ARE MY ANSWERS CORRECT? ALL 25 questions

1. what an A/R aging analysis is, its purpose, and how it is created.

Used to estimate amount needed in Allowance for Bad Debts Account (a contra account)

A/R Days Outstanding

0-3031-6061-90Over 90

Under each term list all A/Rs that are not paid by date

Use historical experience to estimate the percentage of A/R for each date period to determine allowance for Bad Debts

1. What the three major cost components are in a manufacturing inventory (not raw materials. work in process, or finished goods)

M L O

Material

Labor

Overhead

Also known as CGS

3) what are the 4 factors need in determining depreciation

1. Cost
2. Life
3. Residual Value (Salvage)
4. Date Placed in Service

MACS

• For tax purposes only, MACRS must be used - Modified Accelerated Cost Recovery System - NOT a GAAP methods
• Tax depreciation method - NOT GAAP
• Deemed to be arbitrary and capricious
• Does the opposite of its title - slows down depreciation relative to other GAAP depreciation methods.
• Forces companies to maintain 2 sets of books - one for tax and one for financial reporting purposes.

4) what is double declining depreciation (DDB) and why is it very seldom used any more

• Double Declining Balance Depreciation (DDB) was previously widely used as it allowed the expensing of assets at a rate of 2X straight line depreciation. Was a GAAP standard.
• Not used so much any more as MACRS must be used now for tax purposes.

5) What does the UCC term 2/10N30 mean

UCC is a state law that all 50 states have agreed to same law / is the commercial code in business

2/10N30 - if paid in 10 days, the buyers a 2% discount. If paid in 30 days the buyer pays the face amount

Perfecting the asset is Form UCC 1

• If terms are expressed: 2/10N30 - This is a UCC (Uniform Commercial Code) format meaning: If paid in ten days, the buyer gets a 2% discount. If paid in 30 days, the buyer pays the face amount.

Usually there are additional terms for payments made after 30 days

1. Contingent Liabilities - define Contingent liabilities and know the table we presented in class clearing showing when and why items must be expressed in the financial numbers, in footnotes, or not mentioned at all

7) what 4 taxes do employers have to pay

What employers pay:

FWIT - Federal Withholding of Income Taxes

FICA - Social Security

Medicare - Health Tax

FUTA/SUTA - Federal and State Unemployment taxes

8) define debenture

Debenture - unsecure note

9) Know what happens to bond principal amounts if market interest rates change relative to the stated interest on the bond

If we have a bond 10,000 bond that pays 5%--get $500 a year

If we have a bond 10,000 bond that pays 10% --get 1,000 a year

--in this situation you are losing; if we have to sell, and market value is much higher so our value of bond would be less than a 10% bond

Hold to maturity, you get the face principal amount

10) know what is required for a company to issue a cash or stock dividend

• Two Dividends Types
• Cash- must have sufficient cash, dividends are taxable to the party receiving them
• Stock- not taxable, just an adjustment to shareholders' cost basis
• Dividends are paidONLY from Retained Earnings.Requires Board of Directors approval for both
• Dividends may only be paid if there is a sufficiency of retained earnings. Some states set limits.

11) what are the 4 principal dates regarding dividends

• BoD declares dividend -Declaration date
• Date of Record- shareholders who own the shares on this date receive the dividend
• Ex-Dividend date- date the market price of the shares is reduced on the exchanges by the amount of the dividend. (artificial number)
• Pay Date- the date the dividends are paid.

12) what the the two types of earnings per share(EPS) in GAAP. Show the formula for basic and and state the principal difference between the two types.

EPS Is a value metric, you can compare one stock to another

• Two Types

1. BASIC -

Net Income - Preferred Dividends

Weighted Average # of Shares of Common Stock

• Diluted -difference: will be less, take all convertible elements

expanded the denominator greatly; requires the exercise and practice of all exercisable including warrants options units, converted into common stock that then goes into the denominator /

Net Income - Divs. on Non-Convertible Preferred stock + Int. Exp. On Convertible Bonds

Weighted Avg. # of Common Shares O/S + All dilutive elements

13) Define horizontal analysis

Its a Longitudinal analysis of financial statement accounts across numerous periods to discern changes and impact

14) Define vertical analysis

Analysis of financial statement accounts within a period, measuring relative to its class.

