FINANCE FINALS Flashcards by Jackelou Mondejar

It is a service activity. Its function is to provide quantitative information, primarily financial
in nature, about economic entities that is intended to be useful in making economic
decisions.
—Accounting Standards Council (ASC)
It is an art of recording, classifying, summarizing in a significant manner and in terms
of money, transactions, and events which are, in part at least, of a financial
character, and interpreting the results thereof.
-American Institute of Certified Public Accountants (AICPA)
The process of identifying, measuring, and communicating economic information to permit
informed judgements and decisions by users of the information.
—American Accounting Association (AAA)

Definition of Accounting

How well did you know this?

Not at all

Perfectly

INTERNAL STAKEHOLDERS

EMPLOYEES
MANAGERS
OWNERS

How well did you know this?

Not at all

Perfectly

EXTERNAL STAKEHOLDERS

SUPPLIERS
SOCIETY
GOVERNMENT
CREDITORS
SHAREHOLDERS
CUSTOMERS

How well did you know this?

Not at all

Perfectly

SERVICE CONCERN
The business derived its income from services rendered to clients
MERCHANDISING
CONCERN
The business is engaged in buying goods or commodities or any form of finished products and sells them at a profit.
MANUFACTURING
CONCERN
The business is engaged in buying of raw materials and supplies to be processed or manufactured
AGRICULTURE
The business is engaged planting of crops and sells its products
either in raw or finished form at a profit
HYBRID COMPANIES
Are those involved in more than one type of activity which are manufacturing, merchandising and service.

Nature of Business Organization

How well did you know this?

Not at all

Perfectly

The business derived its income from services rendered to clients

SERVICE CONCERN

How well did you know this?

Not at all

Perfectly

The business is engaged in buying goods or commodities or any
form of finished products and sells them at a profit.

MERCHANDISING
CONCERN

How well did you know this?

Not at all

Perfectly

The business is engaged in buying of raw materials and supplies to
be processed or manufactured

MANUFACTURING
CONCERN

How well did you know this?

Not at all

Perfectly

The business is engaged planting of crops and sells its products
either in raw or finished form at a profit

AGRICULTURE

How well did you know this?

Not at all

Perfectly

Are those involved in more than one type of activity which are
manufacturing, merchandising and service.

HYBRID COMPANIES

How well did you know this?

Not at all

Perfectly

a report issued annually by a
corporation to its stockholders. It
contains basic financial statements
as well as management’s analysis
of the firm’s past operations and
future prospects.

ANNUAL REPORT

How well did you know this?

Not at all

Perfectly

The end products of one
accounting cycle, which reveal the
formal record of the financial activities
of an entity for the purpose of
communicating the same to the endusers (stakeholders) as their source
reference in making decisions.

FINANCIAL
STATEMENTS

How well did you know this?

Not at all

Perfectly

Generally Accepted
Accounting Principles
(GAAP)

Conceptual Framework
for Financial Reporting

Accounting Standards
(e.g. IFRS/PFRS and
IAS/PAS)

Applicable Government
Laws (e.g. Taxation)

BASES FOR
FINANCIAL STATEMENTS

How well did you know this?

Not at all

Perfectly

ENTITY
MONEY MEASUREMENT
PERIODICITY
ACCRUAL
MATCHING
GOING CONCERN
COST
REALIZATION
DUAL ASPECT
CONSERVATION
CONSISTENCY
MATERIALITY

ACCOUNTING CONCEPT

How well did you know this?

Not at all

Perfectly

REAL ACCOUNTS (PERMANENT) & NOMINAL ACCOUNTS (TEMPORARY)

Elements of Financial Statements

How well did you know this?

Not at all

Perfectly

RA
ASSET
LIABILITY
EQUITY

NA
INCOME
EXPENSE

Elements of Financial Statements

How well did you know this?

Not at all

Perfectly

REAL ACCOUNTS

ASSET LIABILITY EQUITY

How well did you know this?

Not at all

Perfectly

NOMINAL ACCOUNT

INCOME EXPENSE

How well did you know this?

Not at all

Perfectly

A present economic resource controlled
by the entity as a result of past events.
An economic resource is a right that has
the potential to produce economic
benefits

Asset

How well did you know this?

Not at all

Perfectly

A present obligation of the entity to
transfer an economic resource as a result
of past events. An obligation is a duty of
responsibility that the entity has no
practical ability to avoid

Liability

How well did you know this?

Not at all

Perfectly

residual interest in the assets of the
entity after deducting all its liabilities.

Equity

How well did you know this?

Not at all

Perfectly

increase in the economic benefits
during the accounting period in the
form of inflows or enhancements of
assets or decrease of liabilities that
result in increases in equity, other
than those relating to contributions
from equity participants.

Income

How well did you know this?

