Chapter 12 Flashcards
What is included in “Cash” on the balance sheet?
Short term investments (less than 3 months)
Money market
What are internal controls?
Processes by a company so bad stuff doesn’t happen
The three provisions of Sarbanes-Oxley:
1) Require an audit of internal controls
2) prohibited most non-audit services by auditor (consulting)
3) created the PCAOB; audits auditors
Why did SOX require an annual audit of internal controls?
Because fraud was becoming too common
What are material weaknesses?
something a company gets when their internal controls fail
can be small or big
Why did SOX prohibit consulting for auditors?
Auditors were not being fair when it came to audits because they wanted the money that came with consulting
What is the PCAOB?
Government organization that makes the audit rules
Regulates the auditors; audits the auditors
What is the accrual basis?
GAAP
Net Income
This that are incurred when the service is received or completed
What is the cash basis?
Cash going in and out
T/F Cash basis accounting cannot be manipulated
FALSE
While this is true for the most part, it can be manipulated when the timing is right
What are the two main reasons accruals do not turn into cash flows?
Foggy Crystal Ball and Evil Managers
How is the cash basis manipulated by evil manager?
Higher cash basis income: delay paying expenses or get money back faster from customers
Lower cash basis income:
collect the money later or pay expenses in advance
What is earnings management?
Evil managers manipulating accruals to their benefit
What are the three sections of a cash flow statement?
Operating
Investing
Financing
Interest on loans goes where?
Operating
CAPEX ( buying PP&E) goes where?
Investing
Taxes go where?
Operations
Paying dividends goes where?
Financing
Receiving bank loans goes where?
Financing
Cash from customers goes where?
Operating
Calling bonds goes where?
Financing
Purchase of other companies goes where?
Investing
Repurchase of common stock goes where?
Financing
Receiving dividends goes where?
Operating
Selling stock goes where?
Investing
Disposals (selling PP&E) go where?
Investing
Preferred stock goes where?
Financing
Principal amounts goes where?
Financing
How do you calculate the bottom of the cash flow statement?
Total change in cash = CFO + CFI + CFF
+ beginning cash = ending cash
T/F Your ending cash should line up with the ending cash in the balance sheet
TRUE
Why do we start with the income statement when we do the indirect method?
So that we can back out all of the accruals
Net income is an accrual number
What is already included in net income?
Revenue and Gains
Expenses and losses
Non-cash income and expenses (depreciation and amortization)
Why do we add back depreciation and amortization?
We add them back to make it a zero net affect.
Why do we reverse gains and losses?
Because they belong in the investing section, so we need to back them out of the net income
Why do we subtract changes in operating assets?
because we are undoing the accruals that are in net income
Why do we add changes in operating liabilities?
undoing the accruals that are in net income
What does the CFO look like for a start-up, mature successful company, and mature struggling company?
Start-up - very small or negative
Mature successful company - very positive
Mature struggling - Very negative
CFI for the three companies:
Start-up - Very negative
Mature successful - Pretty negative
Mature struggling - Positive
CFF for the three companies:
Start-up - Very positive
Mature successful - Negative
Mature struggling - Possibly positive
What is free cash flow?
CFO - CAPEX = free cash flow
the way investors see how much extra money companies have
