Accounting Standards: FASB (GAAP) & IASB (IFRS), latter uses either Inventory Cost Flow Assumptions: Inventory

Inventory Cost Flow Assumptions: Inventory Costing Methods:

Historical Cost P. or Fair Value P. (actively traded assets).

i. Speci c Unit Cost: Units and their costs are identi ed. Not always available.

THE FINANCIAL STATEMENTS:

ii. LIFO (not allowed under IFRS): Last in, rst out. Cost of most recent
units are assigned to COGS (earliest costs stay in inventory).

INCOME STATEMENT = Revenues - Expenses

iii. FIFO: First in, rst out. Cost of 1st units are assigned to COGS (most
recent costs stay in inventory). With increasing prices, it generates
Recognition rules: Revenues Expenses
more stale COGS + higher NI & inventories are closer to market value.

Cash Accounting: When cash received When cash paid

iv. Weighted Average: COGS and inventory calculated based on average
Accrual Accounting: When earned (service performed) When incurred
costs for the period.

Example: FIFO Vs. Average Cost: Company sells 121 snowboards in Sept.
*Accrual-basis: Record in period in which events occur:

- Revenue recognition: When performance obligation is satis ed (not UNDER FIFO: COGS = Inventory+Purchases—(items sold-total
when cash received) and asset obtained must be reliably measurable.
amount*last amount). Units U/Cost Total Cost
Beginning Inventory 23 x 970 = $22,310
- Expense recognition: When incurred (not when paid) (expenses follow Credit Term 1/10 EOM = 1% discount if paid within rst 10 days of next month. EOM=End of month. Purchases
revenues). Choose from either:
Sept. 1 45 x 1020 = 45,900
Consolidated Revenues: Net of any discount, returns, allowances Sept. 19 20 x 1040 = 20,800
* Matching expense: Transactions. Ex. iPhone sale $1000 cash. COGS $700:

1st entry (Revenue rec.): Cash $1000 (Dr) & Sales Revenue $1000 (Cr).
(redemptions and rebates) (that is, eliminated): Formula
Sept. 26 44 x 1050 = 46,200
2nd entry (Expense rec.): COGS $700 (Dr) & Inventories $700 (Cr). Cost of good available for sale 135,210
(Gross) Sales Revenue

* Period expense: Passage of time. Ex. Apple buys ad services for $1000 Less: Ending Inventory 11 x 1050 = -11,268
- Credit Card discount
COGS = $123,942
(expects more future revenues but it cannot be precisely predicted, so full amount - Sales discounts

is expensed in the same period: (Dr) Ad expense $1000 & (Cr) Cash $1000.
UNDER AVERAGE COST (WAC):

- Sales returns & allowances

Cash-Basis: Doesn’t record revenues for services performed but not yet paid.
= Net Sales
Average Unit Cost = Cost of goods available for sale / total units available for sale

COGS = Cost of goods total — (last amounts*average unit cost)

RETAINED EARNING (RE): How net income/dividends a ect rms’ nancial position. Uncollectible accounts: After the sale (not able/willing to pay): Acc. Avg. Unit Cost = 135,210/131 = $1024.32.

Ending Retained Earnings = Beginning RE + Net Income - Dividends Receivable (A/R) must be (Cr) to its new lower value. If A/R are overstated, COGS:

BALANCE SHEET Assets = Liabilities - Equity (snapshot at particular time).
Revenues are overstated. When to record: Cost of goods available for sale = $135,210

Less: Ending Inventory (11 * $1024.31) - 11,268

Assets: Intangible; PPE (long-term in use for operations); long-term investments (shares/ Op. 1: When I make the sale: Allowance Method (match bad debt COGS = $123,942

bonds in other rm; non-current ex. land; l/t notes receivables); current assets (convert in expenses with revenues at sale time):
* Under both methods, the sum of “Ending Inventory” and “COGS” equals same amount
cash or use within 1 year or its operating cycle).

i) Estimate future uncollectible amounts; ii) record bad debt expense and (which is the cost of goods available).

Recognition criteria: i) Firms owns/control right to use it, ii) right arises from past
reduce A/R using contra-account at the time of sale:

transaction, iii) future bene t can be measured w/reliability.

