Financial Statements, Ratios, and Revenue Recognition: Key Concepts for Accounting

Full Set of Financial Statements

Balance Sheet, Income Statement, Statement of Comprehensive Income, Statement of Cash Flows, Statement of Owner's Equity

Liquidity

Current Assets / Current Liabilities

Solvency

Ability to pay long-term debt

Basic EPS

(Net Income - Preferred Dividends) / Weighted Avg Common Shares Outstanding

Diluted EPS

(Income + Interest on Dilutive Securities) / Adjusted Shares Outstanding

Comprehensive Income

Net Income + Other Comprehensive Income

Treasury Stock Method

Assumes options exercised and proceeds used to repurchase shares

If-Converted Method

Assumes convertible securities are converted into common stock

Book Value per Share

(Equity - Preferred Equity) / Common Shares Outstanding

Common Shares Outstanding

Issued Shares - Treasury Shares

Authorized Stock

Maximum shares allowed to be issued

Issued Stock

Shares that have been distributed

Treasury Stock (Cost Method)

Recorded at repurchase cost

Retained Earnings

Accumulated net income minus dividends

Stock Dividends

Distribution of additional shares instead of cash

Stock Splits

Increase shares outstanding and reduce par value

Date of Declaration

Board approves dividend

Date of Record

Determines eligible shareholders

Date of Payment

Dividend is paid

OCI (PUFI)

Pension, Unrealized G/L (AFS), Foreign currency, Instrument-specific credit risk

Direct Exchange Rate

Domestic price of foreign currency

Indirect Exchange Rate

Foreign price of domestic currency

Revenue Recognition 5 Steps

Identify contract, Identify POs, Determine price, Allocate price, Recognize revenue

Satisfied Over Time

Customer receives benefits as performance occurs

Satisfied at a Point in Time

Revenue recognized when control transfers

Change in Accounting Estimate

Prospective (future only)

Change in Accounting Principle

Retrospective (adjust prior periods)

Error Correction

Prior period adjustment to retained earnings

Fair Value

Price to sell an asset or transfer a liability

Level 1 Inputs

Observable quoted prices

Level 2 Inputs

Observable inputs (not quoted prices)

Level 3 Inputs

Unobservable inputs

Current Ratio

Current Assets / Current Liabilities

Quick Ratio

(Cash + Securities + AR) / Current Liabilities

Inventory Turnover

COGS / Average Inventory

Days in Inventory

365 / Inventory Turnover

A/R Turnover

Sales / Average A/R

Days Sales in A/R

365 / A/R Turnover

Debt-to-Equity

Total Liabilities / Equity

Gross Profit Margin

(Sales - COGS) / Sales

Profit Margin

Net Income / Sales

FIFO

Oldest inventory sold first

LIFO

Newest inventory sold first

Weighted Average

Average cost per unit

Lower of Cost or NRV

Inventory valued at lower of cost or net realizable value

NRV

Selling Price - Cost to Sell

Depreciation (Straight-Line)

(Cost - Salvage) / Useful Life

Double Declining Balance

Accelerated depreciation method

Units of Production

Based on usage or output

Impairment (Step 1)

Compare undiscounted cash flows to carrying value

Impairment (Step 2)

Write down to fair value

Allowance Method

Estimate bad debts

Write-Off

Remove uncollectible A/R

Capitalized Interest

Interest added to asset cost during construction

Depletion

Allocation of natural resource cost

Bonds Issued at Par

Coupon rate = market rate

Bonds Issued at Discount

Coupon < market rate

Bonds Issued at Premium

Coupon > market rate

Interest Expense

Carrying Value × Market Rate

Lease Criteria (Finance Lease)

Ownership, Option, NPV ≥ 90%, Economic life ≥ 75%, Specialized asset

Operating Lease

Straight-line expense

Finance Lease

Separate interest + amortization

Asset Retirement Obligation

Liability for future asset removal

Accretion Expense

Increase in ARO over time

Trading Securities

Fair value through net income

AFS Securities

Fair value through OCI

HTM Securities

Amortized cost

Equity Method

Used for 20-50% ownership

Consolidation

Used for >50% ownership

Operating CF

Net income adjustments

Investing CF

Asset purchases/sales

Financing CF

Debt and equity transactions

Temporary Tax Differences

Reverse in future (create DTA/DTL)

Permanent Tax Differences

Never reverse

Deferred Tax Asset

Future tax benefit

Deferred Tax Liability

Future tax payment

Government Accounting Basis

Modified accrual (governmental funds)

Proprietary Funds

Full accrual, economic resources

Fiduciary Funds

Held for others

NFP Net Assets

With donor restrictions / Without donor restrictions