Difference as a % of difference of class.

Income statement is different because its measured as a percent of gross revenue.

Example: account as a percent of its class in a period / % of SG&A of revenue, % of cash

15) Calculate a breakeven point with the data presented (fixed and variable expenses)

• BES = FC (in $s / everything below SG&A) + VC (in decimal form CGS)

BES 1.00=1 million FC (viable $$ form/Everything below SG&A) + 45% VC (decimal form of CGS)

BES .55 = 1,000,000

BES = 1,000,000 / .55

=$1.818,000

Or

• FC (in $s) /GM (in decimal form)

16) Calculate working capital from the data given (hint: many of the accounts presented have nothing to do with working capital). You need to know what working capital is, and what accounts are used in calculating working capital

17) Calculate the working capital ratio from the data in the question above

Filter what is current assets minus current liabilities

Current Assets (CA) - Current Liabilities (CL)= Working Capitol

Banks prefer to see twice as much in Current Asset as in Current Liabilities

Example: CA = $100,000 CL = $40,000 WC = $60,000

Working Capital Ratio: 2.5 to 1 ($100,000/$40,000 = 2.5)

18) Calculate the accounts receivable turnover rate is based on the data given

Think about what its paired with. Accounts receivable is paired with revenue.

Steps:

1. Determine amount of Credit Sales
2. Determine average accounts receivable
3. Divide average A/R into Credit sales

Example:

Sales - $2,000,000. Average A/R = $80,000

A/R turnover rate = 25

19) Calculate the number of days in sales inventory from the data presented

Steps:

Determine Average Inventory

Determine Daily CGS in $s

Divide Average Inventory by Daily CGS

Example:

Beginning Inventory: $400,000

Ending Inventory: $600,000

Average Inventory $500,000

Daily CGS $5,000

Avg. Inv. $500,000/Daily CGS $5,000= 100 days or 3.65 turns a year

20) State what the price earnings ratio is and how it is used

• Used as a value metric in order to compare stocks
• You need to know your source
• Take earnings per share and divide EPS into the stock's market price.

Example

Stock Earns $2/share and sells for $30. P/E ratio is 15.

21) What is the difference between period and product costs?

Standard Costs represent a form of budgeting.

Actual product costs are compared against the standard cost estimates as a measure of meeting or missing plan.

Standard costs work best in fairly stable economic environments. If it is a wild market, much turmoil, standard costs do not work well.

Period is SG&A

Product is CGS

22) What is ABC costing?

Activity Based Costing (ABC)

• Attempt to granualarize some SG&A expense such that some SG&A costs may be identified and moved to CGS.
• Attempt to more accurately know product costs at a more discrete level.
• Similar in concept to the IRS' Full Cost Absorption (FCA)concept. Under FCA the IRS drives companies to take some SG&A and apply it to inventory (drives down CGS thereby increasing net income and taxes.

23) What is budgeting and variances and how are each used?

Budgets

An attempt to estimate future costs/performance

Budgets also used to measure performance against plan

Differences between Budgeted amounts and actual results are called variances

Variances may be either positive or negative

24) What are standard costs and when do they work best?

In stable economies

• Standard Costs represent a form of budgeting.
• Actual product costs are compared against the standard cost estimates as a measure of meeting or missing plan.
• Standard costs work best in fairly stable economic environments. If it is a wild market, much turmoil, standard costs do not work well.

25) Calculate the IRR from the data presented. - do it for 3 years

• IRR Definition:

A series of net cash flows when discounted at a specific Net Present Value discount rate, equals zero after recovery of the investment.

It is important to keep the cash inflow estimates separate from the investment requirements (cash outflows), because many try and cover sins by lumping & netting these two flows one against the other.