Dr Bad debt expense $X
Liabilities = Assets - Equity. Can be non current (paid after 1 year) or current.
Cr Allowance for bad debts (+XA) $X
Equity = Assets - Liabilities. Comprised by: Contributed Capital + Ret. Earnings
iii) When it becomes uncollectible reduce A/R (no exp. to recognise):

Dr. Allowance for bad debts (-XA) $X

CASH FLOW STATEMENT: Ability to generate money and its use:
Cr A/R $X
+/- CF from Operating Activities (CFO) (cash paid by customers for operations).
Option 2: Wait until the client becomes uncollectible (see above).
+/- CF from Investing Activities (CFI) (Cash for sell/buying long-term assets).

Reversing/recovery of Uncollectible account: Reverse entry:

+/- CF from Financing Activities (CFF) (loans, issue l/t debt, dividends)

i) Bring the account back:

Change in Cash (Net increase or decrease in cash)

Dr A/R $50
+ Beginning Cash Balance (last period’s cash on balance sheet).
Cr Allowance for bad debts $50
Ending Cash Balance
ii) Turn A/R into cash:

Lower-of-Cost-or-Market (LCM) — Impairment: Inventories decrease market value

Relationship between Statements: Income Statement ( nds Net income) — Retained Earning (uses NI and Dr Cash $50
(Lower materials, obsolete inventory, competitor sells superior product). When
nds RE) — Cash Flow S. (Finds cash) — Balance Sheet (uses cash and RE).
Cr A/R $50
acquisition cost > replacement cost = inventories are impaired:

THE ACCOUNTING CYCLE:

RATIOS - Recognition of uncollectible amounts:
- GAAP: Does not allow rm to recognise subsequent value increases.

- IFRS: Allows rms to reserve impairments up to the initial acquisition cost (if
Assets Liabilities Ordinary Ret. Earn Revenues Expenses Dividends
Net A/R = Gross A/R - Allowance for bad debts

Net A/R (BS value of A/R) / Gross A/R (amounts owed by customers) / Allowance (management estimate).

Dr + Cr — Dr — Cr + Dr — Cr + Dr — Cr + Dr — Cr + Dr + Cr — Dr + Cr — Receivables Turnover = Net Sales / Average Net Trade A/R

Shows how quick a rm collects cash from credit sales. The larger the more e cient receivables are collected.

1.Journal + Post to Average Collection Period = 365 / Receivables Turnover

ledger accounts. Gross Pro t Margin = Gross Pro t (Net Sales-COGS) / Net Sales

Shows how many cents of each sales dollar go to gross pro t. The larger the more e cient rm is at generating
2.Prepare Trial Balance: gross pro t from sales.

Lists accounts and their REVENUE RECOGNITION (TOPIC 606)

balances at a given time.

Dr (left) & Cr (right) = 2 FASBs ve Revenue Recognition Steps:

columns must be equal.

1. Identify contract(s) with a customer.

2. Identify performance obligation(s) in contract.

3.Journal and Post Adj. 3. Determine transaction price (consideration-net cash) & determine
Entries (Deferrals/ probability of consideration collection (<50% IFRS - 75-80% GAAP). conditions generating the impairment no longer exist).

Accruals): To comply with 4. Allocate transaction price to performance obligations in contract.

RATIOS

Inventory Turnover = COGS / Average Inventory

expense/revenue rec. 5. Recognise rev. when/as company satis es performance obligations.

How fast an entity turns over its inventory & how many times needs to replenish during the year.

principles. Every adjusting

Revenue is recognised: Upon transfer of control of promised product/ Average Days to Sell Inventory = 360 / Inventory Turnover

(non-cash events) entry

service to customer for the amount considered in exchange.
Determines how many days of inventory we have available for sale

includes 1 IS+1 BS acc.

SaaS=Software as a service: i) l/t a liation, ii) doesn’t require ownership LONG-LIVED ASSETS
(cloud), iii) multifaceted relationship between customer and seller.
Expenditure an asset or expense?: WorldCom Case: Line costs are
Reason for Adjustment:
Prepaid expenses originally considered expenses as they are “licences”. They afterwards declared
Insurance, supplies, ads, rent, depreciation
recorded in asset acc. have been SaaS Revenue recognition: Ex. Company X signs 12-month contract for $12,000 them as assets (being understated). The correct way was expense.

used.

