Accounting midterm 2

Small stock dividend at declaration

Dr Stock Dividends (market value) / Cr Stock Dividend Distributable (par) / Cr Paid-in Capital in Excess of Par (market − par)

Large stock dividend at declaration

Dr Stock Dividends / Cr Stock Dividend Distributable (both at par)

Stock dividend at distribution

Dr Stock Dividend Distributable / Cr Common Stock

Stock Dividend Distributable

Equity account (NOT a liability) holding the par value of shares to be issued

Operating inflows / Operating outflows

Inflows: Collections from customers, interest received, dividends received

Outflows: Payments to suppliers and employees, interest paid, taxes paid

Investing inflows / Investing outflows

Inflows: Selling PP&E, selling investments, collecting principal on loans the firm made

Outflows: Buying PP&E, buying investments, lending money

Financing inflows / Financing outflows

Inflows: Issuing stock, issuing bonds, borrowing from a bank

Outflows: Repaying loans or bonds, repurchasing shares (treasury stock), paying dividends

Why leverage is a two-way street

Small changes in assets create large % gains OR losses for equity holders in highly levered firms

ROE vs ROA with no debt

ROE = ROA

Return on financial leverage (ROFL)

ROE − ROA; the part of ROE due to leverage

Equity multiplier

Average total assets ÷ Average stockholders' equity

2-stage DuPont (ROE)

ROE = ROA × Equity multiplier

3-stage DuPont (ROE)

ROE = Return on sales × Asset turnover × Equity multiplier

Debt ratio

Total liabilities ÷ Total assets

Debt-to-equity ratio

Total liabilities ÷ Total stockholders' equity; dollars borrowed per dollar of equity

Times interest earned

EBIT ÷ Interest expense; how many times operating income covers interest

Operating cash flow to current liabilities

Cash flow from operations ÷ Average current liabilities

Free cash flow (FCF)

Cash flow from operations − Net cash spent on PP&E and intangibles (CAPEX)

Shows whether the company generates more cash than it needs to maintain and grow its long-term assets

Inventory turnover

Cost of goods sold ÷ Average inventory

Days' sales in inventory

Ending inventory ÷ (COGS ÷ 365), or 365 ÷ inventory turnover

Accounts receivable turnover

Net sales ÷ Average accounts receivable

Days' sales in accounts receivable

Ending AR ÷ (Net sales ÷ 365), or 365 ÷ AR turnover

Earnings per share (EPS)

(Net income − Preferred dividends) ÷ Weighted average common shares outstanding

Diluted EPS

EPS including potential shares from stock options and convertible securities

Price-earnings (P/E) ratio

Market price per share ÷ EPS (usually diluted)

Dividend payout ratio

Dividends per share ÷ EPS; % of earnings paid out

Dividend yield

Dividends per share ÷ Market price per share

Raw materials used

Beginning raw materials + Purchases − Ending raw materials

Cost of goods manufactured (COGM)

Beginning WIP + Direct materials used + Direct labor + Overhead − Ending WIP

Cost of goods sold (manufacturer)

Beginning finished goods + COGM − Ending finished goods

Actual allocation rate

Actual overhead cost ÷ Actual amount of allocation base

Predetermined overhead rate

Estimated overhead cost ÷ Estimated amount of allocation base (set before the period)

Applied (allocated) overhead

Predetermined rate × Actual amount of allocation base used

Overhead variance

Difference between applied overhead and actual overhead