Answer 1. Managerial accounting creates detailed reports that focus on past, present, and future reporting.

In managerial accounting, the reports that are run are not under any constraints. The reports are used by management to make educated decisions about the company. Some reports that are produced are: Sales forecasting Department reports Production reports Planning reports . Financial accountants report on a periodic basis to shareholders, government agencies, banks, and other parties that are external to the business. Financial accounting must follow Generally Accepted Accounting Principles or GAAP guidelines. GAAP is a set of guidelines that public companies must follow . Some reports that are created are: Balance sheets Income statements Retained earnings statements Cash flow reports As we can see, managerial and financial accounting are very different, but both are very important in order for the users of the information to make informed business decisions.

2. Depreciation is the measure of wearing out of a fixed asset. All fixed assets are
expected to be less efficient as time goes on.

Straight Line Depreciation

1.Enter the asset's purchase price. 1. 2. Subtract the salvage value, if any, to find the depreciable value. 3. Divide the depreciable value by the asset's life, or term of years that the asset will be kept and useful.

The result is the amount of annual depreciation for that asset. It will be accrued each year over the life of the asset. Assuming a purchase price of $1,000, a salvage value of $200 and an asset life of 5 years, the annual depreciation under this method would be $160 per year (1000 - 200 = 800; 800 / 5 = 160)

Double-Declining Balance Depreciation

1. 1
Determine the expected life of the asset.
o o

The asset life is used to determine the rate at which the depreciation will accrue. Using the same example asset as above, assume a 5-year asset life.

2. 2
Divide 100 percent by the number of years in the asset life and then multiply by 2 to find the depreciation rate.
o

In our example, 100% / 5 = 20 percent; 20 percent x 2 = 40 percent.

3. 3
Determine the asset's purchase price. Consider this the depreciable basis value.

4. 4
Multiply the current depreciable basis by the depreciation rate to find the year's depreciation.
o o o

In the first year of use, the depreciation will be $400 ($1,000 x 40 percent). For the second year, the depreciable value is now $600 ($1,000 - 400) and the annual depreciation will be $240 ($600 x 40 percent). For the third year, the depreciable basis becomes $360 with a depreciation of $144.

5. 5
o o o

Cease accumulating depreciation in any year in which the depreciable basis will fall below the salvage value. Using this example, in year 4 the depreciable basis is $216. The salvage value is $200. In year 4, calculate depreciation of $18 to reduce the depreciable value to $200. In year 5, there is no need to calculate depreciation.

3.

there are 3 types of accounting principals 1. personnel accoumt:- debit the receiver and credit the giver, 2. real account:- debit what comes in and credit what goes out. 3. nominal account:- debit all expenses and losses and credit all gains and incomes

4. Trial balance is prepared after closing entries have been posted to respective ledger accounts. Its
objective is to test whether total debits equal total credits for all real (permanent) accounts, prior to beginning a new accounting period.

5. Assets are the things you have of "value" - like money in the bank, invoices your customers have yet
to pay to you, inventory you have yet to deliver, real property (land, buildings) you own, machinery you can use to make things, etc. Liabilities are things you "owe" - like bills from your suppliers, salaries you have to pay to your employees, debts for loans you have taken out, rent you owe on the real property, taxes due, etc

7.

working capital

Current assets minus current liabilities. Working capital measures how much in liquid assets a company has available to build its business. The number can be positive or negative, depending on how much debt the company is carrying. In general, companies that have a lot of working capital will be more successful since they canexpand and improve their operations. Companies with negative working capital may lack the funds necessary for growth. also called net current assets or current capital. 8.

The right level of working capital depends on the industry and the particular circumstances of the business. For example: Businesses that only sell services, and do not need to pay cash for inventory need a lower level of working capital. Businesses that take a substantial amount of time to make of sell a product will need a higher level of working capital. It is important you work out the right level of working capital you will need. If the working capital is too:
high - your business has surplus funds which are not earning a return; and low - may indicate that your business is facing financial difficulties.

The formula used to calculate working capital for your business is: (NOTE: You will need figures from your most recent balance sheet)
working capital ($ value) = current assets - current liabilities

This calculation will not give you a sense of whether your working capital safety margin is wide enough. The working capital ratio (current ratio/liquidity ratio) will give you a better measure of liquidity.

