AC 310 1st Edition Exam 2 Study Guide Lectures 8 11 Lecture 8 February 3 Balance Sheet Limitations 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 sheet Usefulness 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 structure Lecture 9 February 5 Comparative Financial Statements allow financial statement users to compare year to year financial position results of operations and cash flows Horizontal 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 time Vertical Analysis involves expressing each item in the financial statements as a percentage of an appropriate corresponding total or base amount within the same year Within same period Current 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 prepaids Debt 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 revenues 2 Add back losses subtract out gains 3 Timing differences in current assets and liabilities 95 companies use indirect method Significant noncash financing and investing activities purchasing land with a note payable are reported at the bottom of the statement of cash flows Operating Activities include current assets current liabilities Investing Activities include noncurrent assets and noncurrent liabilities Financing Activities include long term debt and stockholders equity Lecture 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 another N stands for how many periods compounded if you pay semiannually it s twice yearly Make adjustment to calculator if paying annuity due Clear off calculator after each transaction Enter 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 Solution