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Toolkit Moment
Ch 2 equations
Assumptions
Vocab
100
Should EPS be compared across companies?
While higher EPS suggests improved performance the numbers can be manipulated and therefore should not be compared across companies.
100
Current Ratio
Current Assets/Current Liabilities
100
Monetary unit assumption
Companies must include transaction data that can be expressed in terms of money.
100
Solvency
Ability of a company to pay off debt. Long term
200
Under which ratio can one determine a companies ability to make good on its near-term obligations?
Current ratio
200
What is working capital and how is it found?
Working capital is the measure of liquidity WC = Current Assets - Current Liabilities
200
Economic entity assumption
Allows for economic events to be identified with a particular unit of accountability.
200
Full disclosure principle
Acct principle that demands that companies report information that makes a difference to financial statement users
300
The lower value on which ratio represents favorable solvency?
Debt to total assests ratio
300
How is earnings avaliable to common stockholders found? Bonus 100 for equation to find EPS
Net Income - Preferred stock dividends EPS = (Net income-Preferred stock dividends)/Avg common shares outstanding
300
Time period assumption
States that the economic life of a business can be divided into artificial time periods and that meaningful accounting reports can be prepared for each period
300
What is EPS?
Earnings per share - Measures net income earned on each share of common stock Calculation: (Net income-Preferred stock dividends)/Avg number of common shares outstanding
400
Why do you need information on cash provided by operating activities, cash spent on fixed assets and cash dividends?
It's needed in order to determine the free cash flow of a company. Free cash flow is necessary because it shows a companies potential to finance new investment and pay additional dividends.
400
What is Debt to total assets ratio and how is it found?
Shows information about long-term debt paying ability D2TAR = Total liabilities/Total Assets
400
Going concern assumption
States that the enterprise will continue in operation long enough to carry out its existing objectives and commitments.
400
Describe monetary unit assumption.
Assumption that requires only monetary values are included in accounting records
500
Why would a company want higher liquidity?
To pay off short-term obligations. Liquidity can be determined by the current ratio.
500
Show how to find free cash flow
Free cash flow=Cash from op. act.-capital exp.-cash divi.
500
Define the cost principle
Companies have to record assets at their costs
500
Difference between Financial Accounting Standards board and Public company accounting oversight board.
FASB sets accounting standards for the U.S PCAOB is a group that decides auditing standards and judges performance of auditing firms