ACCTG 101 Chapter Notes - Chapter 1: Financial Statement, Fixed Asset, Interest Expense

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rosebutterfly172

20 Aug 2020

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Focuses on measuring the adequacy of net earnings by comparing it to other items. 1) return on equity (roe): reported on the financial statements. Relates net earnings to the investment made by the owners. It reflects the fact that investors expect to earn more money if they invest more. Two investments that offer the same return but require different investments amounts, cannot be compared. Company earned % on the owners" investment . Compares net earnings to the total assets (total investment) used to generate net earnings. Better measure of management"s ability to utilize assets effectively, because it is not affected by the way in which assets were financed. Ex: roe could be very large for a company that has a large amount of debt compared to a company that earned the same return based on the same amount of assets but borrowed less. Income tax rate = income tax expense/earnings before income.

Related Questions

1. Creditors' claims on the assets of a company are called: (Points : 2)

2. The primary objective of financial accounting is: (Points : 2)

To serve the decision-making needs of internal users

To provide financial statements to help external users analyze and interpret an organization's activities

To monitor and control company activitiesTo provide information on both the costs and benefits of managing products and services

To know what, when and how muchto produce

3. Assets created by selling goods and services on credit are: (Points : 2)

4. The debt ratio is used: (Points : 2)

To measure the amount of equity relative to the expenses

To reflect the risk associated with a company's debts

Only by banks when a business applies for a loan

To determine how much debt a firm should pay off

5. Net Income: (Points : 2)

Decreases equity

Represents the amount of assets owners put into a business

Equals assets minus liabilities

Is the excess of revenues over expenses

Represents the owners' claims against assets

6. Internal users of accounting information include: (Points : 2)

Shareholders

Customers

Creditors

Government regulators

Line Supervisor

7. Risk is: (Points : 2)

Net income divided by average total assets

The reward for investment

The uncertainty about the expected return that will be earned from an investment

Unrelated to expected return

8. An example of an operating activity is: (Points : 2)

Paying wages

Purchasing office equipment

Borrowing money from a bank

Selling stock

Paying off a loan

9. Which accounting assumption assumes that all accounting information is reported monthly or yearly? (Points : 2)

Business entity assumption

Monetary unit assumption

Value assumption

Cost assumption

Time period assumption

10. Distributions of assets by a business to its stockholders are called: (Points : 2)

AECO 3430 Lab Work #5 Understanding Morgan Cattle's FinancialStatements 1 (20pts) How does opening a $125,000 line of creditwith Farm Credit immediately affect the Balance Sheet? Specificallydemonstrate (with hypothetical numbers) how the relevant sectionsof the balance sheet demonstrate this. 2 (20pts) How can a businessfail while showing accrual profits? Which financial statement(s)are needed to demonstrate the answer? Specifically demonstrate(with hypothetical numbers) how the relevant sections demonstratethis. 3 (20pts) What does it mean for a business to show a decreasein Retained Earnings? Which financial statement(s) are needed todemonstrate the answer? Specifically demonstrate (with hypotheticalnumbers) how the relevant sections demonstrate this. 4 (20pts) Howdoes buying more assets immediately affect equity? Which financialstatement(s) are needed to demonstrate the answer? Specificallydemonstrate (with hypothetical numbers) how the relevant sectionsdemonstrate this. 5 (20pts) How does making a final payment of$45,000 with 5% interest on an equipment loan affect equity? Whichfinancial statement(s) are needed to demonstrate the answer?Specifically demonstrate (with hypothetical numbers) how therelevant sections demonstrate this. 6 (10pts) What did you learnfrom this lab exercise?

1.) If you were to take a $150,000 line of credit through FarmCredit your liabilities and cash would automatically increase onthe balance sheet. Hypothetically speaking if your cash account had$100,000 and your total assets were $1,000,000 prior to taking outthe line of credit, your total assets would increase to $1,150,000and your cash account would increase to $250,000. If you alreadyhad $100,000 in notes payable, after accepting the line of creditthat account would increase to $250,000. With these increases thebalance sheet should still balance out if done correctly.

2.) An income statement could show a net profit but still notreflect the actual financial soundness of a business. Incomestatements show revenue and expenses but do not show the amount ofcash on hand and/or other liquid assets. Making it where it couldnot accurately represent the businesses ability to pay a loan back.It could read a net income of $450,000 but the balance sheet couldread that there is only $100,000 in cash and $250,000 inliabilities. To get an adequate representation of the businessesactual financial standing multiple financial statements must beused.

