CMA Part 1 Flashcards
Finanacial Statements
Are balance sheet accounts temporary or perminent? What does this mean?
They are perminent. The accounts are never closed out at the end of a period, unlike income statement item
What is solvency in terms of the balance sheet?
The ability of the company to pay LT debts when they come due.
What is financial flexibility in terms of the balance sheet?
The ability to redistribute funds/assets to respond to events.
What is liquidity?
The ability to turn assets into cash quickly.
- Greater liquidity the less the risk of failure.
What are 4 uses of the Balance Sheet?
1 - Liquidity
2 - Financial Flexibility
3 - Solvency
4 - Risk
What is the Balance Sheet?
Provides information about a companies financials at a point in time.
- Assets, liabilities, equity
What are the 4 pieces an item must meet to be recognized on financial statements?
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.
What are the 4 main financial statements in US GAAP?
1- Balance Sheet
2- Income Statement
3 - Statement of Cash Flows
4 - Statement of Stockholders Equity
What do external users of FS use them for?
To make decisons from outside company regarding whether to begin relationship, lend money, invest, etc.
What do internal users of financial statements use them for?
To make decisions regarding operation of the company.
What are indirect users of financial statements? Who are they?
People who represent direct users.
-Financial analysts, stock markets, regulatory bodies.
What are direct users of financial statements? Who are they?
Directly affected by results of the company, stand to lose/gain money.
- Investors, employees, management, suppliers, creditors.
What is GAAP?
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.
What are the benefits of the income statement?
- Evaluates the companies performance
-Compares performance to other companies.
-Can predict future performance
-Assess the risk or uncertainty of future cash flows
What are unusual gains and losses on the income statement?
Gains/losses of unusual nature such as loss of inventory from a fire.
What is IFRS?
International Financial Standards Board
- Used in many countries
- Principals based, but objective is to be open and flexible in interpretation to companies and auditors.
What is the objective of reporting on financial statements?
To provide financial information about a company that is useful for making decisions.
What are gains and losses on the income statement?
They are increases and decreses in equity other than those from revenues/expenses and/or investments and disributions to owners.
What are revenues and expenses on the income statement?
From producing goods/services of core activities.
What does the income statement report?
The companies perfomance in the period.
What is the comprehensive income statement?
Income from all sources other than investments and distributions to owners.
Comprehensive Income statement is just the Income statement and Other Comprehensive Income.
What are 4 limitations of the BS?
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.
What are the benefits of the balance sheet?
- 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.
What is treasury stock?
A contra-equity account of shares repurchased by the company.
What are Accumulated Other Comprehensive Income Items?
These are items not reported on the income statement
What is retained earnings?
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.
What is additional paid-in-capital?
The excess of amount above par value for shares
What is capital stock?
The par or stated value of shares.
What is the formula for calculating equity?
Assets - Liabilties = Equity
What are the limitations of the income statement?
- 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.
