Financial Ratios and Financial Statements, Exams of Business Systems

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Wall Street Prep Accounting (Latest 2023 – 2024) Complete Solutions Liquidity Ratios - measures of a firm's short-term ability to meet its current obligations Profitability Ratios - measures of a firm's profitability relative to its assets (operating efficiency) and to its revenue (operating profitability) Activity Ratios - Measure of efficiency of a firm's assets Solvency Ratios - Measure of a firm's ability to pay its obligations Inventory Turnover - COGS / avg inventory Receivables Turnover - revenue / average accounts receivable DSO (Days Sales Outstanding) - AR/Credit Sales * days in period days in period/receivables turnover A/P turnover - COGS / Average A/P PPP (payables purchasing period) - days in period/ Accounts payable turnover Current Ratio - current assets/current liabilities Quick ratio (acid test) - Cash and AR divided by current liabilities Gross profit margin - gross profit/revenue operating margin - operating profit/revenue net profit margin - net income/revenue asset turnover - revenue/ average assets return on assets (ROA) - Net Income / Average Assets return on equity (ROE) - net income/ total equity Basic EPS - (Net Income - Preferred Dividends)/(Weighted Average of Shares Outstanding) Diluted EPS - diluted net income / weighted average diluted shares outstanding dividend yield - dividends/net income debt to EBITDA - Total Debt/EBITDA interest coverage ratio - EBIT/ interest expense fixed charge coverage - (EBIT + Lease charges)/(Interest Payments + Lease charges) Debt to Total Assets - Total Debt/Total Assets debt to equity - total liabilities/total equity cash from operations (CFO) - uses net income as a starting point and converts accrual base net income into cash flow from operations via a series of adjustments cash from investing activities (CFI) - capital expenditures / asset sales and purchases cash from financing activities (CFF) - new borrowing / pay down of debt / new issuance of stock / share repurchases / issuance of dividends working capital - -CFO -increase in current assets = cash outflow -increase in current liabilities = cash inflow asset write downs / impairments - -added back to CFS via CFO Increases in A/R, inventory, prepaid expenses, other current assets should be _____________ net income to get to CFO - subtracted increases in A/P, accrued expenses, other current liabilities should be ____________ net income to get to CFO - added gains on sale of assets - subtracted from CFO stock based compensation - added to CFO Common CFI inflows/outflows - - capital expenditures - purchases of intangible assets + asset sales + sales of debt/ equity security - purchases of debt/equity security Common CFS inflows/outflows - -Issuance / repayment of debt (cash inflow / outflow) -Common stock issued / repurchased (cash inflow / outflow) -Payment of common & preferred dividends (cash outflow) Assumptions of Accounting - accounting entity, going concern, measurement, periodicity Straight Line Depreciation - Annual depreciation expense = (original cost- salvage value)/useful life Accelerated Depreciation Methods - -calculates a greater amount of depreciation in early years -declining balance, sum of years digits, units of production Amortization Expense - Allocation of the cost of intangible assets over the number of years that these assets are expected to help generate revenue for the company Types of Intangible assets - Customer lists Franchise, membership, licenses Patents and technology Trademarks and good will are __________ because they are considered to have indefinite useful life - not amoritzed Expenses associated with developing intangible assets are_____________as they are incurred - fully expensd Stock based compensation expense - Expense of employee's salaries are embedded within the expense categories based on the employee's job function -same with stock based compensation Other operating expenses/income - Gains/losses on sales of fixed assets Gains/losses from legal statements Restructuring expenses and severance costs Inventory write down Non-operating income and expenses - -Everything below operating profit -Interest Expense -Interest Income -Usually represnted as Net Income Expense Other non-operating income/expensea - -income: increases in value and gains on sale on certain financial instruments -expenses: decreases in value and losses on sale on certain investments and debt Tax expense does not equal actual cash taxes paid - Because of the ability of companies to defer certain taxes, tax expense companies recognize on their income statement does not equal acutal cash taxes paid that period Net Income - Measure of profitability on income statement income after all expenses have been