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Flashcards in Notes to Financials Deck (14):

Concentration of Credit Risk

GAAP requires disclosure of all significant concentrations of credit risk from receivables and other financial instruments in the notes.


Summary of significant accounting policies

The summary of significant accounting policies footnote presents information that helps assist users in understanding the recognition, measurement, and disclosure decisions made by the firm.


Accounting Policy Footnote

The accounting policy footnote discloses both the methods of accounting used by the firm and other information useful for understanding the bases under which the financial statements were prepared.


Accounting policies include:

the choice of accounting methods made by the firm, the principles and methods specific to an industry, and any unusual or innovative applications of GAAP.


Which type of material related-party transactions require disclosure?

All those other than compensation arrangements, expense allowances, and other similar items in the ordinary course of business.


What inventory method produces the highest value of ending inventory in an inflationary economy?

Fifo. To produce the lowest inventory turnover ratio, we need the highest value of ending inventory.


Debt to Equity Ratio

Total Debt / Owners Equity


Working Capital

Current Assets - Current Liabilities


Working Capital Ratio

Current Assets / Current Liabilities


Acid Test Ratio (Quick Ratio)

(Cash + (Net) Receivables + Marketable Securities) / Current Liabilities


Times Interest Earned Ratios

(Net Income + Interest Expense + Income Tax) / Interest Expense


Operating Number of Cycle = Days in Operating

Number of days sale in A/R + Length Cycle Number of Days Supply in inventory


Successful use of leverage is evidence by a

Rate of return on investment greater than the cost of debt.


Rate of return on assets

Net income / average total assets