ACC 211 - Exam 2

Balance Sheet Elements

Assets, liabilities, equity

Assets

• Things a business owns or controls

• provide value or benefits in the future

Liabilities

• amount a business owes

• obligation to pay money or provide services

Equity

owner’s share of business

• after all debts are paid

Asset Categories (6)

• current assets

• long-term investments

• PPE

• Right-of-use assets

• intangible assets

• other assets

Liabilities & Owner’s Equity Categories (3)

• current liabilities

• long-term debt

• owners equity

Current Assets

Cash or assets converted into cash, sold, or consumed in one year or in the operating cycle

• whichever is longer

Cash & cash equivalents

• any money available on demand

• Cash equivalents - short-term, highly liquid, mature within three months or less

• Restrictions or commitments must be disclosed

Basis of Valuation: fair value

Short-term investments (equity securities)

• BoV: fair value

• changes reported in net income unless:

  • Accounted for under equity

  • Can’t determine fair value

Short-term investments (debt securities)

Three classifications:

Held-to-maturity: positive intent and ability to hold to maturity

Trading: Bought and held to sell in the near term to generate income

Available-for-sale: Not classified as either

Receivables

Shown in the balance sheet or notes

Clearly identify:

• Anticipated loss due to uncollectibles

• Amount and nature of nontrade receivables

• Receivables used as collateral

Basis of Valuation: Estimated amount collectable

Inventories

• Disclose

• Cost flow assumption (e.g., FIFO or LIFO)

Basis of Valuation: Lower-of-cost-or-net realizable value/market

Prepaid expenses

• Payment of cash

• Cash Payment Before Expense Recorded

Basis of Valuation: cost

PPE is measured based on _____

historical cost

Non-current Assets (long-term investments) (4)

• securities

• tangible fixed assets

• special funds

• nonconsolidated subsidiaries or affiliated programs

Long-term investments

• Debt investments —> available-for-sale & fair value

• Held-to-maturity debt investments—> amortized cost

• Equity investments—> fair value or equity method

Noncurrent Assets (PPE)

• long-lived assets used in the regular operations of the business

• Physical property

• depreciates or depletes (land as an exception)

Noncurrent Assets (Intangible Assets)

• lack physical structure and are not financial instruments

  • limited life intangibles amortized

  • indefinite life-intangibles tested for impairment

Noncurrent Assets (other)

• long-term prepaid expenses

• Prepaid pension cost

• Noncurrent receivables

• Assets in special funds

• Deferred income taxes

• Property held for sale

• Restricted cash or securities

Current Liabilities

• short term debt a company expects to pay off soon by using current assets

1. Payables resulting from the acquisition of goods

and services

2. Collections received in advance

3. Other liabilities

Long-term Liabilities

debt a company doesn’t expect to pay off within the normal operating cycle

Long-term Liabilities Types

• financing situations: issuance of bonds, long-term lease obligations, and long-term notes payable

• Ordinary operations: pension obligations and deferred income tax liabilities.

• Occurrence or non-occurrence future events: service or product warranties and other contingencies.

Elements of Owners Equity

• capital stock

• additional paid in capital

• retained earnings

• accumulated other comprehensive income

• treasury stock

Most common form of the balance sheet

report form

• lists the balance sheet sections above one another

Classified report form b/s (assets)

• Assets

  • current assets

  • Long term investments

    • Equity Investments

  • PPE

    • Total PPE

• Intangible Assets

  • total assets

Classified report form b/s (Liabilities & stockholder equity)

• Liabilities & Stockholder’s equity

  • Current liabilities

• Long-term debt

  • Total liabilities

• Stockholders equity

  • Total stockholders equity

  • Total libabilities & stockholders equity

Statement of Cash Flows purpose

provide relevant information about the cash receipts and cash payments of an enterprise during a period

Operating activity in the statment of cash flow

cash effects of transitions that determine net income

Investing activity in the statment of cash flow

making and collecting loans and acquiring and disposing of investments and property, plant, and equipment

Financing activity in the statment of cash flow

Involves liability and owner’s equity

Statement of Cash Flows format

• cash flows from operating

• cash flows from investing

• cash flows from financing

• net increase (decrease) in cash

• cash at beginning of year

• cash at end of year

Inflows: Operating

when cash revenue excedes expenses

Inflows: Investing

• sale of PPE

• Sale of debt or equity securities of other entities

• Collection of loans to other entities

Inflows: Financing

• issuance of capital stock

• issuance of debt (bonds & notes)