paid out Shares Outstanding = - Shares issued - Treasury Stock Treasury stock - stock that has beein issued then repurchased Basic shares outstanding - includes only actual shareholders Diluted shares outstanding - include impact of potentially dilutive security holders that expand the share base (stock option holders and preferred stock holders) that can convert to common stock or holders of convertible debt Earnings per share - -Dividing net income by shares outstanding; -measures how much of the total current period profits belong to each shareholder Weighted average presentation - weighted average of amount of shares outstanding during the period of the income statement Diluted EPS will almost always be _______than basic EPS - smaller What CFO's do with net income/profit? - 1. Make distributions to shareholders via dividends 2. Keep profits and reinvest in the business 3. Pay down any existing debt obligations or other liabilities 4. Sit on it and grow a pile of cash EBIT - earnings before interest and taxes EBITDA - Earnings before interest, taxes, depreciation, and amortization Balance Sheet - Reports the company's resources (assets) and how the resources are funded (liabilities and shareholder's equity) on a particular date Assets = - Liabilities + Equity Requirements of an asset - The company must own the resource The resource must be of value The resources must have a quantifiable, measurable cost Common Types of Assets - -Cash: money held by the company in its bank accounts -Marketable Securities: Debt or equity securities held by the company -Accounts Receivable (A/R): payment owed to a business by its customer for goods and services already delivered to them -Inventories: unfinished or finished goods that are waiting to be sold, and the direct costs associated with production of the goods -Prepaid Expenses: when a company prepays for things such as utilities, insurance, and rents, the rights to the future services become assets -PP&E: land, building, machinery used in the manufacture of the company's services and products -Intangible Assets and Goodwill: non-physical assets such as patents, trademarks, and goodwill acquired by the company that have value based on the rights belonging to the company Requirements for a liability - -must be measurable -must be probable Common Liabilities - -Accounts Payable: company's obligations to suppliers for services and products already received but not yet payed for -Accrued Expenses: expenses like employee compensation that the company has incurred, but has not paid -Short Term Debt: due in less than 12 months -Long Term Debt: debt whose maturity exceeds 12 months Equity - source of fund through equity investment and retained earnings Common Equities - -Preferred Stock: stock that has special priority and rights over common stock -Common Stock: represents capital received when a company issues shares -Treasury stock: Common stock that has been reissued and then repurchased -Retained earnings: Total company earnings/losses since its inception minus all the dividends The Accounting Equation - Every single transaction has two sides: a source of funds and a use of funds -use of funds will always equal source of funds Buying a plant - Cash is the source of funds Funds used to build the plant Buying inventory on credit from the seller - -The source of funds is a new liability -The use of funds is buying inventory Issuing stock - -The additional equity investors are the source of funds -The funds were used to add cash Double Entry Accounting - Every transaction is recorded through the use of a "credit" (source of funds) and an offsetting "debit" (use of funds) such that total debits always equal total credits in value Debit - -Increases in assets -Decreases in liability and equity Credit - -Increases in liabilities and equity -Decreases in assets COGS are _______using LIFO vs. FIFO in periods of rising inventory prices - higher Net income is _______ using LIFO vs FIFO - lower The ________ of LIFO accounting is what makes it preferable for many U.S. companies over FIFO accounting in periods of rising inventory prices - tax benefit LIFO Reserve = - FIFO inventory - LIFO inventory LIFO inventory + LIFO Reserve = - FIFO Inventory FIFO COGS + LIFO Reserve = - LIFO COGS The lower of cost-or-market (LCM) rule dictates that - if market inventory falls below historical cost, they must be written down to market value Loss (in market inventory) must be immediately recognized on the _____ - I/S COGS or SG&A or other line item Impact of inventory write down on B/S - debit > equity > retained earnings Credit > asset > inventory PP&E - Represents land, buildings, and machinery used to manufacture the company's services and products plus all costs necessary to prepare those fixed assets for their service (transportation, installation, other) PP&E cycles out of the B/S and into the I/S as _________(either in COGS, SG&A or elsewhere) - depreciation Net purchases of PP&E are called _______ - capital expenditures Impact of PP&E on B/S: at purchase - Debit > asset > PP&E Credit > asset > cash Impact of PP&E on B/S: after one year - Debit > equity > retained earnings (depreciation) Credit > Asset > PP&E (depreciation) Net PP&E = - Gross PP&E - accumulated depreciation Accumulated depreciation is a _________ - contra account Increases in a contra account ________associated asset amount - reduce PP&E is reported ____________ - net of accumulated depreciation PP&E whose value declines needs to be written down to market value, and ...... - ......The loss needs to be immediately recognized on the balance sheet If a company chooses to sell some of their PP&E, the associated gross PP&E balance (and accumulated depreciation) is removed from the balance sheet offset by ....... - The cash received and any gain/loss on sale on the income statement When a company sells assets, if it receives ______than the net book value it recognizes on the B/S at the time of sale, a ________is recorded on the I/S-usually as _______ - more; gain; "other" operating or non-operating income, or within the expense category that the asset was being depreciated (COGS or SG&A) Regardless of the sale price, only the _______ is removed from the PP&E line, any excess gain (loss) is recognized on the______ - net book value; I/S The lemon squeezer has a net book value of $10 at the end of 2014, comprised of the original purchase price (gross PP&E) of $15k, less accumulated depreciation of $5k. On January 1, 2015 the squeezer is sold for $12k - During 2014: -Debit > Asset > PP&E -Debit > Equity > Retained earnings (depreciation) -Credit > Asset > cash -Credit > asset > PP&E (depreciation) At sale: -Debit > asset > cash -Credit > equity > retained earnings (gains from sale) -Credit > asset > PP&E (sale) Intangible Assets - -Non-physical acquired assets -linked to amortization on I/S Goodwill - amount by which the purchase price for a company exceeds its fair market value (FMV) Goodwill impairment - -goodwill is not amortized but tested annually for loss of value -goodwill can only be written down not up If the value of the previously acquired company declines, goodwill is ________, with a corresponding reduction to _______via the ________, by the amount of the _______ - reduced, retained earnings, income statement, impairment Accounts payable (A/P) - A current liability representing amounts owed by the company to suppliers for prior purchases or services Accrued expenses - expenses that have already been incurred but not yet paid Suppose you didn't actually pay the $12.6k in taxes that you owe, but were planning to pay it on April 15 2015 (next year). In addition, let's say that of the $15k in salary owed to the cashier, you paid $13k, but you hadn't come around to paying the remaining $2k and were planning on paying it in January of 2015 - Credit > asset > cash Debit > retained earnings (SG&A) Debit > equity > retained earnings (Taxes) Credit > Liability > Accrued expenses Deferred (unearned) revenue - Revenue received for services not yet provided by the company Deferred revenue is a _________liability if the revenue is expected to be recognized within the year, otherwise, it is a___________liability - current, long-term Suppose your lemonade stand offered a gift card letting customers prepay for 10 cups of lemonade at a discount and that you sold $3k such contracts during the year, of which $1k were immediately redeemed for lemonade - Debit > Asset > cash Credit > Liability > deferred revenue Credit > equity > retained earning (revenue) Current portion of long-term debt - Portion of long-term debt which is due within 1 year Impact of Long Term Debt: Initial borrowing - Debit > asset > cash credit > liability > long term debt Impact of Long Term Debt: Interest Payment - Debt > Equity > retained earnings (interest expense) Credit > asset > cash Finance leases - Recognizes the lease as debt and the underlying asset as PP&E on the lessee's balance sheet Companies have to estimate the initial liability as the ______value of all _______lease payment, using a - present, future, discount rate assumption On the income statement both _____________and an ____________reduces_______________ - depreciation expense, implied interest expense, net income Finance lease accounting wants us to break up the lease payments into two components: - interest and depreciation fees the overall depreciation + interest expense will be ___________early in the lease and __________later in the lease - higher, lower Operating lease accounting is supposed to apply to leases where - the lessee really doesn't have economic ownership of the lease