Financial Reporting & Analysis Flashcards

A company records a $50,000 write-down of inventory to net realizable value. What is the immediate effect on the financial statements?

Answer: Decrease assets and decrease equity

An inventory write-down decreases the asset (inventory) and increases cost of goods sold, reducing net income and equity.

Which of the following is an example of a non-cash investing and financing activity that must be disclosed?

Answer: Conversion of bonds payable into common stock

Converting bonds to equity is a significant non-cash transaction that must be disclosed separately in the notes to the cash flow statement.

The times interest earned ratio is best described as a measure of:

Answer: Long-term debt-paying ability

Times interest earned (EBIT / interest expense) measures how many times a company can cover its interest obligations from operating income.

Under the allowance method for bad debts, recording the write-off of a specific uncollectible account will:

Answer: Decrease the allowance for doubtful accounts and accounts receivable equally

A write-off under the allowance method debits Allowance for Doubtful Accounts and credits Accounts Receivable, with no income statement impact.

A price-to-earnings (P/E) ratio of 20 means that investors are paying:

Answer: $20 for every $1 of annual earnings

A P/E of 20 indicates the market price is 20 times the company's earnings per share, reflecting investor growth expectations.

Which accounting concept requires that expenses be recorded in the same period as the revenues they helped generate?

Answer: Matching principle

The matching principle requires costs directly related to revenue generation to be expensed in the same period the revenue is recognized.

In a common-size income statement, all line items are expressed as a percentage of:

Answer: Net revenue (sales)

Common-size income statements express each line item as a percentage of net revenues, enabling comparisons across companies or periods.