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Series 65 > Chapter 1 > Flashcards

Chapter 1 Flashcards

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Series 65 flashcards
1
Q

Cash Vs Accrual Accounting

A

Cash accounting recognizes both revenue and expenses later than accrual

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1
Q

Income Statement

A

document detailing company’s revenue and expenses for the year

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2
Q

Gross Sales

A

All invoices of merchandise recorded that year. These are billed sales not collected sales

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3
Q

Returns

A

Merchandise returned for credit

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4
Q

Net Sales

A

Gross sales minus Returns

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5
Q

Cost of Goods Sold

A

The accounting value of inventory sold

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6
Q

Gross Margin

A

Net Sales minus Cost of Goods Sold

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7
Q

Operating Expenses

A

items such as administrative salaries, rent, advertising, and depreciation (a non-cash expense)

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8
Q

Operating Margin

A

Gross Margin minus Operating Expenses

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9
Q

Non-Operating Income

A

Income that does not come from normal business of the company. Ex= income from investments the company owns

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10
Q

Total Income

A

The total of the two sources of income

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11
Q

Bond Interest Expense

A

paid after all operating expenses are covered, so it is listed on the income statement as a “non-operating” expense

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12
Q

Net Income before Tax

A

Total Income minus Bond Interest Expense

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13
Q

Taxes

A

Amounts owed to federal, state, and local governments

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14
Q

Net Income after Tax

A

net profit after deducting all applicable taxes

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15
Q

From an Income Statement, we can determine a company’s profitability. The ratios to measure “profitability” are:

A
  1. Operating Margin of Profit Ratio
  2. Net Profit Ratio
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16
Q

Operating Margin of Profit ratio

A

Operating Profit/Net Sales

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17
Q

Net Profit Ratio

A

Net Income after Tax/Net Sales

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18
Q

Earnings Per Common Share

A

Earnings Available for Common/Common Shares Outstanding

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19
Q

Divedend Payout Ratio

A

Common Dividends Paid/Earning for Common

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20
Q

Mature Companies have __ Dividend Payout Ratios.

A

High

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21
Q

Growth Companies have __ Dividend Payout Ratios.

A

Low

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22
Q

Balance Sheet

A

snapshot of all the company’s assets and liabilities at one point in time

Also called, the statement of financial condition!

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23
Q

Balance Sheet Formula

A

Assets - Liabilities= Net Worth
OR
Assets= Liabilities + Net Worth

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24
Q

The Assets side of a balance sheet are arranged in order of __.

A

Liquidity!

Assets that are quickly convertible to cash are listed 1st. Going down the sheet, assets become less and less liquid.

25
Q

The Liabilities side of a balance sheet are arranged in order of __.

A

Liquidity!

The liabilities that must be paid prompty are listed first

26
Q

The “current” section of the balance sheet is used to evaulate the __.

A

“liquidity” of a company. This section determines if the company has enough current funds to meet its bills as well as access funds for other business purposes.

27
Q

An item is “current” if it comes due within ____.

A

One year

28
Q

Current Assets consist of:

A

Cash and Marketable Securities
Accounts Receivable
Inventory

29
Q

Cash and Marketable Securities =

A

Highly liquid - marketable securities can be turned into cash in 3 business days or less.

30
Q

Accounts Receivable

A

(to be recieved) Money to be received in the future due to the sale of goods or services, money owed to your business.

It is normal to have payment terms of 10-30 days on invoices. Therefore if recievables are well managed, they should not represent more than ~ 30 days worth of sales.

31
Q

Accounts recievable are considered highly liquid bc they can be turned into cash quickly by selling them to a __.

A

“factor”

Factors extend credit to companies using recievables as collateral.

32
Q

Inventory =

A

Goods that have not been sold.

Inventories should not be too large relative to sales. Of the current assets, inventories are the LEAST liquid. They can be difficult to dispose of at full value.

33
Q

Current Liabilities =

A

Accounts Payable
Wages Payable
Taxes Payable
Interest Payable

All of the bills coming due within one year.

34
Q

Accounts Payable

A

(to be paid) Money your business owes suppliers.

Amounts owed to trade creditors of the company.

35
Q

Wages Payable

A

Monies owed to employees at the date of the balance sheet. These are wages that have accured between payroll check dates.

36
Q

Taxes Payable

A

Amounts owed to federal, state, and city governments which have not been paid.

37
Q

Interest Payable

A

Accured amounts payable to note and bondholders between interest payment dates.

38
Q

Net working Capital=

A

Current Assets - Current Liabilities

The excess of current assets over liabilities. The extra left over after paying all bills.