Outflows: Operating

when expenses exceed revenues

Outflow: Investing

• puchase of PPE

• purchase of debt & equity securities of other entities

• loans to other entities

Outflow: Financing

• payment of dividends

• redemption of dividends

• reacquisition of captial stock

Significant Noncash Activties

• financing and investing activities that don’t affect cash

• reported at the bottom of the statement of cash flows or in notes

Types of Ratios

• liquidity

• activity

• profitability

• coverage

Liquidity Ratio

Measure of the company’s short term ability to pay its maturing obligations

Activity Ratio

Measures how effectively the company uses its assets

Profitability Ratios

Measures of the degree of success or failure of a given company or division for a given period of time

Coverage Ratios

Measures of the degree of protection for long-term creditors and investors

Current Ratio

current assets / current liabilities

• measures short term debt paying ability

Quick (acid-test) ratio

Cash - short-term investments + accounts recievable (net) / current liabilities

• measures immediate short-term liquidity

Current cash debt coverage Ratio

Net cash provided by operating activities / average current liabilities

• measures a company’s ability to pay off its current liabilities in a given year from its operations

Accounts Receivable turnover Ratio

Net sales / average net accounts receivable

• measures liquidity of receivables

Inventory Turnover ratio

Cost of goods sold / average inventory

• measures liquidity of inventory

Asset Turnover Ratio

net sales / average total assets

• measures how efficiently assets are used to generate sales

Profit margin on sales ratio

net income / net sales

• measures net income generated by each dollar of sales

Return on assets ratio

net income / average total sales

• measures overall profitability of assets

Return on common stockholder’s equity ratio

Net income - preferred divdends / average common stockholders equity

• measures profitability of owners investment

Earnings per share ratio

net income - preferred dividends / weighted average common shares outstanding

• measures net income earned on each share of common stock

Price earnings ratio

market price per share / earnings per share

• measures the ratio of the market price per share to earnings

Payout Ratio

cash dividends / net income

• measures percentage of earnings distributed in the form of per-share cash dividends

Debt to assets ratio

total liabilities / total assets

• measures the percentage of total assets provided by creditors

Times interest earned ratio

net income + internet expense + income tax expense / interest expense

• measures ability to meet interest payments as they come due

Cash debt coverage ratio

net cash provided by operating activities / average total liabilities

• measures a company’s ability to repay its total liabilities in a given year from its operations

Book value per share ratio

common stockholder’s equity / outstanding shares

• measures the amount each share would recieve if the company were liquidated at the amounts reported on the balance sheet

Free cash flow ratio

net cash provided by operating expenses - capital expenditure - cash dividends

• measures the amount of discretionary cash flow

Future value of a $

• value of amount invested at a future date

  • assuming compound interest

• FV = PV (FVFni)

  • FV= future value

  • PV = present value

  • FVFni = future value factor for n periods at i interest

Present value of a $

• value now of an amount to be paid or recieved in the future

  • assuming compound interest

• PV = FV (PVFni)

• PV = present value

• FV = future value

• PVFni = present value factor for n periods at i interest

Annuities require…

• periodic payments or receipts (called rents) of the same amount

• same length interval between such rents

• compounding of interest once each interval

Ordinary Annuity

• rents occur at the end of each period

• no interest during the 1st month

Annuity Due

• rents occur at the beginning of each period

• Interest will accumulate during 1st period

  • one more interest period thean ordinary annuity

Future value of an ordinary annuity

R (FVF - OAni)

FVF - OAni = ((1+i)^n -1) / i

R = periodic rent

FVF-OAni = future value factor of an ordinary annuity

i = rate of interest per period

n = number of compounding periods

Future value of an annuity due

multiply future value of ordinary annuity factor by 1 + interest rate

Present Value of ordinary annuity

R= periodic rent

PVF-OAni = present value of an ordinary annuity of 1 for n periods at i interest

Present Value of Annuity Due

Deferred Annuity

Rents begin after a specified number of periods

Future Value of a Deferred Annuity

Calculation same as future value of an annuity not deferred

Present Value of a Deferred Annuity

Must recognize interest that accrues during deferral period

Valuation of long term bonds

Two Cash Flows:

• Periodic interest payments (annuity)

• Principal paid at maturity (single-sum)