Creecher purchased $200,000 worth of Troman stock , received four quarterly dividends of $1,000 each, and sold the Troman shares for $206,000 after one year. What is Creecher’s rate of return?
a.1%
b.2.5%
c.5%
d.10%
C
Which of the following is not an advantage of accrual accounting?
a.Spreads out the influence of one-time events that affect multiple reporting periods
b.Highlights cash effects of operations
c.Captures long-run performance
d.Recognizes assets and liabilities associated with receivables and payables
B
Accounting standards in the United States are currently set by:
a.The FASB
b.The AICPA
c.The EITF
d.The NCAA
A
Which of the following is not one of the ways in which high-quality accounting is encouraged by the U.S. financial reporting system?
a.Accounting standards encourage comparability
b.Auditors assess whether financial statements are materially misstated
c.Sarbanes-Oxley instituted reforms designed to improve the quality of financial reporting
d.Managers are required to use frameworks for ethical decision making when deciding how to account for transactions
D
Which of the following is not a component of relevance as defined in the FASB’s conceptual framework?
a.Free from error
b.Materiality
c.Predictive value
d.Confirmatory value
A
Which of the following is not a component of faithful representation as defined in the FASB’s conceptual framework?
a.Free from error
b.Neutrality
c.Understandability
d.Completeness
C
Which of the following is not a measurement attribute defined in the FASB’s conceptual framework?
a.Net realizable value
b.Historical cost
c.List price
d.Fair value
C
Which of the following is not true?
a.The fair value hierarchy reflects the subjectivity of inputs used to compute fair values
b.Level 1 of the fair value hierarchy refers to quoted market prices that can be directly observed
c.Level 3 of the fair value hierarchy refers to inputs that are not directly observable, and so must be based on the entity’s own assumptions
d.Level 3 inputs are preferred to Level 2, which are preferred to Level 1
D
Temporary accounts would not include:
a.Salaries expense
b.Accounts receivable
c.Rent revenue
d.All of these answers are incorrect
B
Recording an expense for salaries incurred and paid in cash would be recorded by:
a.Debiting a liability
b.Debiting an expense
c.Debiting cash
d.Crediting an expense
B
The journal entry to record the issuance of common stock in exchange for cash involves:
a.A debit to common stock and a credit to cash
b.A debit to cash and credits to common stock and retained earnings
c.A debit to cash and a credit to common stock
d.All of these answer choices are incorrect
C
The correct amount of prepaid insurance shown on a company’s December 31, 2021, balance sheet was $1,400. On May 1, 2022, the company paid an additional insurance premium of $1,100. In the December 31, 2022, balance sheet, the amount of prepaid insurance was correctly shown as $1,000. The amount of insurance expense that should appear in the company’s 2022 income statement is:
a.$2,000
b.$1,900
c.$1,500
d.$1,600
C
The Contra Costa Times Company reported a $17,200 liability in its 2021 balance sheet for subscription revenue received in advance. During 2022, $68,000 was received from customers for subscriptions and the 2022 income statement reported subscription revenue of $69,700. What is the liability amount for deferred subscription revenue that will appear in the 2022 balance sheet?
a.$0
b.$17,200
c.$18,900
d.$15,500
D
Gary’s Grocery borrowed $12,000 at 8% interest on May 1, 2021, with principal and interest due on April 30, 2022. The company’s fiscal year ends December 31. What amount of interest expense would appear in the company’s income statement for the year ended December 31, 2021, related to this loan?
a.$480
b.$640
c.$960
d.$560
B
Dan White Draperies maintains its records on a cash basis. During 2021, the company collected $75,000 from customers and paid $21,000 in expenses. Depreciation expense of $8,000 would have been recorded on an accrual basis. Over the course of the year, accounts receivable increased $7,000, prepaid expenses decreased $5,000, and accrued liabilities decreased $4,000. Dan’s accrual basis net income was:
a.$41,000
b.$57,000
c.$52,000
d.$45,000
C
Which of the following is a subclassification of assets in the balance sheet?
