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Accounting Test Review
Chapters 14, 17, & 18
103
Accounting
Undergraduate 3
11/13/2011

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Term
Liquidity and Efficiency Ratios Include:
Definition
Current Ratio
Acid Test (quick) Ratio
Accounts Receivable Turnover
Inventory Turnover
Days Sales Uncollected
Days Sales Inventory
Total Asset Turnover
Term
Is an increase or decrease favorable in a Current Ratio?
Definition
Increase
Term
Is an increase or decrease favorable in a Acid Test Ratio?
Definition
Increase
Term
Is an increase or decrease favorable in a Accounts Receivable Turnover?
Definition
Increase
Term
Is an increase or decrease favorable in a Inventory Turnover
Definition
Increase
Term
Is an increase or decrease favorable in a Days Sales Uncollected
Definition
Decrease
Term
Is an increase or decrease favorable in a Days Sales Inventory?
Definition
Decrease
Term
Is an increase or decrease favorable in a Total Asset Turnover?
Definition
Increase
Term
What are the Solvency Ratios?
Definition
Debt Ratio
Equity Ratio
Times Interest Ratio
Term
Is an increase or decrease favorable in a Debt Ratio?
Definition
Decrease
Term
Is an increase or decrease favorable in a Equity Ratio
Definition
Increase
Term
Is an increase or decrease favorable in a Times Interest Earned Ratio?
Definition
Increase
Term
What are the Profitability Ratios?
Definition
Profit Margin Ratio
Gross Margin Ratio
Return on Common Stockholders Equity
Return on total Assets
Basic Earnings Per Share
Term
Is an increase or decrease favorable in a Profit Margin Ratio?
Definition
Increase
Term
Is an increase or decrease favorable in a Gross Margin Ratio?
Definition
Increase
Term
Is an increase or decrease favorable in a Return on Common Stockholders Equity?
Definition
Increase
Term
Is an increase or decrease favorable in a Return on total assets?
Definition
Increase
Term
Is an increase or decrease favorable in a Basic Earnings Per Share?
Definition
Increase
Term
What are the Market Prospects Ratios?
Definition
Dividend Yield
Price Earnings Ratio
Term
Is an increase or decrease favorable in a Dividend Yield?
Definition
Increase
Term
Is an increase or decrease favorable in a Price Earnings Ratio?
Definition
X
Too many varying factors
Term
What are the disadvantages of Bonds?
Definition
Requires cash payments and can decrease return on equity
Term
Par Value
Definition
represents the amount that must be paid to bondholders at the maturity date regardless of the amount the bond was sold for
Term
Contract Rate
Definition
Rate of interest printed on the bond and represents the interest rate that issuers will pay to the bond holder (calculated based on par value)
Term
Market Rate
Definition
Represents interest rate that bondholders are willing to accept
Term
Premium on bonds
Definition
The issue price of the bond is GREATER than the par value.

Occurs when the contract rate is GREATER than the market rate (considered an adjunct libability account)
Term
Discount on bonds
Definition
The issue price of the bonds is LESS than the par value

Occurs when the contract rate is LESS than the market rate

(Also called Contra Liability account)
Term
Amortization of Bond Discount/Premium
Definition
Systematic reduction of th premium/discount over the life of the bond.

(The difference between what you sold it for and what you wanted to sell it for)
Term
Unamortized Premium/Discount
Definition
Amount of the premium or discount that remains to be decreased.

Equals the balance of the premium or dicount on bonds accounts
Term
Carrying Value
Definition
The net value of the bonds payable account and any related account (premuim or dicount on bonds)

CV of bond issued at premium= par value + unamortized premium = bonds payable + premium on bonds acct. balance

CV of a discounted bond= par value - unamortized discount = Bonds Payable - Dicount on Bonds accout balance
Term
Carrying Value is always equal to the __________________ at the date of issue
Definition
ISSUE PRICE
Term
CV is always euql to the _____________________ at the date of maturity.
Definition
PAR VALUE
Term
Straight- Line Method
Definition
Reduces the discount or premium on bonds by the same amount of every interest payment date. (method to record amortization of discount/premium)
Term
Cash Interest Paid
Definition
Refers to the amount of interst actually being paid to the bond holders

