2. a. Critique Ace Repair’s current method of estimating its before-tax cost of debt. b. Is the earnings yield (E/P) an appropriate measure of the firm’s cost of equity? 3. a.
Which basis of accounting do most companies use, cash or accrual? Why? Which method is approved by GAAP? Why? What are the positives and negatives of each?
D. paid-in capital. 43) Stock dividends distributable should be classified on the A. balance sheet as an asset. B. balance sheet as a liability. C. income statement as an expense. D. balance sheet as an item of stockholders’ equity.
Sales are recorded but are not shipped. B. Sales are shipped but are not recorded. C. Sales are billed but not collected. D. Inventory is held but not billed.
To determine cost of goods sold. b. To determine sales revenue. c. To determine merchandise returns. d. Inventories are not included in the computation of net income.
2. Participation Rights Contractual rights of security holders to receive dividends or returns from the security issuer’s profits, cash flows, or returns on investments. 3. Preferred Stock A security that has preferential rights compared to common stock. C. What information about securities must companies disclose?
Since debt and equity levels are closely related there is an analysis called the “DuPont model” that systematically breaks ROE into components so that each can be evaluated. ROE = NI x EBT x EBIT x Sales x Total assets EBT EBIT Sales Total assets Common equity EBT = earnings before taxes. The first ratio measures the proportion of earnings before tax that is kept by the company. EBIT = earnings before interest and taxes. The second ratio measures the effect of interest; it indicates the proportion of earnings before interest and tax that is retained after paying interest.
Confirmatory value (c) Imperative for providing comparisons of a company from period to period. Comparability (d) Ignores the economic consequences of a standard or rule.
Measurement and recognition concepts such as assumptions, principles, and constraints b. Qualitative characteristics of accounting information c. Elements of financial statements d. Objectives of financial reporting 27. The underlying theme of the conceptual framework
They should rely on the additivity within financial statements- the analyst can rely on the internal discipline of accounting across the three primary financial statements to reduce the possibility of errors from inconsistent assumptions. Seven step forecasting game plan 1. Project revenues from sales and other operating activities 2. Project operating expenses and derive projected operating income 3. Project the operating assets that will be necessary to support the level of operations projected in steps 1 and 2.