a.Cash and cash equivalents
b.Revenue
c.Current assets
d.Disposable assets
C
Current assets include cash and all other assets expected to become cash or be consumed:
a.Within one year
b.Within one operating cycle
c.Within one year or one operating cycle, whichever is shorter
d.Within one year or one operating cycle, whichever is longer
D
Which of the following is most likely to be reported as a long-term asset?
a.Accounts receivable
b.Buildings
c.Prepaid rent
d.Inventory
B
Which of the following represents tangible, long-lived assets used in the operations of the business?
a.Current assets
b.Investments
c.Property, plant, and equipment
d.Intangible assets
C
The key distinction between current liabilities and long-term liabilities is:
a.The amount of the obligation to be satisfied—large versus small
b.To whom the obligation is owed—those inside versus those outside of the company
c.The length of time until the obligation is expected to be satisfied—less than one year versus more than one year, or operating cycle if longer
d.The nature of the obligation—determinable amount versus estimated amount
C
Which of the following is true regarding GAAP and IFRS?
a.There are more differences than similarities between U.S. GAAP and IFRS
b.IFRS specifies a maximum number of items to be reported in the balance sheet
c.Many companies reporting under IFRS present noncurrent assets before current assets in the balance sheet
d.U.S. GAAP specifies a minimum number of items to be reported in the balance sheet
C
Which of the following would be commonly reported in the summary of significant accounting policies note?
a.Errors and fraud
b.Method used to record depreciation
c.Subsequent events
d.Related-party transactions
B
Where is management’s discussion and analysis located?
a.Preceding the financial statements and audit report in the annual report
b.In the annual chairman’s letter to shareholders
c.At the end of the annual report as an appendix
d.At the beginning of the proxy statement
A
Which disclosure provides an independent and professional opinion about the fairness of the representations in the financial statements and about the effectiveness of internal controls?
a.Auditors’ report
b.Proxy statement
c.Management’s discussion and analysis
d.Summary of significant accounting policies
A
Which of the following describes the risk that the company cannot pay its obligations when they come due?
a.Operational risk
b.Cash management risk
c.Horizontal risk
d.Default risk
D
Which of the following transactions would increase a company’s liquidity ratios?
a.Receive cash from customers on accounts receivable
b.Purchase office supplies with cash
c.Pay dividends to shareholders
d.Borrow cash by signing a three-year note
D
Geisner Inc. has total assets of $1,000,000 and total liabilities of $600,000. The industry average debt to equity ratio is 1.20. Calculate Geisner’s debt to equity ratio and indicate whether the company’s default risk is higher or lower than the average of other companies in the industry.
a.0.60; Higher default risk
b.0.60; Lower default risk
c.1.50; Higher default risk
d.1.50; Lower default risk
C
Which of the following captions would more likely be found in a single-step income statement?
a.Total revenues and gains
b.Gross profit
c.Operating income
d.All of these answers are incorrect
A
What are temporary earnings?
a.Earnings from transactions that are not likely to occur again in the foreseeable future
b.Earnings from transactions that are likely to generate similar profits in the future
c.Earnings from transactions likely to have a different impact on income in the future
d.Both a and c
D
Buffalo Manufacturing Company is restructuring and closing the platinum mining division. The mine will be closed and its assets sold off over the course of the next three years. When should the costs related to closing of the mine be recognized?
a.In the year the restructuring plan is announced to the board of directors
b.In the year(s) the costs are actually incurred
c.In the year the restructuring is complete
d.All of these answers are incorrect
B
The Cansela Baseball Bat Company reported income before taxes of $375,000. This amount included a $75,000 loss on discontinued operations. The amount reported as income from continuing operations, assuming a tax rate of 25%, is:
a.$375,000
b.$337,500
c.$300,000
d.$225,000
B
On October 1, 2021, American Medical Inc. adopted a plan to discontinue its generic drug division, which qualifies as a separate component of the business according to GAAP regarding discontinued operations. The disposal of the division was expected to be concluded by March 30, 2022. On December 31, 2021, the company’s year-end, the following information relative to the discontinued division was accumulated:
Operating loss for 2021 $195 million
Excess of book
value over fair value, less costs to sell, at year-end 25 million
In its income statement for the year ended December 31, 2021, American would report a before-tax loss on discontinued operations of:
a.$170 million
b.$195 million
c.$220 million
d.All of these answers are incorrect
C
Which of the following represents a change in accounting principle?