Par Value x Contract rate of interest = Annual Interest Paid to Bond Holders

If interst is paid more frequenty than once a year, we need to adjust the interest calculation for the portion that we are paying. (i.e.: Semi-annually- 6/12 or monthly - 1/12)
Term
Interst Expense
Definition
Total cash paid to bondholders over the life of the bond- cash received from the bondholders = total interest expense
Term
What are the 4 Financial Statements?
Definition
Income Statement
Balance Sheet
Statement of Cash Flows
Statement of Owners Equity
Term
Income Statement
Definition
Reports revenues - expenses = Net Income/Loss

Records a Period of Time

Prublically Traded Company (quarterly Statements)
Term
Balance Sheet
Definition
Reports Assets = Liability + Equity

Records 1 Date in time
Term
Statement of Cash Flows
Definition
Cash activities (operating, investing, financing)

Reports a period of time
Term
Statement of Owners Equity
Definition
Reports investments, withdrawls, net income

Reports how total equity changes over time

Reports a period of time
Term
What are the 4 Building blocks?
Definition
Liquidity and Efficiency
Solvency
Profitability
Market Expectations
Term
Liquidity and Efficiency
Definition
Ability to meet the short term obligations and to efficiently generate revenues.

Inventory, accounts receivable, notes receiveable
Term
Solvency
Definition
Ability to generate future revenues and meet long term obligations
Term
Profitability
Definition
Ability to generate profits

Make sure it's profitable to attract and retain future investors/creditors

(ability to generate rewards/profits)
Term
Market Expectations (prospects)
Definition
Ability to generate positive market expectations

Refers to/ more relevant to public traded companies
Term
Financial Statments are Visually comparitive in the ways that:
Definition
- At least 2 years of info is provided
-Always lists most recent year first (which is the most relevent year to look at)
Term
What are the 4 standards of Comparisons (or benchmarks) to financial Statements?
Definition
Intra-Company Comparison
Inter-Company Comparison
Industry Comparisons
Rules-of-Thumb
Term
Intra-Company Comparison
Definition
Benchmarking current year data to previous years data within the same company
Term
Inter-Company Comparison
Definition
Competitors- benchmark current period data to that of our major competitors
Term
Industry Comparisons
Definition
Comparing/benchmarking current period data to industry averages

(includes companies w/i our industry of all sizes)

Averages are usually available in published form
Term
Rules-of-Thumb
Definition
General Guidelines that provide a general base or an assumption for a specific analysis component

Give a place to start
Term
What are the Types of Analysis? (tools)
Definition
Vertical Analysis
Ratio Analysis
Horizontal Analysis
Term
Horizontal Analysis
Definition
Provides a comparison of 1 Financial Statement item across years/periods
Term
Vertical Analysis
Definition
Provides a comparison of each financial Statement item within a given period to a base amount from that same period.

Balance sheet- Base amount is TOTAL ASSETS

Income Statement- base amount is TOTAL REVENUES OR NET SALES
Term
Ratio Analysis
Definition
Provides a comparison of the relationship between different financial statement items
Term
Horizontal Analysis: Dollar Change
Definition
How much does the F/S item change from last period to this period?

Analysis Period amount-base period amount
Term
Horizontal Analysis: Percent Change
Definition
Helps us to determine how significant was that dollar change. Express the $ change as a % of the abse period amount
Term
Horizontal Analysis: Trend Analysis
Definition
Expresses each year of data provided for 1 financial statment item as a % of the oldest period/years amount provided

trends are plotted and graphed
Term
Current Ratio
Definition
tells us:

How many short term assets does the company have to pay for every $1 of short term debt

Higher (liquidity) ratio suggests strong liquidity and ability to pay short term obligations

General guidelines suggests that a $2:$1 ratio is considered a strong ratio
Term
Acid-Test Ratio
Definition
Limits amount of current assets we include

How many dollars of HIGHLY liquid assets are abailable to pay $1 of current liabilities

General guideline suggests that a ratio of $1:$1 is acceptable
Term
Accounts Receivable Turnover
Definition
How often can you turn A/R into cash?

