Final Exam

🔐 Internal Controls

• Focus on cash controls

• Includes:

  • Checks & balances

  • Separation of duties (no one person controls everything)

• Purpose: prevent fraud + errors

Sarbanes–Oxley Act (SOX)

• Applies to public companies

• Ensures financial statements are accurate and honest

• Strengthens internal controls

💳 Credit Card Sales

• Businesses DO NOT record full amount as revenue

• Must subtract:

  • Credit card fees

• Entry concept:

  • Cash (net)

  • Fee expense

  • Sales (gross)

📉 Receivables + Bad Debt

Accounts Receivable (A/R)

• Asset

• Money customers owe you (future cash)

Debtor

• Person who owes money

Receivable

• A monetary claim against someone

Maturity Date

• Date payment is due

Bad Debt

• When customers don’t pay

Direct Write-Off Method

• Write off when confirmed uncollectible

• Not ideal for matching principle

Factoring Receivables

• Selling A/R to a third party

• Usually results in:

  • Loss (fee)

Pledging Receivables

• Use A/R as collateral for a loan

• You still own the receivables

📝 Notes Receivable

• Formal written promise (promissory note)

• Includes:

  • Principal

  • Interest

  • Due date

🏢 Property, Plant & Equipment (PP&E)

Cost of Property

• Land and building are separate

• Land is NOT depreciated

📊 Depreciation

Methods:

1. Straight-line

2. Units of production

3. Double-declining balance

• Purpose: allocate cost over useful life

⛽ Depletion

• Like depreciation but for natural resources

• Example: oil, minerals

📈 Financial Ratios

Asset Turnover Ratio

• Measures how efficiently assets generate sales

Asset Turnover=Net SalesAverage Total Assets\text{Asset Turnover} = \frac{\text{Net Sales}}{\text{Average Total Assets}}Asset Turnover=Average Total AssetsNet Sales​

• Higher = more efficient

Return on Assets (ROA)

• Measures profitability from assets

ROA=Net IncomeAverage Total Assets\text{ROA} = \frac{\text{Net Income}}{\text{Average Total Assets}}ROA=Average Total AssetsNet Income​

Debt to Equity Ratio

• Measures financial risk

Debt to Equity=Total LiabilitiesTotal Equity\text{Debt to Equity} = \frac{\text{Total Liabilities}}{\text{Total Equity}}Debt to Equity=Total EquityTotal Liabilities​

• Higher = more debt risk

📊 Stocks & Equity

Common Stock

• Ownership in company

• Voting rights

Preferred Stock

• No voting rights

• Priority for dividends

Authorized Stock

• Max shares company can issue

Preemptive Right

• Existing shareholders can buy new shares first

Paid-In Capital

• Money received from investors

📊 Bonds

Key Points

• Typically pay interest every 6 months

• Types:

Held-to-Maturity

• Intend to keep until maturity

Trading Securities

• Bought & sold for short-term profit

💰 Cash Flow Statement

1. Operating Activities

• Day-to-day business

• Cash from revenue & expenses

2. Investing Activities

• Buying/selling long-term assets

• Example:

  • Equipment

  • Buildings

3. Financing Activities

• Borrowing, issuing stock, paying dividends

⚠ Non-Cash Activities

• Don’t involve cash

• Example:

  • Stock issued for assets

💡 Free Cash Flow

• Cash left after operations + capital spending

Free Cash Flow=Operating Cash Flow−Capital Expenditures\text{Free Cash Flow} = \text{Operating Cash Flow} - \text{Capital Expenditures}Free Cash Flow=Operating Cash Flow−Capital Expenditures

• Shows how much cash company can actually use

🎯 Quick Memory Tricks (Exam Gold)

• A/R = future cash

• Bad debt = expense

• Land ≠ depreciated

• Credit card sales ≠ full revenue

• Separation of duties = fraud prevention

• ROA = profitability

• Debt/Equity = risk

• Free cash flow = real usable cash