Lec 2 Accounting Flashcards by Anne-Frédéric Laurin

What is the formula and meaning of Working Capital (WC)?

WC = Current Assets - Current Liabilities. Measures funds available for short-term operations.

How well did you know this?

Not at all

Perfectly

What is the formula and meaning of Current Ratio (CR)?

CR = Current Assets / Current Liabilities. Indicates short-term financial stability (should be above 2.8).

How well did you know this?

Not at all

Perfectly

What is the formula and meaning of Quick Ratio (QR)?

QR = Liquid Current Assets / Current Liabilities. A stricter liquidity measure (should be above 1.0).

How well did you know this?

Not at all

Perfectly

What is the formula and meaning of Debt Ratio (DR)?

DR = Liabilities / (Shareholders’ Equity + Liabilities). Shows company’s dependency on creditors.

How well did you know this?

Not at all

Perfectly

What is the formula and meaning of Equity Ratio (ER)?

ER = Shareholders’ Equity / (Liabilities + Shareholders’ Equity). Reflects financial strength.

How well did you know this?

Not at all

Perfectly

What is the formula and meaning of Debt to Equity Ratio (D/E)?

D/E = Long-term Debt Liabilities / Shareholders’ Equity. Compares long-term debt to equity capital.

How well did you know this?

Not at all

Perfectly

What is the formula and meaning of Times Interest Earned Ratio (TIER)?

TIER = (Before Tax Profit + Interest Expenses) / Interest Expenses. Measures the ability to pay interest on long-term debt.

How well did you know this?

Not at all

Perfectly

What is the formula and meaning of Inventory Turnover Ratio (ITR)?

ITR = Cost of Goods Sold / Average Inventory. Indicates how quickly inventory is utilized.

How well did you know this?

Not at all

Perfectly

What is the formula and meaning of Average Collection Period (ACP)?

ACP = Average Accounts Receivable / Average Daily Credit Sales. Measures how fast a company collects receivables.

How well did you know this?

Not at all

Perfectly

What is the formula and meaning of Fixed Asset Turnover (FAT)?

FAT = Net Sales / Average Net Fixed Assets. Reflects sales-generating capacity of fixed assets.

How well did you know this?

Not at all

Perfectly

What is the formula and meaning of Total Asset Turnover Ratio (TAT)?

TAT = Net Sales / Average Total Assets. Measures how efficiently assets generate sales.

How well did you know this?

Not at all

Perfectly

What is the formula and meaning of Operating Cost Ratio (OCR)?

OCR = Total Operating Expenses (excluding interest & debt) / Net Sales. Indicates the cost of generating one dollar of sales.

How well did you know this?

Not at all

Perfectly

What is the formula and meaning of Profit Margin (PM)?

PM = 1 - Operating Cost Ratio. Represents the before-tax profit-generating capacity per dollar of sales.

How well did you know this?

Not at all

Perfectly

What is the formula and meaning of Net Profit Ratio (NPR)?

NPR = Net Profit / Net Sales. Measures the final profit-generating capacity per dollar of sales, including all expenses.

How well did you know this?

Not at all

Perfectly

What is the formula and meaning of Return on Total Assets (RTA)?

RTA = Net Profit / Average Total Assets. An accounting measure of return on investment.

How well did you know this?

Not at all

Perfectly

What is the formula and meaning of Return on Equity (ROE)?

ROE = (Net Profit - Preferred Dividends) / Average Common Shareholders’ Equity. Measures return on equity investment.

How well did you know this?

Not at all

Perfectly

What is a Balance Sheet (B/S)?

A Balance Sheet (B/S) is a financial statement that reports a company’s assets, liabilities, and shareholders’ equity at a specific point in time.

How well did you know this?

Not at all

Perfectly

What are the main components of a Balance Sheet (B/S)?

The main components of a Balance Sheet are Assets, Liabilities, and Shareholders’ Equity.

How well did you know this?

Not at all

Perfectly

What is an Income Statement (I.S.)?

An Income Statement (I.S.) is a financial statement that reports a company’s revenues, expenses, and net income over a specific period.

How well did you know this?

Not at all

Perfectly

What is included in an Income Statement (I.S.)?

An Income Statement includes Revenue, Cost of Goods Sold (COGS), Operating Expenses, Depreciation, Interest, Taxes, and Net Income.

How well did you know this?

Not at all

Perfectly

What is the formula for Profit?

Profit = Revenue - Operating Expenses

How well did you know this?

Not at all

Perfectly

What is Operating Profit?

Operating Profit is the revenue remaining after subtracting operating expenses, but before deducting taxes and interest.

How well did you know this?

Not at all

Perfectly

What is the formula for Net Income (NI)?

Net Income (NI) = Taxable Income - Taxes

How well did you know this?

Not at all

Perfectly

What does the Statement of Earned Surplus show?

The Statement of Earned Surplus shows changes in Accumulated Retained Earnings (ARE) from one period to the next.

Earned surplus Y1
+ NI y2
- div
= Earned Surplus Y2

How well did you know this?

