ACCT 2

STUDY
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Terms in this set (...)

Earnings Per Share (EPS)
Net Income* / Avg. # of shares of common stock outstanding during the period
*if preferred dividends, amt. subtracted from NI
Return on Assets (ROA) Analysis
NI / Avg. total assets
-measures how much the firm earned for each $ of investment
Net Profit Margin
NI / NSales (how much of every sales $ is profit)
Asset Turnover
NSales / Avg. total assets (begin. total ass. + ending TA)
(notice NPM*AT=ROA)
-how many sales $ the company generates w/ each $ of assets
SEC->FASB->GAAP (5)
PCAOB->sets auditing standards for CPAs
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Quarterly Reports (SEC required)
letter to stockholders
condensed unaudited income statement and balance sheet
-cash flow statement and statement of stockholder's equity often omitted
Annual Reports (SEC required)
1 summarized financial data for 5 or 10 years
2 management discussion and analysis
3 basic financial statements
4 notes (footnotes)
5 independent accountant's report & mgmt. certification
6 recent stock price info
7 summaries of unaudited quarterly financial data
8 lists of directors and officers of company
SEC Reports
10-K, 90 days post 12/31, audited financial statements
10-Q, 45 days post quarter end, states. canb unaudited
8-K, 15 days before major event, states. unaudited
classified balance sheet
assets-order of liquidity (soonest first)
liabilities-order of time until maturity
stockholders' equity (cont. capital & retained earnings)
classified income statement
net sales
-cgs
=gross profit
-operating expenses
=income from operations
+/-nonoperating revenues/expenses & gains/losses
=income before income taxes
-income tax expense
=net income
statement of cash flows
-flows from operating activities
-from investing activities
-from financing activities
net sales (6)
total sales - something
=something: cred. card discounts, sales discs., sales returns and allowances
=nets against sales rev.
cash
cred. card discounts (contra-revenue)
sales revenue
2/10, n/30
two ten, net thirty
2% discount, 10 days in disc. period, net (total sales less return), 30 days max. in credit period
credit card discounts
fee charged by credit card company for services (XA)
sales discounts
customers place open order, pay cash within number of days, receive discount (XA)
sales returns and allowances
reduction of revenue for return of or allowances for unsatisfactory goods (XA)
gross profit percentage
gross profit/net sales
-how effective mgmt. is is selling goods and services for more than the costs to purchase or produce them
other things equal, higher GPP results in higher NI
bad debt expense
debit at end of period w/ estimate
-must balance w/ sales rev. b/c of matching principle
BDE journal entry
Bad Debt Expense
-> Allowance for Doubtful Accounts (XA)
throughout year after, writing off specific uncollectible accounts - journal entry
allowance for doubtful accounts (-XA)
-> accts. receivable (-A)
accts. rec.
- allowance for doubtful accts.
=net realizable value of accts. rec.
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estimating bad debts - % of credit sales method
net credit sales * % bad debt loss rate = BDE to be recorded on income statement
estimating bad debts - aging of accts. rec.
categories of balances by days past due, based on past experience business estimates % for each category, each category aged by %
*this gives you not the BDE to be recorded, but the desired ending balance in the ADA slot on the balance sheet after making necessary adjusting entry. diff. b/t current balance in acct. and estimated balance = BDE in adjusting entry
receivables turnover ratio
net sales/avg. net trade receivables(receivables for [year + year before]/2)
-measures how many times avg. receivables are recorded and collected for the year
avg. collection period
365/rec. turnover ratio
-avg. time customer takes to pay accounts
if prices are rising... FIFO (7)
oldest costs are less, giving lower CGS. means higher net income
recent costs are higher, meaning higher ending inventory price and higher current ration
if prices are rising... LIFO
oldest costs are higher, giving lower ending inventory. means lower net income
recent costs lower, lower CGS, lower net income
-tax
BI(Beg. Inv.)+P(Purchases)-EI=CGS
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Avg. Cost Method
Cost of Goods Available for Sale/# of units available for sale
-CGS and Ending Inventory both assigned same weighted avg. cost per unit
inventory turnover
CGS/Avg. Inventory
don't ever depreciate land! (8)
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acquisition cost includes the purchase price and all expenditures needed to prepare the asset for its intended use
include renovation and repair, legal and realty fees, title fees
fixed asset turnover ratio
net sales (or operating revenues)/avg. net fixed assets
capital expenditure or revenue expense
ordinary repairs and maintenance=revenue expense
-maintains normal operating condition
-does not increase productivity
-does not extend life beyond original estimate
extraordinary repairs=capital expenditure
-major overhauls or partial replacements
-extend life beyond original estimate
additions=capital expenditure
-increases productivity
-may extend useful life
-improvements or expansions
depletion of natural resources is like units of production depreciation
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intangible assets
record at current cash equivalent cost, including purchase price and legal and filing fees
goodwill (a fake asset)
=purchase price of company-FMV of company
-sort of a measure of future net income
dep. exp.
dep. for current year, on income statement
acc. dep.
total dep. on asset to date, on balance sheet
dep. exp.
-> acc. dep.
cost - acc. dep. = net book value (balance sheet)
dep. table
yr / cost / dep. exp. / acc. dep. / book value (cost-AD)
units of production method
cost-residual value/ life in units of production = dep. rate
dep. rate x # of units produced for year = dep. exp.
declining balance method
net book value (cost-acc. dep.) x (rate/useful life in years) = annual dep. exp.
Impairment
loss of significant portion of utility of asset
-test is done at year end as a potential adjusting journal entry
step 1: is there impairment?
-compare book value of asset to estimated future cash flows
-if BV > FCF, the impairment, go to step 2 (def. of imp.)
-if BV < FCF, no impairment, do nothing
step 2: is there a loss on impairment?
-compare book value to FMV
-if BV > FMV, record loss equal to diff.
-if BV < FMV, record nothing (impaired but no loss)

journal entry:
Loss Due to Impairment
-> Equipment
disposal
disposal requires 2 journal entries:
1. entry to update dep. exp. and acc. dep. to date of disposal
2. entry to record disposal
record cash received or paid (writes off acc. dep.) & record gain (credit) or loss (debit) [writes off asset cost]

if cash>BV, record gain
if cash<BV, record loss
cash=BV, neither
*CRUCIAL THING TO REMEMBER:
DEBITS ALWAYS LISTED FIRST, THEN CREDITS TO THE RIGHT*
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cash
acc. dep
-> " " equipment
-> gain/loss on disposal
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depletion
unit depletion rate = (acquisition and development cost - residual value) / estimated recoverable units
depletion cost for a periods unit depletion rate x number of units extracted in period
inventory
-> acc. dep.
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