Final Study Guide

# Final Study Guide - Accounting 42 Final Study Guide: 1....

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Accounting 42 – Final Study Guide: 1. Preparation of a statement of cash flows utilizing balance sheets, an income statement, and supplementary information: -Statement of cash flows: Page 15-23 provides a good example of an indirect method 2. Copulation of basic financial statement ratios: current ratio, accounts receivable turnover, total asset turnover, return on owner’s equity, and gross profit (or margin) percentage. KNOWLEDGE OF THE FORMULAS TO COMPUTE THE RATIOS IS ESSENTIAL. Ratio Computation What it tells us Current Ratio Current Assets_ Current Liabilities Ability to pay debts as they come due. Good rule of thumb is 2:1 Accounts Receivable Turnover Net Sales_______ Avg. Net Accounts Receivable Avg. A/R = (Beg A/R + End A/R) / 2 -How many times we turn accounts receivable into cash during a period -Measure of how well we are doing collecting accounts receivable Total Asset Turnover Net Sales___ Avg. total Assets -Measures the efficiency of the company in using its investment in assets to generate sales -Measures the dollar amount of sales generated by each dollar of assets Return on OE Net Income – Preferred Dividends Average Owner’s Equity -Measures the earnings in relation to the owners’ investment in the company -Measures the amount of income generated by each dollar of owner investment Gross Profit (or Margin) Percent Net Income Net Sales -Percentage that each sales dollar contributes to net income -Measures the dollar amount of income generated by dollar of sales 3. The financial analysis necessary to determine whether a department,

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or segment, of a company should be discontinued -See pages 26-9 thru 26-11 Fixed cost are relevant to the decision… Compare the fixed cost that we could eliminate by dropping the department or segment, to its contribution margin. If the contribution margin is greater then the avoidable fixed cost, we should not drop it unless a substitute provides a greater contribution margin. If the contribution margin is less then the avoidable fixed cost, the company would increase profits by dropping the unit. Ex.) (from page 26-11/12) The company directly identified \$700 of fixed cost incurred by the Children’s Department. The company will eliminate these \$700 if the department closes… If the company does this, net income will increase by \$100. However, if they don’t identify \$700 to be eliminated, the company would
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## This test prep was uploaded on 03/30/2008 for the course ACCT 042 taught by Professor Turlow during the Spring '07 term at Drake University .

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Final Study Guide - Accounting 42 Final Study Guide: 1....

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