Treasury stock:
Company repurchases 1000 shares of its own stock for $13/share
DR treasury stock $13000, CR cash $13000
Treasury stock is contra-equity account, has debit balance
Ch 11 statement of cash flow
● Tells us the ability of the company to generate cash from operating activities vs
investing/financing activities
● We see cash on the balance sheet, we compare TY and LY to see net increase or
decrease in cash, and use it to reconcile
● The increase or decrease in cash from one year to the next
● Operating activity:
○ Net income + depreciation expense + loss on LT assets - gain on LT assets -
increase in current assets + decrease in current assets + increase in current
liability - decrease in current liability
○ If it increases net income, subtract it, if it decreases net income add it
● What type of transactions result in increases/decreases in investing activities?
○ Long term assets
○ Increase in cash from investing when we sell long term assets
○ Decrease in cash from investing when we buy long term assets (land, building,
equipment, etc.)
● What type of transactions result in increases/decreases in financing activities?
○ Long term liabilities and stockholders equity
○ Increases: selling stock, selling bonds, obtaining loans (note payable)
○ Decreases: buying treasury stock, bond matures (pay back bond holders), loan
matures (pay back loan)
CH 12: financial statement analysis
● Gaining understanding of financial health of a company. Evaluate whether a company is
creating value
● Benchmarking: comparing two or more companies that are in the same industry
● Calculations to perform vertical analysis using income statement:
○ Divide each line item by Net revenue
● Vertical analysis using balance sheet:
○ Divide each line item by total assets
● Horizontal analysis: % change and trend %
● Calculations to perform trend analysis using income statement
○ Use earliest year as base year
○ Revenue (2015)/ revenue (2014), revenue 2016/revenue 2014, etc.
● % change from year to year
○ (Revenue 2017- revenue 2016)/revenue 2016
● Discontinued operations: segments of the business we are selling/have sold. Must be
large. We separate it from continuing operations to know what income/losses are not
going to continue in the future (to predict future net income)
● Ratios from balance sheet/income statement
○ Return on assets (ROA): net income/ avg. total assets
○ Return on equity: to find average: add LY + TY and divide by 2
○ Earnings per share (EPS): net income/avg. Shares outstanding
○ Price earnings ratio (P/E ratio): in per share terms. Market price per share/
earnings per share (EPS)
○ Working capital: current assets - current liabilitites
● Common size statement: putting everything in % form (vertical analysis)
○ Expenses - want to see lower % (COGS/net revenue)
○ Revenue, operating income, gross profit- want to see higher %
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