Balance Sheet and Income Statement

Question 1

What is the easiest way to avoid selection risk?

Answer 1

Diversification

Question 2

What is the easiest/most common way to diversify?

Answer 2

Buy Mutual Funds

Question 3

Beta

Answer 3

Measurement of a stock/MF’s volatility compared to the market

Question 4

Alpha

Answer 4

Return in excess

Question 5

What is the easiest way to avoid capital gains tax?

Answer 5

Do not transact (buy/sell)

Question 6

CAPM

Answer 6

Capital Asset Pricing Model (AKA Modern Portfolio Theory) describes the relationship between systematic risk and expected return

Question 7

10K

Answer 7

An annual report of a public company that is reported to the SEC (+ market center) and shareholders

Question 8

What is in a 10K Financial Statement?

Answer 8

Blanace sheet, income statement, statement of cash flow, and footnotes

Question 9

10Q

Answer 9

Quarterly reports of a public company that come out 3x/year to the SEC (+ market center) and shareholders

Question 10

True or False: 10Ks are audited

Answer 10

True

Question 11

True or False: 10Qs are audited

Answer 11

False

Question 12

What is included on a balance sheet?

Answer 12

Current Assets (assets that are liquid within 12 months), Fixed Assets, Current Liabilities (things to be paid within 12 months), Long Term Liabilities, Cash Flow

Question 13

True or False: Cash Flow on a balance sheet includes depreciation.

Answer 13

False

Question 14

True or False: Depreciation is considered a non-cash expense.

Answer 14

True

Question 15

EPS [equation]

Answer 15

Earnings Per Share
Net Income / Number of Shares Outstanding

Question 16

Book Value

Answer 16

Theoretical liquidation of the corporation (what would be left after selling everything post-expenses)

Question 17

Shareholders’ Equity [equation]

Answer 17

Assets (Current + Fixed) - Liabilities (Current + Long Term)

Question 18

Depletion (Allowance)

Answer 18

Tax incentive for companies to find replacements (depletion of naturally wasting resources)

Question 19

Goodwill

Answer 19

Intangible assets (ie patents, brands)

Question 20

LIFO

Answer 20

Last-in, First-out; provides lower profit margin

Question 21

FIFO

Answer 21

First-in, First-out; provides higher profit margin

Question 22

(Filing for) Chapter 7

Answer 22

Complete liquidation of the business (ie Toys-R-Us)

Question 23

Working Capital

Answer 23

Current Assets - Current Liabilities (remember: working = NOW = CURRENT)

Question 24

If the Board of Directors declares a dividend, what happens to the current assets/liabilities? To Working Capital?

Answer 24

It becomes a Current Liability, which causes a decrease in Working Capital

Question 25

Current Ratio [equation]

Answer 25

Current Assets / Current Liabilities (remember: CURRENT)

Question 26

Quick Assets [equation]

Answer 26

Current Assets - Inventory (remember: we want assets quickly = cannot sell off inventory)

Question 27

Acid Test/Quick Ratio [equation]

Answer 27

Quick Assets / Current Liabilities (remember: ratio b/w current assets and liabilities, but only quick assets not coming from inventory)

Question 28

What does the capitalization of a company consist of?

Answer 28

Equity and Debt

Question 29

Debt-to-Equity Ratio (Solvency) [equation]

Answer 29

Debt / Total Capitalization (Debt + Equity)

Question 30

PE Ratio [equation]

Answer 30

Price-Earnings Ratio
Current Market Price / EPS

Question 31

Divident Payout Ratio [equation]

Answer 31

Dividend / EPS

Question 32

Current Yield [equation]

Answer 32

Annual Dividend / Current Market Price
(remember: Current Yield = What it PAYS you / What it COSTS you)
On the test: BE CAREFUL of Quarterly Dividend or Semiannual Dividend
(Quarterly Dividend * 4) / Current Market Price
(Semiannual Dividend *2) / Current Market Price