AC 310 1st EditionExam # 2 Study Guide Lectures: 8 - 11Lecture 8 (February 3)Balance SheetLimitations:- Doesn’t portray the market value of the entity as a going concern nor its liquidation value- Employee skills and reputation are NOT recorded in the balance sheetUsefulness:- Describes many of the resources a company has for generating future cash flows- Provides liquidity information useful in assessing a company’s ability to pay its current obligations- Provides long-term solvency information relating to the riskiness of a company with regard to the amount of liabilities in its capital structureLecture 9 (February 5)Comparative Financial Statements: allow financial statement users to compare year-to-year financial position, results of operations, and cash flowsHorizontal Analysis: expresses each item in the financial statements as a percentage of that same item in the financial statements of another year (base amount)**Across timeVertical Analysis: involves expressing each item in the financial statements as a percentage of anappropriate corresponding total, or base amount within the same year**Within same periodCurrent ratio: measures a company’s ability to satisfy its short term liabilities (current assets divided by current liabilities)Acid-test ratio: provides a more stringent indication of a company’s ability to pay its current liabilities (quick assets divided by current liabilities)**Quick Assets exclude inventories and prepaidsDebt to equity ratio: indicates the extent of how much a company relies on creditors for resources (total liabilities divided by shareholders’ equity)Times interest earned ratio: indicates the company’s ability to make interest payments (net income + interest expense + income taxes all divided by interest expense)Lecture 10 (February 10)Indirect Adjustments to Net Income:1. Noncash expenses & revenues2.Add back losses, subtract out gains3.Timing differences in current assets and liabilities**95% companies use indirect methodSignificant noncash financing and investing activities (purchasing land with a note payable) are reported at the bottom of the statement of cash flowsOperating Activities include current assets & current liabilitiesInvesting Activities include noncurrent assets and noncurrent liabilitiesFinancing Activities include long-term debt and stockholders’ equityLecture 11 (February 24)Ordinary Annuities are paid at the end of the month (one more period of interest)Annuity Dues are paid at the beginning of each period (one less interest payment)**These two amounts WILL differ from one anotherN stands for how many periods compounded; if you pay semiannually, it’s twice yearly.Make adjustment to calculator if paying annuity dueClear off calculator after each transactionEnter either the present value or future value in as negative (doesn’t matter which) to your calculator, so the answer doesn’t come out “No