Not at all

Perfectly

decreased in economic benefits
during the accounting period in the
form of outflows or depreciation of
assets or incurred of liabilities that
result in decreases in equity, other
than those relating to distributions to
equity participants.

Expense

How well did you know this?

Not at all

Perfectly

reports the company’s financial position
and it consists (1) assets, (2) liabilities, and
(3) stockholders’ equity at a specified date

Statement of Financial Position
(Balance Sheet)

How well did you know this?

Not at all

Perfectly

reports the company’s profitability
(revenues/gains minus expenses/losses)
during a specified period of time

Statement of Financial Performance
(Income Statement)

How well did you know this?

Not at all

Perfectly

reports the changes in cash composition during a specified period and is divided into three parts: (1) operating activities, (2) investing activities, and (3) financing activities.

Statement of Cash Flows (Direct/Indirect)

reports the changes or movements in in the equity section during a specified period of time

Statement of Stockholder’s Equity (Changes in Equity)

presents assumptions used, disclosures and relevant information regarding the computation of figures in FS

Notes to Financial Statements

Assets: Current (e.g. Cash, Accts Receivables, Prepayments, Inventories) Non-current (e.g. Fixed Assets) Liabilities: Current (e.g. Accts Payable, Accrued Exp., Short-Term Notes) Non-current (e.g. Long-Term Notes, Loans and Bonds) Equity Capital (e.g. Common and Preferred Stocks, Partners’ Capital, etc.) Retained Earnings (where nominal accounts are closed) Dividend payments & Withdrawals

STATEMENT OF FINANCIAL POSITION/ BALANCE SHEET

Formula :________ = Liabilities + Equity

Assets

Only the cash and cash equivalents account represents actual spendable money. Working Capital = Current Assets Net Working Capital = Current Assets minus Current Liabilities. Net Operating Working Capital (NOWC) = Current assets minus non-interest-bearing current liabilities. The cost of Fixed Assets are periodically depreciated (e.g. SLM, SYD, DDB) Prepayments (e.g. Insurance & Rent) are periodically amortized

Keynotes in SFP/BS

Operating Income: Sales revenue Non-operating income and other income: Interest, Rent and Royalties Gains in selling Long-Term Assets and Securities Operating Expenses: Cost of Good Sold Administrative & Selling (e.g. Salaries, Utilities, Marketing, etc.) Depreciation & Amortization Non-operating expenses and losses: Interests & Taxes Losses in selling Long-Term Assets and Securities) Formula : Net Income = Revenues/Gains - Expenses/Losses

STATEMENT OF FINANCIAL PERFORMANCE/INCOME STATEMENT

1. Operating activities include cash activities related to net income. 2. Investing activities include cash activities related to noncurrent assets. 3. Financing activities include cash activities related to interest-bearing liabilities and equity for the purpose of raising a capital.

STATEMENT OF CASH FLOWS

include cash activities related to net income.

. Operating activities

include cash activities related to noncurrent assets.

. Investing activities

include cash activities related to interest-bearing liabilities and equity for the purpose of raising a capital.

Financing activities

OPERATING INCESTING FINANCING

DIRECT CASH FLOWS

Authorized shares are the number of shares that a corporation is legally allowed to issue. Issued Stocks (Common or Preferred Stocks) represents shares that the corporation has actually sold. Treasury Stocks are issued shares of stocks which are reacquired by the issuing corporation. Additional Paid-in Capital (APIC) arises when stocks are issued in excess to par value per share. Retained Earnings include net income for the period and dividends declared or paid.

STATEMENT OF STOCKHOLDER’S EQUITY

are the number of shares that a corporation is legally allowed to issue.

Authorized shares

(Common or Preferred Stocks) represents shares that the corporation has actually sold.

Issued Stocks

are issued shares of stocks which are reacquired by the issuing corporation.

Treasury Stocks

arises when stocks are issued in excess to par value per share.

Additional Paid-in Capital (APIC)

include net income for the period and dividends declared or paid.

Retained Earnings

1. Basis of presentation 2. Accounting policies 3. Supporting computations for FS 4. Other mandatory disclosures

5. NOTES TO FINANCIAL STATEMENTS

1. Basis of presentation 2. Accounting policies 3. Supporting computations for FS 4. Other mandatory disclosures

process of EXAMINING and EVALUATING a company's financial statements to gain insights into its financial performance, stability, and overall health. It involves analyzing the income statement, balance sheet, and cash flow statement to assess various financial ratios, trends, and patterns. Financial statement analysis helps stakeholders, such as investors, creditors, and managers, make informed decisions about the company.

FINANCIAL ANALYSIS

➢ Expresses a line item as a percentage of some priorperiod amount. ➢ Called TREND ANALYSIS ➢ Line items are expressed as a percentage of a base period amount. line items are expressed as a percentage of a base period amount.

