ACTG 210 Definitions and Ratios PDF

ACTG 210 Definitions and Ratios Study online at https://quizlet.com/_fiwmjj 1. Financial Accounting keeping the score for the entity 2. Financial Accounting External: stockholders, bankers, lenders, creditors, users vendors 3. Financial Accounting GAAP follows...

ACTG 210 Definitions and Ratios Study online at https://quizlet.com/_fiwmjj 1. Financial Accounting keeping the score for the entity 2. Financial Accounting External: stockholders, bankers, lenders, creditors, users vendors 3. Financial Accounting GAAP follows 4. Managerial Account- using accounting and non-accounting information to ing make decisions 5. Managerial Account- Internal: people making decisions about costs ing users 6. Managerial Account- Conventions (no GAAP) ing follows 7. Entity organizational element about which accounting in- formation is collected 8. Cost all costs are historical 9. Objectivity arm's length negotiation 10. Going Concern company will be around long enough to use up assets and pay all liabilities 11. Earned Revenue via rendered goods and services Recognition 12. Recognized Revenue via expectation of payment Recognition 13. Matching match expenses with revenue in the period they occur 14. Consistency follow the same procedures each accounting period so can compare financial statement 15. Conservatism if multiple options exist, pick the least-favorable 1 / 18  ACTG 210 Definitions and Ratios Study online at https://quizlet.com/_fiwmjj 16. Materiality if you knew the fact, it could change your mind; 5% of something 17. Full Disclosure "Full Monty" must disclose all relevant information 18. Accounting Equation Assets = Liabilities + Stockholders' Equity 19. Assets something of future economic value 20. Are all assets and lia- No, they must be objectively quantifiable to be bilities shown on the recorded balance sheet? 21. Liability something owed 22. Stockholders' Equity capital (common stock) + retained earnings 23. Capital investment by the stockholders 24. Contingent Liability liability that cannot by objectively quantifiable 25. Retained Earnings Earnings retained in the business 26. Retained Earnings Ending RE = Beginning RE + NIAT minus Dividends Equation 27. NIAT net income after taxes 28. Dividend distribution of retained earnings for stockholders 29. Expense expired asset 30. Revenue rendered goods and/or services with the expecta- tion of payment 31. Chart of Accounts "Accountant's Bible" or "Index" list of the names and account numbers for all ac- counts 2 / 18  ACTG 210 Definitions and Ratios Study online at https://quizlet.com/_fiwmjj 32. General Journal "Book of Original Entry" shows the debits and credits for each accounting transaction 33. General Ledger list of all transactions for the accounting period sort- ed by account number 34. Debit entry on the left side of a general ledger account 35. Credit entry on the right side of a general ledger account 36. Trial Balance list of all accounts showing that the total debits equal the total credits 37. Adjusting Entry reconciles a general ledger account to a backup schedule 38. Closing Entries at end of period, all revenue and expense accounts closed to Retained Earnings 39. Reversing Entries reversing an accrual entry from a previous period 40. Contra Account account used to keep the balance in another ac- count visible 41. "Close" or "Close the At the end of the period, close (move) all the rev- books" enue and expense account balances on the income statement to retained earnings; resets the income statement to zero to begin the next period. 42. Accrual Basis accounting based on transactions 43. Cash Basis accounting based on cash in/cash out (i.e. Real World) 44. Every Accountant Re- Debit: Expense, Asset ally Enjoys Love Credit: Revenue, Equity, Liability 45. GAAP Generally Accepted Accounting Principles 3 / 18  ACTG 210 Definitions and Ratios Study online at https://quizlet.com/_fiwmjj 46. Controller typically, the top accounting person in a company 47. Income Statement matched the revenue with the expense over a period of time (financial video) 48. Income Statement operating statement or P&L (profit and loss) state- also known as ment 49. Cost of Goods Sold cost of what is not there 50. Cost of Goods Sold beginning inventory + net purchases - ending