Weisinger Accounting Ch 4

List the 3 types of depreciation – Double declining depreciation
Straight-line depreciation
Sum-of-the-year depreciation
assets – property or items of value owned by a business.
the cost of goods or services used to operate a business – expense
a. Depreciation is added back to undo the effect it had on the income statement. Verizon deducted $16,460 million of depreciation expense in computing net income. Depreciation is a noncash expense so Verizon did not actually use $16,460 million cash to pay depreciation. Thus, to determine how much cash was generated, net income is too low by the depreciation amount of $16,460 million. The depreciation add-back is NOT a source of cash as some mistakenly believe. Cash is, ultimately, generated by profitable operations, not by depreciation.

The relative size of the add-back indicates that the company is extremely capital intensive. The add-back is 50% larger than net income itself.

b. The MD&A section of the 10-K provides management's assessment of the operating results and investment activities of the company. Because it is regulated by SEC disclosure rules, the 10-K is a source of useful information that includes less promotional material than other statements by the company.

Companies must continue to invest in their infrastructure, both for new additions and replacement, to remain competitive. Depreciation expense represents the using up of depreciable assets. In general, we should expect capital expenditures (CAPEX) to exceed depreciation expense. This indicates that the company is growing its infrastructure as well as replacing the portion that is wearing out. Verizon's CAPEX is slightly lower than depreciation. The company appears to be just replacing depreciated assets and not making new additions to its infrastructure.

c. Verizon's high debt load places severe demands on its operating cash flow. Cash that should be used to develop its infrastructure must be allocated to the payment of debt. This is particularly problematic for Verizon as it is facing stiff competition from rival Comcast and must make substantial capital investments to remain competitive.

d. Unlike debt, dividends are not a contractual obligation until declared by the board of directors. Although stock price may fall if the company reduces dividends, shareholders cannot force the company into bankruptcy like debt holders can. Nevertheless, high dividend-paying companies, such as Verizon, typically continue their dividend payout even if they must borrow funds to do so as failure to maintain dividend payment levels would depress the market price of the company stock and increase the cost of equity capital should the company need to use its stock to raise capital or acquire another company.

e. Verizon's operations generated a significant amount of cash. Its capital expenditures are significant as the company continues to replace depreciating assets. High capital outlays would, ordinarily, not be a problem were it not for the company's significant existing debt load. Verizon's debt repayment for 2012 was $6,403 million for long-term debt and an additional $1,437 million for short-term debt. In addition, the company paid interest expense that is recorded in its income statement. Although the company is financially strong, balancing its debt level with the cash flow needs for capital expenditures to support its operating activities and dividends to support its stock price is a difficult challenge facing the company. –

Sales returns and allowances – Transactions in which the seller either accepts goods back from the purchaser (a return) or grants a reduction in the purchase price (an allowance) so that the buyer will keep the goods.
Interest Expense – Expense
Income Statement
Which of the following describes the inventory, purchases, and cost of goods sold budget?
Posting – The process of recording information in the ledger is called
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Accrual accounting – Transactions being recognised when they occur and not when cash is paid or received
Prepaid assets – Asset created when a company pays in advance for products or services to be received later. Also called prepaid expenses. (p52)
Trail balance – A list of all accounts and their balances
Which оf the fоllоwing describes the inventory, purchаses, аnd cost of goods sold budget?
financial statements – financial reports that summarize the financial condition & operations of a business.
Purchases – a temporary owner's equity account used to record the buying of merchandise for resale.
Wage – An amount of money paid to an employee at a specified rate per hour worked.
What type of depreciation method computes periodic depreciation by using a declining book value – Declining balance Method

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