How many times the A/R is collected within the Accounting period (determined by how many months are reported on accounting report)

Higher A/R turnover indicates HIGHER efficiency

Higher liquidity means you're most likely to meet debt
Term
Inventory Turnover
Definition
How well do we manage our inventory?
Efficiency of Managment

COGS represents amount merchandise sold for accounting period

Inventory Represents amount merchandise not sold at certain point in time

How many times the inventory balance is turned intoa sale (NOT turned into cash) within that accounting period

Higher turnover ratio indicates how efficiently inventory is managed
Term
Days Sales Uncollected
Definition
If a sale is uncollected, it was a sale made on credit that cash hasn't been received yet.

A/R / sales

What is the proportion of sales still outstanding? (not collected yet)

How many days it takes to turn A/R balance into cash

True liquidity

the more liquid the faster you turn into cash

Fewer days= more liquid
Term
General Rule of Thumb
Definition
How many days does it take each customer to pay?


How long it takes you to pay

the lower the more liquid the more favorable
Term
Days Sales In Inventory
Definition
How many days it takes to sell inventory balance (usually stays around 50,000)

whether sold on credit or for cash

How many days sales stay in inventory account

More liquid = fewer days it takes to sell inventory

How many times $1 of assets are used to produce revenues (or the amot of revenues generated from $1 of assets)

The higher the turnover, the more efficiently assets are used to generage sales
Term
Debt Ratio
Definition
Proportion of assets financed by creditors (debt)

THe more debt, the more have to pay back alter

the higher the debt ratio the riskier that particular company is

the riskier the compay the more likely they won't be able to pay back debt later

Combination of all debs divided by assets
Term
Equity Ratio
Definition
Computed on common-size balance sheet

Tells me the proportion of assets financed by the owners

the higher the ratio, the LESS risky that particular company is

If ratio is > 1 the risk of nonpayment increases

If ratio is < 1 the risk of nonpayment decreases
Term
Times Interest Earned
Definition
Measures how many times interest expense can be paid with the earnings (net income)

Helps creditor determine how well you can make your payments b/c its how much they'll actually make

the higher the ratio the more likely they'll be able to pay interest payment (less risky)

2x or greater- more likely to get additional loans
Term
Profit-Margin Ratio
Definition
Computed on Common size income statment

Measures how much money is left after every $1 of sales (5% = 5cents of every $1)

The higher ratio indicates more prifitability (better at managing prices and expenses by higher profits)
Term
Gross Margin (profit) Ratio
Definition
Computed on common size income statment

amt left from every $1 of sales after paying for the merchandise solde (amt left from every $1 of sales to pay operating expenses)

Higher ratio indicates higher profitability from sale of goods
Term
Return of total assets
Definition
How much profit do we generate for every $1 of assets ownned

the more profit generated from asets= more profitable company (more favorable)

Higher return = more favorable condition
Term
Return on common stockholders equity
Definition
Amount of profit generated from $1 of owners investments (and retained earnings)

Higher ratio is favorable)

Higher equity multiplier indicates amount of debt the larger = the more debt
Term
Basic Earnings per share
Definition
only relevant for CORPORATIONS

Amount of profit earned for every share of common stock outstanding

Higher EPS is favorable

already computed and reported on I/S of publically traded companies
Term
Dividend Yield
Definition
How much dividends deos cmopany pay for 1 share of stock?

Gives us return on current value of the stock (if dividends are paid)

Do'nt have to pay dividends ($0)

helps identify whether a stock is an "income" stock or "growth" stock

If the stock is an "income" stock (pays dividends) the higher the dividend yield, the better (more favorable)

If the stock is growth stock- pays little or no dividends) Expect market price to increase in value rather than receive dividends
Term
Purpose of Managerial accounting
Definition
activity that provides both financial and nonfinancial information to an organizations managment to assist, them to planning and controlling activities
Term
Difference between Managerial financing and financial
Definition
Managerial:
INTERNAL
VERY FLEXIBLE
DECISION MANAGERS ARE TRYING TO MAKE- ONLY IDEAS RELEVANT
QUICK REACTION, TIMELY
NON-MONETARY TERMS

