MGAB01H3 Lecture Notes - Lecture 3: Accrual, Retained Earnings, Gross Margin

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18 Oct 2018

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MGAB01H3 Full Course Notes

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Operating decisions and the statement of comprehensive income: operating cycle, classified statement of earnings elements, accrual versus cash basis accounting, debit/ credit framework, operating cycle (cash-to-cash cycle) The time it takes for a company to pay cash to suppliers, sell those goods and services to customers, and collect cash from customers. Length of cycle depends on the nature of the business. Purchase or manufacture products or supplies on credit -> pay cash to suppliers -> deliver product or provide service to customers on credit -> receive cash from customers -> begin again. To meet the needs of decisions makers, we report financial info for relatively short time periods (monthly, quarterly, annually) Time period: the long life of a company can be reported over a series of shorter time periods. Measurement issues: what amounts should be recognized: classified statement of earnings elements. Classified statement of earnings elements provides a measure of company"s performance on a periodic basis.

Related Questions

a. What is the difference between aâ firm's cash cycle and its operatingâ cycle? Select all that apply

A firm's cash cycle is the average length of time from when a firm pays cash for its inventory to when it receives cash from the sale of that inventory? (or the end product that the firm produced with the? inventory).

B. If a firm were to pay cash for its? inventory, rather than buying the inventory on? credit, the cash cycle and the operating cycle of the firm would be identical. In most? cases, however, firms buy their inventory on? credit, so the cash cycle is longer than the operating cycle of the firm.

C. firm's operating cycle is calculated as the average number of days between the purchase of the initial inventory and the sale of the end product plus the average number of days it takes the? firm's customers to pay for the inventory they purchase.

D. A firm's operating cycle is the average length of time between when a firm purchases its inventory and when the firm receives cash from the sale of the inventory. E. The cash cycle is calculated as the average number of days between the purchase of the initial inventory and the sale of the end product plus the average number of days it takes the? firm's customers to pay cash for the inventory they purchase minus the average number of days the firm takes to pay its suppliers for the inventory. F. If a firm were to pay cash for its? inventory, rather than buying the inventory on? credit, the cash cycle and the operating cycle of the firm would be identical. In most? cases, however, firms buy their inventory on? credit, so the cash cycle is shorter than the operating cycle of the firm.

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Ravenna Company is a merchandiser that uses the indirect methodto prepare the operating activities section of its statement ofcash flows. Its balance sheet for this year is as follows:

	Ending Balance		Beginning Balance
Cash	$	52,800	$	62,700
Accounts receivable		45,100		48,400
Inventory		60,500		55,000

Total current assets		158,400		166,100

Property, plant, and equipment		165,000		154,000
Less accumulated depreciation		55,000		38,500

Net property, plant, and equipment		110,000		115,500

Total assets	$	268,400	$	281,600

Accounts payable	$	35,200	$	62,700
Income taxes payable		27,500		30,900
Bonds payable		66,000		55,000
Common stock		77,000		66,000
Retained earnings		62,700		67,000

Total liabilities and stockholdersâ equity	$	268,400	$	281,600

During the year, Ravenna paid a $6,600 cash dividend and it solda piece of equipment for $3,300 that had originally cost $6,600 andhad accumulated depreciation of $4,400. The company did not retireany bonds or repurchase any of its own common stock during theyear.

1.	What is the amount of the net increase or decrease in cash andcash equivalents that would be shown on the companyâs statement ofcash flows?
3.	How much depreciation would the company add to net income on itsstatement of cash flows?
5-a.	What is the amount and direction (+ or â) of the accountsreceivable adjustment to net income in the operating activitiessection of the statement of cash flows?

5-b.

What does this adjustment represent?

	Cash collected from customers < Credit sales
	Cash collected from customers > Credit sales
	Cash payments > Cash collected

7-a.

What is the combined amount and direction (+ or â) of theinventory and accounts payable adjustments to net income in theoperating activities section of the statement of cash flows?

7-b.

What does this amount represent?

	Cash paid to suppliers > Purchases
	Cash paid to suppliers < Cost of goods sold
	Cash paid to suppliers > Cost of goods sold

1. The term ex-dividend means...

A) The shares trade without the dividend

B) The shares do not pay a dividend

C) The dividend will be reduced by a small percentage

D) The payment is made in stock not cash

2. Which of the following statement is correct?

A) The shorter the operating cycle the less cash invested in liquid assets.

B) The longer the operating cycle the less cash invested in liquid assets.

C) A companyâs operating cycle does not provide information concerning the liquidity needs.

D) The length of the companyâs payableâs period is directly linked to the firmâs profitability.

3) Using common size analysis allows the analysts to compare the same company in different years and the analysts to focus on change in the composition of expenses over time.

A) True

B) False

4) The book value of equity is the value of the company as perceived by investors

A) True

B) False

5) Trends in profit margins such as the net profit margin can provide useful information analysts as to the companyâs future profitability.

A) True

B) False

6) ABC company with a return on assets of 15% and return on equity of 22% would debt to equity ratio of .47

A) True

B) False

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MGAB01H3 Lecture Notes - Lecture 3: Accrual, Retained Earnings, Gross Margin

MGAB01H3 Full Course Notes

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