Final Exam Prep Flashcards

Question

5 Types of Revenue Entries

Answer 1

Cash Unearned revenue (BS lia) Cash Revenue (IS) Unearned revenue (BS) Revenue (IS) Accounts receivable (BS) Revenue (IS) Cash Accounts receivable (BS)

Answer 2

Assets = Liabilities + Equity

Answer 3

Income Statement Because of the matching principle

Answer 4

1. It must be owned (or controlled) by the company 2. It must confer expected future economic benefits that result from a past transaction or event

Answer 5

1. **Cash** - currency, bank deposits, and cash equivalents (investments with an original maturity of ≤ 90 days) 2. **Short-term investments** - marketable securities, other investments expected to be disposed of in the short run 3. **Accounts receivable, net** - amounts due from custtomers arising from the sale of products and services on credit. "Net" refers to the subtraction of estimated uncollectable amounts 4. **Inventories** - goods purchased or produced for sale to cusotmers 5. **Prepaid expenses** - costs paid in advance for rent, insurance, advertising, and other services ## Footnote *Note: the goal is to maintain just enough current assets to cover liquidity needs, but not so much that you unnecessarily reduce income*

Answer 6

1. **Property, plant, and equipment (PPE), net** - land, factory buildings, warehouses, office buildings, machinery, motor vehicles, office equipment, and other items used in operating activities 2. **Long-term investments** - investments the company does not intend to sell in the next financial year 3. **Intangible and other assets** - assets without physical substance, including patents, trademarks, franchise rights, goodwill, and other costs the company incurred that provide future benefits

Answer 7

Liabilities and stockholders' equite represent the source of capital the company uses to finance the acquisition of assets * **Liabilities** represent a company's future economic sacrifices * **Stockholders' equity** represents capital that has been invested by the stockholders either * directly via the purchase of stock, or * indirectly in the form of *retained earnings*

Answer 8

Obligations that must be settled within one year 1. **Accounts payable** - amounts owed to suppliers for goods and services purchased on credit 2. **Accrued liabilities** - obligations for expenses that have been incurred but not yet paid; also called accrued expenses 3. **Unearned revenues** - cash the seller receives in advance from customers for goods or services it will deliver int he future 4. **Short-term debt** - loans from banks or other creditors; includes short=term notes and commercial paper 5. **Current maturities of long-term debt** - principal portion of long-term debt that is due to be paid within one year

Answer 9

Networking Capital = Current assets - Current liabilities

Answer 10

the number of days the company has cash tied up in receivables and inventories less the number of days of trade credit provided by company suppliers.

Answer 11

Noncurrent liabilities are obligations due after one year 1. **Long-term debt** - borrowed amounts that are scheduled to be repaid more than one year in the future 2. **Other long-term liabilities** - various obligations, such as pension liabilities and long-term tax liabilities, that will be settled a year or more into the future

Answer 12

financing provided from company owners 1. **Common stock** - par value received from the original sale of common stock to investors 2. **Additional paid-in captial** - amounts received from the original sale of stock to investors in excess of the par value of stock 3. **Preferred stock** - value received from the original sale of preferred stock to investors; preferred stock has fewer ownership rights than common stock 4. **Treasury stock** - amount the company paid to reacquire its common stock from shareholders 5. **Retained earnings** - accumulated net income (profit) that has not been distributed to stockholders as dividends or as stock repurchases 6. **Accumulated other comprehensive income or loss** - accumulated changes in asset and liability fair values that are not reported in the income statement

Answer 13

1. **Contributed Capital**: the net funding a company received from issuing and reacquiring its shares (i.e. issued - repurchased = contributed capital) 2. **Earned Capital**: primarily includes Retained earnings, which is the cumulative net income [or] (loss) that the company has earned but not paid out to stockholders as dividends

Answer 14

A balance sheeet where each item is recast as a percent of total assets. Used to: * Compare a company's balance sheet across two or more years * Compare two or more companies' balance sheets * Compare balance sheets with an industry average or some other benchmark

Answer 15

Beginning retained earnings + Net income (or - Net loss) - Dividends - Stock repurchased and retired = Ending retained earnings

Answer 16

* GAAP generally reports assets and liabilities at historical costs, whereas the market attempts to estimate fair market values * GAAP excludes resources that cannot be reliably measured (due to the absence of a past transaction or event), such as talented management, employee morale, recent innovations, and successful marketing, whereas the market attempts to value these * GAAP does not consider the business environment in which companies operate, such as competitive conditions and expected changes, whereas the market attempts to factor in these differences in determining value * GAAP does not usually capture expected future performance, whereas the market attempts to predict and value future performance

Answer 17

1. When the cost creates an *immediate* benefit (e.g. gas) 2. When the cost creates a *future* economic benefit (e.g. inventory to be resold or equipment to be used later for manufacturing)

Answer 18

* **Inventory** - when a company purchases or manafactures goods for resale. When the inventories are sold, they no longer have an economic benefit to the company, and their cost is transferred to the income statement in an expense called ***cost of goods sold***. * **Equipment** - when a company acquires equipment, the cost is recorded ont eh balance sheet in an asset called *equipment* (or PPE). As the quipment is used in operations, a portion of the acquisition cost is transferred to the income statement as an expense. This systematic allocation process is called ***depreciation***.

