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Deferred Revenue

cash received before revenue is earned -> recognition of revenue is delayed until company meets obligation (delivery of good/service) ex. Gift card sales/redemption

Deferred Revenue Adjustment Journal Entry

debit unearned revenue, credit sales revenue

Straight Line Method Depreciation Expense Formula

(Cost - Residual Value) / Useful Life

Net Book Value

Cost - Accumulated Depreciation

Bad Debit Expense Journal Entry

debit bad debit expense, credit allowance for doubtful accounts

Depreciation Expense Journal Entry

debit depreciation expense, credit accumulated depreciation

Accounts Payable

obligations to pay suppliers in the near future

Accrued Liabilities

obligations from expenses that have been incurred but not paid

Deferred Revenue

obligations resulting from the receipt of cash prior to providing goods or services (i.e., revenue has not yet been earned, like gift cards)

Notes Payable

obligations resulting from a written formal contract The current portion of long-term debt (the amount due within one year) is reported in the current liability section of the balance sheet

Lease Liabilities

obligations resulting from long-term leases (renting assets); amount of expense recognized over the lease depends on how close the lease looks to ownership

Contingent Liabilities

potential liabilities resulting from a past event; not a definitive liability until some future event occurs (e.g., lawsuits; warranties)

Probable + Amount can be reasonably estimated

Record as liability

Probable + Amount cannot be reasonably estimated

Disclose in footnotes

Reasonably Possible (> Slight; < Likely) + Amount can be reasonably estimated

Disclose in footnotes

Reasonably Possible (> Slight; < Likely) + Amount cannot be reasonably estimated

Disclose in footnotes

Remote (Slight chance) + Amount can be reasonably estimated

Disclosure is not required

Remote (Slight chance) + Amount cannot be reasonably estimated

Disclosure is not required

Beginning Balance

PV

Interest Expense

Beginning Balance * I/Y

Principal Paid

Payment - Interest Expense

Ending Balance

Beginning Balance - Principal Paid

Accounts Payable Turnover Ratio

Cost of Goods Sold / Average Accounts Payable

Accounts Payable Turnover Ratio Interpretation

The number of times per period the company pays off its accounts payable. Higher ratio -> paying off payables in a timely manner

Working Capital Formula

Current Assets - Current Liabilities

Working Capital Interpretation

What is left after a company pays all its current liabilities with its current assets

Too little working Capital

company may not be able to meet its short-term obligations

Too much working capital

resources may be tied up in unproductive assets (e.g., excess inventory)

semi-annual I/Y

market rate / 2

quaterly I/Y

market rate / 4

semi-annual N

N x 2

quaterly N

N x 4

Principal

the amount borrowed

Maturity Date

date the principal must be repaid

Interest Rate

cost of borrowing/time value of money

Interest Expense Adjusting Entry

debit interest expense, credit interest payable

Payment of Note / Installment

debit interest expense and note payable, credit cash

Acquisition Journal Entry

debit equipment, credit note payable

Bonds

form of debt (funds owed to creditors). Bonds are issued to the public (vs. one financial institution). Bonds are traded on public exchanges after issuance (reduces risk to investor)

Bond Principal/Face/Maturity/Par value

is the lump-sum amount the company must pay to investors on the maturity date (also referred to as the face value, par value, or maturity value)

Coupon/Stated/Contract/Nominal rate

is the annual interest rate specified on the bond which is used to calculate cash interest paid to investors (also referred to as the stated rate, contract rate, or nominal rate)

Market/Effective/Yield rate

is the rate of return required by investors to purchase the bond and is used to calculate the price of the bond and the periodic interest expense (also referred to as the yield or effective interest rate)

stated rate = market rate

bond is issued at par

stated rate < market rate

bond is issued at a discount

stated rate > market rate

bond is issued at a premium

Zero-coupon bond

one which does not include period cash interest payments (coupon rate = 0%) and is treated the same as a bond issued at a discount

Callable bond

contains a call feature that allows the bond issuer the option of retiring the bonds early

Convertible bond

contains a conversion feature that allows the bonds to be converted into shares of the issuer’s common stock

Unsecured bond (debenture)

no assets are pledged as a guarantee of repayment

Secured bond

specific assets are pledged as a guarantee of payment at maturity

Bond Advantage 1

Stockholders maintain control: bondholders do not vote or share in dividends; issuing equity reduces the voting power and dividends for current stockholders

Bond Advantage 2

Interest expense is tax deductible: tax reduction reduces the net cost of borrowing, unlike dividends, which are taxed twice (once on corporate net income and once for recipients of dividends)

Bond Advantage 3

Issuing bonds can increase the return to shareholders: Return on Equity (ROE) = Income/Equity; raising capital for a project through bonds should increase income through investments in equipment, etc., but does not alter equity

