Chapter 12

Question 1

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

Answer 1

Short term investments (less than 3 months)

Money market

Question 2

What are internal controls?

Answer 2

Processes by a company so bad stuff doesn’t happen

Question 3

The three provisions of Sarbanes-Oxley:

Answer 3

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

Question 4

Why did SOX require an annual audit of internal controls?

Answer 4

Because fraud was becoming too common

Question 5

What are material weaknesses?

Answer 5

something a company gets when their internal controls fail

can be small or big

Question 6

Why did SOX prohibit consulting for auditors?

Answer 6

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

Question 7

What is the PCAOB?

Answer 7

Government organization that makes the audit rules

Regulates the auditors; audits the auditors

Question 8

What is the accrual basis?

Answer 8

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

Question 9

What is the cash basis?

Answer 9

Cash going in and out

Question 10

T/F Cash basis accounting cannot be manipulated

Answer 10

FALSE

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

Question 11

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

Answer 11

Foggy Crystal Ball and Evil Managers

Question 12

How is the cash basis manipulated by evil manager?

Answer 12

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

Question 13

What is earnings management?

Answer 13

Evil managers manipulating accruals to their benefit

Question 14

What are the three sections of a cash flow statement?

Answer 14

Operating
Investing
Financing

Question 15

Interest on loans goes where?

Answer 15

Operating

Question 16

CAPEX ( buying PP&E) goes where?

Answer 16

Investing

Question 17

Taxes go where?

Answer 17

Operations

Question 18

Paying dividends goes where?

Answer 18

Financing

Question 19

Receiving bank loans goes where?

Answer 19

Financing

Question 20

Cash from customers goes where?

Answer 20

Operating

Question 21

Calling bonds goes where?

Answer 21

Financing

Question 22

Purchase of other companies goes where?

Answer 22

Investing

Question 23

Repurchase of common stock goes where?

Answer 23

Financing

Question 24

Receiving dividends goes where?

Answer 24

Operating

Question 25

Selling stock goes where?

Answer 25

Investing

Question 26

Disposals (selling PP&E) go where?

Answer 26

Investing

Question 27

Preferred stock goes where?

Answer 27

Financing

Question 28

Principal amounts goes where?

Answer 28

Financing

Question 29

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

Answer 29

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

Question 30

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

Answer 30

TRUE

Question 31

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

Answer 31

So that we can back out all of the accruals Net income is an accrual number

Question 32

What is already included in net income?

Answer 32

Revenue and Gains Expenses and losses Non-cash income and expenses (depreciation and amortization)

Question 33

Why do we add back depreciation and amortization?

Answer 33

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

Question 34

Why do we reverse gains and losses?

Answer 34

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

Question 35

Why do we subtract changes in operating assets?

Answer 35

because we are undoing the accruals that are in net income

Question 36

Why do we add changes in operating liabilities?

Answer 36

undoing the accruals that are in net income

Question 37

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

Answer 37

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

Question 38

CFI for the three companies:

Answer 38

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

Question 39

CFF for the three companies:

Answer 39

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

Question 40

What is free cash flow?

Answer 40

CFO - CAPEX = free cash flow the way investors see how much extra money companies have