a.Using a journal entry to correct a misstatement in current-year financial statements
b.Changing inventory costing method from LIFO to average cost method
c.Modifying the amount of bad debt expense in accounts receivables as new information on customer insolvency is obtained
d.Correcting a material error in financial statements that have already been released to investorsB
B
Which of the following is not an example of other comprehensive income?
a.Income from sales
b.Unrealized loss on securities available for sale
c.Foreign currency translation adjustments
d.Deferred gains from derivatives
A
Which of the following is true concerning the statement of cash flows?
a.The statement of cash flows can provide information helpful in assessing future profitability, liquidity, and solvency
b.The statement of cash flows shows cash receipts and cash disbursements of an enterprise
c.The statement of cash flows is required to be presented for any period for which an income statement is presented
d.All of the answers above are true
D
Which of the following items would not be included as a cash flow from operating activities in a statement of cash flows?
a.Purchase of inventory
b.Purchase of machinery
c.Payment of income taxes
d.Collection of interest on a note
B
Bledsoe Motors reported revenue of $7,500,000 for its year ended December 31, 2021. Accounts receivable at December 31, 2020 and 2021, were $480,000 and $532,500, respectively. Using the direct method for reporting cash flows from operating activities, Bledsoe Motors would report cash collected from customers of:
a.$7,500,000
b.$7,552,500
c.$7,567,500
d.$7,447,500
D
Kringle Pastries reported net income of $432,000 for its year ended December 31, 2021. Purchases of merchandise totaled $304,000. Accounts payable balances at the beginning and end of the year were $72,000 and $66,000, respectively. Beginning and ending inventory balances were $88,000 and $92,000, respectively. Assuming that all relevant information has been presented, Kringle Pastries would report operating cash flows of:
a.$310,000
b.$442,000
c.$422,000
d.$302,000
C
Which of the following is accurate concerning presentation of financial statements in regards to IFRS compliance?
a.Unlike U.S. GAAP, IFRS requires certain minimum information to be disclosed on the face of the income statement
b.U.S. GAAP and IFRS display interest and dividends differently on the statement of cash flows
c.Both U.S. GAAP and IFRS allow companies to report comprehensive income as a single statement or in two separate statements
d.All of the answers are correct
D
Harrington’s Pet Supplies begin the year with an inventory balance of $220,000. At year-end, the inventory balance was $185,000. Cost of goods sold for the year was $900,000. Calculate the inventory turnover ratio and average days in inventory (round to two decimals).
a.5.04, 72.42
b.4.86, 75.10
c.4.09, 89.24
d.4.44, 82.21
D
Financial accounting provides relevant information to
investors and creditors.
Where do corporations aquire capital from?
investors- in exchange for ownership and creditors- by borrowing.
Why do investors and creditors provide this capital to corporations?
They want a return on their resrouces.
Where do shareholders recieve cash from?
sale of their stock (ownership), and dividends
Two things to consider in an investment decision is
the rate of return and the uncertainty/risk.
What's the biggest difference between cash and accrual?
Cash measures net operating cash flow and accrual measures net income.
What's a better indicator of future operations? Cash or accrual?
Accrual, use periodic net incomes.
We know GAAP is these accounting standards, but who has authority to place them?
The SEC. Which is currently using a private sector called FASB.
The FASB has a 7 step standard setting process and 7 people on the board. Does this get political?
Absolutely.
Whats the role of an auditor?
To provide a credible opinion on the compliance of a company's financial statements with GAAP.
What's the point in the conceptual framework, reforms (Sarbanes Oxley), auditors, and licensing accountants?
