Financial Accounting Exam 4

Benefits of Stock Financing

Offers flexibility, growth potential, and no fixed repayment schedule like bond financing. No money is owed to stockholder’s.

Par Value

the nominal or original value of the stock as stated by the corporation

Premium

when the shares are issued for a greater price than the par value

Declaration Date

the board of directors announces the intention to pay the dividend, and a liability is created

Date of record

this is the date the corporation records the stockholders that will receive dividend checks

Payment date

this is the date the dividend is paid to stockholders

Calculation for retained earnings

= beginning retained earnings + net income - dividends

Purpose of statement of cash flows

predict future cash flows, evaluate management, predict ability to pay debts and dividends, and analyzes fluctuations of cash

direct method

restates the income in terms of cash and shows the actual cash receipts and cash payments. This is the least common method used.

indirect method

starts with net income and adjusts to net cash. It uses account relationships to determine changes in cash. This is the most popular method.

operating activities

the section on the statement of cash flows which reports on activities that create revenue or expense in the entity’s business

Operating activity +

decrease in merchandise inventory

operating activity +

interest revenue and dividend income

operating activity -

increase in merchandise inventory

operating activity -

payment of operating expenses

operating expenses -

interest expense and income tax expense

investing activities

the section of the statement of cash flows which reports cash receipts and cash payments that increase or decrease long-term assets.

investing activity +

sale of property, plant, equipment, and investments

investing activity +

collection of long-term notes receivable

investing activity -

purchase of property, plant, equipment, and investments

investing activity -

loans made to borrowers

financing activities

section on the statement of cash flows which includes cash inflows and outflows involved in long-term liabilities and equity. Includes issuing stock, paying of dividends, and buying and selling treasury stock

Financing activity +

issuance of stock

financing activity +

selling treasury stock

financing activity +

receipt of borrowing money

financing activity -

payment of dividends

financing activity -

buying treasury stock

financing activity

repayment of loans

Steps of indirect method for operating activities

1. net income

2. add back depreciation (and other non-cash expenses like amortization

3. add losses and subtract gains

4. adjust all changes in current assets and current liabilities

Impact of sale of fixed asset

the investing activities section will gain and inflow due to the increase in cash flow

horizontal analysis

study of percentage changes in line items from comparative financial statements. Provides a year-to-year comparison of a company’s performance in different periods

trend analysis

form of horizontal analysis which indicates the direction a business is taking

vertical analysis

shows the relationship of each item to its base amount, the 100% figure. It provides a way to compare different companies.

Common-size statement

used to compare one company to another by only reporting percentages. It removes the dollar value bias. Uses the net sales revenue as the main figure

ratio analysis

used to provide information about a company’s performance

Dollar amount change formula (horizontal)

= later period amount - earlier period amount

Percentage change (horizontal)

= (dollar amount change / base period amount) x 100

Percent change (vertical)

(specific item/ base amount) x 100

working capital

measures the ability to meet short-term obligations with current assets

current assets - current liabilities

current ratio

measures a company’s ability to pay its current liabilities with its current assets

total current assets / total current liabilities

average receivable turnover

measures the number of times the company collect the average receivables balance in a year

net credit sales / average net accounts receivable

Treasury stock

Contra-equity and has a normal debit balance

Paid-In Capital in Excess of Par

stockholder’s equity and has a normal credit balance

comparative balance statements

covers at least two periods

financial analysis

shows the calculations that you can’t just see by looking at it. These are done by auditors, stock analysts, shareholders, etc.