CRC Flashcards
. Which of the following are characteristics of the allowance method of accounting for bad debts?
I. Probable losses are estimated periodically
II. Write-offs are expensed when losses actually occur
III. Periodic contributions to a bad debt allowance are made
IV. Write-offs reduce only the gross receivables on the balance sheet
c. I & III
All of the following factors impair the quality of an asset as a potential source of loan repayment EXCEPT:
Low historical cost basis of the asset from using accelerated depreciation
All of the following are methods of accounting for inventory EXCEPT:
Net realizable value
Which of the following entities is responsible for paying taxes directly to the IRS?
Regular corporation
Under SFAS 115 marketable securities may be classified in all of the following ways on a financial statement EXCEPT:
Investment securities
When interpreting the authenticity of a manufacturer’s cost of goods sold, all of the following are critical to the analysis EXCEPT:
a. The trend of cost of goods sold in relation to sales
b. The method of accounting used for depreciation
c. The timeliness of payments for raw materials
d. The accuracy of beginning and ending inventory values
In a time of moderate inflation, which inventory accounting method would lead to the highest level of reported profit?
FIFO
A company that collects payment in advance of delivering goods or performing services will report which of the following on its financial statements?
A liability titled “deferred revenues” that decreases as goods are delivered or services are performed
Which of the following circumstances would NOT be treated as a contingency?
A company signs a non-cancelable lease on a fleet of delivery trucks
When recording “Available for sale” securities, which of the following is NOT a requirement?
The securities are designated for sale in the short term
All of the following are common characteristics of subordinated loans EXCEPT:
a. A two-part agreement between lenders to a company gives one lender payment preference over the other
b. The subordinated lender agrees to deferral of all principal payments until the senior lender has been fully repaid
??
All of the following forms of organization expose their owners to personal liability for the business’s obligations EXCEPT:
Proprietorship
When evaluating a company’s current assets, which of the following are expected to convert to cash during the operating cycle? I. Accounts receivable II. Inventory III. Prepaid expenses IV. Deferred tax assets
I & II
Deferred tax assets can arise from which of the following circumstances?
I. The company had prior losses on its tax returns
II. The company uses differing methods of reporting depreciation on its financial statements and its tax returns
III. The company recognizes an expense on its financial statements before it can be recognized on its tax returns
IV. The company reports lower income on its tax return than on its financial statement
I & III
All of the following events will affect the level of retained earnings in a business EXCEPT:
a. The business earns profits
b. The business loses money
c. The business sells stock
d. The business pays dividends
c. The business sells stock
- Which of the following circumstances might lead to concern about the authenticity of a company’s revenues?
I. The company records revenue when a complete order is shipped
II. The company provides a six-month warranty on parts and labor for products sold
III. The company places goods on consignment with a retailer for sale
IV. The company sells raw materials to a wholly owned subsidiary.
a. I & III
b. II & IV
c. I, II & III
d. II, III & IV
D ?
All of the following expenses may properly be capitalized EXCEPT:
a. Construction of a headquarters
b. Cost of developing a new product
c. Purchase of inventory
d. Purchase of a multi-year insurance policy
c. Purchase of inventory
When evaluating a company’s existing liabilities, which of the following is LEAST important to a lender’s analysis?
Interest rate a competitor bank would be willing to offer
Which of the following characteristics explains why a record company’s copyrighted music has more value as a repayment source than its other intangible asset, which is goodwill?
I. Copyrighted music is not subject to impairment tests
II. Copyrighted music is a separable asset
III. The music could be licensed outside the company
IV. The music has significant in-use value
II, III & IV
II. Copyrighted music is a separable asset
III. The music could be licensed outside the company
IV. The music has significant in-use value
When assessing the sustainability of a company’s revenues, which of the following areas should be considered?
I. The composition of sales by type of product or service
II. The company’s share of the total market for its goods or services
III. Change in prices charged relative to the rate of inflation
IV. Growth in operating costs required to support sales
a. I & IV
b. I, II & III
c. II, III & IV
d. I, II, III & IV
D ?
Which of the following reasons for sales growth would be LEAST desirable when assessing the sustainability of a company’s revenues?
a. The company has added some features to its product that have allowed for a price increase.
b. A reconfigured production process has led to increased unit production.
c. The company has extended its payment terms from 30 to 45 days.
d. The company produces a component that is a required part in another company’s latest successful product offering.
a. The company has added some features to its product that have allowed for a price increase.
b. A reconfigured production process has led to increased unit production.
c. The company has extended its payment terms from 30 to 45 days.
d. The company produces a component that is a required part in another company’s latest successful product offering.