($5,000 hosted on X’s cloud and $7,000 on-premises):

Unearned revenues recorded in Keeping track of long-term assets usage: Depreciation (tangible
liability acc. Are now recognised
Rent, magazine subscriptions, customer as revenues for services Before Topic 606:
After Topic 606: SaaS is recognised over the life of assets), amortisation (intangibles), depletion (natural resources).

deposits for future services

performed.

Software is recognised over the contract ($416.67 p/month) / on-premises is Tangible Assets (PPE): Recorded at cost (all expenditures necessary to
AR: Service performed but not the contract period (e.g. recognised immediately even if business relationship
Interest, rent, services.
recorded nor cash received.
acquire and make it ready for use): Land (doesn’t depreciate), land
revenue month 1, 2, 3, …). extends long into the future.

Exp incurred but not paid nor Rev. month 1=$416.67(SaaS)+$7,000(on-premise)=$7,416.67. improvements, buildings, equipment). IFSR allows to revalue plant asset to fail value.

Interest, rent, salaries. recorded yet.

Not included: Licences (expense) and accident insurance (prepaid asset). Represent annual recurring
expenditures & don’t bene t future periods.

Objective of Topic 606: Improve comparability eliminating industry

DEFERRALS: Exp/rev recognised after cash is exchange.
speci c accounting for revenue. Principle-based, single revenue Does the expenditure increases capacity/e ciency:

- Addition and improvements (Yes): Capital expenditure (Debit cost to plant asset a ected, BS).

recognition model across all industries (GAAP-IFRS work together).

- Ordinary repairs (No): Revenue expenditures (Dr Maintenance and Repairs Expense as incurred).

Prepaid expenses:

Multiple performance obligation example: Bundle worth $180, selling Depreciation: A ects the BS (Accumulated Depreciation [expense]), and IS
Supplies adjustment: Example: Supply Purchase at Jan 1st:
systems A ($75), B ($50), E ($100). Determine allocated transaction price
Dr Supplies (A) $2,500 (Depreciation Expense). Factors:

assuming 3 performance obligations has the same package discount

Cr Cash (A) $2,500 - Cost: All expenditures necessary to acquire and make asset ready.

applies: A ($75/$225)*$180=$60 + B ($50/$225)*$180=$40 + E - Useful life: Estimate of expected life based on need for repair, service life, vulnerability
At Jan 31, still 1,000 supplies. Cost/supplies used $1,500 ($2,500-$1,000)

($100/$225)*$180=$80 = 60+40+80=180 (75+50+100=225)

Cr Supplies (A) $1,500 to obsolesce.

Dr Supplies Expense (Eq) $1,500 Contract assets: Arise when invoice is sent at a di erent time than - Depreciable cost: Total amount depreciated over useful life of asset.

- Residual value: Estimate asset value at end of useful life.

Insurance adjustment: Example: $600 payment for 1 year insurance signing the contract. Ex. Dec 1 (contract signed), Dec 31 (end scal year),
paid Jan 1st: Normal entry (Dr Prepaid Insurance [A] $600).
Feb 1 (invoice sent to customer), March 1 (payment received):
Depreciation Methods: i) Straight-line, ii) Units-of-Production (useful when asset value is more
related to the number of units rather than years in use), iii) Double-Declining (initial accelerated expense count).

Adjusting entry: Prepaid Insurance of $50 expires each month ($600/12).

Dec 1 No entry Straight Line = Asset Cost - Residual Value / Useful Life of Asset.

Cr Prepaid Insurance (A) $50

Dec 31 Dr Contract Asset (A) $100 Unit production = (Asset Cost - Residual Value / Life-time Production)*Units Produced

Dr Insurance Expense (Exp) $50

Cr Revenue (E) $100 Double declining = 2*(Asset Cost - Accumulated Depreciation / Useful Life of Asset).

