Term
| Why do corporations invest? |
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Definition
They have excess cash not needed for the immediate purchase of operating assets
AND
To generate earnings from investment income |
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Term
| Term: Speculating that investment will increase in value, thus increasing positive returns |
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Definition
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Term
| Term: Purchase a noncontrolling interest in another company in a related industry in which it wishes to establish a presence |
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Definition
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Term
| Why do companies use strategic reasoning? |
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Definition
In order to enter a new industry without starting over with the costs and risks
AND
To have some influence over customer/supplier(s) |
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Term
| Term: Investments in government and corporations' bonds |
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Definition
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Term
| Which entries involving debt investments are journalized? |
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Definition
1)Acquisition
2)Interest revenue
3)Sale |
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Term
| What applies at acquisition? |
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Definition
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Term
| Journalize the entry for acquiring stock |
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Definition
[Debt Investments]
[ Cash ] |
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Term
| Journalize the entry to record bond interest |
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Definition
[Cash ]
[ Interest Revenue] |
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Term
| Journalize the entry to record interest accrued at year end |
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Definition
[Interest Receivable]
[ Interest Revenue ] |
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Term
| Journalize the entry to record receipt of received interest |
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Definition
[Cash ]
[ Interest Receivable] |
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Term
| Journalize the entry to record selling purchased bonds |
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Definition
[Cash ]
[(Loss on Debt Investments) ]
[ Debt Investments ]
[ (Gain on Debt Investments)] |
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Term
| Term: Investments in the capital stock of corporations |
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Definition
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Term
| Term: Group of securities company is holding from several different corporations |
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Definition
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Term
| Term: Issuing corporation |
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Definition
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Term
Term: Company owns less than 20% common stock of another corporation
Which method do you use? |
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Definition
Insignificant
Use cost method |
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Term
Term: Company owns between 20-50% common stock of another corporation
What method do you use? |
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Definition
Significant
Use equity method |
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Term
Term: Company owns >50% common stock of another corporation
What method do you use? |
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Definition
Controlling
Consolidated financial statements |
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Term
| Term: Investment recorded at cost; recognize revenue only when cash dividends received |
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Definition
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Term
| Jounalize the entry to record acquisition of stock |
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Definition
[Stock Investments]
[ Cash ] |
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Term
| Journalize the entry to record dividends received for the cost method |
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Definition
[Cash ]
[ Dividend Revenue] |
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Term
| Journalize the entry to record sale of stock purchased |
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Definition
[Cash ]
[(Loss on Sale of Stock Investments) ]
[ (Gain on Sale of Stock Investments)]
[ Stock Investments ] |
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Term
| In what amount of stock does the investor probably have a representative on the board of directors? |
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Definition
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Term
| Term: Company initially records investment in common stock at cost, after, adjusts annually to show investor's equity in investee |
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Definition
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Term
| Journalize the entry to show acquisition of stock |
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Definition
[Stock Investments]
[ Cash ] |
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Term
| Journalize the entry to show share of net income under the equity method |
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Definition
[Stock Investments ]
[ Revenue from Investment in _ Company] |
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Term
| Journalize the entry to show the reduction in the investment account for dividends received |
|
Definition
[Cash ]
[ Stock Investments] |
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Term
| Term: Company that owns >50% of another entity |
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Definition
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Term
| Term: Entity whose stock is owned by parent company |
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Definition
| Subsidary (affiliate) company |
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Term
| Term: Amount of interest with ability to control |
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Definition
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Term
| Term: Presents assets and liabilities controlled by parent company and total revenues and expenses of subsidiary company |
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Definition
| Consolidated financial statements |
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Term
| What values can Valuation be reported at? |
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Definition
Cost
Fair value (Market value)
Lower-of-cost-or-market-value |
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Term
| Term: Amount for which a security could be sold in a normal market |
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Definition
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Term
| Term: Held primarily for sale in the short-term to generate income on short-term price differences |
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Definition
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|
Term
| Term: Held with the intent of selling sometime in the future |
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Definition
| Available-for-sale securities |
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Term
| Term: Debt securities the investor has the intent and ability to hold to maturity |
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Definition
| Held-to-maturity securities |
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Term
| How long are trading securities usually kept for? |
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Definition
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Term
| Term: Difference between the total cost and total fair value |
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Definition
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Term
| Under what account holder are trading securities classified? |
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Definition
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Term
| Journalize the entry to record unrealized gain |
|
Definition
[Market Adjustment - (trading, etc.)]
