ACCT 3309 Exam 2

Test 2 Flashcards ACCT 3309

\___ measures assets at what you could get if you were to sellthem ➢ Weakness: may be based on a subjective estimate

Net Realizable Value

\_______ is disaggregated into the profit margin (PM) and Asset Turnover (AT)

Return on assets (ROA)

\________ assets include cash, short term securities and accounts receivable

Quick

\___________ relate to the ordinary revenue and expense producing activities of the firm

operating activities

\_____________ provides information about how a company generated cash and how it used cash

The statement of cash flows

‐ Recognize expense after the cash payment

deferral

‐ Recognize revenue before the cash receipt

accrual

: Revenue the company has already recorded for which they have not yet collected the cash

A/R

(Sales revenue-COGS)/Sales Revenue

Gross Profit Margin

% Change in revenue

(new-old)/old

• Depreciation refers to the \_______ of the cost of a fixed asset (PP&E) to expense over the years the organization expects to use it (expense deferral)

allocation

365 days/ AR turnover

DSO ( days sales outstanding)

365 days/ inventory turnover

average inventory says outstanding

A focus on accrual accounting means you focus on

profitability

a focus on cash basis accounting means you focus on

viability

A good way to understand accrual accounting is to realize that its primary effect on accounting numbers is taking cash flows that take place in on period and assigning the \_______ to different periods.

revenue and expenses

A good way to understand accrual accounting is to realize that its primary effect on accounting numbers is taking cash flows that take place in one period and assigning the \_________________ to a different period.

revenue or expense

Accounts Receivable is a revenue \__________

accrual

Accounts receivable represents cash the company has already collected for which they have not yet recorded the revenue.

false

Accounts receivable turnover (ART) measures the length of the \______.

Collection Cycle

Accrual accountig

the recognition of revenues and expenses with different timing than their cash flows

Accrual Accounting

revenues are often recorded before or after cash is received, and expenses are often recorded before or after cash is paid

Accrual accounting refers specifically to \______________ made to the cash basis method of accounting

adjustments

Accrual accounting refers to \------- made to the cash basis method of accounting

adjustments

Accruals result in income being recorded after their related cash flow, while deferrals result in income being recorded before their related cash flows.

False

Acquisitions of PP&E affect Net Income through \_______ expense

depreciation

Amortization is a generic term referring to the \_____ of a cost over aperiod of time

spreading out ( similar to depreciation)

AR Turnover \=

total revenue/ average AR

average AR/aver daily sales

DSO ( days sales outstanding)

Beg balance in Interest Payable + \____________ - Cash Payments \= End balance in Interest Payable

expenses

Beg balance in Prepaid Rent + \_________________ - Expenses \= Ending balance in Prepaid Rent

cash payments

Beg balance in Unearned Revenue + Cash receipts - \______________ \= End balance in Unearned Revenue

revenue

Beginning balance in A/R + Revenues - \________________ \= Ending balance in A/R

cash receipts

Benchmark (denominator)

to compare a company's current performance to its prior period performance, its competitors, or the industry average

Cash receipts and payments are classified into one of three categories

-Operating activites
-investing activities
-financing activies

Cash the company has paid but not yet recorded as expense **Prepaid rent, prepaid insurance, etc.

Prepaid expenses, Inventory, PP&E

Cash the company has received but not recorded as revenue

Unearned (or Deferred) Revenue

COGS/Average

Inventory Turnover

COGS/average inventory

inventory turnover

CollecƟon cycle: \________ → Cash receipts

sales

Common profitability benchmark

return on equity

corporate finance informs

capital acquisition/maintenance

Current Assets ‒ Current Liabilities \=

Net working capital

Current ratio \=

total current assets/total current liabilities

Days sales outstanding

average AR/average daily sales

or 365 days/AR turnover

Debt to equity ratio \=

total liabilities/ total stockholders equity

deferral of general costs example

prepaid insurance

deferral of the cost of goods example

inventory

Depreciation is a \_____ expense

non-cash

Depreciation refers to the allocation of the \______ of a fixed asset to \________ over the years the company expects to use it.

cost; expense

Direct method

Examine all cash transactions that occur during the period and group them according to the type of activity

Double entry accounting was originally documented by

Luca Pacioli

Double entry facilitates

accrual accounting

During one of the pre-recorded video lectures for Meeting \#15 we reviewed a graph that showed profit margin and asset turnover across industries. Every point on the best-fit curve on the graph corresponds to the same ROA, indicating that market competition drives each industry towards a benchmark ROA. What was that ROA?

