Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

Financial Accounting II > Chapter 12 > Flashcards

Chapter 12 Flashcards

1
Q

Canadian Securities Administrators (CSA)

A

Protect investors and maintain the integrity of the securities market

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

Accounting Standards Board (AcSB)

A

Set Generally Accepted Accounting Standards (GAAP).

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

Canadian Public Accountability Board

A

Federal agency which oversees Canadian accounting firms (independent
auditors) that perform auditing engagements of public companies.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

Corporate Governance Standards (Stock Exchanges)

A

Along with provincial governments, set overall corporate governance
standards. (The most prominent is the Ontario Securities Commission)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

Management

A

Responsible for the information in the financial statements and disclosures.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

Chief Executive Officer (CEO)

A

highest officer of the company.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

Chief Financial Officer (CFO)

A

highest officer associated with the financial and accounting side of the
business

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

Accounting Staff

A

prepare the details of the reports and bear professional responsibility for the
accuracy of the information.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

Board of Directors

A

Responsible for ensuring that processes are in place for maintaining the integrity
of the company’s accounting, financial statement preparation, and financial
reporting.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

Board of Directors (Audit Committee)

A

Is composed of non-management (independent) directors with financial
knowledge and is responsible for hiring the company’s independent auditors.
They also meet separately with the auditors to discuss management’s
compliance with their financial reporting responsibilities.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

Independent Auditors

A

Follow established auditing standards to assess the fairness of the financial
statements and related presentations

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

Information Intermediaries
Analysis and Advice

A
  1. Receive accounting reports and other information about the company from electronic information
    services.
  2. Gather information through conversations with company executives and visits to company
    facilities and competitors.
  3. Results of their analyses are combined into analysts’ reports.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

USERS

A
  • Institutional & Private Investors
  • Lenders or Creditors
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

Institutional Investors

A

Includes pension, mutual, endowment and other funds that invest on
the behalf of others

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

Private Investors

A

Individuals who purchase shares in companies

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

Lenders or Creditors

A

Suppliers, banks, commercial credit companies, and other financial institutions
that lend money to companies

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

THE DISCLOSURE PROCESS – PRESS RELEASES

A

Press Releases are used to announce quarterly and
annual earnings as soon as the verified figures are
available

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

ANNUAL REPORTS - Private Held Companies

A
  1. Four basic financial statements.
  2. Related notes.
  3. Report of independent accountants (auditor’s
    opinion) if the statements are audited.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

ANNUAL REPORTS - Public Companies

A
  1. Non-financial Section
    * Includes a letter to the shareholders, a description of
    management’s philosophy, products, successes, etc.
  2. Financial Section
    * Provincial securities commission regulators set
    minimum disclosure standards for the financial
    section for public companies.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

Quarterly Reports

A

QUARTERLY REPORTS
- Usually begin with a short letter to shareholders

  • Condensed unaudited statement of earnings and
    statement of financial position for the quarter.
  • Often, the statement of cash flows and statement of
    changes in shareholders’ equity are omitted. Some
    notes to the financial statements also may be
    omitted.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

What does Investors need to know?

A

Investors need to know if the company is trying to
earn a high rate of return through product
differentiation or cost differentiation.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
22
Q

FINANCIAL STATEMENT USERS

A

Management - uses accounting data
to make product pricing
and expansion
decisions.

External Decision makers - use accounting data
for investment, credit,
tax, and public policy
decisions.

23
Q

THREE TYPES OF FINANCIAL
STATEMENT INFORMATION

A
  • Past
    Performance

Net earnings,
sales volume,
cash flows,
return-on-
investment,
EPS.

  • Present
    Condition

Assets, debt,
inventory,
various ratios.

  • Future Performance

Sales and earnings
trends are good
indicators of future
performance.

24
Q

Financial Statement Analysis based on comparisons

A
  • Time series
    analysis

Examines a single
company to identify
trends over time.

  • Comparison with similar companies

Provides insights
concerning a
company’s relative
performance

25
Q

Ratio analysis is used to…

A

express the proportionate relationship between two
different amounts.

26
Q

Profitability Ratios

A

a primary measure of the overall success of a
company. It is necessary for a company’s survival.

  • Return on Equity
  • Return on Assets
  • Gross Profit Percentage
  • Net profit margin ratio
  • Earnings per share (EPS) ratio
  • Quality of earnings ratio
27
Q

Profitability Ratios - Return on Equity (ROE)

A

This measure indicates how much income was earned for every
dollar invested by the owners

Net Earnings / Average Shareholders’ Equity

28
Q

Profitability Ratios - Return on Assets (ROA)

A

Many analysts consider this ratio as the best overall
measure of a company’s profitability.

Return on Assets

29
Q

PROFITABILITY RATIOS – FINANCIAL LEVERAGE %

A

Financial leverage is the advantage or disadvantage that occurs
as the result of earning a return on equity that is different from
the return on assets.

Financial Leverage = Return on Equity - Return on Assets

30
Q

PROFITABILITY RATIOS – GROSS PROFIT PERCENTAGE

A

The gross profit percentage (also referred to as the gross profit
margin) reflects gross profit as a percent of sales. If not shown
separately on a company’s statement of earnings, gross profit is
calculated by subtracting cost of sales from net sales.

