Bsbwor501 Final Exam
Revenues measure the inflow of net assets resulting from selling products or services. Failure to adjust for depreciation results in the overstatement of assets and the understatement of net income. (FALSE). Which of the following transactions would not affect owners’equity? Purchasing supplies for cash. Increased earnings do not always generate an increase in cash flow. CFO includes: selling goods, not: buildings, dividends, long-term debt. Depreciation reduces net income but is not related to a cash expenditure during the period (ignoring income tax effects). Current liabilities Are obligations that a firm expects to pay or discharge during the normal operating cycle of the firm, usually one year as of the date of the Balance Sheet. Usually
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includes liabilities to merchandise suppliers and employees. Includes notes and bonds payable to the extent that they will expect to be paid off within the next year. Balance sheet measures financial leverage and liquidity. Cash paid for employees salaries creates an expense when cash is paid for work done in current period. If a company has $100 COGS, $100 other exp, $100 profit, sales = $200 ($100 cogs + $100 profit), net margin = 0%.
Short term liquidity ratios measure the ability of a company to pay off short term debts due in the very near future. Working capital = total current A – total current L. Net Sales – gross profit = COGS. Balance sheet + income statement show total costs of merchandise that remains and total sold. Accounting: a process of identifying, analyzing, recording, summarizing, and reporting economic information to decision makers. Financial accounting: focuses on specific needs of decision makers external to the org (stockholders, suppliers, banks, govt agencies) used for evaluating past performance, assess future prospects, bus. Relations. 10k report: letter to shareholders, description of bus./strategy, management’s discussion and analysis: covers liquidty, cap structure, results from operations. Financial statements, financial statement footnotes, highlights, 5-yr financial data, independent auditors report. Regulation: SEC (delegates rule making power to FASB) FASB: established GAAP (standards of financial acctg). IASB: established IFRS, PCAOB: created by Sarbanes-oxley act: established auditing standards for public
companies. Sarbanes-Oxley: corp responsibility for financial reports, management assessment of internal controls. How well did company do? Look at income statement/cash flow statement. What is financial position on a given day? Look at balance sheet. Income statement: flow of revenues/expenses during period of time. RE from OE goes onto Income statement, which equals beginning RE + NI – Div declared = Ending RE. cash basis acctg: only records transactions when cash is received or paid. Accrual basis: recognizes transactions when they occur( revenues: earned and realized = cash collection is reasonably assured/expenses: matching principle—matched with revenue generated) . ex: inventory bought in December, sold in Feb: COGS recorded in Feb. Rent is prepaid on dec 1 for 3 months, rent expense should be recog at end of each of the 3 months. Worker works 2 weeks in dec, paid in beg of jan, salary exp is recorded at end of dec. Client prepays for future services in dec, rev is recognized in may when services are rendered. Revenues: increase in OE from delivering goods/services to customers. Expenses: decreases OE from producing/delivering. Services. Etc (COGS, operating expenses: ads,salaries,utilities,rent,supplies,depreciation, Beginning RE + NI – Div declared = Ending RE. Balance sheet: snapshot of assets/liabilities/equity at a point in time. Statement of cash flows: cash receipts/payments during period of time. A = L + SE (owners equity, book value). Assets: Cash, AR, Prepaid rent, Inventory, Buildings, Equipment. L: AP, Prepayments from customers, debt. SE: Cont capital (common stock), RE. Cash inflow/outflow from operating/investing/financing activities. Cash flow statement: CFO + CFI + CFF = net change in cash. Statement of Shareholders Equity: reports changes in accts held in equity (common stock, RE) Net income is needed to determine ending balance of RE. Double entry accounting: each transaction affects at least 2 accounts (some don’t need to be recorded, like promises: signing a lease, taking an order, hiring a new employee) Adjusting Process: ensures that all A,L,SE are properly stated. Under actual, revs recog when earned/realized, exp matched with revs. Adjusting entries record events that aren’t routinely recorded bc of efficiency or not resulting from exchange transactions. Each adj entry affects at least 1 balance sheet acct, and 1 income statement acct. (do not involve changes in cash) 3 categories: deferrals: delay recog in income statement after cash exchange. Prepaid/deferred: comp paid cash in advance of recog exp. Unearned or deferred revs: comp recd cash in advance of recog rev. accruals: recog rev or exp in income statement in adv of cash: accrued asset: comp recog rev before receiving cash/accrued L= comp recog exp before paying cash. Depreciation: systematic allocation of cost of plant asset to exp over assets useful life. Accum dep: cum. Sum of all dep exp recog since asset acquired. “Closing Books” – temp accouns (income