Working capital as a percentage of sales

Most business owners have a clear idea of their weekly, monthly, or quarterly sales levels, so you may prefer to calculate how much working capital you need as a percentage of sales. The formula used to calculate an estimate of working capital as a percentage of sales for your business is: (NOTE: You will need figures from your most recentbalance sheet and profit and loss statement)
Working capital = (Inventory + accounts receivable - accounts payable) as a % of sales Sales x 100

and:
Working capital ($ value) = sales x (working capital as a % of sales)

For example: Working capital as a percentage of sales of 35% means that you need $35 for every $100 of sales to fund the sale to allow for the time delay in the working capital cycle. This method is useful for businesses going through a period of growth and expansion to work out how much extra working capital you need if turnover increased by a certain amount

10. Money which is owed to a company by

a customer for products and services provided on credit. This is often treated as a current asset on a balance sheet. A specific sale is generally only treated as an account receivable after the customer is sent an invoice. 11. the accounts receivable aging schedule is a listing of the customers making up your total
accounts receivable balance. The typical accounts receivable aging schedule consists of 6 columns: 1. Column 1 lists the name of each customer with an accounts receivable balance. 2. Column 2 lists the total amount due from the customers listed in Column 1. 3. Column 3 is the "current column." Listed in this column are the amounts due from customers for sales made during the current month. 4. Column 4 shows the unpaid amount due from customers for sales made in the previous month. These are the customers with accounts 1 to 30 days past due. 5. Column 5 lists the amounts due from customers for sales made two months prior. These are customers with accounts 31 to 60 days past due. 6. Column 6 lists the amount due from customers with accounts over 60 days past due. 12. Acid test also known as the "quick ratio" allows you to see just how many times the company can

cover it's short term liabilities with the cash, marketable securities, andaccounts receivables it has on hand (accounts receiveables are counted since these can often be resold at a discount to generate cash wheras inventory, which is in the current but not quick ratio, is not as easy to dispose of). A healthy company should have at least a 2:1 ratio of quick assets/short term liabilities. This is not the only factor important to a business - highly leveraged businesses may have good liquidity ratios but high D/E ratios which could be serious if they cannot generate enough cash to cover interest payments, the times interest (how many times the company can cover interest payments) is also important

13.

The DuPont Model is a technique that can be used to analyze the profitability of a company using traditional performance management tools. To enable this, the DuPont model integrates elements of the Income Statement with those of the Balance Sheet. ORIGIN OF THE DUPONT MODEL. HISTORY The DuPont model of financial analysis was made by F. Donaldson Brown, an Electrical Engineer who joined the giant chemical companys Treasury department in 1914. A few years later, DuPont bought 23 percent of the stock of General Motors Corp. and gave Brown the task of cleaning up the car makers tangled finances. This was perhaps the first large-scale reengineering effort in the USA. Much of the credit for GMs ascension afterward belongs to the planning and control systems of Brown, according to Alfred Sloan, GMs former chairman. Ensuing success launched the DuPont model towards prominence in all major U.S. corporations. It remained the dominant form of financial analysis until the 1970s. (CASHFLOW-BASED APPROACHES such as Discounted Cash Flows (DCF) coz they provide insight into the quality if a company earnings) CALCULATION OF DUPONT. FORMULA Return on Assets = Net Profit Margin x Total Assets Turnover = Net Operating Profit After Taxes/Sales x Sales/Average Net Asset USAGE OF THE DUPONT FRAMEWORK. APPLICATIONS The model cab be used by the purchasing department or by the sales department to

examine or demonstrate why a given ROA was earned Compare a firm with its colleagues Analyze changes over time Teach people a basic understanding how they can have an impact on the company results Show the impact of professionalizing the purchase function STEPS IN THE DUPONT METHOD. PROCESS 1. Collect the business numbers (from the finance department) 2. Calculate (use a spreadsheet) 3. Draw conclusions 4. Id the conclusions seem unrealistic, check the numbers and...