To keep it ethical!
What are some key provisions of the Sarbanes Oxley Act of 2002?
1) Having a board
2) Corporate executive accountability
3) Non audit services
4) Retention of work papers
5) Auditor rotation
6) Conflicts of interest
7) Hiring an auditor
8) Internal control
Should accounting be principles based or rule based?
Principle because it stresses professional judgement.
FASB's conceptual framework: THE CONSTITUITION
What's a key constraint of the conceptual framework?
cost effectiveness.
What's the objective of the conceptual framework?
To provide financial information that is useful to capital providers in making decisions.
Qualitative characteristics from conceptual framework:
What is relevance as a qualitative characteristic?
information has both predictive value and confirmatory value.
What is predictive value as a qualitative characteristic?
helping users predict future cash flows.
What is confirmatory value as a qualitative characteristic?
helps confirm or change prior assessments regarding a company's cash flow generating ability.
What is materiality as a qualitative characteristic?
something is material if it has the ability the affect something later.
What is faithful representation as a qualitative characteristic?
agreement between a measure or description and the phenomenon it purports to represent.
What is complete as a qualitative characteristic?
includes all the information necessary for faithful representation of the economic phenomenon that it purports to represent.
What is neutral as a qualitative characteristic?
free from bias.
What does free from error mean as a qualitative characteristic?
there are no errors or omissions in the description of the amount or the process used to report the amount.
What is comparability as a qualitative characteristic?
helps users see similarities and differences between events and conditions.
What is consistency as a qualitative characteristic?
refers to the same accounting practices being used over time to permit valid comparisons between reporting periods.
What is verifiability as a qualitative characteristic?
implies that different knowledgeable and independent measurers would reach consensus regarding whether information is a faithful representation of what it is intended to depict.
What is timeliness as a qualitative characteristic?
indicates that information is available to users early enough to allow them to use it in their decision process.
What is understandability as a qualitative characteristic?
means that users can comprehend the information within the context of the decision being made
What are the 10 elements of the conceptual framework?
Assets, liabilities, equity, investment by owners, gains and losses, distribution to owners, comprehensive income, revenues and expenses
What is the recognition, measurement, and disclosure concepts of the conceptual framwork?
recognition- admits info to financial statements
measurement- associating numeral amounts with info
disclosure- including additional info
What are some general recognition criteria?
Definition, measurability, relevance, and reliability.
What is revenue recognition?
It's guided by realization principle:
1) earnings process is complete or almost complete
2) certainty to collect on asset
What is expense recognition?
Four approaches:
1) exact cause and effect relationship
2) associating expense with revenue in specific time period
3) systematic and rational allocation
4) in period occurred
What does measurement's mixed attribute include?
1) Historical cost
2) net realizable value- amount of cash an asset is expected to be converted into
3) Current cost
4) Present value- calculate by applying time value of money
5) Fair value- price that would be received to sell assets or paid to transfer liability in an orderly transaction between market participants at the measurement date, not the sticker price, and is what 2 parties agree to sell on.
What are the components of disclosure?
1) parenthetical or modifying comments
2) disclosure notes
3) supplemental schedules and tables
What are the 4 underlying assumptions of GAAP?
1) Economic entity
2) Going concern (assume business last forever)
3) Periodicity (AC periods, end of fiscal year)
4) Monetary unit (US $ or euro)
What is the revenue/expense approach?
recognizing only some assets and liabilities to have balance sheet match income statement
What is asset/liability approach?
recognize assets and liabilities at balance sheet date
US GAAP and IFRS have tried to work together and combine as one, but its not happening. What are some differences?
GAAP provides guidance to standard setters and so does IFRS but they also provide guidance to preparers.
What is the accounting equation and what effect does it have?
A=L+SE, has a dual effect
What are the resources in the AC equation and what are the claims? Do they have to equal each other?
Resources are assets and claims are L and SE. Yes.
