ACCG101 Lecture 7: ACCOUNTING 100 - financial statements

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limehound700

30 May 2018

School

Macquarie University

Department

Accounting and Corporate Governance

Course

ACCG101

Professor

All

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Week 7 Preparing Financial Statements

Users of Financial Statements

1. Financial performance

- Information about the ability of the entity to utilise its assets effectively and

efficiently e.g. profitable?

2. Financial position

- Information about the financial resources controlled by the entity

- Information about the entity’s financial structure

- E.g. liability?

3. Cash movements

- Information about the entity’s ability to generate cash flows

- E.g. cash inflow vs outflow

Income Statement

As known as:

- Statement of financial performance

- Profit and loss statement

- Reports financial performance for a specific time period e.g. monthly, yearly

- Shows income and expenses

- Income > expenses = profit

- Income < expenses = loss

Balance Sheet

Also known as:

- Statement of financial position

- Reports financial position at a specific point in time

- Shows assets, liabilities and equities

- Represents the accounting equation (assets = liabilities + equity)

- Two alternatives are

- Narrative format (vertical) and account format (horizontal)

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Document Summary

Information about the financial resources controlled by the entity. Information about the entity"s financial structure: financial position. Information about the entity"s ability to generate cash flows. Reports financial performance for a specific time period e. g. monthly, yearly. Reports financial position at a specific point in time. Represents the accounting equation (assets = liabilities + equity) Narrative format (vertical) and account format (horizontal) Assets and liabilities are classified as current and non-current. Current assets: expected to be sold, converted to cash or consumed. Non-current assets: expected to last longer than 12 months. Current liabilities: obligations that are expected to be settled within 12 months. E. g. accounts payable, salary payable, rent payable. Non-current liabilities: all liabilities that aren"t needed now. Reports the changes that took place in equity during the period. Shows the opening balance, the movement and the ending balance. The opening balance should match with the ending balance of equity.

Related Questions

Rent and insurance payments are examples of

	A.	variable expenses.
	B.	fixed expenses.
	C.	long-term liabilities.
	D.	short-term liabilities.

Matthew is concerned about his ability to save money regularlyand has prepared a budget. Which of the following budgetclassifications would be most appropriate for Matthew'sbudget?

	A.	Savings as a fixed expenditure
	B.	Saving whatever may be left over
	C.	Savings as a variable expenditure

Question 3

A successful financial plan includes

	A.	explicitly stated financial goals.
	B.	specified values that underlie the plan.
	C.	all of these.
	D.	logical and consistent financial strategies.

Question 4

A cash-flow statement is also known as a(n) ____ statement.

	A.	taxable income
	B.	net worth
	C.	income and expense
	D.	asset-and-liability

Question 5

A long-term goal is one that is projected to be acheived beyondhow much time?

	A.	five year
	B.	ten years
	C.	six months
	D.	one year

Question 6

A balance sheet includes ____, ____, and ____.

	A.	income; expenses; net worth
	B.	assets; expenses; liabilities
	C.	income; liabilities; net worth
	D.	assets; liabilities; net worth

Question 7

Disposable income is income

	A.	after all employer withholding including taxes.
	B.	minus fixed expenditures.
	C.	before taxes.
	D.	after all employer withholding except taxes.

Question 8

Which of the following would be classified as a long-termliability?

	A.	Education loan balance
	B.	Credit card debt
	C.	Bank card debt
	D.	All of these

Question 9

Stephen Scott's monthly pay stub indicates that his monthlygross income is $3,800. However, $800 is withheld for income andSocial Security taxes, $200 is withheld for his health anddisability insurance, and another $200 is contributed to hispension plan. How much is Stephen's disposable income?

	A.	$2,800
	B.	$3,000
	C.	$2,600
	D.	$3,800

Question 10

Which of the following provides information about a person'sfinancial condition at a specific point in time?

	A.	Federal tax return
	B.	Balance sheet
	C.	All of these
	D.	Income and expense statement

Question 11

The two most useful financial statements are ____ and____.

	A.	federal tax returns; income and expense statements
	B.	balance sheets; wills
	C.	cash-flow statements; balance sheets
	D.	wills; federal tax returns

Question 12

Which of the following is the best example of awell-stated financial goal?

	A.	Pay off your credit cards as soon as possible
	B.	Purchase a three-bedroom home in five years
	C.	Buy a $3,000 computer in 18 months
	D.	Buy a $2,000 stereo

Question 13

The first step in the budgeting process is

	A.	setting financial goals.
	B.	evaluating.
	C.	organizing.
	D.	decision making.

Question 13

The first step in the budgeting process is

	A.	setting financial goals.
	B.	evaluating.
	C.	organizing.
	D.	decision making.

Which of the following is a characteristic of a cash-flowstatement?

	A.	It shows if you were able to live within your income for theperiod covered.
	B.	All of these.
	C.	It covers a period of time, usually one month or one year.
	D.	The statement includes three sections: income, expenses, andsurplus (or deficit).

