Statement of Cash Flows

*Cash flow from Operating: Inflow: sale of goods, interest and dividends received. Outflow: sup.-inventory, emp.-services, gov-taxes, lenders-interest, others-
expenses *Investing activities –Inflows: sale of PPE, sale of debt or equity securities of other entities, collection of principal on loans to other entities. Outflows:
purchase PPE, purchase debt or equity securities of other entities, make loans to other entities *Financing activities-Inflows: issuance of equity securities (company's
own stocks), issuance of debt (bonds and notes). Outflows: stockholders as dividends, redeem long-term debt or reacquire company’s stock
*Free Cash Flow: Cash from Operations – Dividends – Capital Expenditures *Quality of Income Ratio – Cash flow from operating activities/Net income - Ratio
measures the portion of income that was generated in cash. a higher quality of income ratio indicates greater ability to finance operating and other cash needs from
operating cash inflows

Ratios
*ROA= Net Income/Average Total Assets. Measures how well the firm uses its assets to generate income, and does not consider leverage.
*ROA = Profit margin ratio x Total assets turnover, Profit margin ratio = Net Income/Sales (Profit margin ratio measures a firm's ability to control its expenses
relative to its sales.). Total Assets Turnover= Sales/Average Total Assets (Total assets turnover measures a firm's ability to generate sales from a given level of
assets.). *Accounts Receivable turnover=Sales/average acct. receivable. (Measures how quickly a firm collects cash. If A.R. turn over twice a year, then they average
one-half of a year in collection. High turnover is preferred.) *Inventory Turnover=COGS/Avg. Inventory(Indicates how fast firms sell merchandise.) A high turnover is
preferred to a low one. *Fixed Asset Turnover=Sales/Avg. fixed assets. *ROE= Net Income/Average Shareholders’ Equity. (ROE measures the rate of return on the
ownership interest.) *ROE = Profit Margin Ratio x Total Assets Turnover x Leverage Ratio. *Leverage Ratio= Average Total Assets / Average Equity (A high leverage
ratio means that the firm relies heavily on debt.) *EPS= Net Income/ Weighted average of common shares. *P/E = market price of a share of stock/EPS. (P/E
measures the return to the purchaser of a share.)

*Acct. Receivable Net = Gross Acct. Receivable – ADA (Estimated Uncollectable Amount). Journal Entry – Bad debt expense (D), ADA (C)
*Write off- Net accounts receivable doesn’t change. Both the gross accounts receivable and allowance for doubtful accounts are reduced. JE – ADA (D), AR (C)
*Receivable Turnover – Net Credit sales/ Avg. Net AR.(This ratio measures how quickly a company
collects its accounts receivable.) *Days Receivable Outstanding = 365/ Rec. Turnover

*Gross Profit = Sales-COGS, *Net Income = Gross Profit – Operating Expenses, *COG available for sales = Beg Inv. + Purchases, *COG available for sales – COGS =
Ending Inv.
*Perpetual Systems - JE’s – 1. Acc. Rec(D) Sales(C) 2. COGS(D) Inv.(C)
*The key difference between periodic and perpetual inventory is when the costs of goods sold is computed.
*Average Cost Method - The weighted average unit cost is then applied to the units sold to determine the cost of goods sold. In addition, it is applied to the units in
ending inventory to determine the value of ending inventory.
*In periods of increasing prices, FIFO reports the highest net income, LIFO the lowest net income, and average cost falls in the middle. In periods of decreasing
prices, the converse is true: FIFO will report the lowest net income, LIFO the highest, with average cost in the middle
*Both inventory on the balance sheet and net income on the income statement are higher when FIFO is used in a period of inflation. Many companies have switched
to LIFO because LIFO yields the lowest net income and, therefore, the lowest income tax liability in a period of increasing prices.
*The tax law requires that if a company uses LIFO for tax purposes, it must use it for book purposes. This is referred to as the LIFO conformity rule
*Lifo Reserve - The amount by which inventory would be increased (or on occasion decreased). , *LOCM – Not Materials (JE) – Cogs(D) Inv(C). Material (JE) – Loss on
Write down(D) Inv(C), *Gross Profit Ratio = (Net Sales – COGS)/Sales, *Inventory Turnover Ratio – COGS/Avg. Inventory, Inventory in Days – 365/ Inv.
Turnover ratio

*Straight Line – (Original Cost – salvage value)/ The asset's useful life measured in years
*Units of Production – [(Original Cost – Salvage Value)*Yearly Production]/ Total Expected Production.
*Double Declining - (Original Cost – Salvage Value)*2/ The asset's useful life measured in years)
*Sum of years – [(Original Cost – Salvage Value)*Asset years left]/ total asset years
*Book value is the difference between the cost of the plant asset and the accumulated depreciation to date
*Asset Impairment (Write down)= The difference between the asset’s current book value and the present value of the expected future cash flows.
*Most intangible assets are amortized over shorter of economic life or legal life, subject to rules specified by GAAP. Use straight line method. R&D costs are normally
expensed. Trademarks and Brand Names are not amortized

*Face value – The amount printed on the instrument’s face, to be repaid by the borrower at the maturity date.
*Coupon rate – The percentage applied to the instrument’s face value to determine periodic payments of interest. This is not always the same as the current market
rate of interest for valuing the bond.
*Market Value – To calculate present value, calculate both the interest’s PV and the Principle’s PV.
*The difference between the face value and market value is referred to as bond discount.
*Discount represents an additional cost of borrowing and should be recorded as bond interest expense over the life of the bond.
*The carrying value of the bonds is equal to the face value of the bonds minus the bond discount.