inven- formula tory 51. Non-cash Charges deduction on income statement but no cash paid out 52. Non-cash Charges ex- depreciation, amortization, depletion, gain or loss amples on asset sale 53. Gross Profit net revenue - cost of goods sold (net revenue - (beginning inventory + net purchases - ending inventory)) 54. SG&A selling, general, and administrative expense (aka operating expenses) 55. Operating Income income from the core business 56. Operating Income for- gross profit - SG&A mula 57. Non-operating In- (aka "other") come interest income and expense, capital gain or loss 58. Balance Sheet shows assets = liabilities + stockholders' equity at a point in time (financial snapshot) 59. Current within 12 months or one operating cycle 4 / 18  ACTG 210 Definitions and Ratios Study online at https://quizlet.com/_fiwmjj 60. Current Assets assets that will be used up or converted to cash within one year 61. Current Liabilities liabilities which are due within one year 62. Statement of Changes difference between two balance sheets expressed in Cash Position in cash (Statement of Cash Flows) 63. "Capitalize It" put the amount on the balance sheet; generally, as an asset to be depreciated or amortized increases net income 64. "Expense It" = "Write deduct the amount on the income statement It Off" decreases net income 65. Common Stock basic (common) stock of the company sold to stock- holders; rights by state law 66. Preferred Stock hybrid stock (may possess bank-like characteristics) sold to specific investors; rights by contract 67. Authorized Stock stock authorized for sale by stockholders in the Ar- ticle of Incorporation 68. Issued Stock sold or exchanged for value 69. Treasury Stock stock bought back by the company (i.e. in the trea- sury of the company) 70. Outstanding Stock stock held by investors 71. Outstanding Stock issued stock - treasury stock formula 72. Fixed (plant) Assets assets with an estimated useful life of more than one (aka PPE) year 5 / 18  ACTG 210 Definitions and Ratios Study online at https://quizlet.com/_fiwmjj 73. Impairment irreversible reduction in the value of asset below its book value 74. Goodwill amount paid above the identifiable assets of a trans- action 75. Long Term Liabilities liabilities due beyond more than one year 76. Book Value of an As- original cost - accumulated depreciation set found on balance sheet in assets 77. Market Value of an As- value paid by a willing buyer willing seller set not found on the financial statements 78. Sales vs. Revenue there is no difference 79. Accrued estimated 80. Net income revenue - expense 81. Prepaid expense paid cash but have not yet received the goods and services 82. Unearned revenue received cash but have not yet rendered the goods (aka customer de- and services posits) 83. Depreciation, Amorti- method of cost allocation of long-term assets over zation, and Depletion the estimated useful life under the Matching Princi- ple doesn't represent wear and tear or loss of value 84. Depreciation formula allocation of original costs / estimated useful life of a tangible asset 85. Amortization formula allocation of original costs / estimated useful life of an intangible asset 6 / 18  ACTG 210 Definitions and Ratios Study online at https://quizlet.com/_fiwmjj 86. Depletion formula allocation of original costs / the estimated useful life of a natural resource asset 87. Depreciation, Amorti- expense for the period vs. sum of the expense zation, and Depletion across all periods since the asset was placed in vs. Accumulated De- service (contra asset accounts on the B/S) preciation, Amortiza- tion, and Depletion 88. Establishment of re- "who" is responsible sponsibility 89. Segregation of duties for "what" is "who" responsible for 90. Documentation pro- required paperwork to trace the transaction cedures 91. Physical controls physical barriers 92. Independent internal check by someone independent of the process verification 93. Human resource con- hiring people with the appropriate skills trol 94. Check and balance organizing work so people naturally check on each other (Both for internal control as well as to catch mis- takes) It is easier/cheaper to keep a customer than to find a new one 95. Calendar year accounting year ends December 31 96. Fiscal year accounting years ends