[ Unrealized Gain - Income ] |
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Term
| Which values are reported on the balance sheet? |
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Definition
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Term
| Where are unrealized losses located? |
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Definition
| Separate section of Stockholders' Equity |
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Term
| Term: Readily marketable securities intended to be converted into cash within a year or in the operating cycle (whichever is longer) |
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Definition
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Term
| Term: Investments that won't be converted into cash within a year or in the operating cycle |
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Definition
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Term
| Where are realized and unrealized gains/losses reported? |
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Definition
| Non-operating activities section of the income statement after "Total paid-in capital and retained earnings" |
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Term
| Why do we report gains/losses? |
|
Definition
To reduce a volatility of net income due to fair value
AND
Informs the financial statement user of the gain/loss that would occur if securities were sold at fair value |
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Term
| Term: Items such as unrealized gains/losses on available-for-sale securities |
|
Definition
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Term
| Term: Records cash receipts and payments from operating, investing, and financing activities during a period |
|
Definition
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Term
| Term: Includes cash effects of transactions that create revenues and expenses to enter into the determination of net income |
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Definition
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Term
| Term: Include acquiring and disposing of investments of property, plant, and equipment, and lending money and collecting the loans |
|
Definition
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Term
| Term: Includes obtaining cash from stockholders, repurchasing shares, and paying dividends |
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Definition
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Term
| Term: Introductory phase, growth phase, maturity phase, decline phase |
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Definition
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Term
| Term: Company does not generate positive cash flow |
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Definition
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Term
| Term: Company starts to generate small amounts of cash during operations |
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Definition
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Term
| Term: Time period in which cash from operations = net income |
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Definition
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|
Term
| Term: Time period in which cash from operations decreases |
|
Definition
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Term
| Term: Adjusts net income for items that do not affect cash to determine net cash provided by operating activities |
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Definition
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Term
| Term: Shows operating cash receipts and payments |
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Definition
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Term
| Term: Describes cash remaining from operations after adjustment for capital expenditure and dividends |
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Definition
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Term
| What does the statement of cash flows show? |
|
Definition
Entity's ability to generate future cash flows
AND
Entity's ability to pay dividends and meet obligations
AND
Reasons for difference between net income and net cash provided by operating activities
AND
Cash investing and financing transactions during period |
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Term
| What are the three type of activities of a business? |
|
Definition
Operating
Investing
Financing |
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Term
| Where can you find information of operating activities? |
|
Definition
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Term
| What are some significant noncash activities? |
|
Definition
Direct issuance of common stock to purchase assets
AND
Conversion of bonds into common stock
AND
Direct issuance of debt to purchase assets
AND
Exchanges of plant assets |
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Term
| Which investing/financing activities are classified as operating activities? |
|
Definition
Receipts of investment revenue (interest/dividends)
AND
Payment of interest to lenders
AND
Because companies report items in income statement |
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Term
| Where are significant financing and investing activities that do not affect cash reported? |
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Definition
| Either a separate schedule at the bottom of the statement of cash flows or in a separate note or supplementary schedule to financial statements |
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Term
| Is the statement of cash flows prepared using a trial balance? |
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Definition
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Term
| What does the statement of cash flows deal with, unlike other financial statements? |
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Definition
| Cash receipts and payments |
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Term
| What must the company adjust for to determine cash flows? |
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Definition
| Use of accrual accounting |
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Term
| Where does the information from the Statement of Cash Flows come from? |
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Definition
Comparative balance sheets - changes in assets, liabs, and SHE
Current income statement
Transactional data |
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Term
| What are the three steps a statement of cash flows is performed in? |
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Definition
