ACC 310F Lecture Notes - Lecture 8: Net Income, Financial Statement, Intangible Asset
● Total Profit Variance = Actual Profit - Master Budget Profit
● Rate of return on equity
○ Reveals how much profit a company generates with the money owners have
invested.
○ Net income / owners’ equity
○ (Revenues - expenses) / revenues + expenses
● Interest coverage ratio
○ Determines how easily a company can pay interest on outstanding debt.
○ (EBITDA) Earnings before interest & tax / interest expense
● Debt-to-asset ratio
○ Leverage ratio that defines the total amount of debt relative to assets.
○ Total liability / total assets
● High return on equity is better
● Which of the following would not be a good benchmark for evaluating the Return on Equity of
the Ford Motor Company for their most recent year
○ Microsoft
● A bank may write a covenant into a lending agreement that prohibits the borrower from
taking actions that would
○ Raise leverage ratio above .60
● Variance analysis is an important tool because:
○ It helps management determine why actual profits varied from budgeted profits
● Small variances probably indicate random factors at work while large variances could signal
a permanent change in the operating environment.
● For most organizations, a budget is the benchmark for evaluating actual performance.
● A budget is the difference between the actual result and budgeted result
● If a budgeted cost is greater than the actual cost, the result is an unfavorable variance.
● Profit variance
○ Actual profit - master budget profit
● From a bank’s perspective, they would feel more comfortable with an outstanding loan if the
borrower’s most recent financial statements indicated that
○ Return on Equity and Interest Coverage Ratio had increased relative to the prior
period and Liabilities to Tangible Net Worth and Leverage Ratio had decreased
relative to the prior period
● Good will is an intangible asset
● Tangible assets
○ Inventory
○ Accounts receivable
○ Investments
● The computation of EBITDA includes
○ Adding tax expense to net income
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Document Summary
Total profit variance = actual profit - master budget profit. Reveals how much profit a company generates with the money owners have invested. Net income / owners" equity (revenues - expenses) / revenues + expenses. Determines how easily a company can pay interest on outstanding debt. (ebitda) earnings before interest & tax / interest expense. Leverage ratio that defines the total amount of debt relative to assets. Which of the following would not be a good benchmark for evaluating the return on equity of the ford motor company for their most recent year. A bank may write a covenant into a lending agreement that prohibits the borrower from taking actions that would. Variance analysis is an important tool because: It helps management determine why actual profits varied from budgeted profits. Small variances probably indicate random factors at work while large variances could signal a permanent change in the operating environment.