HORIZONTAL ANALYSIS

➢Trend percentages are a form of horizontal analysis ➢Trends indicate the direction a business is taking ➢Trend percentages are computed by selecting a base year. ➢Base year amounts are set equal to 100%. TREND % = Any year peso amount /Base year peso Amount

TREND PERCENTAGE

➢ concerned with relationships among items within a particular time period ➢ expresses the line item as a percentage of some other line item for the same period. ➢ Income statement—each item expressed as percentage of net sales ➢ Balance sheet—each item expressed as percentage of total assets

VERTICAL ANALYSIS

—each item expressed as percentage of net sales

➢ Income statement

each item expressed as percentage of total assets

➢ Balance sheet—

➢ A means of evaluating the relationships between key components of the financial statements ➢ The information needed can be found in the company’s financial statements ➢ A few ratios require the amount of the company’s closing market price ➢ Some ratios require knowledge of the number of shares outstanding

RATIO ANALYSIS

LIQUIDITY Can the company meet its short-term obligations using the resources it currently has on hand? ASSET MANAGEMENT right amount of assets vs. sales? DEBT MANAGEMENT Right mix of debt and equity? PROFITABILITY Do sales prices exceed unit costs, and are sales high enough as reflected in PM, ROE, and ROA? 21 MARKET PERFORMANCE Do investors like what they see as reflected in P/E and M/B ratios?

FIVE MAJOR CATEGORIES OF RATIOS

Current Ratio Quick Ratio Working Capital

LIQUIDITY RATIO

is used to evaluate a company’s ability to pay current liabilities. The 2020 WC for XYZ Co.: Working Capital = Current Asset – Current Liabilities = 393, 000 – 213,000 = 180, 000

WORKING CAPITAL

➢ the current ratio measures the ability to pay current liabilities with current assets. ➢ Higher than one (1) indicates that company has sufficient current assets to cover current liabilities The 2020 Current Ratio for XYZ Co.: The ratio of 1.85:1 means that for every peso of current liabilities, the company has P1.85 of current assets. Formula Current Ratio 2020 Current Ratio = Current Asset 393,000 = 1.85 : 1 Current Liabilities 213,

CURRENT RATIO

➢ measures immediate liquidity. ➢ Quick assets—cash, short-term investments, net current receivables . ➢ One (1) or higher indicates that the company can meet its short term liabilities without relying on inventory. The ratio of 1.01 : 1 means that for every peso of current liabilities, the company has P1.01 of quick assets.

ACID TEST RATIO (QUICK RATIO)

—cash, short-term investments, net current receivables .

Quick assets

ASSET MANAGEMENT Inventory Management Average Sale Period Accounts Receivable Turnover Average Collection Period Operating Cycle Total Asset Turnover

➢ how many times a year the company sells its average level of inventory ➢ A higher inventory turnover ratio indicates that a company is selling its inventory more quickly and efficiently *Average Turn over = (Beginning Inventory + Ending Inventory) / 2

INVENTORY TURN OVER

AVERAGE SALE PERIOD 28 ➢ is an efficiency ratio that measures the average number of days the company holds its inventory before selling it. ➢ The ratio measures the number of days funds are tied up in inventory.

➢ measures the number of times, on average, the company collects receivables during the period. ➢ higher accounts receivable turnover ratio indicates that a company is collecting its receivables more quickly, which is generally favorable Average net Accounts Receivable = Beg. Receivables + Ending Receivables ) / 2

ACCOUNTS RECEIVABLE TURNOVER

➢ determine the average number of days required to collect an account. Formula Ave, Sale Period 2020 Average Collection = Period 365 Days 365 days = 42.34 days Acc. Recl Turnover 8.62 times This means that receivables are collected on average every 42.34 days.

AVERAGE COLLECTION PERIOD

➢ measures the elapsed time from when inventory is received from suppliers to when cash is received from customers. A manager’s goal is to reduce the operating cycle because it puts cash receipts in the company’s possession sooner

OPERATING CYCLE

➢ measures how efficiently a company’s assets are being used to generate sales. A company’s goal is to increase its total asset turnover

TOTAL ASSET TURNOVER

➢ Times Interest Earned Ratio ➢ Debt – to – Equity Ratio

DEBT MANAGEMENT

➢ Measures the company’s ability to make interest payments. ➢ A higher TIE ratio indicates a greater ability to meet interest obligations and suggests that the company is financially stable

Times Interest Earned Ratio (TIER)

➢ is one type of leverage ratio that indicates the relative proportions of debt and equity at one point in time on a company’s balance sheet. ➢ As the debt-to-equity ratio increases, it indicates that a company is increasing its financial leverage.

DEBT-TO-EQUITY RATIO

Measures the income or operating success of a company for a given period of time.

PROFITABILITY

➢ measures the percentage of each peso of sales that results in gross margin. Formula

GROSS MARGIN RATIO

➢ measures the percentage of each peso of sales that results in net income.

NET PROFIT MARGIN RATIO

➢ is a measure of operating performance. It measures the profitability of total assets, without considering how the assets are finance. ➢ A higher ROA indicates better asset utilization and greater profitability, as it means the company is generating more income per unit of assets

Return on Total Assets

➢ measures profitability of owners’ investment. It shows how many peso of net income the company earned for each peso invested by the owner.

RETURN ON EQUITY

Earnings per share Price – earning ratio Dividend payout ratio Dividend Yield Ratio Book Value per share

MARKET PERFORMANCE

➢ A measure of the net income earned on each share of common stock ➢ A higher EPS indicates higher earnings potential and may make a company's stock more attractive to investors.

Earnings per Share of Common Stock

➢ An index of whether a stock is relatively cheap or relatively expensive in relation to current earnings. ➢ A higher P/E ratio suggests that investors have high expectations for future earnings growth, while a lower P/E ratio may indicate lower growth expectations or undervaluation

Price Earnings Ratio

➢ measures the amount that would be distributed to holders of each share of common stock if all assets were sold at their balance sheet carrying amounts (i.e., book values) and if all creditors were paid off

Book Value per Share

➢ An index showing whether a company pays out most of its earnings in dividends or reinvests the earnings internally. ➢ A higher dividend payout ratio indicates that a larger portion of earnings is being distributed to shareholders as dividends, leaving less money for reinvestment in the company

Dividend Payout

➢ measures the rate of return (in the form of cash dividends only) that would be earned by an investor who buys common stock at the current market price. ➢ A higher dividend yield indicates a higher return from dividend income, making the stock potentially more attractive to incomefocused investors.

Dividend Yield

1. Ratios that reveal large deviations from the norm merely indicate the possibility of a problem. 2. A single ratio does not generally provide sufficient information from which to judge the overall performance of the firm. 3. The ratios being compared should be calculated using financial statements dated at the same point in time during the year. 4. It is preferable to use audited financial statements. 5. The financial data being compared should have been developed in the same way. 6. Results can be distorted by inflation.

Using Financial Ratios: Cautions about Using Ratio Analysis

Financial statement analysis helps stakeholders evaluate a company's financial position, profitability, liquidity, solvency, and operational efficiency. It provides valuable insights for making investment decisions, extending credit, evaluating business performance, and identifying areas for improvement.

Employees are interested in information about the liquidity of the company. True False

True

High financial leverage means the company has higher debts compared to equity but fails to maximize using it to earn higher profits False True

False

Normally, the analyst singles out the accounting value being analyzed and performs the analysis on the account per se in order to become objective in evaluation. True False

False

Financial statement analysis is the ultimate source of Information in determining the probable tendencies of a business. True False

False

Under horizontal analysis, the percentage of change in total assets is the sum of the percentage of current assets and non-current assets. False True

False

Vertical analysis is also called as common-sized analysis. * False True

True

High financial leverage means the company has higher debts compared to equity but fails to maximize using it to earn higher profits. True False

False

Employees are interested in information about the liquidity of the company. False True

True

Normally, the analyst singles out the accounting value being analyzed and performs the analysis on the account per se in order to become objective in evaluation. * False True

False

A horizontal analysis is conducted when the company compares its present performance with the amounts of two previous years. False True

False

The business activity performance of the company can be seen in this component of financial statements. Statement of Financial Performance. Statement of Changes in Equity. Statement of Financial Position. Statement of Cash Flows.

Statement of Financial Performance.

Which is FALSE about the statement of cash flows? * It is the most liquid asset and thereby necessary to present a statement intended for cash. It is an integral component of financial statements. It shows the financial capital structure of the business. It shows the ability of the company to obtain cash during a specified time frame.

It shows the financial capital structure of the business.

Which of the following is not correct about real accounts? * The best example of a real account is cash. Real accounts are presented with cumulative balances. Real accounts are presented in the Statement of Financial Performance. Asset is a real account.

Real accounts are presented in the Statement of Financial Performance.

This ratio is used to measure the company's ability to manage its obligations. Basic earnings per share. Inventory turnover. Acid test ratio. Debt to asset ratio.

Debt to asset ratio.

This ratio is used to measure the company's ability to manage its obligations. Basic earnings per share. Inventory turnover. Acid test ratio. Debt to asset ratio.

Debt to asset ratio.

Quick assets include:* Marketable securities, receivables, and inventories. Cash, marketable securities, and receivables. Cash, inventories, and receivables. Cash, marketable securities, and inventories.

Cash, marketable securities, and receivables.

FINANCE FINALS Flashcards

(100 cards)