CMA Part 1

Question 1

Finanacial Statements

Are balance sheet accounts temporary or perminent? What does this mean?

Answer 1

They are perminent. The accounts are never closed out at the end of a period, unlike income statement item

Question 2

What is solvency in terms of the balance sheet?

Answer 2

The ability of the company to pay LT debts when they come due.

Question 3

What is financial flexibility in terms of the balance sheet?

Answer 3

The ability to redistribute funds/assets to respond to events.

Question 4

What is liquidity?

Answer 4

The ability to turn assets into cash quickly.
- Greater liquidity the less the risk of failure.

Question 5

What are 4 uses of the Balance Sheet?

Answer 5

1 - Liquidity
2 - Financial Flexibility
3 - Solvency
4 - Risk

Question 6

What is the Balance Sheet?

Answer 6

Provides information about a companies financials at a point in time.

• Assets, liabilities, equity

Question 7

What are the 4 pieces an item must meet to be recognized on financial statements?

Answer 7

1- Meet definition of an elements of FS
2- Be measurable
3- Be able to be measured with faithful representation
4- Be represenionally faithful, verifiable, and neutral.

When an item does not meet all of these, it must be removed from the FS.

Question 8

What are the 4 main financial statements in US GAAP?

Answer 8

1- Balance Sheet
2- Income Statement
3 - Statement of Cash Flows
4 - Statement of Stockholders Equity

Question 9

What do external users of FS use them for?

Answer 9

To make decisons from outside company regarding whether to begin relationship, lend money, invest, etc.

Question 10

What do internal users of financial statements use them for?

Answer 10

To make decisions regarding operation of the company.

Question 11

What are indirect users of financial statements? Who are they?

Answer 11

People who represent direct users.
-Financial analysts, stock markets, regulatory bodies.

Question 12

What are direct users of financial statements? Who are they?

Answer 12

Directly affected by results of the company, stand to lose/gain money.
- Investors, employees, management, suppliers, creditors.

Question 13

What is GAAP?

Answer 13

US - Rules based standard with interpretive guidance and specific examples for companies.
- Applies to US Based companies and foreign companies that participate in US Markets.

Question 14

What are the benefits of the income statement?

Answer 14

• Evaluates the companies performance
  -Compares performance to other companies.
  -Can predict future performance
  -Assess the risk or uncertainty of future cash flows

Question 15

What are unusual gains and losses on the income statement?

Answer 15

Gains/losses of unusual nature such as loss of inventory from a fire.

Question 16

What is IFRS?

Answer 16

International Financial Standards Board
- Used in many countries
- Principals based, but objective is to be open and flexible in interpretation to companies and auditors.

Question 17

What is the objective of reporting on financial statements?

Answer 17

To provide financial information about a company that is useful for making decisions.

Question 18

What are gains and losses on the income statement?

Answer 18

They are increases and decreses in equity other than those from revenues/expenses and/or investments and disributions to owners.

Question 19

What are revenues and expenses on the income statement?

Answer 19

From producing goods/services of core activities.

Question 20

What does the income statement report?

Answer 20

The companies perfomance in the period.

Question 21

What is the comprehensive income statement?

Answer 21

Income from all sources other than investments and distributions to owners.

Comprehensive Income statement is just the Income statement and Other Comprehensive Income.

Question 22

What are 4 limitations of the BS?

Answer 22

1- Some assets are not reported.
-Employees, human resources, internally generated intangible assets, competitive advantages
2- Assets valued at historical cost.
3 - Judgements and estimates used to value many items on the BS.
-Collectible receivables, useful lives of Fixed assets.
4 - Most liabilities are valued to PV of cashflows at the rate that was current when liability was incurred.
-If market rates increase, the fixed interest rate increases in value to the company.

Question 23

What are the benefits of the balance sheet?

Answer 23

• Computing rates of return
  -Evaluate capital structure
  -Evaluate exposure to Risk
  -The Ability to meet LT obligations (solvency)
  -Ability to predict future cash flows.
• Ability to distribute dividends.

Question 24

What is treasury stock?

Answer 24

A contra-equity account of shares repurchased by the company.

Question 25

What are Accumulated Other Comprehensive Income Items?

Answer 25

These are items not reported on the income statement

Question 26

What is retained earnings?

Answer 26

Net income from the IS that is closed out to this balance sheet account at the end of the year. This amount can be distributed as dividends.

Question 27

What is additional paid-in-capital?

Answer 27

The excess of amount above par value for shares

Question 28

What is capital stock?

Answer 28

The par or stated value of shares.

Question 29

What is the formula for calculating equity?

Answer 29

Assets - Liabilties = Equity

Question 30

What are the limitations of the income statement?

Answer 30

• Many estimates affect companies performance.
  -NI is an estimate that reflects many assumptions.
• Income #’s are affected by accounting methods used - eg depreciation
• Income measurement requires judgement.
  -Items that can’t be reliably measured are not reported. E.g brand recognition, customer service etc.
  -Some transactions are not reported on the income statement immediately.