Question 15

The formula for calculating net worth is

	A.	income minus liabilities.
	B.	assets minus expenses.
	C.	income minus expenses.
	D.	assets minus liabilities.

Question 16

Food, clothing, and entertainment are examples of

	A.	long-term liabilities.
	B.	short-term liabilities.
	C.	fixed expenses.
	D.	variable expenses.

Question 17

To construct a balance sheet, you need to compile dollar valuesfor your assets and liabilities. Good sources from which to beginare

	A.	checkbook or savings account records.
	B.	all of these.
	C.	investments.
	D.	receipts of various payments.

Question 18

Discretionary income is used to pay for things like

	A.	housing.
	B.	vacations.
	C.	utilities.
	D.	food.

Question 19

A short-term goal is one that is projected to be acheived withinhow much time?

	A.	one month
	B.	three months
	C.	one year
	D.	five years

Question 20

The advantages of having organized financial records include

	A.	helping you take advantage of all available tax deductions.
	B.	all of these.
	C.	enabling you to review the results of financialtransactions.
	D.	helping you save money as well as make money.

magentarhinoceros749

The following information has been reported by Laporte Inc. on its statements of financial position at December 31, 2016 and 2017, and on its statement of earnings for the year ended December 31, 2017. Amounts are in millions of dollars:

Statements of Financial Position

Merchandise inventory

Long-term investments

Property, plant, and equipment

232

190

Accumulated depreciation

Total liabilities and shareholdersâ equity

342

272

Statement of Earnings

Other operating expenses

(40.0

)

Earnings from operations

18.0

Gain on sale of investments

Loss on sale of equipment

(14

)

Earnings before income tax

Additional information is as follows:
a.	Old equipment was disposed of for cash during 2017. It had an original cost of $52 and an accumulated depreciation of $40.
b.	A new building was acquired during the year in exchange for a long-term note for $60, payable in five years. In addition, new equipment was purchased for cash.

Required:
1.	Prepare a statement of cash flows for Laporte Inc. for the year ended December 31, 2017 by using the direct method. (Negative answers should be indicated by a minus sign. Enter your answers in millions.)

limemouse936

This term you have learned to understand a companyâs financial story using the language of accounting. The recording and reporting of information is essential to decision makers and other users of financial information; numbers on the various financial statements are used to help further understand the financial condition of the business. This process is known as financial ratio analysis and allows us to analyze the companyâs financial position in relation to other organizations in the industry. In this final assignment, you will apply the concepts you have learned throughout the term to perform financial statement analysis and to offer some recommendations.

Assume that you are a health care consultant hired by the Dependable DME Company. DME is Durable Medical Equipment and includes all equipment that benefits patients who have certain medical conditions. The owner of the company, David Smith, is interested in applying for a loan to expand his business; he desires to open a second location in another city. He is preparing to apply to a local bank for a loan.

The bank will base its decision on the following averages for the DME industry:

Ratio	Industry Average
Current ratio	1.50
Quick ratio	0.80
Receivables turnover ratio	18.0
Inventory turnover ratio	20.0
Debt to assets ratio	0.56
Profit margin	10.25%

The balance sheet data for Dependable DME Company follows:

	December 31, 2017	December 31, 2016
Cash	$75,000	$60,000
Accounts receivable	40,000	20,000
Inventory	30,000	20,000
Prepaid insurance	5,000	5,000
Total current assets	140,000	105,000
Property and equipment	600,000	550,000
Accumulated depreciation	140,000	110,000
Total property and equipment	460,000	440,000
Total assets	$600,000	$545,000
Accounts payable	$60,000	$60,000
Other current liabilities	40,000	45,000
Total current liabilities	100,000	105,000
Bonds payable	150,000	150,000
Total liabilities	250,000	255,000
Common stock	250,000	250,000
Retained earnings	100,000	40,000
Total stockholdersâ equity	350,000	290,000
Total liabilities and stockholdersâ equity	$600,000	$545,000

The income statement data for Dependable DME Company follows:

Sales	$600,000
Cost of goods sold	350,000
Gross profit	$250,000
Operating expenses	100,000
Operating income	$150,000
Interest expense	25,000
Income before taxes	$125,000
Income tax expense	65,000
Net income	$60,000

Required:

Calculate the following six (6) ratios: Current Ratio, Quick Ratio, Receivables Turnover Ratio, Inventory Turnover Ratio, Profit Margin Ratio and Debt to Assets Ratio. Be sure to show the actual calculation as well as your final answer.

You are only required to calculate the ratios for 2017; however, for two of the ratios (Receivables Turnover Ratio and Inventory Turnover Ratio), you will need data from 2016 for the formula. When calculating the Quick Ratio, please note that Short-Term Investments are $0 in this scenario. (24 points; 4 points for each ratio calculation)

Below each ratio, comment on the interpretation of the ratio. In other words, what does the result tell you, specifically? (8 points)

Based upon the industry averages upon which the bank relies, should they approve the loan to Mr. Smith? Why or why not? (7 points)

In one-half page, comment on what financial aspect of Dependable DME Company looks good and where can Mr. Smith make some improvements. Specifically identify at least two recommendations to Mr. Smith that can be made to improve the financial position of his business. (8 points)

ACCG101 Lecture 7: ACCOUNTING 100 - financial statements

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