UCI MGMT 30A midterm

What is accounting?

A process of identifying, analyzing, recording, summarizing and reporting economic information to decision makers in a form of financial statements.

Who use accounting information?

Internal --> Managers

External --> Investors, Creditors, Legislators

What does financial accounting focus on?

It focuses on the specific needs of decision makers external to the organization.

What are the 4 financial statements?

Income statement

Retained earnings statement

Balance sheet

Statement of cash flows

Income statement

-Reports revenues and expenses for A SPECIFIC TIME PERIOD

-Net income - revenues exceed expenses

-Net loss - expenses exceed revenues

-Past net income provides information for predicting future net income

-Net income is needed to determine the ending balance in retained earnings

Retained earnings statement

-Statement shows amounts and causes of changes in retained earnings during the period

-Time period is the same as that covered by the income statement

-Users can evaluate dividend payment practices

-Ending balance in retained earnings is needed in preparing the balance sheet

Balance sheet

-Reports assets and claims to assets at a specific point in time

-Assets = Liabilities + Stockholders' Equity

-Lists assets first, followed by liabilities and stockholders' equity

Statement of cash flows

Provides answers to -

-Where did cash come from during the period?

-How was cash used during the period?

-What was the change in the cash balance during the period?

Annual report

U.S. companies that are publicly traded must provide shareholders with an annual report, which always includes -

-Financial statements

-Management discussion and analysis

-Notes to the financial statements

-Auditor's report

Management Discussion and Analysis (MD&A)

-Part of the annual report

-Presents management's view on the company's ability to pay near-term obligations, its ability to fund operations and expansion, and its results of operations

-Management must highlight favorable or unfavorable trends and identify significant events and uncertainties that affect these three factors

Notes to the financial statements

-Clarify the financial statements

-Provide additional detail

-Notes are essential to understanding a company's operating performance and financial position

Auditor's report

-Auditor's opinion as to the fairness of the presentation of the financial position and results of operations and their conformance with generally accepted accounting principles

-Only certified public accountants (CPA) may perform audits

Assets =

= Liabilities + Equity

Equity =

= Contributed Capital + Earned Capital (Retained Earnings)

Financial Statement Effects Template (FSET): 

• Cash+Noncash Assets=Liabilities+Contrib. Capital+ Earned Capital 

• Revenues−Expenses = Net Income

Stock issuance:

Cash ↑, Contributed Capital ↑

Borrowing (loan):

Cash ↑, Liabilities ↑

Pay Expenses:

Cash ↓, Expenses ↑

Sell goods

Cash↑, Revenue ↑, Noncash (Inventory) ↓, COGS ↑

Buy inventory on account

Assets (Inventory) ↑, Liabilities (Accounts Payable) ↑

Liabilities include…

• Accounts Payable

• borrowing

Noncash Assets include…

• bought inventory

• goodwill

• stock

• PP&E

• trademarks

Cash includes…

• revenue

• purchasing

• selling

Earned Capital includes

• all undistributed income that remains (net income)

Revenue is recognized when _______ is received/transferred

product/service

unearned revenue includes…

customer prepayment: service/product not given yet

prepaid expense includes….

Pay cash in advance before expense is given

Ending Inventory =

= Beginning Inv + Purchases – COGS

Retained Earnings (RE) =

Beg RE + Net Income – Dividends

Cost to cost method (percentage of completion)

Revenue Recognized= (Sum % completion)(cost) - rev recognized

Gross Profit =

= Revenue Recognized − COGS

Accounts Receivable (Net) *on balance sheet =

A/R (Gross) − Allowance (for Doubtful Accounts)

Accounts Receivable is…

Balance money due to a firm for goods/services delivered but not paid yet by customers

Unearned Revenue is:

Received cash before good/service is delivered (recorded)

—>A liability (obligation) created for a company to deliver a good/service at a future date

Allowance (asset related to A/R) =

= Beg + Bad Debt Exp − Write-offs = Ending Balance

Profit Margin =

= Net Income / Total Revenue

Effective Tax Rate =

= Tax Expense / Income b4 Tax

Bas Debt Estimation:

Aging OR % of sales (income statement)

Net PP&E =

= Cost - depreciation

Intangible assets

Are BY CONTRACT rather than physical nature

Goodwill =

= purchase price - fair price of identifiable net assets of aquired

• -cash

• +assets

• +goodwill assets

•+liability

Goodwill is an…

Intangible asset

Annual Depreciation Expense =

= (Cost - Salvage) / Project lifespan

PPE Gross =

= Original Cost b4 accumulating depreciation

Average (effective) tax rate =

=Tax expense/ Income b4 tax

Interest Expense =

=Principle x Annual Rate x Portion of Yr Outstanding

Principal is…

The amount borrowed or invested on which interest accrues

Interest is…

Rental expense of using principle or rents revenue for lending principal

Interest Expense

•+liabilities

•+expenses

PE ratio =

= stock price/ EPS

Basic EPS =

= Net Income/ Weighted Avg # common Shares Outstanding

Percent Change =

= (2nd yr - base yr) / base yr

Gross Margin =

= (Sales - COGS) / Sales

Gross Profit =

= Sales - COGS

Profit Margin =

= Net Income / Sales

Current Ratio =

= Current Assets/ Current Liabilities

Short Term Liquidity is…

Ability to meet current obligations

•generate sufficient cash to supply operations

•service/ pay off debts to suppliers, employees, and other creditors short run

Current Ratio limitations…

• is easily manipulated

•doesn’t show synchronization between cash in and outflows

•high doesn’t necessarily mean good for a firm (situational by CFO)

Liabilities: Assets Ratio =

= Total Liabilities/ Total Assets

Long-term solvency is long-term…

ability to

•generate cash to satisfy capacity and debt repayment needs

•make interest and principal payments on debts and similar obligations

Quick Ratio =

= (cash + marketable securities + accounts receivable) / current liabilities