* Prepaid Insurance ends up on Jan 31st with balance of $550 (unexpired Feb 1 Dr A/R (A) (replace contract asset w/A/R) $1200
Example: Cost of delivery truck (38,000-Jan 1, 2020) / Residual value (6,000) / Expected
cost of the remaining 11 months of coverage). Cr Contract Asset (A) $100
usage (100,000 miles) / Useful life (8 years) / Actual usage (15,000 [2020], 12,000 [2021]).

Cr Revenue (E) $100

Depreciation adjustment: To comply w/exp rec. principle. Its recorded Cr Unearned Revenue (L) $1000
(Cr) in contra asset account “Accumulated Depreciation”. Ex.: Accumulated March 1 Dr Cash (A) $1200
Depreciation—Equipment account o sets the asset Equipment. To maintain balance, Cr A/R (A) $1200
equity is decreased by increasing the expense account Depreciation Expense.
*Cloud Service, it will [generally] be recognised rateably (prorated) over the contract term.
*Book Value/Carrying Value: 
 Cost of revenues = Indirect costs incurred and allocated to expense. Ex.: Data centre
Depreciable asset cost — Accumulated depreciation. cost, computer lease expenses, overhead (expenses not directly related to creating good,
fees paid to 3rd parties, etc.).
Unearned Revenues: Cash received before service performed. Revenue
is recognised when service is performed, hence the need to adjust to Full retrospective method = Journal entry made in Jan 31, 2018 to convert current scal Asset impairment: if not expected to generate su cient future cash ows of at least its
year’s beginning BS amounts to comply w/Topic 606 as if it had been in force priorly. book value, it must be impaired. Impairment loss = Net Book Value - Fair Value.

record revenue for service and show remaining liability.

Impairment Loss $X
ACCRUALS: Adjusting increases BS and NI statements.
INVENTORIES AND COST OF SALES

Asset $X
Accrued revenues: Service performed, cash not received (interest Inventory: Tangible items held for sale or used to produce goods for sale.
*New depreciation schedule after impairment / GAAP doesn’t allow subsequent reversal of impaired value.

Ending Inventory = Beginning Inventory + Purchased Inventory - Sold Inventory.


revenues-accumulates with time) / not recorded (commission/fees- Sold Inventory = Beginning Inventory + Purchased Inventory - Ending Inventory.
Assets disposal: Remove asset form company’s.

unrecorded because only a portion of service has been perceived).

Intangible Assets: Recorded at cost. If have limited life=amortise (always using straight-
Types: Raw materials and consumables (for production); work in progress line method) (patents, goodwill, etc.). Formulas:

Accrued Expenses: Expenses incurred, not yet paid or recorded.

(value during production); maturing inventories (process until product is
Accrued Interest adjustment: Formula computing interest = Face Value nished, wine to ripe); nished goods and for sale (end product).

of Note Payable*Annual Interest Rate*Time in Terms of One Year. Example: COGS: Carrying amount of inventory when its sold becomes an expense.

$5,000*12%*1/12 = $50 — Note: Time period is express as a fraction of a year.

Inventory Accounting Systems:

Adjustment entry:

Perpetual inventory system: COGS recorded at time of sale (no entry at end of period).

Dr Interest Expense (Exp) $50
Cr Interest Payable (L) $50
Periodic Inventory system: COGS and inventory computed only at regular
intervals, not continuously (item sold, records revenue; at end of period record
Accrued salaries and wages adjustment: Paydays: 26th & 9th mostly. COGS).

Between 27th & 31st (adjustment period) service has been performed but not recorded Beginning Inventory

yet as an Expense because next payday is the 9th of the next period. Daily salary $18.
+ Cost of Goods Purchased .

Cost of Goods Available for Sale

Adjustment entry:
- Ending Inventory .

Cr Salaries & Wages Payable (L) $90 Cost of Goods Sold

Dr Salaries & Wages Expense (Exp) $90 Assets turnover = Net Sales / Average total assets

(For the days left to the month not paid yet). Adjusting amount = Daily Salary*Days owed. Fixed assets turnover = Average xed assets.

4. Prepare Adjusted Trial Balance + Prep. Financial Statement

LIABILITIES: Report only if it already happened or are 100% it will happen
5. Journalise and Post Closing Entries:
Prepayments: Dr Cash / Cr Unearned revenue.

