Exam 1

Question 1

accounting cycle definition

Answer 1

procedures involved in recording and preparing financial statements

Question 2

accounting cycle

Answer 2

1. identification & measurement of transaction and other events
2. journalization - general journal, cash receipts journal, purchases journal, cash disbursements journal, sales journal, other special journals
3. posting - general (monthly), subsidiary (daily) ledger
4. trial balance preparation
5. adjustments (accruals, deferrals)
6. adjusted trial balance
7. statement preparation (income, RE, balance sheet, CFs)
8. closing entries (nominal accounts)
9. post closing trial balance (optional)
10. reversing entries (optional)

Question 3

when do you make an entry?

Answer 3

if it is an event that causes a change in assets, liabilities, or equity

an event that affects the company’s financial position

Question 4

examples of what to record and what not to record

Answer 4

record: sales, purchases

don’t record: hiring someone, signing a contract

Question 5

standard accounting equation

Answer 5

assets = liabilities + SE equity

Question 6

accounting equation expanded

Answer 6

liabilities + Beginning SE + revenues - expenses - dividends

Question 7

purpose of a journal

Answer 7

1. draft journal entries
2. see both sides of journal entry
3. review the journal entry

Question 8

posting

Answer 8

journal –> ledger

Question 9

ledger

Answer 9

place where we accumulate the activities in each account and can easily determine balances or activity for each account when necessary

Question 10

trial balance

Answer 10

list of accounts and their balances at a given time

Question 11

when do we prepare trial balance

Answer 11

at the end of the period (end of month, quarter, year)

Question 12

why do we prepare trial balances

Answer 12

• make sure debts=credits

- provides us with a nice way to look for unusual balances

Question 13

deferrals

Answer 13

waiting to recognize, haven’t yet incurred

1. prepaid expenses - expenses paid in cash be (ex: prepaid insurance)
2. unearned revenues - cash received before services are performed (ex: tickets)

Question 14

accruals

Answer 14

1. accrued revenues - revenues for services performed buy not yet received in cash or recorded
2. accrued expenses: expenses incurred but not yet paid in cash or recorded (ex salaries(last 3 days of the year), utilities)

Question 15

where do we record adjusting entries

Answer 15

general journal and general ledger

Question 16

equation to calculate monthly depreciation

Answer 16

(historical cost - salvage value)/useful life

Question 17

Financial leverage ratios

Answer 17

times interest earned

cash coverage

Question 18

times interest earned

Answer 18

-financial leverage ratio
-higher is better
-having too low of interest might be a bad thing because we may be leveraging poorly
TIE = EBIT / Interest

Question 19

cash coverage ratio

Answer 19

= (EBIT + Depreciation) / interest

-adds depreciation back in TIE

Question 20

Asset management inventory ratios

Answer 20

• inventory turnover

- Days’ sales inventory

Question 21

inventory turnover

Answer 21

= COGS / Inventory
- the entire inventory turns over ___ each year
- in general, we’d like a little higher
- too high could mean you don’t have enough inventory, could be missing sales
-

Question 22

Days’ sales inventory

Answer 22

= 365 / Inventory Turnover

• makes the inventory turnover more conceptually understandable
• I sell my entire inventory every ___ days
• a good DSI ratio depends on the company, need a higher ratio for a butcher vs someone who sells yachts.
• must compare ratio to get a feel for good or bad

Question 23

Asset management: Receivables

Answer 23

• Receivables turnover

- Days’ sales in receivables

Question 24

Receivables turnover

Answer 24

= Sales / AR

• tells me that I turn over my receivables __ times per year
• want a higher number

Question 25

Days sales in receivables

Answer 25

= 365 / receivables turnover - i collect my receivables every __ days - must compare ratio to get a feel for good or bad - DSR makes receivable turnover ratio more understandable

Question 26

Asset management: Asset turnover ratios

Answer 26

- total asset turnover | - capital intensity ratio

Question 27

total asset turnover

Answer 27

= sales / total assets - Dollar of revenue per dollar of assets - I have $0.64 of sales for every dollar in assets - want higher - have to compare to get a feel for good or bad - lower can be bad --> PPE tends to be the more expensive assets, assets are listed net of depreciation, older equipment have a smaller impact because they've accounted for more depreciation, indicative of older machines which is not always beneficial to a business

Question 28

capital intensity ratio

Answer 28

= 1 / Total Asset Turnover

Question 29

Profitability measures

Answer 29

- profit margin - ROA - ROE

Question 30

profit margin

Answer 30

=NI / sales - have to compare - higher is better - can be too high though, if margin is set so high we might be losing out on sales. Might be better to take a lower margin with a higher volume of sales

Question 31

return on assets

Answer 31

= NI / Total Assets - higher is better - could be bad, older equipment?

Question 32

return on equity

Answer 32

=NI / Total equity - higher is better - must compare - high can be bad, too much equity could be I'm using too much debt

Question 33

market value measures

Answer 33

- EPS - PE ratio - price/sales ratio - market-to-book ratio

Question 34

earnings perr share

Answer 34

- higher is better | - need to compare to previous periods

Question 35

P/E ratio

Answer 35

= Price per share / earnings per share - value investors want a lower PE - ManagementCEOs want this to be high because that means investors think we're doing good

Question 36

price/sales ratio

Answer 36

= price per share / sales per share - value investors want a lower PE - Managements wants this to higher

Question 37

market-to-book ratio aka Price/book

Answer 37

= price per share / book value per share - low P/B stocks have historically returned more - want a low P/B from investor standpoint

Question 38

DuPont

Answer 38

ROE = PM x TAT x EM NI / TE = (NI / Sales) x (Sales / Ta) x (TA/TE) - leverage make good times better and bad times worse Things that impact ROE: -PM (ability to control costs) - TAT (how efficiently we manage our assets (inventory, fixed assets etc.) - EM (how well we use debt will increase ROE) *** continued to multiple by 1 and found that essentially everything affected ROE (reason why its such an important ratio)

Question 39

why evaluate financial statements

Answer 39

-internal users: performance evaluation planning for future -external users:

Question 40

Benchmarking

Answer 40

ratio need to be compared to something - ourselves at a different time - industry average - single competitor - sometimes an index

Question 41

Dont worry about EVA

Answer 41

ddd

Question 42

problems with financial analysis

Answer 42

-conglomerates (no readily available comparables, who do you compare GE to? themselves) -global competitors -different accounting procedures etc.