39
Q

Ratios that are used to measure liquidity include:

A

Current Ratio, Quick Ratio

40
Q

Current Ratio =

A

Current Assets/Current Liabilities

$4,000/$2,000= 2 : 1

ABC Corporation has 2 times the current assets it needs to pay its Current Liabilites.

41
Q

Quick Ratio

A

(Current Assets-Those not easily turned into cash)/ Current Liabilites

Includes inventory, bc its not quickly convertible to cash

Also called “Acid Test”

($4,000-$1,000)/$2,000 = 1.5 : 1

ABC Corporation has 1.5 times the assets quickly convertible to cash that it needs to pay off its bills. If this ratio is less than 1, it may have problems meeting its current bills.

42
Q

When calculating Quick Ratio, if a company has any other current assets that cannot be quickly converted into cash, they would be deducted from Current Assets as well. An Example=

A

Ex= Prepaid Expenses. Prepaid rent or insurance. These payments are made in advance of use, are booked as an asset, and then they are expensed as they are “used up”. This is a current asset that almost never converts to cash.

43
Q

The sources of long term capital for a company are _____.

A

Long Term Liabilities and Stockholder’s Equity

44
Q

Items that are included in the capitalization of a company are:

A

Long Term Debt
Preferred Stock
Common Stock

45
Q

Long Term Debt

A

“funded debt”, it is a source of long term funding for the company. For balance sheet purposes, this is debt that must be repaid in more than ONE year.

46
Q

Preferred Stock

A

Preferred stock is a type of stock that has characteristics of both stocks and bonds. Like bonds, preferred shares make cash payouts, often at a higher yield than bonds, while offering higher dividend returns and less risk than common stock.

47
Q

Common Stock

A

Common stock is a form of corporate equity ownership, a type of security.
Shares entitling their holder to dividends that vary in amount.

Consists of
-Common at Par
-Capital in Excess
-Retained Earnings

48
Q

Common at Par

A

means “at face value”, full payment received without obligation for additional charges or premiums.

49
Q

Capital in Excess of Par

A

(Ask about this ex. in long term capitalizaiton section)

the amount of money that investors pay for a company’s stock above its par value.

“CEP”

50
Q

Retained Earnings

A

(Ask about this ex. in long term capitalizaiton section)

The retained earnings of a corporation is the accumulated net income of the corporation that is retained by the corporation at a particular point of time, such as at the end of the reporting period.

51
Q

Debt/Equity Ratio =

A

Long Term Debt/ Total Stockholders’ Equity

Note: Stockholders’ Equity includes both Common Equoty and Preferred Stock

52
Q

Claim Priority in liquidation

A

In a corporate liquidaton the priority of claim to assets is:

  • Securred Bondholders
  • Unsecured Bondholders
  • Preferred Stockholders
  • Common Stockholders
53
Q

A fundamental Analsyst can get a company’s financial statements by examining the corporations filings w/ the SEC. These docs are made available to the public. The major financial statement filings are:

A

10K - Corporate Annual Audited Financial Statements=
Company’s audited year end financial statements, filed w/ SEC. Filed 60-90 days after year end. Larger companies (over $700 million public float) filing within 60 days and smaller companies filing within 90.

10Q- Corporate Quarterly Unadudited Financial Statements=
Company’s quarterly unaduited statements. Filed w/ SEC either 40 days (larger companies) or 45 days (smaller companies, after quarter end.

54
Q

Footnotes

A
  • significant accounting policies
  • upcoming scheduled debt payments
  • open contractural commitments, including derivates
  • open unused credit lines
  • future lease payments
    -future pension payments
    -estimated legal payments
  • deferred tax payments
  • details of discontinued operations charges
55
Q

Net Operating Profit =

A

Operating Profit - bond interest expense & taxes

56
Q

Techincal analysts

A

select investments based on chart movements, trading volumes, advance-decline ratios, etc.

57
Q

Fundamental analyst

A

select investments based on fundamentals such as earnings trends, balance sheet strength (liquidity ratios), management, etc.

58
Q

When looking at the Price/Book ratio of a company, which statements are TRUE

A
  1. The numerator on the equation is based on market value
  2. The denominator in the equation is based on accounting value
59
Q

To calculate a company’s Debt/Equity Ratio, the needed information is found on the

A

B- Statement of financial condition (aka balance sheet)

60
Q

Inventory is an example of a ___ asset

A

illiquid. Its not liquid bc it would be very hard to get the full inventory stock at its full cash value

Series 65 (2 decks)

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