ACCT 2120 1st Edition Exam 1 Study Guide Lectures 1 3 Lecture 1 January 26th 28th Long term Liabilities Describe a bond Then describe a note What s different and what s the same A Bond This is an issuer s written promise to pay an amount identified as the par value of the bond with interest They are issued under state and federal laws and an official bond certificate is issued and contains the details of the bond In Bond Trading they are securities that can be purchased or sold in the securities markets The following journal entry shows when a bond is issued Cash Bonds Payable This journal entry shows an interest payment on a bond usually happens every 6 months Bond Interest Expense Cash The following journal entry shows when a bond is fully matured Bonds Payable Cash Advantages of Bonds o Bonds do not affect owner control o Interest on bonds is tax deductible o Bonds can increase return on equity Disadvantages o Bonds do require payment of both periodic interest and par value at maturity o Bonds can decrease return on equity The following journal entry shows when you re amortizing a Bond Discount Bonds Interest Expense Discount on Bonds Payable Cash The following journal entry shows when you re amortizing a Bond Premium Bonds Interest Expense Premium on Bonds Payable Cash A Note This is an obligation requiring a series of payments to the lender These are common for franchises and other businesses when lenders and the borrowers agree to spread payments over several periods of time The following journal entry shows how you would record an installment payment on a note Interest Expense Notes Payable Cash Bonds vs Notes Bonds Can be converted into common stock Notes Are issued to obtain assets such as cash Typically transacted with a single lender such as a bank A commonly used ratio in this chapter is the Debt to Equity Ratio This measures the risk of a company s financing structure Debt to Equity Total Liabilities Ratio Total Equity Lecture 2 February 2nd 4th Reporting the Statement of Cash Flows What is a statement of cash flows and how do you report it How do you analyze cash inflows and cash outflows and what are they How do you prepare and interpret these statements of cash flows A statement of Cash Flows Is a detailed disclosure of individual cash flows Have the purpose of reporting cash receipts and cash payments during a period To report the Statement of Cash flows we re going to use the Indirect Method This means we first report the net income and from there adjust it by adding and subtracting items from the operating activities only Different Cash Flows Operating these activities include the production or purchase of merchandise and the sale of goods or services to customers Investing these activities include the purchasing and selling of long term assets Financing activities these are transactions with owners and creditors Cash Inflow vs Cash Outflow Cash inflow occurs when the receipts in a category exceed the payments Cash outflow occurs when the payments in a category exceed the receipts Preparing the Statement of Cash Flows 1 Compute any net increases or decreases in cash 2 Compute net cash from the operating activities 3 Compute net cash from the investing activities 4 Compute net cash from financing activities 5 Prove and report beginning and ending cash balances Some commonly used ratios in this chapter are as followed Cash Flow Cash Flow from operating activities On Total Assets Average Total Assets Cash Coverage Operating Cash Flow of Growth Cash outflow for plant assets Operating Cash Flow Operating Cash Flow to sales Net Sales Lecture 3 February 9th 11th Analysis of Financial Statements How do we interpret and analyze financial statement information How do we use horizontal vertical and ratio analyses to better understand the company s performance and financial condition Financial Statement analysis focuses on multiple elements of a company s financial and performance standings to help users make better decisions The Building Blocks of Financial Statement Analysis includes Liquidity availability of resources to meet short term cash requirements Efficiency how productive a company is in using its assets Solvency ability to generate future revenues and meet long term obligations Profitability ability to provide rewards for retaining good financing Market Prospects ability to generate positive market expectations There are 3 common tools for Financial Statement Analysis Horizontal Analysis comparing a company s financial condition over time Vertical Analysis comparing a company s financial condition to a base amount Ratio Analysis measure of relations between financial statements Some commonly used ratios under the Horizontal Analysis o Trend Analysis used to reveal patterns in the data covering successive periods Trend Percent Analysis Period Amount Base Period Amount Some commonly used ratios under the Vertical Analysis o Common Size Statements reveals changes in the relative importance of each financial statement item Common Size Percent Analysis Amount Base Amount x 100 Some commonly used ratios under the Ratio Analysis o Working Capital represents current assets financed from long term capital sources Current Assets Current Liabilities Working Capital o Current Ratio Current Ratio Current Assets Current Liabilities o Acid Test Ratio Quick Ratio reflects on a company s short term liquidity Acid Test Cash Short Term Investments Current Receivables Ratio Current Liabilities o Accounts Receivable Turnover measures how frequently a company converts its receivables Accounts Receivable Net Sales Turnover Average accounts Receivable net o Inventory Turnover measures how long a company holds inventory before selling it Inventory Costs of Goods Sold Turnover Average Inventory o Day s Sales Uncollected measures the liquidity of receivables Day s Sales Uncollected Accounts Receivable net Net Sales x 365 o Day s Sales Inventory measures the liquidity of inventory Day s Sales Inventory Ending Inventory Costs of Goods Sold x 365 o Total Asset Turnover reflects a company s ability to use its assets to generate sales efficiently Total Asset Net Sales Turnover Average Total Assets Some commonly used ratios when looking at Solvency o Debt to Equity measures solvency Debt to Equity Total Liability Ratio Total Equity o Times Interest Earned reflects the creditor s risk of loan repayments with interest Times Interest Income before interest expense and taxes Earned Interest