Financial:
EXTERNAL
NOT FLEXIBLE
HAVE TO FOLLOW GAAP; MORE STRUCTURED
HAVE TO BE AUDITED
NOT ABAILABLE TILL AFTER AUDIT IS COMPLETED AFTER THE YEAR; NOT TIMELY
ASSETS, LIABILITIES, EQUITY ARE EXPRESSED IN DOLLARS
MONETARY TERMS
Term
Planning
Definition
refers to the process of setting goals and making a plan to achieve these goals

goals are usualy set- long term goals

medium and short term goals are set after long-term goals are set they help to reach long term goalsa nd are more focused
Term
Controlling
Definition
The process of monitoring the planning decisions and evaluating organizations activities and employees

looks at efficiency

because price is important to the customers, and costs set the price, managerial accounting is important to help keep costs down while also paying attention to quality. higher to help set an appropriate price
Term
Classification Categories of Managerial Accounting
Definition
By Behavior
By Traceability
By Controllability
By Function
By Relevance
Term
By Behavior
Definition
Does the cost change with changes in volume of activity (within a relevant range)
Term
By Traceability
Definition
Can a cost be traced to a specific cost object or does it benefit more than 1 cost object?

Must first specify the cost object
Term
By controllability
Definition
Who controls the Cost?

Heiarchy of management
Term
By Relevance
Definition
Is the cost relevant for future decisions?

Outsroucing

getting rid of departments or products
Term
By Function
Definition
Is cost capitalized (recorded as an asset such as inventory) or expensed as incurred

Manufacturing company
person who buys things and refurbish them
rent depends on what expense is for
Term
By Behavior:
Variable Cost
FIxed Cost
Mixed Cost
Definition
Variable Cost- A cost that changes in direct proportion to a change in a volume of activity

Raw material, labor needed

increase by same incriments

Fixed Cost:
A cost that does NOT change in total as the volume of actively changes (within a relevant range)
rent

Mixed Cost:
A cost with botha fixed and a variable component
Term
Traceability:

Direct Cost:
Indirect Cost:
Definition
Direct Cost: Costs that are traceable to a single cost object
-If easy for you to say what costs go into making each
-Raw materials, assembly line workers wages
-Typically considered variable cost

Indirect Cost: Cost that benefits more than 1 cost object/ cannot be easily separated or traced to 1 cost object
Term
Sunk Cost
Definition
a cost that was incurred in the past that cannot be changed or avoided
Term
Out of pocket Cost
Definition
a cost that requires future outlay (payment) of cash (cost that hasn't been incurred yet)
Term
Opportunity Cost
Definition
Potential benefit thats lost by choosing/ alternative from 2 or more options
Term
Product Cost (by function)
Definition
capitalized as an asset; any cost that is necessary and integral to the production of a product
Term
Direct Materials
Definition
Raw materials used to make the product (that can be traced to a specific product)
Term
Direct Labor
Definition
labor costs used to make the product (can trace the cost to a specific product)
Term
Indirect Product cost (overhead costs)
Definition
-Costs necessary to make product but cannot easily be traced to 1 specific product
Term
Period Cost
Definition
expenditure that is identified more w/ time period than w/ a finished product. (costs not pertaining to the manufacturing processs)
Term
Raw Materials Inventory
Definition
Raw materials available to be used in production (purchased but not used in production yet)
Term
Goods in process inventory
Definition
records all product costs of products that have been started but not cmopleted (includes raw materials used, direct labor used and all of factory overhead costs incurred (indirect product cost))
Term
Finished GOods Inventory
Definition
records all product cost of products that have been finished but not sold yet.
Term
Costs of Goods Sold
Definition
Records all product costs of products that have been cmopleted and sold (can sell on credit or cash immediately, but either way it can be recorded as sold)
Term
Asset Accounts on a Common Size Balance Sheet
Definition
Cash
A/R
Inventory
Plant Assets, net
Total Assets
Term
Liability Accounts on a Common Size Balance Sheet
Definition
A/P
N/P
Common Stock
Retained Earnings
Total Liabilities and Equity
Term
Accounts on a Common Size Income Statement
Definition
Net sales
-COGS
=Gross Profit
-Selling expenses
-General and Administrative Expenses
=Net Income
Term
On a common size balance sheet you get the percentage of everything by dividing everything by
Definition
TOTAL ASSETS
Term
On a common size income statement, you divide everything by:
Definition
TOTAL NET SALES
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