14. Solvency Ratios - Quick Ratios

The quick ratio, sometimes called the "acid test" or "liquid" ratio measures the extent to which a business can cover its current liabilities with those current assets readily convertible to cash. Only cash and accounts receivable would be included, as inventory and other current assets would require time and effort to convert into cash. A minimum ratio of 1.0 to 1.0 ($1 of cash receivables to $1 current liabilities) is desirable. Solvency Ratios - Current Ratios The current ratio expresses the working capital relationship of current assets to cover current liabilities. A rule of thumb is that at least 2 to 1 is considered a sign of sound financial strength. However, much depends on the standards of the specific industry you are reviewing. Solvency Ratios - Current Liabilities To Net Worth Current liabilities to net worth ratios indicates the amount due creditor within a year as percentage of the owners or stockholders investment. The smaller the net worth and the larger the liabilities, the less security for creditors. Normally a business starts to have trouble when this relationship exceeds 80 percent. Solvency Ratios - Current Liabilities To Inventory Current liabilities to inventory ratio shows you, as a percentage, the reliance on available inventory for payment of debt (how much a company relies on funds from disposal of unsold inventories to meet its current debt). Solvency Ratios - Total Liabilities To Net Worth Total liabilities to net worth shows how all of the company's debt relates to the equity of the owners or stockholders. The higher this ratio, the less protection there is for the creditors of the business. Solvency Ratios- Fixed Assets To Net Worth Fixed assets to net worth ratio shows the percentage of assets centered in fixed assets compared to total equity. Generally the higher this percentage is over 75 percent, the more vulnerable a concern becomes to unexpected hazards and business climate changes. Capital is frozen in the form of machinery and the margin for operating funds becomes too narrow for day to day operations. Efficiency Ratios - Collection Period Collection period ratio is helpful in analyzing the collectabiliy of accounts receivable, or how fast a business can increase its cash supply. Although businesses establish credit terms, they are not always observed by their customers for one reason or another. In analyzing a business, you must know the credit terms it offers before determing the quality of its receivables. While each industry has its own average collection period (number of days it takes to collect payments from customers), there are observers who feel that more than 10 to 15 days over terms should be of concern. Efficiency Ratios - Sales to Inventory Sales inventory ratio provides a yardstick for comparing stock-to-sales ratios of a business with others in the same industry. When this ratio is high, it may indicate a situation where sales are being lost because a concern is understocked and/ or customers are buying else where. If the ratio is too low, this may show that inventories are obsolete or stagnant.

Efficiency Ratios - Assets To Sales Assets to sales ratio measures the percentage of investment in assets that is required to generate the current annual sales level. If the percentage is abnormally high, it indicates that a business is not being aggressive enough in its sales efforts, or that its assets are not being fully utilized. A low ratio may indicate a business is selling more than can be safely covered by its assets. Efficiency Ratios - Sales To Net Working Capital Sales to net worth capital ratio measures the number of times working capital turns over annually in relation to net sales. A high turn over can indicate over trading (an excessive sales volume in relation to the investment in the business). This ratio should be reviewed in conjunction with the assets to sales ratio. A high turnover rate might also indicate that the business relies extensively upon credit granted by suppliers or the bank as a substitute for an adequate margin of operating funds. Efficiency Ratios - Accounts Payable To Sales Accounts payable to sales ratio measure how the company pay its suppliers in relation to the sales volume being transacted. A low percentage would indicate a healthy ratio. Profitability Ratios - Return On Sales (Profit Margin) Return on sales (profit margin) ratio measures the profits after taxes on the year's sales. The higher this ratio, the better the prepared the business is to handle downtrends brought on by adverse conditions. Profit Ratios - Return On Assets Return on assets ratio is the key indicator of the profitability of a company. It matches net profits after taxes with the assets used to earn such profits. A high percentage rate will tell you the company is well run and has a healthy return on assets. Profitability Ratios - Return On Net Worth (Return Of Equity) Return on net worth ratio measures the ability of a company's management to realize an adequate return on the capital invested by the owners in the company.