- Temporary accounts (nominal): Close at end of period. All Income Product warranties: Recorded at time of sale estimating the company historic data. Ex.
Statement accounts (revenue, expense, dividends)
$60k product sold with 36 months warranty. Defect cost $5% of price:

- Permanent accounts (real): Not closed. BS (asset, liability, equity).

Dr Product Warranty Expense $3,000
Cr Product Warranty Liability $3,000
6. Prepare Post-Closing Trial Balance: Lists permanent accounts and On Aug 16, customer needs repair. Cost is $200:

Dr Product Warranty Liability $200

their balances to prove equality of the acc. forwarded to the next Cr Supplies $200
accounting period / Temporary Accounts=0 balance.

Lawsuit lings: Record if its probable the company will loose and damages can be
EVENTS THAT AFFECT REVENUE RECOGNITION:
reasonably estimated:

Dr Lawsuit Expense $X
Sales Incentives: At the time of sale: Cr Accrued Legal Liability $X

Leases: $5,000/year at 10$ interest rate, for 10 years:

At signing date: $X = PV ($5,000, 10, 10yrs) = $30,723

Dr Leased Asset $X
Cr Lease Liability $X
At end of year 1 of lease contract:

For assets:
Dr Amortization Expense 3,072.3
Cr Leased building (A) 3,072.3
fi
fi
fi
fi
fi
fi
fi
fi
fi
fi
fi
fi
ff
fi
fi
fi
fi
fi
ff
fi
fi
ffi
fi
fi
fi
fi
ffi
ffi
ff
fi
fi
ff
ffi
ff
fi
ffi
fl
fi
fi
fi
fi
 For liability: RATIOS / FORMULAS:
What can be done to prevent corporate fraud in the company?

Dr Lease Interest expense 3,072.3

Dr Lease Liability (-L) 1,972.7 Basic EPS = Net income - Preferred Stock Dividend .
- The impact of the culture and the leadership style (e.g., existence of
Cr Cash 5,000
Long-Term Notes Payable: Ex. Company issues $500,000 / 8% / 20y mortgage note on Avg. No. of Shares of Common Stock Outstanding
code of ethics)

Dec 31, 2017 to obtain nancing. Annual instalments of $50,926. Build the schedule:

Earnings Per Share (EPS) measures the ability to produce net income for each share of common stock.
- Role of internal auditing (e.g., to whom internal auditors report to)

Dividend Yield Ratio = Dividends per share / market price per share
- Existence of internal controls (e.g., control of access to general ledgers)

Interest Period (A) Cash (B) Interest Expense (C) Reduction of (D) Principal Measures the return on investment based on dividends paid by the company.
- Role of the Board of Directors (e.g., e ective, meeting frequency,
Payment = (D)*8% principal = (A)-(B) balance = (D)-(C)
P/E = Market price per share / Earnings Per Share (EPS)
independent 

Price to Earning (P/E). Re ects investor’s assessment of a company’s future earnings.
members, an audit committee, etc.)

Issue Date ——>

?
?
?
?
- External auditors (independence of auditors)

Year 1 ————> 50,926

500,000*0.08 = 50,926-40,000 = 500,000-10,926 ROE = Net income - Preferred Stock Dividend .

Constante 40,000 10,926 = 489,074 Avg. common stockholders’ equity

Suma Equity: What is private equity?

Measures pro tability from the common stockholders’ point of view.

- Investment funds which buy companies and restructure them and Exit
Journal Entry Dec 31, 2017:
FINANCIAL STATEMENT ANALYSIS (sell or IPO)

Dr Cash $500,000 - Restructure nancial, operations or governance

Cr Mortgage payable $500,000 Financial Ratios: Standardises nancial data to identify economic - Venture capital – investing through equity / investing in companies with
Journal Entry Dec 31, 2018:
relations between quantities in the nancial statement. Can be time series high risk

Dr Interest Expense $40,000 or cross sectional.

Dr Mortgage payable $10,926

- Private Equity – investing through loans etc.