1. Net cash provided/used by operating activities by converting net income from accrual basis into cash basis
2. Analyze changes in noncurrent asset and liability accounts and record as investing/financing activities, or disclose as noncash transactions
3. Compare the net change in cash on statement of cash flows with change in the cash account reported on balance sheet to make amounts agree |
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Term
| Which method do most companies use to convert their net income from an accrual to a cash basis? |
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Definition
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Term
| Why do companies favor the indirect method? |
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Definition
| It is easier, less costly to prepare, and focuses on the differences between net income and net cash flow from operating activities |
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Term
| Which method does FASB prefer? |
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Definition
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Term
| What are some adjustments to adjust net income into net cash provided/used by operating activities? |
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Definition
-Adding back noncash activities (depreciation expense, amortization, depletion)
-Deduct gains/Add losses (resulting from investing/financing activities)
-Analyze changed (to noncash current asset/liab accounts) |
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Term
| What are some of the changes to noncash current asset/liability accounts? |
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Definition
- Deduct +s in current assets
- Add -s in current assets
- Deduct +s in inventory
- Add -s in inventory
- Deduct +s in prepaid expenses
- Add -s in prepaid expenses
- Add +s in current liabilities
- Deduct -s in current liabilities |
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Term
| At what point does the current cash debt coverage ratio become risky? |
|
Definition
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|
Term
| At what point does the cash debt coverage ratio become risky? |
|
Definition
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|
Term
| Term: Measure of how efficiently a company uses its assets to generate sales |
|
Definition
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|
Term
|
Definition
Net sales
---------
Average total assets |
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|
Term
| Term: Securities held with the intent of selling sometime in the future |
|
Definition
| Available-for-sale securities |
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Term
| Term: Average number of days receivables are outstanding |
|
Definition
| Average collection period |
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|
Term
| Average collection period |
|
Definition
365 days
--------
Receivables turnover |
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|
Term
| Term: Cash-basis measure used to evaluate solvency |
|
Definition
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|
Term
|
Definition
Cash from operations
--------------------
Average total liabilities |
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|
Term
| Term: Use in current year compared to previous years |
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Definition
| Change in accounting cycle |
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Term
| Term: Measure of income that includes all changes in SHE during period except those resulting from investments and distributions |
|
Definition
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|
Term
| Term: Cash-basis measure of liquidity |
|
Definition
| Current cash debt coverage ratio |
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|
Term
| Current cash debt coverage ratio |
|
Definition
Cash provided by operations
---------------------------
Average current liabilities |
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Term
| Term: Measure to evaluate a company's liquidity and short-term debt paying ability |
|
Definition
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|
Term
|
Definition
Current assets
--------------
Current liabilities |
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|
Term
| Term: Measure of average number of days inventory is held |
|
Definition
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|
Term
|
Definition
365 Days
--------
Days in inventory |
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Term
| Term: Measure of % total financing provided by creditors |
|
Definition
| Debt to total assets ratio |
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|
Term
| Debt to total assets ratio |
|
Definition
Total debt
----------
Total assets |
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Term
| Term: Disposal of a significant part of a business |
|
Definition
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|
Term
| Term: Net income earned by each share of common stock |
|
Definition
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|
Term
|
Definition
Net income - preferred dividends
--------------------------------
Average common shares outstanding |
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|
Term
| Term: Events/transactions unusual in nature and infrequent in occurence |
|
Definition
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|
Term
| Term: Measure of solvency; cash remaining from operating activities after adjusting for capital expenditures and dividends paid |
|
Definition
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|
Term
|
Definition
Gross profit
------------
Net sales |
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|
Term
| Term: To evaluate series of financial statement data over time to determine increases/decreases taking place |
|
Definition
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|
Term
| Term: Measures liquidity of inventory; # of times average inventory was sold |
|
Definition
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|
Term
|
Definition
Cost of goods sold
------------------
Average inventory |
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|
Term
| Term: Borrowing money at a lower rate of interest that can be earned using borrowed cash (trading on the equity) |
|
Definition
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|
Term
|
Definition
| Measure of short-term ability of company to pay maturing obligations and unexpected needs for cash |
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|
Term
| Term: Measure of % earnings distributed as cash dividends |
|
Definition