Answer 19

* revenues earned from products sold and services provided during a period * the expenses incurred to produce those revenues * the resulting net income or loss

Answer 20

The usual and customer costs a company incurs to support its operating activites. Includes cogs, selling expenses, depreciation expense and research and development

Answer 21

Relates to the company's financing and investing activities Includes interest expense, interest or dividend income, and gains and losses from the sale of securities

Answer 22

1. Revenue recognition principle: recognize revenue when a performance obligation is satisfied by transferring to a customer a promised good or service 2. Expense recognition (matching) principle: recognize expenses when *incurred* These are the foundation of **Accrual Accounting** (used to prepare all GAAP-based financial statements)

Answer 23

1. Recognize revenues in the time period when the company satisfies the performance obligations of the sales contract at the amount expected to be received; 2. Record all expenses incurred to generate those revenues during that same time period (this is called *matching expenses to revenues*)

Answer 24

Transitory items refer to income statement line items for divested segments of business (typically related to a change in strategy). These are listed as ***discontinued operations*** on the Income Statement 1. Net income (loss) from the discontinued segment's business activites prior to sale 2. Any gain or loss on the actual sale of the discontinued segment The Income Statement separately reports the per share effects with two EPS numbers 1. Earnings per share from continuing opetations 2. Earnings per share from discontinued operations

Answer 25

Net income for that period divided by the average total assets durning that period Components: 1. **Profitability** relates profit to sales - This ratio is called the *profit margin* )PM), and it reflects the net income (profit after tax) earned on each sales dollar. 2. **Productivity** relates sales to assets - The component is called *asset turnover* (AT), reflects sales generated by each dollar of assets. 3. **Gross profit margin** (Gross profit / Sales) - Is influenced by both the selling price of the company's products and the cost to make or buy those products 4. **Operating expense margins** - focuses on each expense category reported by the company as a percentage of sales over time and compared with peer companies

Answer 26

* Common stock and additional paid-in capital increase by the proceeds from the sale of stock * Retained earnings increase by the net income (or decrease by the net loss) reported on the income statejment and decrease by the dividends to shareholders * Retained earnings also decrease if a company repurchases shares from stockholders and then retires the repurchased shares

Answer 27

Provides information about the company's ability to generate cash from [sales of product and services] transactions

Answer 28

1. **Cash flows from operating activities**: Cash flows from the company's transactions and events that relate to its operations 2. **Cash flows from investing activities**: Cash flows from acquisitions and divestures of investments and long-term assets 3. **Cash flows from financing activities**: Cash flows from issuances of and payments towards borrowings and equity

Answer 29

Sources and uses of cash * Is the company generating cash from operating activities * Is the operating cash flow sustainable * Is the company investing its cash to grow its infrastructure (PPE) or to enter new markets by acquiring other companies * Is the company using its excess cash to build liquidity (purchase marketable securities) * Is the company paying down debt or paying dividends * Is the comapny repurchasing stock

Answer 30

It links the Income Statement and the Balance Sheet ## Footnote Beginning retained earnings ± Net income (loss) - Dividends - Shares repurchased and retired + Ending retained earnings

Answer 31

1. Step 1: Record transactions in the accounting records 2. Setp 2: Prepare accounting adjustments for events taht have occured but not hey been recorded 3. Step 3: Prepare financial statements 4. Step 4: Close the books

Answer 32

1. **Prepaid expenses**: reflect advance cash payments that will ultimately become expenses (e.g. payment for radio advertising) 2. **Unearned revenues**: reflect cash received from customers before any services or goods are provided (e.g. cash from patrons for tickets to an upcoming event) 3. **Accrued expenses**: expenses incurred and recognized on the IS even though they are not yet paid in cash (e.g. wages owed to an employee) 4. **Accrued revenues**: revenues earned and recognized on the IS even though cash is not yet received (e.g. sales on credit and revenue earned under a long-term contract)

Answer 33

1. **First**: prepare the **Income Statement** using the income statement accounts 2. **Second**: prepare the **Balance Sheet** using the updated retained earnings account along with the remaining balance sheet accounts 3. **Third**: prepare **Statement of Stockholders' Equity** 4. **Fourth**: prepare the **Statement of Cash Flows** using the information from the cash account

Answer 34

1. Analyze transactions and prepare (and post) entries 2. Prepare (and post) accounting adjustments 3. Prepare financial statements 4. Perform the closing process

Answer 35

1. Identify the contract(s) with a customer 2. Identify the performance obligation(s) in the contract 3. Determine the transaction price 4. Allocate the transaction price to the performance obligation(s) 5. Recognize revenue when the performance obligation is satisfied

Answer 36

1. Nonrefundable up-front fees 2. Bill-and-hoild arrangements 3. Consignment sales 4. Licenses 5. Franchises 6. Variable consideration 7. Multiple-element-contracts 8. Right of return 9. Gift cards Module 5-6 for details

Answer 37

* **Accounts receivable turnover** = Sales / Average accounts receivable * **Days sales outstanding (DSO)** = 365 (days) / Accounts receivable turnover, which = 365 x Average accounts receivable / Sales

Answer 38

use (focus on) the allowance for uncollectible accounts Allowance for Doubtful Accounts (from Pfizer statement)

Answer 39

1. Credit quality has improved 2. Underestimating allowance account

Answer 40

The ratio of sales to COGS. Increase in ratio implise sales are growing faster than costs GMR = Sales less COGS / Sales

Answer 41

Ratio of sales to receivables RT = Sales on IS / Ending Receivables on BS

Answer 42

1. How does the firm generate revenue? (Check the first footnote) 2. Analyze the following ratios 1. Gross margin 2. Receivables turnover 3. What are the estimated expenses related to sales (Bad debts, returned goods, warranties, etc) 1. Is the amounbt of write-offs equal to the expense (check the Valuation and Qualifying accounts section of the 10-K)?

Answer 43

1. Prepaid items - Current assets (BS) 2. Unearned or deferred revenues - Current Liabilities (BS) 3. Accrued expenses - Current Liabilities (BS) 4. Accrued revenues - Current assets (BS) 5. Estimated items

Answer 44

1. Unbilled revenue: Revenue that has been earned, but not collected 1. Increases: when revenue is earned 2. Decreases: when cash is collected 2. Prepaid expenses: Expenses paid before they can be recognized as expenses 1. Increases: when cash is paid 2. Decreases: when expense is recognized 3. Accounts payable: Used for inventory purchases 1. Increases: when inventory is purchased 2. Decreases: when cash is paid 4. Line of credit: This is debt 1. Increases: wehn cash is borrowed 2. Decreases: when cash is paid 5. Sales tax payable, accrued expenses payable: Expenses incurred but not yet paid 1. Increases: when expense is recognized 2. Decreases: when cash is paid 6. Deferred revenue: Revenue collected in advance before it is earned 1. Increases: when cash is collected 2. Decreases: when revenue is earned

Answer 45

1. Cash 2. Marketable Securities 3. Accounts receivable 4. Inventories 5. Prepaid items (or expenses)

Answer 46

1. Direct write-off (would lead to a poor mathcing method for expenses) - not acceptable for accounting purposes 2. Allowance methods (this is an adjusting entry at the balance sheet date) 1. Percetnage of sales method 2. Aging schedule method 3. Percent of ending accounts receivable method (similar to aging schedule) Allowance Methods are the methods we use for Accounting

Answer 47

1. Debit Account Receivables, Credit Sales 2. Allowance for bad debts (BS) debit, Credit Accoutns receivables (BS) 3. Cash debits, Credits for accounts receivables

Answer 48

Days sales outstanding (accounts receivable) + Days inventory outstanding - Days payable outstanding = Cash conversion cycle

Answer 49

When PPE is acquired, it is recorded at cost on the balance sheet (BS)

Answer 50

1. **Useful life** - period of time over which the asset is expected to generate measurable benefits 2. **Salvage value** - amount expected for the asset when disposed of at the end of its useful life 3. **Depreciation method** - estimate of how the asset is used up over its useful life

Answer 51

1. Whether an tangible projects or services will be developed is often uncertain while the R&D is ongoing. 2. Even for R&D programs that look promising, the timing of future products and services is uncertain 3. Salaries for R&D are no different than for other personnel whose salaries and wages are expensed when incurred

Answer 52

Gain or Loss on Asset Sale = Proceeds from Sale - Net Book Value of Asset Sold

Answer 53

It's acquisition cost - accumulated depreciation

Answer 54

if the sum of the expected cash flow is less than net book value, the asset is deemed impaired and it is written down to its current fair value

Answer 55

You reduce assets by the amount of the write-down and recognize a loss in the income statement (IS)

Answer 56

1. Employee severance or relocation costs 2. Asset write-downs 3. Other restructuring costs

Final Exam Prep Flashcards

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