15. If a person invests in Debt funds it means he is either investing in Company bonds, Fixed Deposits,
Debt linked mutual funds, bank bonds, municipal bonds, central/state government securities etc. As the name suggest companies/Institutions line central government, state government, Private/Public sector companies, banks etc needs funds to run their daily business. They issue securities/certificates against which we lend them money against a chargeable interest. Mainly in Debt market we lend money in the form of DEBT. The interest promised by companies, banks, government here is secured. In Equity market we buy shares instead of certificates. These shares makes us a proportionate owner of the company of which we buy shares. Here also we lend money to the companies but like a owner. If companies makes profit we gain interest and if the companies makes loss we loose money. In short you can say in DEBT MARKET investment is very safe but gives low but fixed returns. In EQUITY MARKET investment is linked with a risk but when market if good given a much better returns than DEBT schemes.

16. The opportunity cost of an investment; that is, the rate of return that
a company would otherwise be able to earn at the same risk level as the investment that has been selected. For example, when an investor purchases stock in a company, he/she expects to see a return on that investment. Since the individual expects to get back more than his/her initial investment, the cost of capital is equal to this return that the investor receives, or the money that the company misses out on by selling its stock.

A company has different sources of finance, namely common stock, retained earnings, preferred stock and debt. Weighted average cost of capital (WACC) is the average after tax cost of all the sources. It is calculated by multiplying the cost of each source of finance by the relevant weight and summing the products up.

Formula
For a company which has two sources of finance, namely equity and debt, WACC is calculated using the following formula:

Cost of equity is calculated using different models for example dividend growth model and capital asset pricing model. Cost of debt is based on the yield to maturity of the relevant instruments. If no yield to maturity can be calculated we can base the estimate on the instrument's current yield, etc. The weights are based on the target market values of the relevant components. But if no market values are available we base the weights on book values.

Example
Company has a 1 million shares of common stock currently trading at $30 per share. Current risk free rate is 4%, market risk premium is 8% and the company has a beta of 1.2. It also has 10,000 bonds with of $1,000 pare paying 10% coupon annually maturing in 20 years currently trading at $900. The company's tax rate is 35%. Calculate the weighted average cost of capital. Solution: First we need to calculate the weights of debt and equity. Market Value of Equity = 1,000,000 $30 = $30,000,000 Market Value of Debt = 50,000 $950 = $47,500,000 Total Market Value of Debt and Equity = $77,500,000 Weight of Equity = $30,000,000 / $77,500,000 = 38.71% Weight of Debt = $47,500,000 / $77,500,000 = 61.29% Weight of Debt can be calculated as 100% minus cost of equity = 100% 38.71% = 61.29% Second step in our solution is to calculate the cost of equity. With the given data we can use capital asset pricing model (CAPM) to calculate cost of equity as follows: Cost of Equity = Risk Free Eate + Beta Mrket Risk Premium = 4% + 1.2 8% = 13.6%

We also, need to find the cost of debt. Cost of debt is equal to the yield to maturity of the bonds. With the given data, we can find that yield to maturity is 10.61%. After tax cost of debt is hence 10.61% ( 1 30% ) = 7.427% And finally, WACC = 38.71% 13.6% + 61.29% 7.427% = 9.8166%

Uses of WACC
Weighted average cost of capital is used in discounting cash flows for calculation of NPV and other valuations for investment analysis. WACC represents the average risk faced by the organization. It would require an upward adjustment if it has to be used to calculate NPV of project which are more risk than the company's average projects and a downward adjustment in case of less risky projects.