on any other month 97. Cash discount 7 / 18  ACTG 210 Definitions and Ratios Study online at https://quizlet.com/_fiwmjj prompt payment discount—to get customers to pay faster (interest expense on I/S) 98. Trade discount reduction from retail price to get wholesale price (not on financial statements) 99. Periodic every so often, i.e. daily, weekly, monthly, quarterly, annually part of inventory on I/S 100. Perpetual every transaction (i.e. scanner) part of inventory on I/S 101. Other income and ex- Non-operating portion of the income statement pense Interest income, interest expense, gain or loss on the sale of assets 102. Gain sale of non-operating asset at greater than book value 103. Less sale of non-operating asset at less than book value 104. Only operating asset inventory 105. Basis Value from which tax gains and tax losses are mea- sured (similar to book value) 106. Value chain all the processes and procedures which add value to product or service in the customers eyes 107. Value added add value in the customer's eyes 108. Non-value added don't add value in the customer's eyes 8 / 18  ACTG 210 Definitions and Ratios Study online at https://quizlet.com/_fiwmjj 109. Supply chain all the activities to get the product made and in the hands of the customer 110. Tax expense expense to company appears on income statement examples: income tax, employer payroll taxes, sales tax paid by company on its purchases 111. Tax pass through taxes collected on behalf of a governmental entity and passed through to the entity neither a revenue nor an expense- may appear on balance sheet as liability if not yet paid examples: sales taxes, excise taxes, employee pay- roll taxes 112. "B to B" Business to Business companies selling primarily to other companies 113. "B to C" Business to Consumer companies selling primarily to consumers 114. "C level" the executive level of a company examples: chief executive officer, chief financial offi- cer, chief technology officer, chief marketing officer, chief (whatever) 115. What is the purpose of to satisfy a customer demand a for-profit, non-profit, and non-governmen- tal entity? 116. 9 / 18  ACTG 210 Definitions and Ratios Study online at https://quizlet.com/_fiwmjj How can a compa- The company keeps its books on the accrual basis ny "make" money and which follows transactions, but the Real Worldoper- not have any cash? ates on the cash basis of cash in/cash out 117. Why does a company To reward the stockholders for taking the investment need to make a profit? risk 118. Does a not-for-profit Yes, the cash donations to a not-for-profit must ex- entity need to make a" ceedthe cash paid out for the entity in order to build profit"? reserves and to fund future activities 119. Who pays the corpo- The customer pays the taxes. Revenue must cover ration or business en- all expenses which includes taxes. tity income taxes? An increase in taxes is an increase in expense which requires an increase in revenue for the company to make a profit. 120. What is the dif- 1) Not-for-profit entity: pays no income taxesFor ference between a profit entity pays taxes and thereby subsidizes for-profit entity and a not-for-profit entities not-for-profit entity? 2) For profit entity has stockholders. Not for profit entity has no owners 121. Do taxes matter? Yes. Taxes represent unavoidable cash out which Why? makes the cash unavailable for reinvestment in the business 122. Annuity cash flow pat- same amount (in or out) in each period tern 123. Simple interest interest for one period I = PRT I = Interest amount P= Principle R = Annual rate of interest T = Time (portion of a year) 10 / 18  ACTG 210 Definitions and Ratios Study online at https://quizlet.com/_fiwmjj 124. Compound interest interest over multiple periods; interest on interest 125. Rule of 72 to estimate roughly how long it will take of an invest- ment to double in value, divide the interest rate as a number into 72. Example: if the return is 5% per year it will take approximately 72/5 = 14.4 years for the investment to double in value. 126. What causes the pre- the market rate of interest differs from the coupon mium or discount in rate of interest. bond pricing? 