31 (referred to as calendar years). However, many U.S. corporations have fiscal years which end on other dates, such as June 30, September 30, etc. In addition, some U.S. corporations have 52/53-week years which end on the Saturday nearest to January 31... | This is a cheet sheet Question |
Income Statement | The income statement reports a corporation’s revenues, expenses, gains, losses, and the resulting net income for the period of time specified in its heading. The period of time or time interval could be a year, quarter, week, 26 weeks, etc. If the corporation’s shares of stock are publicly traded, the earnings per shar... | This is a cheet sheet Question |
Statement of Comprehensive Income | The statement of comprehensive income reports the amount of a corporation’s comprehensive income (or loss), which consists of the following: • The corporation’s net income (the details of which are reported on the income statement) • Items that are classified as other comprehensive income for the period of time indic... | This is a cheet sheet Question |
Balance Sheet | The balance sheet reports a corporation’s assets, liabilities, and stockholders’ equity as of a moment in time. (The other financial statements report amounts for a period of time.) The balance sheet reports amounts as of the final moment of the day shown in the heading of the balance sheet, which is typically the fina... | This is a cheet sheet Question |
Statement of Stockholders’ Equity | The statement of stockholders’ equity reports the changes that occurred during the accounting year to the corporation’s paid-in capital, retained earnings, accumulated other comprehensive income, and treasury stock. | This is a cheet sheet Question |
Statement of Cash Flows | The statement of cash flows (SCF or cash flow statement) reports a corporation’s significant cash inflows and cash outflows that caused the corporation’s cash and cash equivalents to change. The cash flow information is important because the income statement reflects the accrual method of accounting (not the cash metho... | This is a cheet sheet Question |
Notes to Financial Statements | The notes to the financial statements are considered to be an integral part of the financial statements and are referenced at the bottom of each financial statement. The first of the notes lists the corporation’s significant accounting policies. Large corporations could have 30 or more pages of notes in order to comply... | This is a cheet sheet Question |
Comparative Financial Statements | In order for the financial statements to be more useful, corporations prepare comparative financial statements. This means that in addition to the amounts for the current year, the statements will also have columns containing the amounts from one or two of the earlier years. These earlier amounts give the readers a fra... | This is a cheet sheet Question |
Audited Financial Statements | Some financial statements must be audited. For example, corporations with common stock that is traded on a stock exchange must have their financial statements audited by a registered CPA firm. Other corporations may have a lender or investor that requires that the financial statements be audited. The CPA firm that perf... | This is a cheet sheet Question |
Financial Ratios Including Limitations | Financial ratios are one component of financial analysis. Financial ratios are often calculated by using amounts from previously issued annual financial statements. In that case the resulting ratios are history and may not be indicative of the present and future situation. It is also wise to consider the financial rati... | This is a cheet sheet Question |
Working Capital | Working capital is actually an amount (rather than a ratio) which is an indicator of a company’s ability to meet its obligations. It is calculated as follows: current assets minus current liabilities. For example, if a business has $280,000 of current assets and $260,000 of current liabilities, its working capital is $... | This is a cheet sheet Question |
Current Ratio | The current ratio is also an indicator of a company’s ability to pay its current obligations. The calculation is: current assets divided by current liabilities. If a company has current assets of $300,000 and current liabilities of $150,000 the company’s current ratio is 2:1 [($300,000/$150,000):1]. | This is a cheet sheet Question |
Acid-Test Ratio or Quick Ratio | The acid-test ratio is also known as the quick ratio. It is a more conservative indicator of a company’s ability to pay its current obligations (than the current ratio) since inventory is excluded from the calculation. In other words, the calculation is: [cash + marketable securities + accounts receivable] divided by c... | This is a cheet sheet Question |
Receivables Turnover Ratio | The receivables turnover ratio is an indicator of how fast a company’s accounts receivable are (or were) collected. The calculation is: credit sales for a year divided by the average balance in accounts receivable during the same year. If credit sales for the year were $800,000 and the average amount of accounts receiv... | This is a cheet sheet Question |
Average Collection Period or Days’ Sales in Receivables | The average collection period tells how many days (on average) it takes to collect a company’s accounts receivable. The calculation is: 360 or 365 days divided by the receivables turnover ratio. Using the information in our previous calculation, the receivables turnover ratio was 8. Therefore, the average collection pe... | This is a cheet sheet Question |
Inventory Turnover Ratio | The inventory turnover ratio indicates how many times a company’s inventory turns over in a year. The calculation is: cost of goods sold for a year divided by the average inventory during the same year. Since a company records inventory at cost, it is logical to use the cost of goods sold from the income statement. If ... | This is a cheet sheet Question |
Days’ Sales in Inventory or Days to Sell | The days’ sales in inventory indicates how many days of sales are in inventory. The calculation is: 360 or 365 days divided by the inventory turnover ratio. If the inventory turnover ratio is 3, the days’ sales in inventory will be 120 days [360 days/3]. | This is a cheet sheet Question |
Free Cash Flow | The calculation of free cash flow is: net cash flow from operating activities minus the necessary capital expenditures. (Sometimes a company’s dividend payments are deducted along with the capital expenditures.) If a corporation had cash from operating activities of $200,000 and necessary capital expenditures of $60,00... | This is a cheet sheet Question |
Times Interest Earned | Times interest earned indicates a company’s ability to pay the interest on its debt. The calculation is: income before interest expense and income tax expense divided by interest expense. If a company’s net income was $100,000 after interest expense of $40,000 and income tax expense of $20,000 the times interest earned... | This is a cheet sheet Question |
Percentage | The gross profit percentage is the dollars of gross profit divided by the dollars of net sales. If the gross profit was $200,000 and the net sales were $800,000 the gross profit percentage or gross margin was 25%. | This is a cheet sheet Question |
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