Financial Accounting Study Guide PDF

\#\#\# Study Guide \#\#\#\# \*\*Current Liabilities and Ethics\*\* \*\*Current Liabilities\*\*: \- \*\*Definition\*\*: Obligations expected to be settled within one year or the operating cycle, whichever is longer. \- \*\*Examples\*\*: \- Accounts payable: Amounts owed to suppliers. \- Short-t...

\#\#\# Study Guide \#\#\#\# \*\*Current Liabilities and Ethics\*\* \*\*Current Liabilities\*\*: \- \*\*Definition\*\*: Obligations expected to be settled within one year or the operating cycle, whichever is longer. \- \*\*Examples\*\*: \- Accounts payable: Amounts owed to suppliers. \- Short-term notes payable: Written promises to pay specific amounts. \- Accrued liabilities: Expenses incurred but not yet paid (e.g., wages, taxes). \- Unearned revenue: Payments received before delivering goods or services. \- \*\*Key Ratios\*\*: \- Current ratio = Current Assets / Current Liabilities \- Quick ratio = (Cash + Marketable Securities + Accounts Receivable) / Current Liabilities \*\*Ethics in Financial Reporting\*\*: \- Importance of transparency and accuracy. \- Avoid practices like misstating liabilities or delaying recognition of obligations. \- Adherence to professional codes of ethics and standards (e.g., GAAP, IFRS). \- Consequences of unethical behavior: loss of credibility, legal penalties, and damage to reputation. \-\-- \#\#\#\# \*\*Appendix C: Time Value of Money (TVM)\*\* \*\*Core Concepts\*\*: \- \*\*Time Value of Money\*\*: A dollar today is worth more than a dollar in the future due to earning potential. \- \*\*Key Formulas\*\*: \- Future Value (FV):  \\(FV = PV \\times (1 + r)\^n\\) \- Present Value (PV):  \\(PV = \\frac{FV}{(1 + r)\^n}\\) \- Annuities: \- Ordinary annuity (payments at period-end): \\(FV = P \\times \\frac{(1 + r)\^n - 1}{r}\\) \- Present value of an annuity: \\(PV = P \\times \\frac{1 - (1 + r)\^{-n}}{r}\\) \*\*Applications\*\*: \- Loan amortizations. \- Valuing investments. \- Determining interest rates and compounding effects. \*\*Example Problem 1\*\*: Calculate the future value of a \$5,000 investment over 10 years at an annual interest rate of 6%, compounded quarterly. \- \*\*Solution\*\*: \- Principal \\(PV = 5000\\), rate per period \\(r = 0.06 / 4 = 0.015\\), number of periods \\(n = 10 \\times 4 = 40\\). \- \\(FV = 5000 \\times (1 + 0.015)\^{40} \\approx 9070.09\\) \*\*Example Problem 2\*\*: Determine the present value of receiving \$20,000 in 5 years if the discount rate is 8%, compounded annually. \- \*\*Solution\*\*: \- \\(FV = 20000, r = 0.08, n = 5\\). \- \\(PV = \\frac{20000}{(1 + 0.08)\^5} \\approx 13611.66\\) \-\-- \#\#\#\# \*\*Chapter 9: Long-Term Liabilities\*\* \*\*Types of Long-Term Liabilities\*\*: \- Bonds payable: Long-term borrowing through the issuance of bonds. \- Lease obligations: Commitments to pay for leased assets. \- Pension liabilities: Obligations to employees for retirement benefits. \*\*Bond Terminology\*\*: \- Face Value: Principal amount to be repaid. \- Coupon Rate: Interest rate stated on the bond. \- Market Rate: Prevailing rate of interest in the market. \- Premium/Discount: Bonds issued above/below face value. \*\*Amortization Methods\*\*: \- Straight-line method: Equal expense over the bond term. \- Effective-interest method: Based on the carrying amount and market rate. \*\*Example Problem 3\*\*: A \$100,000 bond with a 5% annual coupon rate is issued for \$96,000. Calculate the annual straight-line amortization over 10 years. \- \*\*Solution\*\*: \- Total discount = \\(100000 - 96000 = 4000\\). \- Annual amortization = \\(\\frac{4000}{10} = 400\\). \- Each year, \$400 is added to the carrying value of the bond. \*\*Example Problem 4\*\*: Calculate the total interest expense over the life of the bond in Example 3. \- \*\*Solution\*\*: \- Annual coupon payment = \\(100000 \\times 0.05 = 5000\\). \- Total payments = \\(5000 \\times 10 = 50000\\). \- Add the total discount = \\(4000\\). \- Total interest expense = \\(50000 + 4000 = 54000\\). \-\-- \#\#\#\# \*\*Stockholders' Equity\*\* \*\*Components\*\*: \- Common stock: Ownership shares in the company. \- Preferred stock: Shares with preferential rights (e.g., dividends). \- Retained earnings: Accumulated net income not distributed as dividends. \- Treasury stock: Reacquired company stock. \*\*Key Ratios\*\*: \- Earnings per Share (EPS): \\(EPS = \\frac{Net\\ Income - Preferred\\ Dividends}{Weighted\\ Average\\ Shares\\ Outstanding}\\) \- Return on Equity (ROE): \\(ROE = \\frac{Net\\ Income}{Average\\ Stockholders\'\\ Equity}\\) \*\*Example Problem 5\*\*: A company has a net income of \$500,000, preferred dividends of \$50,000, and 200,000 weighted average shares outstanding. Calculate EPS. \- \*\*Solution\*\*: \- \\(EPS = \\frac{500000 - 50000}{200000} = 2.25\\). \-\-- \#\#\#\# \*\*Statement of Cash Flows\*\* \*\*Purpose\*\*: To show cash inflows and outflows from operating, investing, and financing activities. \*\*Sections\*\*: \- \*\*Operating Activities\*\*: Cash from core business operations. \- Direct method: Lists cash receipts and payments. \- Indirect method: Adjusts net income for non-cash transactions. \- \*\*Investing Activities\*\*: Purchases/sales of long-term assets. \- \*\*Financing Activities\*\*: Issuance/repayment of debt, issuance/repurchase of stock, dividends. \*\*Key Insights\*\*: \- Positive cash flow from operations indicates financial health. \- Trends in investing and financing reveal strategic priorities. \- Reconcile beginning and ending cash balances. \*\*Example Problem 6\*\*: A company reports the following: \- Net income: \$100,000 \- Depreciation: \$20,000 \- Increase in accounts receivable: \$10,000 \- Decrease in accounts payable: \$5,000 \- Calculate cash flow from operating activities (indirect method). \- \*\*Solution\*\*: \- \\(100000 + 20000 - 10000 - 5000 = 105000\\). \- Cash flow from operations = \$105,000. \-\--