127. Debt Service (aka ser- timely payment of principal and interest vicing debt) 128. Book Value of Compa- common stockholders' equity ny 129. Gross revenue revenue from sales PxQ 130. Net revenue net revenue = sales revenue - sales returns and allowances - sales discounts 131. Is gross revenue for net revenue because it's what you expect to collect net revenue more im- portant? 132. Gross accounts re- receivables from sales ceivable 133. Net accounts receiv- net accounts receivable = gross accounts receivable able - allowance for doubtful accounts 134. Is gross accounts net accounts receivable because it's what you ex- receivable or net pect to collect 11 / 18  ACTG 210 Definitions and Ratios Study online at https://quizlet.com/_fiwmjj accounts receivable more important? 135. Straight line deprecia- allocation of original cost evenly over the estimated tion life of an asset authority: GAAP 136. Accelerated deprecia- any depreciation methos faster than straight line tion authority: IRS 137. Purpose of straight matching principle: match expenses with revenue line depreciation 138. Purpose of accelerat- accelerate depreciation expenxe per tax to reduce ed depreciation taxable income to incent business to purchase cap- ital assets and thereby expand employment 139. Limit of straight line TOTAL depreciation over the life of the asset per and accelerated de- books and per tax will be the same preciation 140. FOB ("Free on point at which title transfers: FOB Plant, FOB desti- Board") nation not to be confused with who ultimately pays the shipping cost 141. Freight-In part of inventory which is a current asset on B/S cost of getting materials to the plant or warehouse 142. Freight-Out part of SG&A - sales/marketing expense of getting product to the customer; deduction from gross profit on I/S 143. Bad debt expense the net (squeeze) adjustment to the ADA account part of SG&A on the income statement 12 / 18  ACTG 210 Definitions and Ratios Study online at https://quizlet.com/_fiwmjj 144. ADA the estimate of accounts that are uncollectible contra account to A/R in current assets 145. Direct write off bed debts go directly to I/S since there is no ADA history 146. Just-in-Time invento- delivery of inventory just as it is required for produc- ry (JIT) tion trade off of reduced inventory levels vs stock out and additional costs of expedited inventory 147. First-In-First-Out earliest goods purchased are sold first (FIFO) flow of goods sold last-is-still-here (LISH) inventory valuation 148. Last-In-First-Out most recent goods purchased are sold first (LIFO) flow of goods sold first-is-still-here (FISH) inventory valuation 149. Fair (general usage) unit of emotional measure without objective refer- ence 150. Fair (accounting) estimate of value based on references to other ob- jective values (e.g. fair value accounting) auditors opinion after considering all management assertions in the financial statements (e.g. presents fairly) 151. Fair (baseball) a ball hit on the ground between first and third base 152. Formula for gain/loss sale price - net book value net book value = original cost - accumulated depre- ciation 153. Which stock is most outstanding stock because investors vote and re- important? ceive dividends (if declared) 13 / 18  ACTG 210 Definitions and Ratios Study online at https://quizlet.com/_fiwmjj 154. Hurtle rate required material rate of return 155. Weighted average economic cost of liability and equity components cost of capital weighted for their presence in the capital structure frequently approximated by "10%" or the increment- ed borrowing rate 156. Risk adjustment rate arbitrarily defined (higher) rate of return due to the of return uncertainties of the cash flows 157. Annuity same cash flow over multiple periods 158. Ordinary annuity cash flows at the end of the period (most common) 159. Annuity due cash flow at the beginning of the period (e.g. leases and lottery) 160. Capital budgeting focus is on after-tax rate of return on invested cash 161. Discounted cash flow considers time value of money (DCF) 162. Use cash not account- account data based on transactions and includes ing data non-cash charges NCF = NIAT + non-cash charges 163. Net present value at assumed discount rate (NPV) NPV = PV of cash flows in - PV of cash flows out 164. Internal rate of return discount rate where NPV equals zero (IRR) decision rule: do project if IRR > hurtle rate 