Chapter 8 – Reporting and Analyzing Receivables

Types of Receivables
 Accounts receivable – amounts owed by customers due to the sale of goods and
services
 Notes receivable – formal credit instrument (written promise to pay)
 Other receivables – interest receivable, loans and advances to employees,
recoverable sales tax, income tax receivable
 Subsidiary ledger is a group of accounts that share a common characteristic (i.e.
they are all receivable accounts)
Interest Revenue
- Customer doesn’t pay credit amount in full = interest added
- Seller recognizes interest revenue and increase AR balance
Bad Debt Expense
- Some accounts receivables become uncollectible = not be paid by debtor = Bad Debts
Expense
- Bad debts expense is recognized in the same period that the related sales revenue is
generated
Allowance Method
- Estimates uncollectable amounts = Allowance for Doubtful Accounts
- Calculate carrying amount which is AR minus Allowance for doubtful accounts
Calculating Interest
- Principal Amount of Note * Annual interest rate * time in terms of one year
- The interest rate specified on the note is an ANNUAL RATE OF INTEREST, divide it by
number of months
LOOK at formula sheet for equations
Chapter 9 – Reporting and Analyzing Long Lived Assets
Types of Expenditures
- Operating expenditures: immediately charged as expense, only benefits current period
- Capital expenditures: capitalized as an asset (land, land improvements, buildings,
equipment)
Depreciation
Straight-line
- Consistent for each year of asset’s value
Diminishing Balance Method
- Decreasing annual depreciation expense
over an assets’ useful life
- Asset’s carrying amount and diminishes
each year as accumulated depreciations
increases
- Depreciation rate = Straight-line rate x
multiplier
- Residual is not calculated in the
calculation
- Beg carrying amount, Dep Rate (percent),
# of months, Dep Expense, Accumulated
Dep, End carrying amount
Units of production method
- Units of production, Dep cost/unit, Dep
Exp, Accumulated Dep, Carrying Amount
Derecognition of property, plant, and equipment
- Record disposal, remove cost of asset and accumulated Dep, record proceeds, record
gain or loss on disposition
Chapter 10 – A further look at financial statements
Sales Tax Payable
- When paid, debit sales tax payable account and credit cash
Property taxes payable
- Upon receipt of the property tax bill (assume in March), an expense is recorded for the
months that have passed (assume in January and February)

- When paid (assume in May), expense is recorded for additional months that have
passed, and prepaid is set up for remaining months

- Pre
pai
d is
cleared to expense at the end of the year

Payroll
- Deduct CPP, EI, federal and provincial income taxes
Instalment Notes Payable
- Fixed principal payments plus interest
- Blended principal and interest payments
Solvency
- Measures ability to meet long term obligations
- Debt to total assets
- Times interest earned
Chapter 11 – Reporting and Analyzing Shareholder’s Equity
Share issue considerations
- To raise capital, corporations sell ownership rights
o Common shares – potential for higher profits but higher risk
o Preferred shares – interested in regular dividends incomes with lower risk
o Debit Cash, Credit common shares/preferred common shares
o Companies can reacquire shares (Debit common shares, Credit surplus/loss,
credit cash)
Dividends
- Declaration date (common shares * $ per share) = dividends declared
- Record date (no entry necessary)
- Payment date – paying the shareholders

Stock Dividend
- Cash dividend is paid in cash and stock dividend is
paid in shares
- Declaration date (Stock dividends = common shares *
% of stock dividends * $ per share)
Retained earnings
- Cumulative net incomes (net losses) since incorporation
- Annual net income is added; net losses and dividends declared are deducted
Look at equations
Chapter 13 – Statement of Cash Flow
Cash receipts paid in three categories
- Operating: create revenue and expenses
- Investing: long term investments
- Financing: cash from non-current liabilities and shareholder’s equity items
Conversion to Net Cash for operating, investing, and financing activities – Indirect Method