Define general ledger.
collection of accounts
Define T account
instructional purposes instead of ledgers. Debit/Credit
What order is assets listed?
by liquidity
What order is SE listed?
contributed first then earned
What order are journals listed?
Chronologically
What is a journal?
Collection of T accounts
Journal entry example for Assets and Expenses:
Debit=increase
Credit=decrease
Journal entry example for Liabilities, Equity, and Revenues
Debit= decrease
Credit= increase
What are subsidiary accounts?
its like an accounts recievable.
What are permanent accounts?
A, L, SE
What are temporary accounts?
Gain, loss, revenue, expense (changes in SE) that are closed out.
What is the current ratio?
CA/CL
What are the 10 steps to the AC processing cycle?
1) Obtain source documents
2) Analyze them
3) Record in journal
4) Post to general ledgers
5) Prepare unadjusted trial balance
6) Record adjusting entries
7) Prepare adjusted trial balance
8) Prepare financial statements
9) Close temporary accounts in RE
10) Prepare post closing trial balance
What are the source documents in step 1?
Like invoices, bills, cash receipts.
What does step 2 mean by analyzing source documents?
To determine the dual effect on the AC equation Debit/Credit.
What does step 3 mean to actually record?
To actually create a T account for it.
Is deferred revenue a liability?
yes because you already received the $ for a good or service you haven't done yet.
What's a perpetual inventory account?
Inventory and COGS are continuously updated.
What's a periodic inventory account?
Inventory and COGS are updated at the end of reporting period.
What's an unadjusted trial balance?
Its where after everything is imputed, we see if total debits=total credits.
What are some examples of adjusting entries?
Prepayments, deferred revenue, estimates, and accruals.
Explain why accumulated depreciation is a contra asset
This is still an asset even though to increase it, you credit it. The purpose is to keep original cost of asset intact while reducing it indirectly on the balance sheet.
If prepaid expense is not recorded, what becomes overstated?
NI, Assets, SE.
Give an example of how a T account would look for depreciation
Depreciation expense debited
Accumulated depreciation credited
Give an example of how a T account would look for deferred revenue
Liability debited
Revenue credited
Accrual means
AFTER, the cash flow after the revenue or expense was recognized.
An accrued liability is an _______. Show its debit credit form.
expense incurred prior to cash payment.
Expense debited
Liability credited
An accrued receivable is an _______. Show its debit credit form
revenue incurred prior to cash payment.
Asset debited
Revenue credited
What kind of estimates would a depreciation expense have?
The expected useful; life or the expected residual value.
What kind of estimates would bad debt have?
the amount of AR that will not be collected.
Define income statement.
change in SE that occurred because of revenues, expenses, gains or losses.
Operating income minus COGS equals
gross profit.
Define statement of comprehensive income
changes in SE that did not occur.
The statement of comprehensive income can be reported 2 ways. What are they?
Either by "single step" with IS, or right after the income statement seperately.
Describe single step statement of comprehensive income
Net income would basically be a subtotal then have OCIs listed underneath it to produce a total total.
Describe how a statement of comprehensive income would be listed right after the IS
The statement of comprehensive income would just start with net income at the top then list its OCI's
What are OCIs?
incomes that are included on statement of comprehensive income, but excluded from the net income on the income statement.
Define balance sheet
current (meaning about 1 year) status of financials in a given time period.
What 3 compenents does statement of cash flows contain?
OA: related to income
IA: long term assets (land) and nonoperating investment assets
FA: creditors and owners
Define statement of shareholders equity
changes in investment by owners, distribution to owners, net income, other comprehensive income
What's the dual purpose of closing out the temporary accounts?
To 1) reduce them to 0 so that the accounts will be ready for next AC period and 2) to transfer amounts to RE because we want RE to reflect what changes occurred.
The difference in the amount of close out from revenues to expenses is actually the
net income.
Why is RE so weird and the "opposite of what you think" when closing out?
Its on the liabilities side of the equation right so most D/C will look like:
RE Debited
Expenses Credited OR
RE Debited
Dividends Credited
The control account amount is the
individual subsidiary account amount.