Not at all

Perfectly

What is the formula for Book Value Per Share (BVPS)?

BVPS = (Shareholders' Equity - Preferred Stock) / Number of Common Shares

What does Book Value Per Share (BVPS) represent?

BVPS represents the theoretical value of each common share based on the company's book value.

What is the formula for Market Price per Share?

Market Price per Share = Market Capitalization / Total Number of Shares

What is the purpose of a Cash Flow Statement (CFS)?

A Cash Flow Statement (CFS) shows how cash is generated and used over a period of time.

What are the three main types of cash flows in a Cash Flow Statement (CFS)?

The three main types of cash flows are Operating Cash Flow (OCF), Investing Cash Flow (ICF), and Financing Cash Flow (FCF).

What are examples of cash inflows in a Cash Flow Statement (CFS)?

Examples of cash inflows: Net Income, Depreciation, Borrowing, Selling Assets, Issuing Shares.

What are examples of cash outflows in a Cash Flow Statement (CFS)?

Examples of cash outflows: Buying Equipment, Paying Dividends, Repurchasing Shares, Paying Off Debt.

What is Gross Cash Flow?

Gross Cash Flow = Total cash spent to acquire new assets.

How does Depreciation impact Cash Flow Statements?

Depreciation is a non-cash expense, so it is added back to OCF to reflect the actual cash position.

What is the formula for Total Depreciation Claimed (TDC) for accounting

TDC = Initial Cost (IC) - Salvage Value (SV)

How is depreciation calculated for tax purposes?

For tax purposes, depreciation is calculated based on IC, so the full cost of the asset is written off.

How is depreciation calculated for accounting purposes?

For accounting purposes, depreciation is calculated based on IC - SV to maintain a salvage value.

What is the formula for Terminal Book Value (TBV) under tax purposes?

Under tax purposes, TBV = 0 since the full cost is depreciated.

What is the formula for Terminal Book Value (TBV) under accounting purposes?

Under accounting purposes, TBV = Salvage Value (SV) as the asset retains a book value.

What happens if declared TDC exceeds (IC - SV) at disposal?

If declared TDC exceeds (IC - SV), the excess is taxed because too much depreciation was claimed.

What happens if declared TDC is less than (IC - SV) at disposal?

If declared TDC is less than (IC - SV), the difference is written off as a tax loss.

What is Accumulated Depreciation Charge (ADC)?

Accumulated Depreciation Charge (ADC) is the total amount of depreciation recorded over the life of an asset.

What are the different depreciation methods?

Depreciation methods include Straight-Line Depreciation (SLD), Declining Balance Depreciation (DBD), Sum-of-the-Years-Digits Depreciation (SOYD), and Unit of Production Depreciation (UPD).

What is the formula for Straight-Line Depreciation (SLD)?

SLD Formula: Depreciation = (Initial Value - Salvage Value) / Useful Life

What is the formula for Declining Balance Depreciation (DBD)?

DBD Formula: Depreciation = (Initial Value) * (Depreciation Rate) * (1 - Depreciation Rate)^(n-1)

What is the formula for Sum-of-the-Years-Digits Depreciation (SOYD)?

SOYD Formula: Depreciation = (Remaining Life / Sum of Years' Digits) * (Initial Value - Salvage Value)

What is the formula for Unit of Production Depreciation (UPD)?

UPD Formula: Depreciation = (Initial Value - Salvage Value) * (Actual Usage / Estimated Total Usage)

Shareholder Equity

SHE = assets - liabilities Net worth of the business to its owners after obligations payed off. Includes : Capital Stock, Preferred Stock and Accumulated retained earnings

Assets

Goods owned by the business

Liabilities

elements owned by the business

Capital Expenditures

Expense associated with the purchase of non-consumables

Accumulated Retained Earnings

Net Income - Dividends Payed

Fixed Assets vs. Fixed assets at cost

Net Fixed Assets = Fixed Assets - Total Depreciation

OCF whats included

A/R, A/P, NI, Inv, Dep Source

ICF whats included

NFA, Dep use = FA purchase

FCF whats included

N/P, C/S, Div paid, LTD

what does loan and withdrawal do to CF

Loan source Withdrawal USE Both FCF

What CF does income taxes payable fall into

OCF

Current assets vs fixed

Cash/Cash equivalents AR Inv Fixed: Land Equipment

Current Liabilities vs Long-term

Current: Accounts payable Long-term Mortage, loans

When they just say fixed assets what is usually meant

Net fixed assets (FA cost - Dep)

Typical liquid current assets

AR, Cash Securities

Common Shareholders’ Equity

SHE - PS

Book value

SHE - PS

B/S

Current assets (Cash, INv, A/R) Net Fixed Assets Lia (current: debt, Long-term: loan mortage) SHE PS CS ARE

ROE ROA Debt ratio relation

ROE=ROA×(1/( 1−Debt ratio)) return on total assets

Total operating expenses for profit margin

Op Ex -Dep (no LTD and taxes) ->>> EBIT