Basic Accounting Math

Service Business – A business that preforms an activity for a fee is called a Service Business
Debt financing – borrowing money (liabilities)
The issues which the FASB and IASB must address in developing a common conceptual framework include all of the following except:

A. should a single measurement method such as historical cost be used?

B. should the characteristic of reliability be traded-off in favor of information that is verifiable?

C. should the role of financial reporting focus on stewardship as well as providing information to assist users in decision making?

D. should the common framework lead to standards that are principles-based or rules-based? – C. should the role of financial reporting focus on stewardship as well as providing information to assist users in decision making?

Types of Bonds – Secured and unsecured, term and serial, Registered and bearer, convertible and callable
working capital – Betriebskapital
raw materials – basic goods that will be used in production but have not yet been placed in production
Timeliness – Accounting information is timely when it is available to decision makers in time to influence their decisions
liabilities – Claims to a business's assets by parties external to the business
stated value – the legal capital assigned per share to no par stock
Contributed Capital – the result of owners providing to the businesses cash
When the cause of process variation is a cluttered workplace, which tool could be used to increase process stability?
Business – all of the activities necessary to provide the members of an economic system with goods and services
What type of account is accounts receivable – Debit
When the cаuse оf prоcess vаriаtiоn is a cluttered workplace, which tool could be used to increase process stability?
Accounting standards developed and applied by professional accountants – generally accepted accounting principles [gaap]
dip – a drop in the price of a stock that is temporary, making the ideal time to but that stock
Compound Journal Entry – Journal entry that affects at least three accounts.
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. –

This entry was posted in Uncategorized. Bookmark the permalink.

Leave a Reply