Cr Cash $50,926
Bonds Payable: Debt of the issuing company to rise money. Types:
Convertible (bondholder has right to convert bond into common stock),
callable (issuer has right to buy bonds back at stated price before
maturity), zero-coupon bond (pay no interest).

RATIOS:

Working Capital (Current ratio) = Current Assets - Current Liabilities

Company’s ability to meet its current obligations, given volume of current assets.

Downside: No generally accepted, no ratio tells whole story, manipulable.

Quick ratio = Quick assets / Current liabilities

Quick assets = Current Assets - Inventories

Pro tability Ratios:

Accounts payable Turnover = COGS / Average Accounts Payable

Debt-to-Equity Ratio = Total liabilities / Shareholder’s Equity

Relation between the amount of capital provided by owners and amount provided by creditors.

Time Interest Earned = Income Before Interest Expense & Inc. Tax / Interest Expense

Debt-to-Asset Ratio = Total Debt / Total Asset

OWNERS’ EQUITY: Corporation (limited liability) - Charter (birth certi cate)

Initial Public O ering (IPO): Shares are sold to institutional and retail
(individual) investors. Mostly assisted by investment banking rm (acts as
Return on Assets (ROA) = Net Income / Average total assets.

underwriter), but rms can also issue directly to investors (company

Performance using assets to generate income. Focused on operating and investing.

doesn’t make money). New stocks are issued.

DuPont decomposition:

Direct Public O ering - Listing (DPO): Companies become publicly

traded without a bank-back IPO. Company sell only existing shares.
Pro t Margin: How well the
rm control expenses levels
Pros’ and Cons’: Pros’ (liquidity, branding, legitimacy and stability), relative to sales (operating
cons’ (regulatory compliance, long and expensive, quarterly earnings are costs).

public, loss control in shareholders meeting, higher potential of volatile

stock price).
Assets’ turnover: Ability to
generate sales from using its
Par value: Legal capital per share that must be retained. Entry: Cr investments (Invest. decisions)

Common Stock / Additional Paid-in-Capital [Contributed Capital in

Excess of Par]), separate account.

Dr Cash $Y (# shares issued * market price of a share)

Cr Common Stock $X (# shares issued * par value)
Additional Paid-in-Capital (APIC) $Y-X (cash collected - common stock value) Conclusion: Returns to shareholders can be improved by following either:

Classes of Stock:
- Increase in ROA (pro tability): Pro t margin [improved by increased
- Common Stock: Most basic form of capital stock / voting right.
prices and lower expenses], Asset turnover [improve by more e cient
- Preferred Stock: Dividends are priority (access rst in case of use of investments].

liquidation). No votes.
- Taking on more nancing.

Authorised stock: Max. stock rm is allowed to sell as authorised - Return on Equity (ROE) = Net Income / Average shareholders’ equity.

disclose on BS.
Performance using resources provided by shareholders in generate income. Focused on
Issued stock: No. of shares originally sold to stockholders. Repeated operating and investing and nancing.

o erings.
Financial Leverage % = ROE - ROA

Financial leverage is the advantage or disadvantage that occurs as the result of earning
Outstanding stock: No. of shares hold by stockholders. Shares in
a result on equity that is di erent from the return on asset.

circulation. *Subset of how much has been issued. Shares Outstanding:

Issued shares - Treasury Stock.
Pro t Margins = Net Income / Sales.

Treasury Stock: A company’s own shares that has issued and then later Gross Pro t Margin = (Sales - COGS) / Sales

reacquired (buy back of own shares. Treasury Stock = Shares issued - Operating Pro t Margin = Operating income / Sales.

shares reacquired.

Earnings Per Share (see above).

Journal Entry of Treasury Stock: *Contra-asset account.

Dr Treasury Stock (+XSE, -SE) $X E ciency Ratios: Drivers of pro tability:

Cr Cash (-A) $X
*Original amount of Common Stock is not a ected because number of issued shares doesn’t change. When
company disposes of the shares, Cr Treasury Stock the same amount it paid to reacquire them.

Retirement of Stock (Delist): Purchasing stock and removing it from the issued status
(cannot be reissued). Journal Entry: *No gain nor loss on retirement.