165. Profit and loss based on accrual accounting (accounting concept) 166. Rate of return (RoR) 14 / 18  ACTG 210 Definitions and Ratios Study online at https://quizlet.com/_fiwmjj based on time value of money and cash in/out (fi- nance concept) very possible to have profitable project that doesn't meet RoR minimum 167. Basic assumptions of all cash flows occur at the end of the period and DCF analysis immediately reinvested at the discount rate 168. Reinvestment rate fal- all cash flows will actually be reinvested and earn lacy the discount rate 169. Relationship between profit/loss is accounting process based on accrual NPV/IRR and prof- accounting itability NPV is financial concept based on cash in/out and recognizes time value of money 170. Performance ratios ROS, ROE, debt/equity 171. Diagnostic ratios current ratio, working capital, GP percentage, quick ratio, DSO, A/R turn, NCF, asset turnover 172. Valuation ratios book value, book value per share, EBITDA 173. SIT seasonality, industry, trend 174. Solvency capacity to pay bills 175. Liquidity ability to pay bills 176. Return on sales (ROS) how much net revenue is getting to stockholders via net income 177. ROS formula NIAT/net sales 178. ROS rule of thumb S&P 500: 5-10% 179. Return on equity what are stockholders getting on their investment (ROE) 15 / 18  ACTG 210 Definitions and Ratios Study online at https://quizlet.com/_fiwmjj 180. ROE formula NIAT/total SE 181. ROE rule of thumb S&P 500: 15 - 20% 182. Debt/equity ratio (D/E) measure of risk 183. D/E formula total debt/total equity 184. D/E rule of thumb 1 to 2: if > 2 then may have debt service problems 185. Current ratio (CR) measure of short term solvency 186. CR formula current assets/current liabilities 187. CR rule of thumb 1 to 2: if > 2 then may have bad A/R or obsolete inventory 188. Working capital (WC) extra cash available 189. WC formula current assets - current liabilities 190. WC rule of thumb >0; as high as possible 191. Gross profit percent- applies to companies with inventory or an identifi- age (GP%) able cost of goods sold; reflects pricing policy. 192. GP% formula gross profit/net revenue 193. GP% rule of thumb trends over time, at least flat over time 194. Quick ratio (QR or measure of liquidity, how fast can raise cash Quick) 195. Quick formula (cash + marketable securities + net A/R)/current liabilities 196. Quick rule of thumb as close to or greater than 1 197. Days sales outstand- measure of liquidity, how fast sales are turning into ing (DSO) cash 16 / 18  ACTG 210 Definitions and Ratios Study online at https://quizlet.com/_fiwmjj 198. DSO formula net A/R/daily net sales 199. DSO rule of thumb 1.5 x credit terms 200. Accounts receivable average daily A/R collection turn (A/R turn) 201. A/R turn formula 365/DSO 202. A/R turn rule of thumb as high as possible 203. Net cash flow (NCF) how much cash the income statement is generating by assuming the income statement reflects a cash basis not an accrual basis how much cash business is generating 204. NCF formula NIAT + non-cash charges non-cash charges: all adjustments to reconcile 205. NCF rule of thumb >0; as high as possible 206. Asset turnover (AT) measure use of assets to generate revenue 207. AT formula net sales/average total assets 208. AT rule of thumb increasing over time 209. Book value (BV) the value of the company according to the account- ing books 210. BV formula common stockholders' equity - preferred stock 211. BV rule of thumb >0; as high as possible 212. Book value per share the value of the company according to the account- (BVPS) ing books 213. BVPS formula (common stockholders' equity - preferred stock)/common shares outstanding 17 / 18  ACTG 210 Definitions and Ratios Study online at https://quizlet.com/_fiwmjj 214. BVPS rule of thumb >0; as high as possible 215. Earnings before tax- measure cash generated by core business es, interest, depre- ciations, amortization (EBITDA) 216. EBITDA formula operating income + non-cash charges non-cash charges: depreciation, amortization, any expenses/income in operating income 217. EBITDA rule of thumb >0; as high as possible 218. Where is straight line used on the income statement ("per books') depreciation used? 219. Where is accelerated used in tax return ("per tax") depreciation used? 18 / 18