Case #1 – “Just the Terms, Madam! Just the Terms”
NAME HERE
Business Administration, Truett McConnell University
BU211 – Financial Accounting
Professor Louie Moon
Apr. 21, 2020
PART ONE: ACCOUNTING TERM DEFINITIONS
(Definitions That Come Directly From Textbook Have The Page Number Listed.)
· Account “A record used to accumulate amounts for each individual asset, liability, revenue, expense, and component of stockholders’ equity.” (p. 107)
· Accounting cycle “A series of steps performed each period and culminating with the preparation of a set of financial statements. (p. 172)
· Aging schedule “A form used to categorize the various individual accounts receivable according to the length of time each has been outstanding.” (p. 317)
· Allowance ratio “is a method of estimating bad debts on the basis of either the net credit sales of the period or the accounts receivable at the end of the period.” (p. 314)
· Asset “A future economic benefit.” (p. 7)
· Authorized shares “The maximum number of shares a corporation may issue as indicated in the corporate charter.” (p. 504)
· Bad debt expense “is related to a company's cu
ent asset accounts receivable. Bad debts expense is also refe
ed to as uncollectible accounts expense or doubtful accounts expense. Bad debts expense results because a company delivered goods or services on credit and the customer did not pay the amount owed.” (Averkamp)
· Balance sheet “The financial statement that summarizes the assets, liabilities, and owners’ equity at specific point in time.” (p. 12)
· Capital expenditure “A cost that improves the asset and is added to the asset account.” (p. 367)
· Capital structure
· Cash flows provided (used) by financing activities
· Cash flows provided (used) by investing activities
· Cash flows provided (used) by operating activities
· Common stock
· Conceptual framework of accounting
· Consistency “For accounting information, the quality that allows a user to compare two or more accounting periods for a single company.” (p. 54)
· Contributed capital
· Corporation “A form of entity organized under the laws of a particular state; ownership evidenced by shares of stock.” (p. 5)
· Cost method
· Cost principle “Assets are recorded at the cost to acquire them.” (p.20)
· Cu
ent asset “An asset that is expected to be realized in cash or sold or consumed during the operating cycle or within one year if the cycle is shorter than one year.” (p. 58)
· Cu
ent liability “An obligation that will be satisfied within the next operating cycle or within one year if the cycle is shorter than one year.” (pp. 59, 404)
· Cu
ent ratio “The ratio of cu
ent assets to cu
ent liabilities.” (pp. 62, 633)
· Days-in-receivables ratio “
· Debt to assets ratio
· Debt-to-equity ratio “The ratio of total liabilities to total stockholder’ equity.” (p. 638)
· Depreciation “The process of allocating the cost of a long-term tangible asset over its useful life.” (pp. 54, 361)
· Dividends “A distribution of the net income of a business to its stockholders. (p. 14)
· Earnings per share (EPS) “A company’s bottom line stated on a per-share basis.” (p. 644)
· Equity
· Fixed asset
· Going Concern Assumption “The assumption that an entity is not in the process of liquidation and that it will continue indefinitely.” (p. 20)
· Income before taxes
· Income statement “A statement that summarizes revenues and expenses.” (p. 13)
· Internal control
· Liability “An obligation of a business. (p. 6)
· Long-term liability “An obligation that will not be satisfied within one year or the cu
ent operating cycle.” (p. 456)
· Matching principle “The association of revenue of a period with all cost necessary to generate that revenue.” (p. 156)
· Materiality “That magnitude of an accounting information omission or misstatement that will affect the judgment of someone relying on the information.” (p. 55)
· Net book value
· Net income “The excess of revenues over expenses.” (p. 13)
· Note payable “A liability resulting from the signing of a promissory note.” (pp. 323, 405)
· Note receivable “An asset resulting from the acceptance of a promissory note from another company. (p. 323)
· Off-balance-sheet financing
· Operating profit
· Outstanding shares “The number of shares issued less the number of shares held as treasury stock.” (p. 504)
· Patent
· Percentage-of-receivables approach
· Percentage-of-sales approach
· Profit margin ratio “Net income to net sales. (p. 630)
· Reliability
· Retained earnings “The part of stockholders’ equity that represents the income earned less dividends paid over the life of an entity. (pp. 12, 505)
· Return on assets ratio “A measure of an company’s success in earning a return for all providers of capital. (P. 643)
· Revenue “An inflow of assets resulting from the sale of goods and services.” (p. 7)
· Risk assessment
· Sales
· Solvency
· Statement of cash flows “The financial statement that summarizes a company’s cash receipts and cash payments during the period from operating, investing, and financing activities. (pp. 14, 556)
· Statement of retained earnings “The statement that summarizes the income earned and dividends paid over the life of a business.” (p. 14)
· Statement of stockholders' equity “Reflects the differences between beginning and ending balances for all accounts in the Stockholder’ Equity category of the balance sheet.” (p. 516)
· Treasury stock “Stock issued by the firm and then repurchased but not retired.” (p.507)
PART TWO: FINANCIAL BUSINESS ACTIVITIES
A business can be of four types: sole proprietorship, partnership, corporation, and Limited Liability Company. But almost all kinds of business have to incur some activities to run the business smoothly. The activities are similar in any form of business.