Three types of journals: what are they?
Special, sales, and cash reciepts.
Describe a special journal:
still captures dual effect, but simplifies recording process by: only recording accumulated summaries, not individual accounts and only those specialized record.
Describe a sales journal:
Has only 1 column because every entry has same effect. But it only records the credit sales, the cash ones go in the cash journal.
Describe a cash journal:
All the debits are cash, if there's an AR, its simply a credit.
Why is the balance sheet useful?
Liquidity, long term solvency, and financial flexibility.
What are the limitations of the balance sheet?
That book value does not represent market value.
Why does book value not represent market value?
Because assets are measured at historical costs and many valuable resources are not considered assets.
Assets and liabilities have current and long term, where shareholder equity has
paid in capital and retained earnings.
Current assets on the balance sheet are listed in order of
liquidity from most liquid to least liquid. They can be converted to cash in 1 year or 1 operating cycle, whichever is longer.
What are some current assets in their correct order?
1) Cash
2) Short term investments like stock and debt securities
3) AR
4) Inventory
5) Prepaid expenses
What are long term assets?
assets expected to be turned into cash for more than 1 year, or operating cycle, whichever is longer.
List some long term assets.
1) Property, plant, equipment (remember after this is listed the accumulated depreciation follows)
2) Intangible Assets (trademarks, accumulated amortization)
3) Investments (not used directly in operations)
4) Other long term assets (based on managers intent)
What are current liabilities?
items expected to be satisfied within 1 year, or operating cycle, whichever is longer.
List some current liabilities.
1) AP (normally due in 30-60 days)
2) Notes payable (short term) (interest included)
3) Deferred Revenue (example gift cards)
4) Accrued liabilities (expense incurred, but not yet paid)
5) Maturing portion of debt (payable in installment)
What are long term liabilities?
items due to be settled in more than a year, or operating cycle, whichever is longer.
List some long term liabilities
1) Long term notes (ex. mortgage)
2) Long term bonds
3) Pension or lease obligations
What is shareholders equity?
A-L=SE. Sometimes called net asset, book value, and includes accumulated other comprehensive income (AOCI)
What does shareholders equity include?
1) Paid in capital- amounts invested by shareholders in the corporations
2) Retained earnings- accumulated net income reported by a company since its inception minus all dividends distributed to shareholders
Does GAAP or IFRS have minimum requirements on the balance sheet?
IFRS.
Who lists non currents before currents? GAAP or IFRS?
IFRS.
What are disclosure notes?
They explain the data presented that would include a summary of AC policies, description of subsequent events, and related 3rd party transactions.
What are some examples of disclosure notes?
-pension plans
-long term debt
-income taxes
-property, plant, equipment
-leases
-investments
-employee benefit plans
What is meant by AC policies?
straight line or accelerated depreciation? LIFO or FIFO?
What are subsequent events?
events that occur after a year end, but before financial statements are issued.
What is meant by related 3rd party transactions?
families of owners, affiliated parties, errors & fraud where errors are unintentional and fraud is intentional, illegal acts such as bribes and contributions
What's management analysis?
its biased but informed perspectives on events, trends, and uncertainties related to: operations, liquidity, and capital resources.
What's management responsibility?
when manager claims responsibility and must certify financial statements due to Sarbanes Oxley.
The SEC requires a proxy statement, what is it?
its provided each year to shareholders with the annual report including compensation to directors and top executives with invites to shareholders to annual meetings to elect board members to vote on issues.
What do auditors do?
they examine financial statements and internal control procedures and attest fairness of financial statements resulting in an opinion based auditors report.
What are the four types of auditors report?
1) Unqualified
2) Unqualified with explanatory paragraph
3) Qualified
4) Adverse or disclaimer
What is an unqualified auditors report?
a clean opinion undertaken with professional care: planning for audit, understanding internal control procedures, and gathering evidence to attest accuracy to follow GAAP.
