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Accounting > Chapters 9, 11, 14 > Flashcards

Chapters 9, 11, 14 Flashcards

(54 cards)

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1
Q

What happens to total fixed cost when activity increases or decreases?

A

It stays the same.

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2
Q

What happens to fixed cost per unit when activity increases or decreases?

A

It increases or decreases based on the activity.

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3
Q

What happens to total variable cost when activity increases or decreases?

A

It increases or decreases proportionately.

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4
Q

What happens to variable cost per unit when activity increases or decreases?

A

It stays the same.

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5
Q

What does the contribution margin represent?

A

The amount available to cover fixed expenses and thereafter to to provide company profits.

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6
Q

What is the contribution margin formula?

A

Sales Revenue
(Variable Costs)
———————–
Contribution Margin

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7
Q

How do you find the magnitude of operating leverage?

A

Contribution Margin (divided by) Net Income

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8
Q

How do you find net income? Provide the complete formula.

A 
Sales Revenue 
(Variable Costs)
\_\_\_\_\_\_\_\_\_\_\_\_\_\_
Contribution Margin
(Fixed Costs)
\_\_\_\_\_\_\_\_\_\_\_\_\_
Net Income
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9
Q

Is the contribution margin included in external or internal financial reports?

A

Internal only - GAAP prohibits its use in external financial statements

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10
Q

If a company has a magnitude of operating leverage of 7, what does that mean?

A

A 10% increase/decrease in revenue produces a 70% increase/decrease in profitability

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11
Q

What is relevant range?

A

The range of activity (production) where fixed costs to not change

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12
Q

What is the break-even point?

A

Where profit (income) equals zero

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13
Q

What are the 2 methods to determine break-even point?

A
  1. Equation Method

2. Contribution Margin per Unit Method

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14
Q

What is the formula or the equation method?

A

Sales per unit- Variable costs per unit - Fixed costs = Profit (Net Income)

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15
Q

What is the formula for the contribution margin per unit?

A

$ Sales price per unit
$ (Variable cost per unit)
__________________
$ Contribution margin per unit

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16
Q

What is the break-even point formula?

A

Fixed Costs (divided by) Contribution margin per unit

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17
Q

How do you determine the break-even point in dollars?

A

multiply the # of units times the sales price per unit

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18
Q

How do you determine the sale volume necessary to reach a desired profit by using the contribution margin per unit method?

A

Fixed Costs + Desired Profits / Contribution margin per unit

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19
Q

What is the margin of safety?

A

The gap between the budgeted and the break-even sales. It quantifies the amount by which actual sales can fall short of expectation before the company will begin to incur losses.

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20
Q

What is the formula to determine the margin of safety?

A

Budget Sales
(Break-even Sales)
__________________
Margin of safety

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21
Q

What is the formula to determine the margin of safety percentage?

A

Budgeted sales - Break-even sales / Budgeted

The higher the percentage the better/safer you are from incurring a loss.

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22
Q

What is ratio analysis?

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A

involves studying various relationships between different items reported in a set of financial statements.

23
Q

What do liquidity ratios indicate?

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A

A company’s ability to pay short-term debts. They focus on current assets and current liabilities.

24
Q

What are some liquidity ratios?

