COB 242 1st EditionExam # 1 Study Guide Chapter: 2–3, 14-15Chapter 151. Ratios to be tested a. Gross margin %- indicates how much of each sales dollar is left after deducting the cost of goods sold to cover expenses and provide a profit i. Gross margin / sales = gross margin percentageii. Remember: Gross margin = sales – cost of goods soldb. Earnings per Share (EPS)- earnings form the basis for dividend payments and future increases in the value of shares of stock i. Net income / average number of common shares outstanding = earnings per shareii. Indicates how much income was earned for each share of common stock outstandingc. Working Capital- the excess of current assets over current liabilitiesi. Current assets – current liabilities = working capitald. Current Ratio- measures a company’s short term debt paying abilityi. Current assets / current liabilities = current ratioii. <1 means the company generally can’t pay their debtse. Accts Receivable Turnover- measures how many times a company converts its receivables into cash each yeari. Sales on account / average accounts receivable = accounts receivable turnover f. Average days to collect- measures, on average, how many days it takes to collect on accounts receivablei. 365 days / accounts receivable turnover = average collection period g. Inventory Turnover- measures how many times a company’s inventory has been sold and replaced during the yeari. Cost of goods sold / average inventory = inventory turnover2. The ratio may be given and you will be asked to find something else in the formula3. You need to be able to understand what the ratios say about the company. VERY IMPORTANTChapter 141. Indirect method is used to form the cash flow statement2. Three-step process and use it to do the operating section of the cash flow statementa. Step 1i. Add depreciation charges to new incomeb. Step 2i. Analyze net changes in noncash balance sheet accounts1. For the operating section look at exhibit 14-2.c. Step 3i. Adjust for gains and losses1. Add a loss back2. Subtract a gain 3. Be able to do the cash flow statement and the different sections.a. OperatingOperating ActivitiesNet Income 140AdjustmentsDepreciation 103Accounts receivable 17inventory (49)accounts payable 44accrued liability 3income tax payable 4gain on sale of store (3) 119Net Cash provided by Operating Activities $259b. FinancingInvesting ActivitiesAdditions to Property, plant, and equipment (138)Proceeds from sale of store 8 Net Cash used in Investing Activities $130c. InvestingFinancing ActivitiesRetirement of bonds payable (41)Issuance of common stock 2Cash dividends paid (28)Net Cash used in financing activities $67Net increase in cash and cash equivalents 62Cash and cash equivalents beginning balance 29Cash and cash equivalents ending balance $914. Be able to analyze accounts to determine the amounts you need.a. Analyze Property, Plant, and Equipment to determine additions or sales of equipment. i. Page 641-642b. Analyze Retained Earnings to get Dividends paid or Net Income.i. Page 642-643c. Analyze Accumulated Depreciation to determine depreciation expense. i. Page 638 5. How do you know your cash flow statement balances to the balance sheet?a. The change in cash on your cash flow statement is the same as the change in cash on thebalance sheet.b. Ending cash and cash equivalents on the cash flow statement is the same as the cash and cash flow equivalent balance on the balance sheet. 6. Know how to create a cash flow statementChapter 21. Cost Classifications for Assigning Costs to Cost Objectsa. Direct Cost or Indirecti. Direct cost- can be easily and conveniently traced to a specified cost objectii. Indirect cost- cannot be easily and conveniently traced to a specified cost objectb. Manufacturing Costsi. Direct Materials- become an integral part of the finished product and whose costs can be conveniently traced to the finished productsii. Direct Labor- labor costs that can be easily traced to individual units of productiii. Manufacturing Overhead- all manufacturing costs associated with operating the factory except direct materials and labor1. Indirect labor- labor costs that cannot be physically traced to particular products easily or conveniently2. Indirect material- small items that may be an integral part of a finished product, but whose costs cannot be easily traced to it3. Other manufacturing costsc. Nonmanufacturing Costsi. Selling- incurred to secure customer orders and get the finished product to the customerii. Administration- associated with the general management of an organization rather than the manufacturing or selling2. Cost Classifications For Preparing Financial Statementsa. Product Costs- Costs involved in acquiring or making a producti. Attach to products as you make them. They are first assigned to inventory. (Rawmaterials inventory, WIP inventory, Finished Goods inventory.) They become an expense when the product is sold and becomes cost of goods soldb. Period Costs- all costs that are not product costsi. Selling + administrative = period costsc. Prime costs- the sum of direct labor and direct labor costsd. Conversion Costs- the sum of direct labor and manufacturing overhead costs3. Costs classifications to predict behaviora. Variable Costs- varies, in total, in direct proportion to changes in the level of activityi. Total variable costs increase or decrease based on activity levelii. Cost per unit stays the sameiii. Activity base- a measure of whatever causes the incurrence of a variable costb. Fixed Costs- remains constant, in total, regardless of changes in the level of activity i. Total fixed costs stay the same within the relevant rangeii. Fixed costs per unit increase and decrease based on the activity leveliii. Committed fixed costs- organizational investments with a multiyear planning horizon that can’t be significantly reduced even for short periodsof time without making fundamental changes1. Arise from long-term decisions made by the company2. Example: facilities and equipmenti. Discretionary fixed costs- arise from annual decisions by management to spend on curtained fixed cost items1. Example: advertising, research, internships, and development2. Arise from short- term, often annual, decisions.c. Mixed Costs- contains both variable and fixed cost elementsi. We use the high-low method to determine the mixed and variable portion1. The formula for a mixed cost that we get from the high-low method is Y= a + b(x)d.