What is an unqualified with explanatory paragraph auditors report?
financial statements do follow GAAP but further info needs to be disclosed because of: lack of consistency, going concern, and material misstatement.
What is a qualified auditors report and/or an adverse/disclaimer auditors report?
When an auditor needs a second pair of eyes because it doesn't follow GAAP, has inadequate disclosures, and restriction on scope of examination.
What is default risk?
that a company wants to be able to pay its obligations when they come due.
What is operational risk?
this relates to how a company can withstand various events and circumstances that might impair ability to earn profits.
What are four methods to formulate predictions for risks?
1) Comparative financial statements
2) Horizontal Analysis
3) Vertical Analysis
4) Ratio analysis
How do you analyze financial statements in a comparative way?
the statements would be presented for the preceding year and often previous 2 years.
How do you analyze financial statements in a horizontal analysis?
the items would be presented as a percentage of base year amount.
How do you analyze financial statements in a vertical analysis?
the items would be presented as a percentage of total.
How do you analyze financial statements in a ratio analysis?
the items would be converted into ratios.
What are the liquidity ratios and what do they tell you?
They are current ratio and acid test ratio, this tells you if a company can pay its short term obligations.
What is current ratio?
current assets/current liabilities
What is acid test ratio?
quick assets/current liabilities
Formula for working capital=
current assets-current liabilities
If the current ratio was 2.93, put that in lamen terms
there is 2.93 current assets for every 1 current liability
For the acid test ratio, what does the numerator exclude?
inventories, prepaid items, and restricted cash.
For the acid test ratio, what does the numerator include?
cash, short term investments, AR.
What are the solvency ratios and what do they tell us?
They tell us our ability to pay long term debt, the ratios are debt to equity ratio and times interest earned ratio.
What is the formula for the debt to equity ratio?
total liabilities/shareholders equity
What is the formula for the times interest earned ratio?
net income +interest expense +income taxes/interest expense
The higher the debt to equity ratio,
the higher the risk
What does the debt to equity ratio compare?
compares resources provided by creditors with the resources provided by owners.
This measures creditors protection
If income is greater than interest expense,
creditors interests are more protected
The times interest earned ratio is used in conjunction with the debt to equity ratio. What does times interest earned ratio measure?
If the company has the funds to remain solvent or take on more debt.
More debt could mean,
higher return on shareholders equity
Favorable finanical leverage is risky. What is it?
using borrowed funds to provide greater returns to its shareholder.
What additional disclosure does the IFRS require?
amount of segment liabilities
What's an example of gains or losses increasing or decreasing in equity from peripheral or incidental transactions of an equity?
selling land for an amount that was different than the recording amount
What are the 3 sources of income from continuing operations that are ALSO in order on the income statement (multiple step version)
1) operating items (revenue, cogs, expenses)
2) nonoperating items (interest income and expense)
3) Income tax expense (subtract this one)
What is the single step version of the income statement?
Revenue and gains
minus expenses and losses
minus income tax expense
equals net income
What is the multiple step version of the income statements?
Operating and nonoperating
Revenue minus COGS
equals gross profit
Operating expenses subtracted from gross profit
equals operating income
nonoperating expenses and income tax expense subtracted from operating income
equals net income
What's income smoothing (GAAP approved)
creating a smooth pattern of earnings over time by overestimating expenses in current year to reduce net income, then reversing these estimates in future years to increase net income.
What is classification shifting?
to shift operating expenses to a nonoperating expense classification to report fewer operating expenses and higher operating income.
What is earnings quality?
ability of reported earnings to predict future earnings.
Because historical costs hinge on predictive value, we must enhance predictive value by
separating temporary earnings from permanent earnings.
Manipulating income reduces what?
earning quality by masking permanent earnings.
What is restructing costs?
managers plan to change the scope of business operations.
example: terminating benefits to an employee to be terminated
What would impair earnings quality for operating income?
asset impairment in value, losing a major customer, misstatement of revenue, and premature revenue recognition.
What would impair earnings quality for nonoperating income?
interest income and expense, gains or losses on sale of investments.