6%

Equity investors are more concerned with solvency than profitability.

false

Expense accrual expample

wages payable

Expense is \_____ from when cash is paid

deferred

Expense Recognition Financial accounting rule: Expenses are recorded by \______________ them with revenues when incurred (even if not \_______________), as assets are used or obligations are created

matching; paid in cash

Expenses are recorded by matching them with revenues when incurred as assets are used or \______ are created

obligations

Expenses the company has already recorded but haven't yet paid in cash *Interest payable, Wages payable, Taxes payable, etc.

Accrued expenses

Fair value measures

assets using updated values

financial account measures

the returns

Financing activities relate to \________

debt and equity

Free cash flow

operating cash flow - investments

Free cash flow \=

operating cash flow - net capital expenditures

Free cash flow measures

measures the cash flows generated by operations that are available to pay creditors and equity holders, or perhaps be re-invested by the firm

Gross Profit Margin

Gross Profit/Sales

if the balance \____ over a period, then you have cash where you didn't have revenue

decreases

if the balance \_______ over a period, then you have cash payments where you didn't have a reduction to Net Income

decreases

if the balance in Accounts Receivable \_________ over a period, that means that revenues relating to these transactions exceeded cash receipts

increases

if the balance in Interest Payable \_______over a period, that means that expenses relating to these transactions exceeded cash payments. You had a reduction in Net Income where you didn't have cash.

increases

If the balance in prepaid insurance decreases over a period, that means that cash payments relating to these transactions exceeded expenses relating to these transactions.

False

In order to identify the situation where accounting income may be misleading you need to understand how changes in balance sheet accounts differentially impact net income and cash flows.

true

In our in-class case during meeting \#15, the $2000 distribution the owner took each month to pay his rent represents a(n) \_________.

Financial decision

in the absence of accounting rules, the Income Statement and the Statement of Cash Flows are \____

identical

In the past, until the last 25 years or so, accounting principles have required valuation based primarily on

historical costs

income after cash

deferrals

Income before cash

accruals

Indirect method

reconcile the income statement and balance sheet information to arrive at operating cashflows

interest cover \=

operating income/ interest expense

Interest coverage is

how much operating profit is available to pay interest on debt

Inventory accruals carry \_________________ 'red flag' risks for earnings quality.

medium to high

Inventory is an expense \__________

deferral

inventory turnover \=

COGS/Average Inventory

investing activites relate to the pruchase and sale of \________ and securities

fixed assets

Liquidity Analysis

the analysis of available cash

managerial finance informs

investment decisions

Manufacturing/sales cycle: Investments → \________

sales

Methods for valuing assets

-historcial (or acquisition cost)
-fair value
-Net Realizable Value
-Future Profits
-Replacement costs

Net income can be significantly larger than operating cash flow because of a

-Large increase in AR
-Large increase in Inventory
-Large decrease in unearned revenue

Net income differs from operating cash flows because accounting rules make changes to the \_____ of cash flows.

Timing

net income/average stockholders equity

return on equity

net income/average total assets

return on assets

Net Income/total revenue

profit margin

Net Working Capital \=

current assets - current liabilities

Net working capital is defined as the \______________ between current assets and current liabilities

difference

Operating cash flow to current liabilities \=

operating cash flow/average current liabilites

Past benefit \= no asset

e.g. utility costs

PP&E acquisitions are an \____ activity

investing

PP&E is an expense \___________

deferral