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|
Term
|
Definition
Cash dividends declared on common stock
---------------------------------------
Net income |
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|
Term
| Term: Comparison of market price of each share to earnings per share |
|
Definition
| Price-earnings (P-E) ratio |
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|
Term
|
Definition
Market price of each stock
--------------------------
Earnings per share |
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|
Term
| Term: Measure of income usually excluding items unusual or nonrecurring |
|
Definition
|
|
Term
| Term: Measures net income generated by each $ of sales |
|
Definition
|
|
Term
|
Definition
Net income
----------
Net sales |
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|
Term
| Term: Measures income of operating success for a given period of time |
|
Definition
|
|
Term
| Term: Indicates level of full and transparent info provided to users of financial statements |
|
Definition
|
|
Term
| Term: Measure of liquidity of receivables |
|
Definition
|
|
Term
|
Definition
Net credit sales
----------------
Average net receivables |
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|
Term
| Term: Profitability measure indicates amount of net income generated by each $ of assets |
|
Definition
|
|
Term
|
Definition
Net income
----------
Average total assets |
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|
Term
| Term: Measure of $ of net income earned for each $ invested by owners |
|
Definition
|
|
Term
|
Definition
Net income available to common SH
---------------------------------
Average common SHE |
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|
Term
| Term: Ability of company to pay interest as it comes due and repay balance of debt at maturity |
|
Definition
|
|
Term
| Term: Most likely level of income obtained in future; net income adjusted for irregularities |
|
Definition
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|
Term
| Term: Measure of solvency and ability to make interest payments as they come due |
|
Definition
| Times interest earned ratio |
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|
Term
|
Definition
Net income before interest expense and taxes
--------------------------------------
Interest expense |
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|
Term
| Term: Securities bought and held for near-term sales |
|
Definition
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|
Term
| Term: Technique for evaluating financial statement data that expresses each item as a % of a base amount |
|
Definition
|
|
Term
| Which items are irregular? |
|
Definition
Discontinued operations
Extraordinary items |
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Term
| Where are extraordinary items reported? |
|
Definition
| A separate section of the income statement below discontinued operations |
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Term
| What if an extraordinary item meets only one of the conditions to be considered one? |
|
Definition
| It is reported in a separate line item in upper section of the income statement under "Other revenue/expenses and gains/losses" |
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Term
| When do accounting rules permit a change? |
|
Definition
| When management can show change is preferable |
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|
Term
| How are changed in accounting principle shown? |
|
Definition
| Retroactively - current and past years changed for comparison reasons |
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Term
| What is the gain/loss on an available-for -sale security reported as? |
|
Definition
| Other comprehensive income |
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|
Term
| Why do we report the unrealized gain/loss in the SHE section? |
|
Definition
To reduce the volatility of net income due to fluctuations in fair value
AND
Informs the financial statement user of gain/loss if sold at fair value |
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|
Term
| What are the three types of comparisons to improve the decision usefulness of information? |
|
Definition
Industry average
Intercompany
Intracompany |
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|
Term
| What are the three basic tools to highlight significance of financial statement data? |
|
Definition
Horizontal analysis
Vertical analysis
Ratio analysis |
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|
Term
| What is another name for horizontal analysis? |
|
Definition
|
|
Term
| How do you calculate the change since the base period under horizontal analysis? |
|
Definition
Current year amount - Base year amount
--------------------------------------
Base year amount |
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|
Term
| How do you calculate the current result in relation to the base period under horizontal analysis? |
|
Definition
Current year amount
-------------------
Base-year amount |
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|
Term
| What is another name for vertical analysis? |
|
Definition
|
|
Term
| What are the liquidity ratios? |
|
Definition
Working capital: current assets-current liabilities
Current ratio
Current cash debt coverage ratio
Inventory turnover
Days in inventory
Receivables turnover
Average collection period |
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|
Term
| What are the solvency ratios? |
|
Definition
Debt to total assets ratio
Cash debt coverage ratio
Times interest earned ratio
Free cash flow |
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|
Term
| What are the profitability ratios? |
|
Definition
Earnings per share
Price-earnings ratio
Gross profit rate
Profit margin ratio
Return on assets
Asset turnover
Payout ratio
Return on common SHE |
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|
Term
| Which factors affect the quality of earnings? |
|
Definition
Alternative accounting methods
Pro forma income
Improper recognition
Price-earnings ratio |
|
|
Term
| What differences in alternate accounting methods occur? |
|
Definition
Inventory costing methods
Reporting depreciation and amortization |
|
|
Term
| What are some ways of improper recognition? |
|
Definition
Channel stuffing
Improper capitalization of operating expenses |
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|
Term
| Term: Offering deep discounts on products to customers so companies can encourage customers to buy now rather than later |
|
Definition
|
|
Term
| How are extraordinary items reported? |
|
Definition
|
|
Term
| Profit margin x asset turnover = ? |
|
Definition
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|