3.) Retained earnings show the relation between the balancesheet and income statement, events that cause net loss in cash flowwill decrease retained earnings. This is usually the result ofoperating costs/expenses. A decrease in retained earnings representa decrease in owners equity on the balance sheet, this is a resultfrom an increase in expenses. These relates to problem 1 somewhat.If you were to take out a loan of $200,000 and your cash was at$300,000 it would increase to $500,000. Subsequently your notespayable would increase by $200,000 as well. The accounts wouldbalance out in the end the same because they increased the same.However the interest expense would increase causing net farmincrease to decrease. The retained earnings would decrease as aresult of notes payable increasing.

4.) If the assets were purchased using cash your current assetswould increase and cash account would decrease because it waspurchased immediately with cash. If a new truck was purchased for$65,000 dollars your cash would decrease by that amount and yourcurrent assets account would increase by the same amount. If theasset was purchased at market value it doesnât affect your equity,because nothing was gained or loss in the acquisition of thetruck.

5.) A final payment of $35,000 with 5% interest would decreasecash on the balance sheet and also decrease liabilities. Theinterest payments would increase and the farms net income woulddecrease on income statement. Statement of owners equity would showan increase on retained earnings amount.

6.) On this lab exercise I learned to show with words the thingswe have learned in class. I learned how to put into words thechanges we see in financial statements and how they affect theoutlook on a business. To me it makes more sense to see it in aword explanation than it does to look at it on paper. I feel like Ihave a better understanding of what is going on when it is inwritten form as opposed to when it is on a spreadsheet surroundedby other numbers where I get lost in it all. When it is in words Ithink it is easier to take that and go back to the financialstatement and really see it. I think this is an important part offinancial management whether you are the accountant or the businessowner. It is important to be able to understand financial recordsand how they affect your business or the person you are workingfor. Either way it is necessary to know somewhat of both sides tounderstand it fully.

I just need these answers worded different.

Question #3 Setup: You come across a small office building for sale with an asking price of $400,000. After careful analysis, you estimate that youâll receive $26,000 in cash flow from operations during the year (after all expenses) plus a 5.00% appreciation of the value of the property. For each part of this question, show your work with the help of a table. We strongly recommend you complete your calculations for this question in Excel (since you can reuse your work). To assist you with this, weâve published the Excel Template for calculating the Benefits and Risks of Financial Leverage from Lecture 7 below: Click Here to Download the Excel Template with the Example from ClassPreview the documentView in a new window Project Value $1,000,000 Cash Flow from Operations $80,000 Appreciation Rate 3.00% Appreciation $30,000 Profit Before Financing Expenses $110,000 Source of Capital Loan-to-Value 50% Loan Amount $500,000 Equity $500,000 Finacing Costs $30,000 Profit After Financing Expenses $80,000 To make your life easier, please review the information on copying and pasting tables from Excel into Canvas, please see Lecture 0.3: Working with Table and Equations in Canvas. As a reminder, to copy and paste tables from Excel into Canvas, please follow the steps below: Zoom out on your browser window to 100% or whichever size that will accommodate the table. Increase the size of your answer box, so the entire table will be visible to you. Copy your table from Excel and Paste into the Canvas Answer Box. Select All (CTRL A) and adjust the Font to size 8pt Add a Border Format the text to match the table you copied Finally, be sure to follow the guidelines for âShowing Your Workâ under Lecture 0.2: Completing Assignments in Canvas when you are asked to âshow your workâ in calculating Return on Assets or Return on Equity (show us the equation youâre using). 3(a). What is your projected Return-on-Assets for this investment? Use a table to show your financial analysis. In addition, show your work for calculating projected Return-on-Assets. 3(b). After talking with your lender, you find you can easily borrow 60% of the propertyâs purchase price. Interest and fees related to the loan will cost you $14,000 per year. What is your projected Return-on-Equity for this investment? Use a table to show your financial analysis. In addition, show your work for calculating projected Return-on-Equity. 3(c). Being a savvy investor, you want to find out what would happen if there is downturn in the market. In the event of a market downturn, you estimate the cash flow from operations generated by the property would be only $6,000 and you estimate the propertyâs value would decreases by 4.0%. What would the Return-on-Assets for this investment be in the event the market downturn above? Use a table to show your financial analysis. In addition, show your work for calculating Return-on-Assets 3(d). Under the same assumptions as Q3(c), what would the Return-on-Equity for this investment be? Use a table to show your financial analysis. In addition, show your work for calculating Return-on-Equity. 3(e). What does the relationship between ROA and ROE in the two cases above tell us about the effect of leverage on real estate investments?

ACCTG 101 Chapter Notes - Chapter 1: Financial Statement, Fixed Asset, Interest Expense

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