Dr Common Stock $X
Dr Additional Pain-in Capital $Y
Dr Retained Earnings $Z
Cr Cash $X+Y+Z
Call-back shares: Contractual agreement where Company can force to Conversion process (Asset to sales) = Sales or COGS / Asset to convert

How e cient is a rm in employing its assets.

sell back if they go private (paying market value).

Working Capital Management = Current assets - current liabilities

Backdating: Pretending the options were granted on an earlier/more
convenient date.
A/R Turnover = Credit Sales / Avg. A-R

Days Receivable = 365 / A-R turnover.

Dividends: Company’s distribution of cash or stock to its shareholders. A How long does it take for the company to collect cash from its clients? Sows collection
company must have enough Retained Earnings/enough cash to pay it.
e ciency. Low values suggest that cash that could earn a return is tied up in A/R.

Cash dividends:
*Selling A/R (Factoring) can be a useful cash management strategy, but long-term it may
- On the declaration date (board formally authorises divided):
be unsustainable for cash ow growth.

Dr Retained Earnings X
Cr Dividends Payable X
Inventory Turnover = COGS / Avg Inventory

- On the date of record (identify who receives the dividends): No journal.

Days Inventory = 365 / Inventory turnover.

How long does it take until the rm sells its inventory? Low values suggest that cash that
- On the date of payment:
could earn a return is tied up in inventory.

Dr Dividends Payable X
Cr Cash X Fixed Assets E ciency-Turnover = Sales / Avg PPE

Stock dividends: Are a proportional distribution by a corporation of its Asset Turnover = Sales / Total Assets.

How many sales does the rm generate for each 1$ of PPE (or total assets)? High values
own stock to the stockholders. Reasons: Conserve cash or reduce per- suggest that the rm can keep sales healthy and potentially use its capital investments
share market price of stock.
somewhere else.

Dr Retained Earnings (-SE) X

Cr Common Stock (+SE) X Liquidity Ratios (see part “ nancial leverage” in chart above).

* Total equity is unchanged but its redistributed between RE and CS. Increase in number
of outstanding shares. Exercise:
Current ratio = Current assets / Current liabilities

Quick ratio = (Current assets - inventory) / Current liabilities

Cash ratio = Cash / Current liabilities.

Solvency Ratios:
Times interest earned = Net income + interest exp + income tax
expense / interest expense

Measures ability of a company to meet its periodic interest payments.

Cash coverage = Cash or from operations before interest and taxes

paid / Interest Paid.

Compares the cash generated from operations to the cash obligations of the company.

Debt-to-Equity = Total liabilities / shareholders’ equity.

How much debt does the company have for each $1 of shareholders’ equity?

Market Ratios: Ratios that relate the current market price of a share of
stock to an indicator of the return that might accrue the investor.

P/E ratio = Current Market Price Per Share / Earnings Per Share

Relation between the current market price of the stock and its earnings per share.

Dividends Yield = Dividends Per Share / Market Price Per Share

Investors are interested in the amount of income that they will receive in the form of
dividends. This ratio is often used to compare the dividend-paying performance of
di erent investment alternative.

Payout Ratio = total Dividends / Net income.

EARNINGS MANAGEMENT

Stock Split: Increase number of authorised, issued, and outstanding

shares of stick. A 2-1 split would give each shareholder one additional
share for each share owned. *Stock splits don’t a ect the balance on any
account and no journal entry.

Is it worth it: Some say a stock split is a good buying factor, signalling the company’s
share price is increasing and doing well; while this may be true, a stock split simply has
no e ect on the fundamental value of stock and poses no real advantage to investors.

Pros’: Appeal to mom and pop investors, don’t look overvalued, signal con dence in P
increases.

Cons: Cheap stocks have high bid-ask spreads (=high trade cost), expensive (fees to
bank), time value of money, weakening of SHs base.

fi
ffi
ff
ffi
ff
fi
ff
fi
fi
ffi
fi
fi
fi
fi
fi
fi
ffi
ff
fi
ff
fl
fi
fi
fi
fl
ff
fi
fi
fl
fi
fi
ff
fi
fi
fi
fi
fi
ff
fi
ff
fi
fi
fi
ffi