1B Financial Statements For-Profit

Question 1

Current ratio (working capital ratio)

Answer 1

current assets
___________
current liabilities

Ratio higher than 1 is favorable because company can pay it’s debts.

Question 2

Quick ratio (acid-test ratio)

Answer 2

Cash and equivalents + marketable securities + AR, net
_____________________
Total current liabilities

Question 3

Debt to total asset

Answer 3

Total liabilities
_____________
Total assets

Higher ratio is less favorable indicating higher risk and more leverage

Question 4

Debt to equity

Answer 4

Total liabilities
______________
Total equity

lower ratio is more favorable and indicates less risk

Question 5

AR turnover

Answer 5

Net credit sales
_____________________
AR less Allowance for doubtful accounts

Higher ratio is favorable because receivables are more liquid.

Question 6

Days sales outstanding (average collection period in days)

Answer 6

365
_____________
AR Turnover

Question 7

Inventory turnover

Answer 7

COGS
_________________
Average Inventory

Question 8

Days in inventory

Answer 8

365
_________________
Inventory turnover

Question 9

Total asset turnover

Answer 9

Net sales
__________________
Average total assets

Question 10

PE ratio

Answer 10

Stock price per share
______________
Basic EPS

lower ratio is favorable (greater than zero), indicating the company needs few years to earn amount investors paid.

Question 11

Book value per share

Answer 11

Common shareholders’ equity
______________________
# of share of common stock outstanding (exclude treasury stock)

Question 12

Profit margin ratio

Answer 12

Net Income after interest and taxes
_____________________________
Net Sales

Question 13

Gross Margin

Answer 13

Gross profit
____________
Net Sales

Question 14

Return on assets (ROA)

Answer 14

Net Income
____________________
Average total assets

Question 15

Return on equity (ROE)

Answer 15

Net income after interest and taxes
________________________________
Average common stockholders’ equity

Question 16

Return on sales

Answer 16

Net income before interest income, interest expense and taxes
___________________________________
Net Sales

Question 17

Earnings per share

Answer 17

Net income - Current year preferred dividends
______________________________________
Weighted average number of common shared outstanding

Question 18

Dividend payout

Answer 18

Cash dividend
__________________
Net Income

Question 19

Asset turnover ratio

Answer 19

Net Sales
_______________
Avg Total Assets

Question 20

Times interest earned

Answer 20

EBIT
______________
Interest Expense

Question 21

Free cash flow

Answer 21

Net Operating Profit after taxes + Depreciation - Capital expenditures - change in working capital

Question 22

Operating Cash Flow ratio

Answer 22

Cash flow from operations
_______________________
Ending current liabilities

Question 23

Statement of Other Comprehensive Income

Answer 23

Net Income $55,000
Other Comprehensive Income
Unrealized Holding Gain (net of tax) 15,000
Comprehensive Income $70,000

Other comprehensive income, net of tax means only items from the current year are included. OCI is closed out to Accumulated OCI.

Question 24

Items included in other comprehensive income

Answer 24

1. Impairment on AFS deb securities or equity securities (before ASU 2016-01), if a portion was recognized in OCI and not earnings
2. Unrealized holding gains and losses for AFS debt securities
3. Unrealized gains and losses from debt securities transferred from HTM to AFS
4. Gains and losses from cash flow hedge derivative instruments
5. Gains and losses on intra-entity foreign currency transactions where settlement is not expected soon
6. Gains and losses from foreign currency transactions from effective hedges in foreign entity investments.
7. Translation adjustments from foreign currency using current rate method
8. Gains and losses from pension or post-retirement benefit plans
9. Prior service costs or credit adjustments from pensions/benefit plans
10. Transition assets or obligations from pension/benefit plans not recognized as part of net periodic benefit or cost.

Question 25

ASC 230

Answer 25

Statement of Cash Flows

Question 26

Non-Cash items disclosed

Answer 26

1. Conversion of debt to equity 2. Conversion of preferred to common shares 3. Acquisition of assets through capital leases 4. Acquisition of LT assets by issuing notes payable 5. Acquisition of non-cash assets (patents, licenses) in exchange for shares or debt.

Question 27

Cash Equivalents

Answer 27

Treasury bills, commercial paper and money market funds

Question 28

Operating activities

Answer 28

day to day cash operating income and expenses

Question 29

Investing activities

Answer 29

acquisition and disposal of non-current assets

Question 30

Financing activities

Answer 30

methods that a company raises capital (stock, borrowings)

Question 31

ASU 2016-18 Restricted Cash

Answer 31

Must present restricted cash on Statement of Cash Flows or in notes to financial statements. This change is retrospective

Question 32

ASU 2016-15 Classification of cash receipts and payments

Answer 32

Operating: - portion of zero coupon debt attributable to interest - cash payments in excess of contingent consideration on business combinations Investing: - Cash payments soon after acquisition to settle contingent liability - Cash proceeds from settlement of corporate owned life insurance policies Financing: - Cash payments for debt prepayment/extinguishment - zero coupon debt attributable to principal - contingent consideration on business up to acquisition date

Question 33

CF Direct Method: Cash collected from customers

Answer 33

Sales + change in AR

Question 34

CF Direct Method: Interest received

Answer 34

Interest revenue + change in interest receivable

Question 35

CF Direct Method: Dividends received

Answer 35

Dividend revenue + change in dividend receivable

Question 36

CF Direct Method: cash paid to employees

Answer 36

sales and wages expense + change in salary and wages payable

Question 37

CF Direct Method: cash paid to suppliers

Answer 37

COGS + change in inventory + change in AP

Question 38

CF Direct Method: Interest paid

Answer 38

interest expense + change in interest payable + change in discount and/or premium on bonds

Question 39

CF Direct Method: Income taxes paid

Answer 39

Income tax expense + change in Income tax payable

Question 40

CF Direct Method: Rent paid

Answer 40

Rent Expense + change in prepaid rent

Question 41

Discontinued operations eligibility

Answer 41

must represent a major shift that has or will have a major affect on the entity's operations and financial result. (disposal of major line of business, major geographical area, major equity method investment or other major parts of the entity)

Question 42

Failing to meet going concern assumption

Answer 42

negative working capital

Question 43

ASU 2014-15 Disclosure of going concern

Answer 43

Required to evaluate and disclose in annual and interim financials

Question 44

doubt about going concern is alleviated by management's plan

Answer 44

Disclosure must include: 1. conditions that raise substantial doubt 2. Management's evaluation of the significant conditions. 3. Management's plan to alleviate doubt

Question 45

doubt about going concern is NOT alleviated by management's plan

Answer 45

Disclosure must include: 1. statement about substantial doubt 2. Conditions that cause the substantial doubt 3. Management's evaluation of the significant conditions.

Question 46

IFRS going concern requirements

Answer 46

Disclosures are required when management is aware of material uncertainties that cast doubt over entity's ability to continue as going concern - assessment period is at least on year