Business activities can be classified into (Skyrius & Bujauskas, 2010): sales activities, marketing activities, accounting activities, finance activities, customer service activities, budgeting, operation and supply chain and human resource activities. On the basis of cash flow statement, a business generally ca
ies on three types of activities which are operating, investing and financing activities.
Finance activities are common in all types of classification of business activities. Finance can be described to be the movement of capital assets between two or more parties (Brealey et al., XXXXXXXXXXThe parties involved can be individual, companies as well as government bodies. Financial activities are those, which are accomplished by the companies in order to achieve the economic goals and objectives. The annual report is actually known as financial statement since it depicts the financial position of a company.
All the activities with monetary objectives can be classified as finance activities (Esplin et al., XXXXXXXXXXFor example, activities like issuance of bonds and other forms of debt, repayments of bonds and other forms of debt, issuance of new shares, buy back of existing shares, payment of dividend, sale of treasury stock, purchase of treasury stock, etc.
Activities like issuance of bonds, debts and shares, sell of treasury stocks involve cash inflows in the business since when share is issued money is received from the shareholders, when debts are loan money is received from the creditors in terms of short term or long term bo
owings, when treasury stocks are sold money is received against that. Activities like payment towards shares, bonds, other debts and dividend, purchase of treasury stocks are cash outflow from the business since money is being paid to pay off the debts both short term as well as long term, money is also paid to purchase treasury stocks as well as buy back the shares of the company itself.
The financial activities can further categorized as change in the equity of the owners, change in short term bo
owings as well as long term bo
owings. Mainly equity and liabilities are involved in the financial activities, assets are not really involved and they constitute investing activities.
Financial activities generally depict the relation between the business and its creditors. The creditors include individual creditors, banks and financial institutions. When a business requires funds, it initiates finance activities (Huault & Richard, XXXXXXXXXXThe fund can be through equity or debt. The equity fund raised need not to be repaid; only dividends have to be paid against those. But raising equity will result in divulging of interest. On the other hand, for debt instruments like debenture, bond, short term loan and long term loan, there is no divulge of ownership but such debts has to be repaid regularly with a part of the principle amount along with interest.
In the cash flow, the fincial activities need to be recognized at the transaction amount and not on the fair value basis. The results from financial activities in the cash flow depict the financial health of the company at a certain point of time (Dickinson, XXXXXXXXXXA positive cash flow from financial activities reveal that more funds are flowing in and the company is planning to develop and grow. The inflow of cash from financing activities can be invested in new projects, acquiring other companies, in new product, so that the business can be benefitted in the long run, with more inflow of cash flow in future.
A negative cash flow from the financial activities depict that the company has no intention of growth at that point of time. Moreover, the company is improving its liquidity position by paying off the due obligations. Negative cash flow often involves financial activities like payment of dividends, which is a good policy since giving shareholders their return of the profit increases the market price of the share and also builds the goodwill of the company. From this, the company can benefit in the future.
So, neither positive cash flow from financial activities nor cash flow from financial activities have a bad impact on the business, it just depicts the monetary goals and the objectives of the company at that point of time.
References
Averkamp, H. (n.d.). What is bad debts expense? Retrieved from
https:
www.accountingcoach.com
log/what-is-bad-debts-expense
Brealey, R. A., Myers, S. C., Allen, F., & Mohanty, P XXXXXXXXXXPrinciples of corporate finance. Tata McGraw-Hill Education.
Dickinson, V XXXXXXXXXXCash flow patterns as a proxy for firm life cycle. The Accounting Review, 86(6), XXXXXXXXXX.
Esplin, A., Hewitt, M., Plumlee, M., & Yohn, T. L XXXXXXXXXXDisaggregating operating and financial activities: Implications for forecasts of profitability. Review of Accounting Studies, 19(1), XXXXXXXXXX.
Huault, I., & Richard, C. (Eds XXXXXXXXXXFinance: The discreet regulator: How financial activities shape and