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ACCT 2010 > Chapter 12 > Flashcards

Chapter 12 Flashcards

1
Q

What is included in “Cash” on the balance sheet?

A

Short term investments (less than 3 months)

Money market

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2
Q

What are internal controls?

A

Processes by a company so bad stuff doesn’t happen

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3
Q

The three provisions of Sarbanes-Oxley:

A

1) Require an audit of internal controls
2) prohibited most non-audit services by auditor (consulting)
3) created the PCAOB; audits auditors

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4
Q

Why did SOX require an annual audit of internal controls?

A

Because fraud was becoming too common

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5
Q

What are material weaknesses?

A

something a company gets when their internal controls fail

can be small or big

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6
Q

Why did SOX prohibit consulting for auditors?

A

Auditors were not being fair when it came to audits because they wanted the money that came with consulting

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7
Q

What is the PCAOB?

A

Government organization that makes the audit rules

Regulates the auditors; audits the auditors

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8
Q

What is the accrual basis?

A

GAAP
Net Income
This that are incurred when the service is received or completed

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9
Q

What is the cash basis?

A

Cash going in and out

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10
Q

T/F Cash basis accounting cannot be manipulated

A

FALSE

While this is true for the most part, it can be manipulated when the timing is right

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11
Q

What are the two main reasons accruals do not turn into cash flows?

A

Foggy Crystal Ball and Evil Managers

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12
Q

How is the cash basis manipulated by evil manager?

A

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

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13
Q

What is earnings management?

A

Evil managers manipulating accruals to their benefit

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14
Q

What are the three sections of a cash flow statement?

A

Operating
Investing
Financing

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15
Q

Interest on loans goes where?

A

Operating

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16
Q

CAPEX ( buying PP&E) goes where?

A

Investing

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17
Q

Taxes go where?

A

Operations

18
Q

Paying dividends goes where?

A

Financing

19
Q

Receiving bank loans goes where?

A

Financing

20
Q

Cash from customers goes where?

A

Operating

21
Q

Calling bonds goes where?

A

Financing

22
Q

Purchase of other companies goes where?

A

Investing

23
Q

Repurchase of common stock goes where?

A

Financing

24
Q

Receiving dividends goes where?

A

Operating

25
Q

Selling stock goes where?

A

Investing

26
Q

Disposals (selling PP&E) go where?

A

Investing

27
Q

Preferred stock goes where?

A

Financing

28
Q

Principal amounts goes where?

A

Financing

29
Q

How do you calculate the bottom of the cash flow statement?

A

Total change in cash = CFO + CFI + CFF
+ beginning cash = ending cash

30
Q

T/F Your ending cash should line up with the ending cash in the balance sheet

A

TRUE

31
Q

Why do we start with the income statement when we do the indirect method?

A

So that we can back out all of the accruals

Net income is an accrual number

32
Q

What is already included in net income?

A

Revenue and Gains

Expenses and losses

Non-cash income and expenses (depreciation and amortization)

33
Q

Why do we add back depreciation and amortization?

A

We add them back to make it a zero net affect.

34
Q

Why do we reverse gains and losses?

A

Because they belong in the investing section, so we need to back them out of the net income

35
Q

Why do we subtract changes in operating assets?

A

because we are undoing the accruals that are in net income

36
Q

Why do we add changes in operating liabilities?

A

undoing the accruals that are in net income

37
Q

What does the CFO look like for a start-up, mature successful company, and mature struggling company?

A

Start-up - very small or negative
Mature successful company - very positive
Mature struggling - Very negative

38
Q

CFI for the three companies:

A

Start-up - Very negative
Mature successful - Pretty negative
Mature struggling - Positive

39
Q

CFF for the three companies:

A

Start-up - Very positive
Mature successful - Negative
Mature struggling - Possibly positive

40
Q

What is free cash flow?

A

CFO - CAPEX = free cash flow

the way investors see how much extra money companies have

ACCT 2010 (13 decks)

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