Can you report Non GAAP Earnings?
Yes it may be controversial but would include things related to GAAP like restructuring costs, acquisition costs, or stock competition.
When are discountinued operations reported?
when a component has been sold, disposed of, or is held considered for sale
or a strategic shift that has or will have a major effect.
What happens when something is sold before the end of the period?
either an income or loss from operation or a gain or loss from disposal
What happens when something is held for sale?
either and income or loss from operations or an impairment loss of book value (fair value-cost to sell)
Where on the income statement are discontinued operations listed?
at the bottom
What are the 3 accounting changes?
principle, estimate, and reporting entity
What are 3 ways principle change is mandated?
1) retrospective approach
2) modified retrospective approach
3) prospective approach (change in depreciation, amortization, or depletion method)
What's an additional way principle change is mandated?
voluntary which is done retrospectively by revising prior financial statements.
How is estimate change mandated?
prospectively. If change is material, a disclosure note is required.
An error discovered in the same year is a quick fix. What about an error discovered in later years?
its a prior period adjustment (if material)
What are the steps to a prior period adjustment to fix an error?
Find the material error
The Balance sheet is adjusted to appropriate levels
The income statement increases or decreases the beginning retained earnings
Lastly, add a disclosure note to explain why amounts changed.
What is earnings per share?
a ratio telling you income earned on a per share bases.
There's two types of earnings per share. What are they? Are they both reported on income statement?
Basic and diluted. Yes with basic first then diluted.
What's the basic type of earnings per share formula?
net income minus preferred stock dividends/weighted-average number of common shares outstanding
Describe the diluted type of earnings per share formula.
it affects all common shares. as # of common shares outstanding increases, EPS decreases
What is accumulated OCI?
an additional component of shareholders equity that is subtracted out and doesn't affect net income, just separates RE
What are some inflows for operating income on the SCF?
sale of goods or services, interest and dividends from investments
What are some outflows for operating income on the SCF?
purchase of inventory, salaries, interest on debt, and income taxes
What are two methods for operating income on SCF?
Direct- cuts out the middle man and
indirect- starts with net income and works backwards
What are some inflows for investing activities on SCF?
sale of long lived assets, sale of investment securities, collection of nontrade receivables
What are some outflows for investing activities on SCF?
purchase long live asset, purchase investment securities, loans to other entities
What are some inflows for financing activities on the SCF?
from owners when are shares are sold to them, from creditors when cash is borrowed
What are some outflows for financing activities on the SCF?
to owner in form of dividends, to owner for requistion of shares previously sold, to creditors as repayment of principal amounts of debt
What is there is a noncash item. How is it reported?
Its either on the front page of the SCF or has a disclosure note.
What's the 3 sections of the Dupont Framework?
1) Profitability
2) Activity
3) Financial leverage
What is profitability of the Dupont Framework and its 3 ratios?
its the measure of ability to make return on sales.
Ratios: profit margin on sales, return on assets, and return on equity.
What is the profit margin on sales ratio?
Net income/net sales
What is the return on assets ratio?
Net income/average total assets
What is the return on equity ratio?
Net income/average shareholders equity
Describe activity part of the Dupont framework and its 3 ratios.
higher the ratio, fewer assets required to maintain activity level.
Ratios:
asset turnover ratio, receivables turnover ratio, and inventory turnover ratio
What is the asset turnover ratio?
net sales/average total assets
What is receivables turnover ratio?
net sales/average AR. You can do 365/receivables turnover ratio to know exact # of days AR has been outstanding.
What is inventory turnover ratio?
COGS/average inventory. You can do 365/inventory turnover ratio to know how quickly inventory sold
What is the financial leverage formula that's part of the Dupont framework?
average total assets/average total equity
What's interim reporting?
Quarter reporting. Everything would stay same as usual except discontinued operations would be reported separately.
What are the minimums for interim reporting?
Sales, tax, net income, earnings per share, gains/losses, revenue/expenses, changes, discontinued operations, etc.