16.
Economic value added (EVA) is a performance measure developed by Stern Stewart & Co that attempts to measure the true economic profit produced by a company. It is frequently also referred to as "economic profit", and provides a measurement of a company's economic success (or failure) over a period of time. Such a metric is useful for investors who wish to determine how well a company has produced value for its investors, and it can be compared against the company's peers for a quick analysis of how well the company is operating in its industry. Economic profit can be calculated by taking a company's net after-tax operating profit and subtracting from it the product of the company's invested capital multiplied by its percentage cost of capital. For example, if a fictional firm, Cory's Tequila Company (CTC), has 2005 net after-tax operating profits of $200,000 and invested capital of $2 million at an average cost of 8.5%, then CTC's economic profit would be computed as $200,000 - ($2 million x 8.5%) = $30,000. This $30,000 represents an amount equal to 1.5% of CTC's invested capital, providing a standardized measure for the wealth the company generated over and above its cost of capital during the year. Market value added (MVA), on the other hand, is simply the difference between the current total market value of a company and the capital contributed by investors (including both shareholders and bondholders). MVA is not a performance metric like EVA, but instead is a wealth metric, measuring the level of value a company has accumulated over time. As a company performs well over time, it will retain earnings. This will improve the book value of the company's shares, and investors will likely bid up the prices of those shares in expectation of future earnings, causing the company's market value to rise. As this occurs, the difference between the company's market value and the capital contributed by investors (its MVA) represents the excess price tag the market assigns to the company as a result of it past operating successes.

The formula for calculating EVA is as follows: = Net Operating Profit After Taxes (NOPAT) - (Capital * Cost of Capital)

19. An entity may not be able to recover its balances outstanding in respect of certain receivables. In
accountancy we refer to such receivables as Irrecoverable Debts or Bad Debts. Bad debts could arise for a number of reasons such as customer going bankrupt, trade dispute or fraud. Every time an entity realizes that it unlikely to recover its debt from a receivable, it must 'write off' the bad debt from its books. This ensures that the entity's assets (i.e. receivables) are not stated above the amount it can reasonably expect to recover which is in line with the concept of prudence.

20. Suppose XYZ Biotech spent $30 million dollars on a piece of medical equipment and
that the patent on the equipment lasts 15 years, this would mean that $2 million would be recorded each year as an amortization expense. While amortization and depreciation are often used interchangeably, technically this is an incorrect practice because amortization refers to intangible assets and depreciation refers to tangible assets. Amortization can be calculated easily using most modern financial calculators, spreadsheet software packages such as Microsoft Excel, or amortization charts and tables.

21. The profit earned from a firm's normal core business operations. This value does not
include any profit earned from the firm's investments (such as earnings from firms in which the company has partial interest) and the effects of interest and taxes. Also known as "earnings before interest and tax" (EBIT). Calculated as:

22. Earnings before interest, taxes, depreciation and amortization (EBITDA) is a non-GAAP
metric that can be used to evaluate a company's profitability. EBITDA = Operating Revenue - Operating Expenses + Other Revenue Its name comes from the fact that Operating Expenses do not include interest, taxes, depreciation or amortization. EBITDA is not a defined measure according to Generally Accepted Accounting Principles

(GAAP), and thus can be calculated however a company wishes. It is also not a measure of cash flow. EBITDA differs from the operating cash flow in a cash flow statement primarily by excluding payments for taxes or interest as well as changes in working capital. EBITDA also differs from free cash flow because it excludes cash requirements for replacing capital assets. EBITDA is used when evaluating a company's ability to earn a profit, and it is often used in stock analysis.

23. Debt-to-Equity ratio is the ratio of total liabilities of a business to its shareholders' equity. It is a
leverage ratio and it measures the degree to which the assets of the business are financed by the debts and the shareholders' equity of a business.

Formula
Debt-to-equity ratio is calculated using the following formula:

Total Liabilities Debt-to-Equity Ratio = Shareholders' Equity

Both total liabilities and shareholders' equity figures in the above formula can be obtained from the balance sheet of a business. A variation of the above formula uses only the interest bearing long-term liabilities in the numerator.

Analysis
Lower values of debt-to-equity ratio are favorable indicating less risk. Higher debt-to-equity ratio is unfavorable because it means that the business relies more on external lenders thus it is at higher risk, especially at higher interest rates. A debt-to-equity ratio of 1.00 means that half of the assets of a business are financed by debts and half by shareholders' equity. A value higher than 1.00 means that more assets are financed by debt that those financed by money of shareholders' and vice versa. An increasing trend in of debt-to-equity ratio is also alarming because it means that the percentage of assets of a business which are financed by the debts is increasing.

Example
Calculate debt-to-equity ratio of a business which has total liabilities of $3,423,000 and shareholders' equity of $5,493,000. Solution Debt-to-Equity Ratio = $3,423,000 / $5,493,000 0.62