Gross Profit % = Gross Profit / Net Sales

31
Q

PROFITABILITY RATIOS – NET PROFIT MARGIN RATIO

A

The net profit margin ratio measures the percentage of each sales
dollar, on average, that represents net earnings.

Net Profit Margin Ratio = Net Earnings / Net Sales

32
Q

PROFITABILITY RATIOS – EARNINGS PER SHARE
(EPS)

A

Earnings per share is probably the single most widely watched financial ratio. The
average number of shares based on the number of shares at the beginning and end of
the year.

EPS = Net Earnings available to common shareholders / Average number of common shares outstanding

33
Q

PROFITABILITY RATIOS – QUALITY OF EARNINGS
RATIO

A

Most financial analysts are concerned about the quality of a
company’s earnings because the use of some accounting
procedures can result in higher earnings reports. A ratio higher
than 1 indicates high-quality earnings.

Quality of Earnings Ratio = Cash flows from op. activities / Net Earnings

34
Q

ASSET TURNOVER RATIOS

A

Asset turnover ratios focus on capturing how efficiently a company uses its assets.

35
Q

ASSET TURNOVER RATIOS – TOTAL ASSET TURNOVER
RATIO

A

The total asset turnover ratio captures how well a company uses its
assets to generate revenue. The ratio is calculated as follows

Total Asset Turnover = Net Sales / Average Total Assets

36
Q

ASSET TURNOVER RATIOS – FIXED ASSET TURNOVER
RATIO

A

This ratio measures a company’s ability to generate sales
given an investment in fixed assets.

Fixed Asset Turnover Ratio = Net Sales / Average Net Fixed Assets

37
Q

ASSET TURNOVER RATIOS – RECEIVABLES TURNOVER
RATIO

A

This ratio measures how quickly a company collects
its trade receivables.

Receivables Turnover Ratio = Net Credit Sales / Average Net Accounts Receivable

38
Q

ASSET TURNOVER RATIOS – INVENTORY TURNOVER
RATIO

A

This ratio measures how quickly the company sells its inventory.

Investory Turnover Ratio = Cost of Sales / Average Inventory

39
Q

Operating cycle for most companies involves:

A
  • Acquisition of inventory
  • Sale of inventory
  • Collection of cash from customers
40
Q

Liquidity Ratios

A

Liquidity refers to a company’s ability to meet its short-term obligations. A company’s ability to pay its current liabilities is an important
factor in evaluating its short-term financial strength.

41
Q

Liquidity Ratios

A
  1. the current ratio
  2. the quick ratio
  3. the cash ratio
42
Q

LIQUIDITY RATIOS – CURRENT RATIO

A

The current ratio measures the relationship between the current
assets and current liabilities at a specific date.

Current Ratio = Current Assets / Current Liabilities

43
Q

LIQUIDITY RATIOS – QUICK RATIO

A

The quick ratio, sometimes referred to as the acid test, is a more stringent test of short-term liquidity than the current ratio. The quick ratio compares quick assets, defined as cash and near–
cash assets, to current liabilities.

Quick Ratio = Quick Assets / Current Liabilities

44
Q

LIQUIDITY RATIOS – CASH RATIO

A

This ratio measures the adequacy of available cash.

Cash Ratio = Cash + Cash Equivalents / Current Liabilities

45
Q

SOLVENCY RATIOS

A

Solvency refers to a company’s ability to meet its long-term
obligations.

  • Times interest earned
  • Cash coverage
  • Debt-to-Equity ratios
46
Q

SOLVENCY RATIOS – TIMES INTEREST EARNED

A

Tests of solvency measure a company’s ability to meet its long-term obligations. This ratio indicates a margin of protection for creditors

Times Interest Earned = Net Earnings + Interest Expense + Income Tax Expense / Interest Expense

47
Q

SOLVENCY RATIOS – CASH COVERAGE RATIO

A

This ratio compares the cash generated with the cash
obligations of the period

Cash Coverage Ratio = Cash Flow from Operating Activities Before Interest and Taxes / Interest Paid (from statement of cash flows)

48
Q

SOLVENCY RATIOS – DEBT-TO-EQUITY RATIO

A

This ratio measures the amount of liabilities that exists for each $1
invested by the owners.

Debt-to-Equity Ratio = Total Liabilitiies / Shareholder’s equity

49
Q

MARKET RATIOS

A

Some ratios, often called market ratios, relate the current
market price per share to the return that accrues to
investors.

50
Q

MARKET RATIOS – PRICE/EARNINGS (P/E)
RATIO

A

Market tests relate the current market price of a share to an
indicator of the return that might accrue to the investor.

This ratio measures the relationship between the current market
price of the share and its earnings per share.

P/E Ratio = Current Market Price Per Share / Earnings Per Share

51
Q

INTERPRETING RATIOS

A
  • Ratios may be interpreted by comparison with ratios of
    other companies or with industry average ratios.
  • Ratios may vary because of the company’s industry
    characteristics, nature of operations, size, and
    accounting policies.
52
Q

What is an efficient market?

A

A securities market in which prices fully reflect available information is called
an efficient market. In an efficient market, a company’s share price reacts
quickly when new, relevant information is released about the company.

53
Q

In addition to financial ratios, 3 special factors might affect company analysis

A
  • Rapid growth
  • Uneconomical expansion
  • Subjective factors

Financial Accounting II (6 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions