Financial Statement Analysis Flashcards
(47 cards)
Revenue Recognition Model 5 step
- identify contracts with customer
- Identify performance obligations in contracts
- determine transaction price
- allocate transaction price to performance obligations
- Recognize revenue when/as performance obligations are satisfied
Gross Profit Margin
GPM = Gross Profit / Revenue = %
Capitzalizing
Spreading an assets cost over multiple periods, creating a balance sheet asset
Why: If benefits extend over multiple periods; amount can include additional costs to prepare the asset for future use.
- Subsequent expenditures that provide benefits beyond one year (replacing a roof) are capitalized
- Subsequent expenditures that do not provide benefits beyond one year are expensed
Expensing
Taking an assets cost as an expense on the income statement in the current period
Why: If benefits beyond one period are unlikely or highly uncertain
Interest Coverage
= EBIT / Interest Expense
Basic Earnings Per Share EPS
(net income - preferred dividends) / (weighed average # common stock)
Gross Profit Margin
= (Revenue - COGS) / Revenue
Net Profit Margin
Net Income / Revenue
Intangible assets
- Purchased patents, copyrights, brand, trademark, direct response advertising, purchased franchise and license costs, goodwill, computer software development costs
The SF Corporation has created employee goodwill by reorganizing its retirement benefit package. An independent management consultant estimated the value of the goodwill at $2 million. In addition, SF recently purchased a patent that was developed by a competitor. The patent has an estimated useful life of five years. Should SF report the goodwill and patent on its balance sheet?
Goodwill Patent
No / Yes
Explanation:
Goodwill:
Goodwill is only recognized on the balance sheet when it is purchased as part of a business acquisition. It cannot be internally generated, even if it creates value (such as employee goodwill from reorganization).
In this case, the goodwill is internally generated, so it cannot be reported on the balance sheet.
Patent:
The patent was purchased from a competitor, so it meets the criteria for capitalization under accounting standards (e.g., US GAAP or IFRS). Purchased intangible assets, like patents, are recorded at cost and amortized over their useful life if they have a finite life.
In this case, the patent has a useful life of five years, so it should be reported on the balance sheet and amortized over its useful life.
Goodwill Equation
Goodwill=PurchasePrice−FairValueofNetAssetsAcquired
At the beginning of the year, the Parent Company purchased all 500,000 shares of Sub, Inc. for $15 per share. Just before the acquisition date, Sub’s balance sheet reported net assets of $6 million. Parent determined the fair value of Sub’s property and equipment was $1 million higher than reported by Sub. What amount of goodwill should Parent report as a result of its acquisition of Sub?
Goodwill=PurchasePrice−FairValueofNetAcquired
PurchasePrice=500,000×15=7,500,000
FairValueofNetAssets=6,000,000+1,000,000=7,000,000
Goodwill=PurchasePrice−FairValueofNetAssets
Goodwill=7,500,000−7,000,000=500,000
At the beginning of the year, Company P purchased $80,000 face value of Company S corporate bonds for $77,000. Company P intends to hold these bonds for several years but sell them before they mature. At the end of the year, the market value of the bonds was $75,000. What amount should Company P report on its balance sheet at year-end for the investment in Company S bonds?
Purchase Price (Amortized Cost): $77,000
Year-End Market Value (Fair Value): $75,000
Since AFS securities are recorded at fair value, Company P will report $75,000 as the value of the investment in Company S bonds on the balance sheet.
Current Ratio Formula
current assets /
current liabilities
Quick Ratio Formula
Cash + Marketable Securities + receivables / Current Liabilties
Cash Ratio Formula
cash + marketable securities / Current liabilities
Long-term debt-to-equity ratio
long-term debt /
total equity
debt to equity ratio
total debt / total assets
Financial leverage ratio
total assets / total equity
Total Debt
Total debt/ total Assets
A company purchases an intangible asset for which an active market exists. The company may present the intangible asset’s value using the revaluation model if it reports its financial statements under: IFRS of GAAP
The following data is from Delta’s common size financial statement:
Earnings after taxes 18%
Equity 40%
Current assets 60%
Current liabilities 30%
Sales $300
Total assets $1,400
What is Delta’s total-liabilities-to-equity ratio?
TotalLiabilities-to-EquityRatio= TotalLiabilities / Equity
Expensed Items
Start up costs, training costs, admin & general overhead, ads and promo, relocation and reorganization, R&D But can be capitalized in IFRS
R&D Capitalization if:
- Project is technically feasible
- Resources exist to complete project
Market exists for the product - Company has intention to complete and sell product