Bond Disadvantage 1

Risk of bankruptcy: interest must be paid regardless of performance and the company can be held in default for lack of payment, unlike dividends, which companies may voluntarily declare

Bond Disadvantage 2

Negative impact on cash flows: bond require sufficient cash to pay principal and interest when due or the ability to refinance debt

Cash interest paid per period

Face Value x Stated Rate (per payment period)

Cash Interest Paid

Face x Stated

Discount/Premium Amortization

Interest Expense - Cash Interest Paid

Carrying Value (end)

Carrying Value (begin) + Discount/Premium Amortization

Times Interest Earned Ratio

Net Income + Interest Expense + Income Tax Expense/Interest Expense

Times Interest Earned Ratio Interpretation

Amount of income earned for each dollar of interest expense. Higher ratio indicates wider margin to pay interest expense in case income deteriorate. ability to cover future payments

Debt to Equity Ratio

Total Liabilities/Total Stockholders Equity

Debt to Equity Ratio Interpretation

Reliance on debt financing relative to equity financing Higher ratio indicates higher reliance on debt may not be able to meet obligations in the event of an economic downturn

Owners of common stock benefits

voting rights, dividend rights, residual claim

Common Stock

basic voting stock issued by a corporation

Preferred Stock

stock that has specified rights over common stock

Treasury Stock

a corporations own stock that has been repurchased

Authorized Shares

maximum number of shares of stock a corporation can issue as specified in its charter

Issued Shares

total number of shares that have been sold (includes treasury stock)

Outstanding Shares

total number of shares that are owned by stockholders on any particular date (excludes treasury stock)

Outstanding Shares Equation

Issued Shares - Treasury Stock

Large Stock Dividend

use par value only (>20-25% outstanding shares)

Small Stock Dividend

use market price, par value, and APIC (<20-25% outstanding shares)

Stock Splits

a company gives shareholders a specified number of additional shares for each share that they currently hold. In a X

Current dividend preference

requires that dividend be paid to preferred stockholders before any can be paid to common stockholders (typical)

Cumulative dividend preference

requires unpaid dividends on preferred stock to accumulate (dividends in arrears must be paid before common stockholders are paid)

Earnings Per Share Interpretation

Amount of earnings attributable to a single share of outstanding common stock. How well is a company performing?

Dividend Yield Ratio Interpretation

Return investors receive on investment attributed solely to dividends. How much does a company pay out in dividends each year relative to its share price?

Cash has an inverse relationship with

noncash assets (they move in opposite directions)

Cash has a direct relationship with

liabilities and equity (they move in the same direction)

Cash Flows from Operating Activities

directly related to earnings from normal operations. (Ex.Cash from customers, Dividends and interest on investments (note

Changes in liabilities have a

direct relationship with changes in cash. (Increases in liabilities -> Increases in cash, Decreases in liabilities -> Decreases in cash

Cash Flows from Investing Activities

cash in/outflows related to the purchase and disposal of long lived productive assets and investments in the securities of other companies (Ex. Sale or disposal of property, plant, and equipment, Sale or maturity of investments in securities, Purchase of property, plant, and equipment, Purchase of investments in securities)

Cash Flows from FInancing Activities

cash in/outflows related to external sources of funding (owners and creditors) (Ex. Borrowing on notes, mortgages, bonds, etc. from creditors, Issuing stock to owners, Repayment of principal to creditors (excluding interest operating), Repurchasing stock from owners, Payment of cash dividends to owners)

Quality of Income Ratio Interpretation

The portion of income that was generated in cash. How much cash does each dollar of net income generate?

Capital Acquisitions Ratio Interpretation

The portion of purchases of PPE financed from operating activities. To what degree was the company able to finance purchases of PPE with cash provided by operating activities

Free Cash Flow Interpretation

Positive free cash flow means cash is available for additional capital expenditures, investments in other companies, and mergers & acquisitions.

Retained Earnings Equation

Net Income - Dividends

Annual Dividend Equation

dividend rate x par x shared outstanding

Deferred Revenue Inception Journal Entry

debit cash, credit unearned revenue

Preferred Stock Characteristics

no voting rights, less risky, fixed dividend rate

Bond Issuance Journal Entry at par

debit cash, credit bond payable

Interest Payment Journal Entry at par

debit interest expense, credit cash

Bond Maturity Journal Entry (Bond Repayment) at par

debit bond payable, credit cash

Zero Coupon Bond Issuance Journal Entry

debit cash and bond discount, credit bond payable

Interest Expense Journal Entry

debit interest expense, credit bond payable

Common Stock Sale of Stock Journal Entry

debit cash, credit common stock and APIC

Common Stock Repurchase of Stock Journal Entry

debit treasury stock, credit cash

Common Stock Sale of Repurchased Stock Journal Entry

debit cash, credit treasury stock (apic balances it out)

Cash Dividend Declaration Date Journal Entry

debit retained earnings, credit dividends payable