2 Module REVIEW 2.1-2.5

Question 1

CONFER

Answer 1

1. to consult together; compare opinions; carry on a discussion or deliberation.
2. to bestow upon as a gift, favor, honor, give etc.:

Question 2

Two characteristic Asset must Posses

Answer 2

1. It must be owned (or controlled) by the company.

2. It must confer expected future economic benefits that result from a past transaction or event

Question 3

Historical cost

Answer 3

How assets are measured; reported at their original acquisition cost not market value

Question 4

When intangible assets are reported

Answer 4

Assets are purchased externally

Question 5

When intangible assets aren’t reported

Answer 5

. Internally created intangible are not reported.

Knowledge based assets can refer to non reported intangible assets

Question 6

Fiscal year

Answer 6

Any 12 month period 52 week period

Question 7

ACCOUNTING YEAR/ CALENDAR YEAR

Answer 7

From January 1st to December 31st

Question 8

Debt vs Equity Financing.

Answer 8

Interest is deductible not dividend payout

Question 9

Unearned revenues/ Deferred Revenues & impact to Financial Statements.

Answer 9

obligations created when the company accepts payment in advance for goods or services it will deliver in the future; also called advances from customers, customer deposits, or deferred revenues.
All of these accruals involve recognition of expense in the income statement and a liability on the balance sheet

Question 10

operating (or cash) cycle & its goal

Answer 10

time between paying cash for goods and receiving cash from customers
A prime objective is to shorten the operating cycle in order to complete as many cycles as possible during the year.

Question 11

trade credit

Answer 11

Type of financing where Inventories are usually purchased on credit from suppliers (accounts payable)
When receivables are ultimately collected, a portion of the cash received is used to repay accounts pay-able, and the remainder goes to the cash account for the next operating cycle

Question 12

3 Actions to shorten Operating cycle

Answer 12

1. Decrease accounts receivable with tighter credit-granting policies and more assertive collection procedures.
2. Reduce inventory levels by improved production systems and management of the depth and breadth of inventory.
3. Increase trade credit to minimize the cash invested in inventories

Question 13

Cash Conversion Cycle use for analyst & formula

Answer 13

Analysts often use this” to evaluate company liquidity
Average days sales outstanding (collection period + Average Days Inventory Outstanding - Average days Payable Outstanding

Question 14

Why Equity is called Residual Interest

Answer 14

stockholders have a claim on any assets in excess of what is needed to meet company obligations to creditors.

Question 15

Additional paid-in capital

Answer 15

amounts received from the original sale of stock to investors in excess of the par value of stock

Question 16

Retained earnings

Answer 16

accumulated net income (profit) that has not been distributed to stockholders as dividends

Question 17

Earned Capital

Answer 17

Retained Earnings & Accumulated other comprehensive income or loss

Question 18

Accumulated other comprehensive income or loss

Answer 18

accumulated changes in asset and liability fair values that are not reported in the income statement.

Question 19

Contributed Capital

Answer 19

Commons stock, Preferred stock, additional paid in capital, Treasury stock

Question 20

2 components of Equity on balance sheet

Answer 20

contributed capital and earned capital

Question 21

Retained Earnings Reconciliation

Answer 21

Beginning retained earnings + Net income (or 2 Net loss) - Dividends = Ending retained earnings

Question 22

Market-to-Book Ratio & Formula

Answer 22

company’s market value divided by the book value to total equity.
company’s market value divided by the book value to total equity.

Question 23

apportion

Answer 23

to distribute or allocate proportionally; divide and assign according to some rule of proportional distribution:

Question 24

Non-controlling interests

Answer 24

arises when a subsidiary company is partially owned by shareholders other than the parent company.

Question 25

two lines after the net income line

Answer 25

These lines apportion “consolidated” net income between net income attributable to non-controlling interests and net income attributable to the parent company shareholders (also called the controlling interest)

Question 26

Non-operating expenses

Answer 26

relating to the company’s financing and investing activities and include interest expense, interest or dividend income, and gains and losses from the sale of securities.

Question 27

Alert on FASB

Answer 27

released a preliminary draft of a proposal to restructure financial statements to, among other things, better distinguish operating and non-operating activities

Question 28

Write-offs

Answer 28

represent the accelerated transfer of costs from the balance sheet to the income statement.

Question 29

Revenue recognition principle

Answer 29

recognize revenues for goods and services provided to customers at an amount expected to be received.

Question 30

Expense recognition (matching) principle

Answer 30

recognize expenses when incurred.

Question 31

Transitory Items

Answer 31

Items that are not expected to occur again

Question 32

Discontinued operations

Answer 32

segregated from “Income from continuing operations” because this operation represent a transitory item

Question 33

Core view of Securities Analyst pertaining to Discontinued operations

Answer 33

aim is to identify core operating income and cash flow that will persist into the future.
Ex. Subsidiary that is sol is a discontinued operation

Question 34

2 Additional Profitability Measures & their Formulas for ROA

Answer 34

1. Gross profit margin (Gross profit/Sales).

2. Margins for operating expenses (Operating expense/Sales)

Question 35

Gross profit margin used in analysis

Answer 35

We analyze this margin by comparing the ratio over time and with peer companies’ ratios.
Typically, a high and/or increasing gross profit margin is a positive sign

Question 36

operating expenses used in analysis

Answer 36

focuses on each expense category reported by the company as a percentage of sales over time and compared with peer companies.
Any deviations from historical trends or significantly higher or lower levels from peer companies should be investigated to uncover causes.

Question 37

What could be happening when particularly worrisome sign that operating expenses are declining in the face of falling profits.

Answer 37

company has tried to address declining profits by reducing critical expenses such as R&D, marketing, or compensation costs. This generally leads to a short-term improvement at a long-term cost as market share declines and employee morale suffers.

Question 38

time-series analysis

Answer 38

comparisons of one company across years

Question 39

cross-sectional analysis

Answer 39

comparisons of many companies across one year

Question 40

vertical analysis/ Common size analysis

Answer 40

percentages in the column on the income statement add up vertically to 100% of total sales (the top-line number on the income statement). A common size balance sheet adds up vertically to 100% of total assets.