Chapter 1 - Accounting Basics

Question 1

Alternate term for a broker dealer’s balance sheet in its FOCUS Report

Answer 1

Statement of Financial Condition

Question 2

Three basic types of assets on a balance sheet

Answer 2

Current, fixed, and intangible

Question 3

Types of cash on the balance sheet

Answer 3

Currency, checking accounts, and other bank deposits

Question 4

What are marketable securities?

Answer 4

Securities that are owned (Treasury bills, stocks and bonds) and readily convertible into cash. These are typically carried on the balance sheet at lower of cost or market value.

Question 5

Types of accounts receivable

Answer 5

1. Receivables from customers (aka customer debits) - this may include balances in margin accounts in which customers have borrowed against securities as collateral
2. Receivables from other broker-dealers and other non-customers (for money that will be paid to the BD when it delivers securities it owes another firm)
3. Dividends and interest receivable (from the issuers of securities in the BD’s trading/investment accounts)
4. Reverse repurchase agreements (where a dealer has purchased securities from another dealer with an agreement to sell)

Question 6

Factors contributing to goodwill value

Answer 6

Potential earning power due to reputation in the marketplace, customer relations, skilled staff

Question 7

For a broker-dealer, _________ is more important than the current/fixed/intangible asset classification

Answer 7

Liquidity of assets

Question 8

Types of liabilities

Answer 8

Accounts payable
Interest payable
Notes payable
Taxes payable
Repurchase agreements

Question 9

What is a subordinated loan?

Answer 9

A loan obtained with the condition that the lender will accept payment after all other creditors. Subordinated loans are advantaged when it comes to the net capital calculation.

Question 10

For a broker-dealer, it is more important whether the liability is ________ than the current/noncurrent classification

Answer 10

Secured or unsecured

Question 11

Aggregate indebtedness

Answer 11

All unsecured debt of a BD. Secured debt such as loans collateralized by a firm’s own trading securities are not included in AI.

Question 12

Types of stockholders’ equity

Answer 12

Preferred stock
Common stock
Retained earnings (or earned surplus)
Paid-in capital (paid in surplus or capital surplus)

Question 13

Types of BD revenues

Answer 13

1. Commissions (charges to customers for executing transactions)
2. Gains/losses on firm securities trading accounts (acting as a dealer, aka gains/losses on the firm’s own securities, taxed as ordinary income)
3. Gains/losses on firm securities investment accounts (G/L on longer term investment securities, these are taxed as capital gains)
4. Profits/losses from underwriting/selling groups (investment banking, underwriting fees)
5. Margin interest (interest charged to customers who have borrowed money using their securities as collateral)
6. Revenue from sale of investment company shares (12b-1 trailing fees, mutual fund discounts)
7. Commodities revenue (income on commodities/futures contracts)

Question 14

Types of BD expenses

Answer 14

1. Compensation
2. Floor brokerage (commissions to 3rd parties for execution of trades on an exchange)
3. Clearing costs (paid to clearing firms)
4. Communications (computer/telephone expenses)
5. Interest expense
6. Regulatory fees (paid to the SEC or SROs such as FINRA, including SIPC assessments)
7. Operational expenses (admin and office expenses)