ACC 403: Financial Accounting

BYU Intermediate Financial Accounting Flash Cards

Current Ratio

Current Assets ➗ Current Liabilities

• A liquidity ratio

• Tells us how well the companies assets can cover current obligations. Asses against industry average

Quick Ratio

Quick Assets ➗ Current Liabilities

• Quick Assets are Current assets minus prepaids, inventory, and restricted cash

• A liquidity ratio more rigorous than the current ratio

Debt-to-Equity Ratio

Total Liabilities ➗ Shareholders Equity

• A Solvency ratio that tells a companies capital structure (more debt or equity?).

• The higher it is the riskier the company is because creditors have more claim to assets if they default

Times Interest Earned Ratio

(Net income + Interest Exp. + Income tax Exp.) ➗ Interest Expense

• A Solvency Ratio that tells us how many times the firm can cover its current interest. I.e. how protected are creditors

Profit Margin on Sales

Net income ➗ Net Sales

• A profitability ratio that tells us the portion of revenue that is available after expenses

Return on Assets (ROA)

Net income ➗ Average total assets

• A profitability ratio that tells us the % of average total assets available to generate income

• can also be calculated as:

  • ROA = NI/S * S/AVG Assets

Return on Equity (ROE)

Net Income ➗ Shareholders Equity

• Profitability Ratio that tells us the return to suppliers of equity after company operations

• The result of the DuPont Framework

DuPont Frame Work

ROE = Profit Margin * Asset turnover * Equity Multiplier

NI/E = NI/S * S/Avg.A * AVG.A/E

Direct method for CFO aspects

Sales revenue —> Cash received from customers

COGS —> cash paid for inventory

Salaries expense —> cash paid for employee salaries

Cash Flows From Customers

Sales - increase in A/R + Increase in deferred revenue

Cash Received from Investment Revenue

simply recorded in CFO as a cash receipt

Cash Paid for Inventory

COGS - Decrease in inventory - Increase in A/P

Find inventory purchases and then use that to determine how much A/P you paid off in cash

Cash Paid for Salaries

Salaries Expense +

Decrease in salaries payable

Cash Paid for Insurance

Insurance expense + Increase in prepaid insurance

Cash paid for Interest

Interest Expense + decrease in interest payable

Cash Paid for Income Taxes

Income Tax Expense + Decrease in income tax payable

Operating Cash Inflows

cash received from customers for sale of inventory and services, collection of interest, tax refunds, lawsuit settlements and dividends

Operating Cash Outflows

cash paid for inventory, operating expenses (like salaries, rent and utilities), interest on debt, income taxes, and lawsuit settlements.

Investing Cash Outflows

cash paid for investments, PPE, intangible assets, and lending with notes receivable.

Investing Cash Inflows

sale of investments, PPE, intangibles, collecting notes receivable