Cash receipts from Customers

Cash Payments for Income Tax

Direct Method
Chapter 14 – Performance
Horizontal Analysis
- Also known as trend analysis
- A technique to determine the change over time
- Can be expressed as an amount or percentage
- Percentage of base-period amount
- Percentage change for the period
Vertical Analysis
- Also known as common size analysis
- A technique that expresses each item in a financial statement as a percent of a base
amount (total assets or net sales)
- Expressed as a percentage
Ratio Analysis
- Liquidity Ratios: Measure short-term ability of the company to pay its maturing -
obligations and to meet unexpected needs for cash
- Solvency Ratios: Measure the ability of the company to survive over a long period of
time
- Profitability Ratios: Measure the operating success of a company for a specific period of
time
LOOK AT EQUATIONS
Ch1
Net income (profit or loss) = Revenues – expenses
Retained earnings end of period = RE at beginning + Net income – Dividends Declared
Assets = Liabilities + Shareholder’s equity (Must be equal)
Balance Sheet (Financial Statement) = Retained earnings + net income – dividends
Ch2
Liquidity Ratios
Working Capital = Current assets – current liabilities
Current ratio = current assets/current liabilities HIGHER IS BETTER
Solvency ratios
Debts to total assets = total liabilities/total assets LOWER IS BETTER
Profitability ratios
Basic earnings per share = profit available to common shareholders/weighted average number
of common shares
Price earnings ratio = market price per share/basic earnings per share HIGHER IS BETTER
Ch5
Gross Profit = Sales revenue – cost of goods sold (expenses)
Income (loss) Before Income Tax = Gross profit – operating expenses
Net Income (loss) = Income before income tax – income tax expense
Cost of goods available for sale = beginning inventory + cost of goods purchased
Cost of goods sold = beginning inventory + cost of purchases - ending inventory
Net sales = Sales – Sales returns and allowances – sales discounts
Evaluating Profitability
Gross profit margin = gross profit/net sales
Profit Margin = profit (net income)/net sales
Ch6
Inventory Turnover = Costs of goods sold/Average Inventory
Days in Inventory = 365 days/Inventory turnover
Ch8
Receivables Turnover = Net Credit Sales/ Avg Gross Accounts Receivables HIGHER IS BETTER
Avg collection period = 365 days/receivables turnover LOWER IS BETTER
Ch9
Return on assets = net income/average total assets HIGHER IS BETTER
Assets Turnover = Net sales/Average total assets HIGHER IS BETTER
Profit margin = Return of Assets/Assets turnover
Ch10
Debt to Total Assets = Total Liabilities/ Total Assets LOWER IS BETTER
Times Interest Earned = (Net Income + Interest Expense + Income Tax Expense)/ Interest
Expense HIGHER IS BETTER
Ch11x
Payout Ratio = Cash Dividends declared/ Net income HIGHER IS BETTER
Dividend yield = dividends declared per share/market price per share HIGHER IS BETTER
Basic earnings per share = income available to common shareholders/weighted average
number of common shares
Return on common shareholder’s equity = Income available to common shareholders/ average
common shareholders’ equity HIGHER IS BETTER
Ch14
Horizontal Percentage of Base-Period Amount = Analysis-Period Amount/Base-Period Amount
Horizontal Percentage Change for Period = (Analysis Period Amount – Prior Period
Amount)/Prior Period Amount
Vertical Percentage of Base Amount = Analysis Amount/Base Amount
Working Capital = Current Assets – Current Liabilities HIGHER IS BETTER
Current Ratio = Current Assets/Current Liabilities HIGHER IS NOT ALWAYS BETTER
Receivables Turnover = Net Credit Sales/Average Gross Receivables HIGHER IS BETTER
Average collection Period = 365 days/Receivables Turnover LOWER IS BETTER
Days in Inventory = 365 days/Inventory Turnover LOWER IS BETTER
Debts to Total Assets = Total Liabilities/Total Assets LOWER IS BETTER
Times Interest Earned = (Net Income + Interest Expense + Income Tax Expense EBIT)/Interest
Expense HIGHER IS BETTER
Free Cash Flow = Net Cash provided (used) by operating activities – net capital expenditures –
dividends paid
Gross Profit Margin = Gross Profit/Net Sales HIGHER IS BETTER
Profit Margin = Net Income/Net Sales HIGHER IS BETTER
Asset Turnover = Net Sales/Average Total Assets HIGHER IS BETTER
Return on Assets = Net Income/Average Total Assets HIGHER IS BETTER
Return in Common Shareholders’ equity = Net Income – preferred Dividends/Average Common
Shareholders’ Equity HIGHER IS BETTER
Common Shareholder’s equity = Total shareholder’s equity – preferred shares HIGHER IS
BETTER
Earnings per share = (Net Income – Preferred Dividends Declared)/(Weighted Average Number
of Common Shares)
Price Earnings Ratio = Market Price per Share/Basic Earnings Per Share
Payout Ratio = Cash Dividends Declared/Net Income
Dividend Yield = Dividends Declared Per share/Market Price per share