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A
  1. Working capital
  2. Current ratio
  3. Quick ratio
  4. Accounts receivable ratios
  5. Inventory ratios
25
What is the working capital ratio?
The difference between current assets and current liabilities. The higher the number the better - more availability to cover different type of operations.
26
What is the current ratio and what does it mean? What should the minimum number be?
Current Assets / Current Liability Measures a company's short-term debt paying ability. A declining ratio may be a sign of deteriorating financial condition, or it might result from eliminating obsolete inventories. Minimum number should be at least 1 A too high of a current ratio may mean they are not taking enough risk, paying enough out in dividends or the current assets are inflating the current ratio.
27
What is the quick ratio, or acid test, and what does it mean?
Quick Assets / Current Liabilities Measure a company's ability to meet obligations without having to liquidate inventory. Will usually hover around 1 or .9 - anything lower (.5 or .4) has serious cash flow problems
28
What are quick assets?
Quick assets include cash, current marketable securities, and AR. Purposely does not include inventory.
29
What is the AR Turnover Ratio and what does it mean?
Total Sales / Average AR (beg AR + end AR/2) Measures how many times a company convert its receivables into cash each year Want to see AR Turnover consistent with the terms
30
What is the Average Days to Collect Receivables ratio and what does it mean?
356 days / AR Turnover Measures, on average, how many days it takes to collect an accounts receivable
31
What is the Inventory Turnover Ratio and what does it mean?
COGS / Average Inventory Measures how many times a company's inventory has been sold and replaced during the year. A decline over years could mean potential excess or obsolete inventory
32
What is the Average Days to Sell Inventory ratio and what does it mean?
365 Days / Inventory Turnover Measures how many days, on average, it takes to sell the inventory
33
What do solvency ratios used for?
Used to analyze a company's long-term debt-paying ability and its financing structure - surviving long-term
34
What are some solvency ratios?
1. Debt to Assets Ratio 2. Debt to Equity Ratio 3. Number of Times Interest Earned 4. Plant Assets to Long-Term Liabilities
35
What is the Debt to Assets Ratio and what does it measure?
Total Liabilities / Total Assets Measures the % of a company's assets that are financed by debt. The higher the ratio the more risk the company has not being able to pay back its debts. Lower the better. 70 - 80% is called highly leveraged
36
What is the Debt to Equity Ratio and what does it measure?
Total Liabilities / Total SE Indicates the relative proportions of debt to equity on a company's balance sheet
37
What is the Number of Times Interest Earned Ratio and what does it measure?
Earning (Net Income) before Interest Expense and Income Taxes / Interest Expense Most common measure of a company's ability to provide protection for its long-term creditors.
38
What is the Plant Assets to Long-Term Liabilities Ratio and what does it measure?
Net Plant Assets / Long-Term Liabilities Suggest how well long-term debt is managed to finance long-term assets
39
What are profitability ratios used for?
Measure a company's ability to generate earnings
40
What are the profitability ratios?
1. Net Margin (or Return on Sales) 2. Asset Turnover Ratio 3. ROI 4. Return on Equity
41
What is the Net Margin ratio and what does it measure?
Net Income / Net Sales Tells us what we made on $1 of sales
42
What is the Asset Turnover ratio and what does it measure?
Net Sales / Avg Total Assets Measures how many sales dollars were generated for each dollar of assets invested.
43
What is the ROI ratio and what does it measure?
Net Income / Avg Total Assets Measures how profitable the company is. Needs to look at the trend to determine how good or bad it is - the higher the better
44
What is the Return on Equity (ROE) ratio and what does it measure?
Net Income / Avg. Total SE Equity Measures the profitability of the stockholder's investment - the higher the better
45
What do stock market ratios analyze?
The earnings and dividends of a company
46
What are the stock market ratios?
1. Earnings Per Share (EPS) 2. Book Value 3. Price - Earnings (P/E) Ratio 4. Dividend Yield
47
What is the EPS ratio and what does it measure?
Net Earnings Available for Common Stock (Net Income - Preferred Stock Dividends) / Avg # of Outstanding Common Shares Indicates how much income was earned for each share of CS outstanding
48
What is the Book Value ratio and what does it measure?
SE - Preferred Stock / Outstanding Common Shares Measures the amount that would be distributed to holders of each share of CS if all asset were sold at their balance sheet carrying amounts and if all creditors were paid off. Not many people use BV to manage companies - Buffet looks at this
49
What is the P/E ratio and what does it measure?
Market Price Per Share / Earnings Per Share Compares the earnings of a company to the market price for a share of the company's stock. Overpriced - PE Ratio is high Undervalued - PE ratio is lower and perhaps a good time to purchase
50
What is the Dividend Yield ratio and what does it measure?
Dividends Per Share / Market Price Per Share Identifies the return, in terms of cash dividends, on the current market price of the stock
51
What are some limitations of financial statement analysis?
- Different industries - Changing economic environment - Accounting principles (using consistent principles) - Looking at internal trends (3-5 years) - industry averages
52
What are the 3 levels of planning for business activity and what do they focus on?
1. Strategic planning - long term decisions 2. Capital budgeting - intermediate range planning 3. Operations budgeting - short -term planning
53
What components make up the master budget?
1. Operating budgets 2. Capital budgets 3. Pro forma financial statements
54
Cash receipts from customers is included in what type of budget?
Sales budget

Accounting (3 decks)

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