statement accts) are closed at end of acct period, transferred to RE, balances go to 0 at beg of next acct period. Permanent accts (balance sheet accts): not closed, ending balances become beg balances at beg of next acct period. Closing entries transfer revs, gains, exp, loss to RE. statement of cash flows: one of the main statements required to report, reports cash flows (receipts-inflows and payments – outflows) during a given period of time. Classifies flows based on related activities, operating/financing/investing. Cash inflows/outflows reported separately. Beg and end cash on cash flow statement must equal balances reported on balance sheet. Includes “cash equivalents” which are highly liquid short-term investments that can be quickly converted to cash (3 months or less: money market investments, US Govt treasury bills investments) This and income statement provide info on performance of a company. Income statement: provides measure of econ activity and performance. Cash flow: how company is receiving and distributing cash and ability to pay future debts. 6 parts to every cash flow statement: CFO, CFI, CFF, total change in cash, beg. Cash, end cash (beg + end cash must equal cash reported on balance sheet). 3 types of activities on cash flow statement: operating – main, day to day activities. Investing – borrowing money, repaying debt, issuing securities. CFO: involve current op assets/L. cash inflows: from sales of goods/services, return on loans (interest), return on equity (dividends). Cash outflow: payments for getting inventory (cash payments to suppliers), employees, govts (taxes), interest expense, other expenses. CFI: cash inflow: sale of property/plant/equipment, sale of debt/equity securities of other corporations, receipts from loans collected. Cash outflows: purchase of property/plant/equipment, purchase of debt/equity securities. Loans to other entitites. CFF: inflow: issuance (sale) of equity securities, sale of bond, mortgages, notes, other short or long-term borrowings, borrowing cash from creditors. Outflows: payment of dividends, repurchase of firms stock, payment of amounts borrowed. (cash receipts of interest/divs are reported in CFO, cash payments of interest are CFO, dividend payment s are CFF. 2 methods used to compute CFO: direct – lists cash receipts/payments for each major operating activity/easy to understand. Ex: cash collection from customers, cash receipt of interest/dividends, payments to suppliers/employees, payments for interest, taxes. Indirect method: adjusts NI to reflect only cash receipts/payments related to op activities, difficult to understand, easy to prepare. Income statement below the line items: discontinued operations: disposal of a sig component of a business. Reports a gain or loss from disco operations, net of tax.extraordinary items: events that meet 2 conditions: unusual in nature, infrequent in occurrence ( a major casualty or natural disaster, or expropriation of property by a foreign govt) company must consider environment in which it operates, amounts reported net of tax. Ex: 9/11 was above the line.
includes liabilities to merchandise suppliers and employees. Includes notes and bonds payable to the extent that they will expect to be paid off within the next year. Balance sheet measures financial leverage and liquidity. Cash paid for employees salaries creates an expense when cash is paid for work done in current period. If a company has $100 COGS, $100 other exp, $100 profit, sales = $200 ($100 cogs + $100 profit), net margin = 0%.
Short term liquidity ratios measure the ability of a company to pay off short term debts due in the very near future. Working capital = total current A – total current L. Net Sales – gross profit = COGS. Balance sheet + income statement show total costs of merchandise that remains and total sold. Accounting: a process of identifying, analyzing, recording, summarizing, and reporting economic information to decision makers. Financial accounting: focuses on specific needs of decision makers external to the org (stockholders, suppliers, banks, govt agencies) used for evaluating past performance, assess future prospects, bus. Relations. 10k report: letter to shareholders, description of bus./strategy, management’s discussion and analysis: covers liquidty, cap structure, results from operations. Financial statements, financial statement footnotes, highlights, 5-yr financial data, independent auditors report. Regulation: SEC (delegates rule making power to FASB) FASB: established GAAP (standards of financial acctg). IASB: established IFRS, PCAOB: created by Sarbanes-oxley act: established auditing standards for public
companies. Sarbanes-Oxley: corp responsibility for financial reports, management assessment of internal controls. How well did company do? Look at income statement/cash flow statement. What is financial position on a given day? Look at balance sheet. Income statement: flow of revenues/expenses during period of time. RE from OE goes onto Income statement, which equals beginning RE + NI – Div declared = Ending RE. cash basis acctg: only records transactions when cash is received or paid. Accrual basis: recognizes transactions when they occur( revenues: earned and realized = cash collection is reasonably assured/expenses: matching principle—matched with revenue generated) . ex: inventory bought in December, sold in Feb: COGS recorded in Feb. Rent is prepaid on dec 1 for 3 months, rent expense should be recog at end of each of the 3 months. Worker works 2 weeks in dec, paid in beg of jan, salary exp is recorded at end of dec. Client prepays for future services in dec, rev is recognized in may when services are rendered. Revenues: increase in OE from delivering goods/services to customers. Expenses: decreases OE from producing/delivering. Services. Etc (COGS, operating expenses: ads,salaries,utilities,rent,supplies,depreciation, Beginning RE + NI – Div declared = Ending RE. Balance sheet: snapshot of assets/liabilities/equity at a point in time. Statement of cash flows: cash receipts/payments during period of time. A = L + SE (owners equity, book value). Assets: Cash, AR, Prepaid rent, Inventory, Buildings, Equipment. L: AP, Prepayments from customers, debt. SE: Cont capital (common stock), RE. Cash inflow/outflow from operating/investing/financing activities. Cash flow statement: CFO + CFI + CFF = net change in cash. Statement of Shareholders Equity: reports changes in accts held in equity (common stock, RE) Net income is needed to determine ending balance of RE. Double entry accounting: each transaction affects at least 2 accounts (some don’t need to be recorded, like promises: signing a lease, taking an order, hiring a new employee) Adjusting Process: ensures that all A,L,SE are properly stated. Under actual, revs recog when earned/realized, exp matched with revs. Adjusting entries record events that aren’t routinely recorded bc of efficiency or not resulting from exchange transactions. Each adj entry affects at least 1 balance sheet acct, and 1 income statement acct. (do not involve changes in cash) 3 categories: deferrals: delay recog in income statement after cash exchange. Prepaid/deferred: comp paid cash in advance of recog exp. Unearned or deferred revs: comp recd cash in advance of recog rev. accruals: recog rev or exp in income statement in adv of cash: accrued asset: comp recog rev before receiving cash/accrued L= comp recog exp before paying cash. Depreciation: systematic allocation of cost of plant asset to exp over assets useful life. Accum dep: cum. Sum of all dep exp recog since asset acquired. “Closing Books” – temp accouns (income statement accts) are closed at end of acct period, transferred to RE, balances go to 0 at beg of next acct period. Permanent accts (balance sheet accts): not closed, ending balances become beg balances at beg of next acct period. Closing entries transfer revs, gains, exp, loss to RE. statement of cash flows: one of the main statements required to report, reports cash flows (receipts-inflows and payments – outflows) during a given period of time. Classifies flows based on related activities, operating/financing/investing. Cash inflows/outflows reported separately. Beg and end cash on cash flow statement must equal balances reported on balance sheet. Includes “cash equivalents” which are highly liquid short-term investments that can be quickly converted to cash (3 months or less: money market investments, US Govt treasury bills investments) This and income statement provide info on performance of a company. Income statement: provides measure of econ activity and performance. Cash flow: how company is receiving and distributing cash and ability to pay future debts. 6 parts to every cash flow statement: CFO, CFI, CFF, total change in cash, beg. Cash, end cash (beg + end cash must equal cash reported on balance sheet). 3 types of activities on cash flow statement: operating – main, day to day activities. Investing – borrowing money, repaying debt, issuing securities. CFO: involve current op assets/L. cash inflows: from sales of goods/services, return on loans (interest), return on equity (dividends). Cash outflow: payments for getting inventory (cash payments to suppliers), employees, govts (taxes), interest expense, other expenses. CFI: cash inflow: sale of property/plant/equipment, sale of debt/equity securities of other corporations, receipts from loans collected. Cash outflows: purchase of property/plant/equipment, purchase of debt/equity securities. Loans to other entitites. CFF: inflow: issuance (sale) of equity securities, sale of bond, mortgages, notes, other short or long-term borrowings, borrowing cash from creditors. Outflows: payment of dividends, repurchase of firms stock, payment of amounts borrowed. (cash receipts of interest/divs are reported in CFO, cash payments of interest are CFO, dividend payment s are CFF. 2 methods used to compute CFO: direct – lists cash receipts/payments for each major operating activity/easy to understand. Ex: cash collection from customers, cash receipt of interest/dividends, payments to suppliers/employees, payments for interest, taxes. Indirect method: adjusts NI to reflect only cash receipts/payments related to op activities, difficult to understand, easy to prepare. Income statement below the line items: discontinued operations: disposal of a sig component of a business. Reports a gain or loss from disco operations, net of tax.extraordinary items: events that meet 2 conditions: unusual in nature, infrequent in occurrence ( a major casualty or natural disaster, or expropriation of property by a foreign govt) company must consider environment in which it operates, amounts reported net of tax. Ex: 9/11 was above the line.