A lease must be accounted for as a capital lease if which of the following tests are met?
I. The lessee may purchase the asset for a nominal amount at the end of the lease term
II. The term of the lease equals 75% or more of the leased asset’s estimated useful life
III. The lessee is required to pay for any repairs to the leased asset
IV. The present value of lease payments is at least 90% of the asset’s fair market value
I, II & IV
I. The lessee may purchase the asset for a nominal amount at the end of the lease term
II. The term of the lease equals 75% or more of the leased asset’s estimated useful life
IV. The present value of lease payments is at least 90% of the asset’s fair market value
Cavendish Computers is a distributor of computers and accessories to corporate accounts. Based on the changing needs of its customers, products are frequently returned before payment is received. The company has a permanent working capital facility with Your Bank. The advance rates on the line are 80% on A/R and 50% on inventory. Which of the following is most likely to occur if the revolver remains fully drawn?
The company may not be able to repay the bank
New Vision Manufacturing produces commercial kitchen ware. The company’s adjusted working capital to sales ratio has increased from 15% to 24% over the last 3 years. Which of the following is most likely the cause of the change in the ratio?
Increase in accounts receivable days
3) Customer 1-30 days 31-60 days 61+ days Total
A 1,500,000 50,000 10,000 1,560,000
B 300,000 25,000 40,000 365,000
C 500,000 150,000 50,000 700,000
D 100,000 8,600 0 108,600
E 87,800 300,000 0 387,800
Total 2,487,800 533,600 100,000 3,121,400
The above table represents the A/R aging for Bayfield Medical Supplies, a distributor of medical supplies to hospitals and physicians. The company has a $52MM line of credit with Your Bank. Draws on the line are calculated as follows: Advance rate: 50% of eligible A/R, Ineligible accounts: 61+ days of invoice, 10% cross age (if 10% of a customer’s accounts is 61+ days, the entire receivable is ineligible). Based on the above information, which of the following represents the maximum amount of money this company may borrow from Your Bank?
a. $1,461,400
Sabre Manufacturing produces sheet components used in the production of washing machines and dryers. Revenues are $72MM. The following are highlights from the company’s balance sheet (in 000’s). Cash 400 Short Term Debt 1,000 Accts Rec 5,000 CMLTD 250 Inventory 7,000 Accts Payable 4,000 Other C/A 100 Accrued Expenses 2,000 Current Assets 12,500 Current Liabilities 7,250
Which of the following is the company’s adjusted working capital to sales ratio?
8.47%
Sabre Manufacturing produces sheet components used in the production of washing machines and dryers. Revenues are $72MM. The following are highlights from the company’s balance sheet (in 000’s).
Cash 400 Short Term Debt 1,000
Accts Rec 5,000 CMLTD 250
Inventory 7,000 Accts Payable 4,000
Other C/A 100 Accrued Expenses 2,000
Current Assets 12,500 Current Liabilities 7,250
5) Which of the following is the company’s adjusted working capital?
6,100
Clearview Contacts, a distributor of contact lenses to optometric practices, is requesting a line of credit to support growing accounts receivable and inventory. Which of the following is the most appropriate facility?
Revolving line of credit with a borrowing base formula
Pro Paving is an asphalt contractor specializing in driveways and parking lots. The company has a $1MM line of credit with the bank. In June, the company purchased $750M piece of equipment with cash. At FYE December, the company found it could not retire the line of credit in full as it had done historically. Which of the following is the most likely reason the company couldn’t clean up its line?
Cash from the line of credit was used to finance the equipment purchase.
Pawley’s Hammocks is a rope, hammocks and outdoor chair manufacturer and is owned by Jeff Tybor. The company has revenues of $3MM. Pawley’s has requested a seasonal line of credit from your bank. If the purpose of the loan is to finance the seasonal assets of the company, which of the following is the banks’ PSR?
Conversion of trading assets
Pawley’s Hammocks is a rope, hammocks and outdoor chair manufacturer and is owned by Jeff Tybor. The company has revenues of $3MM. Pawley’s has requested a seasonal line of credit from your bank. Which of the following forms of support will you most likely require?
An unlimited personal guarantee from the owner
Ski Valley is a ski resort in the northeast. The company is requesting a line of credit from Your Bank to finance its working capital needs. Which of the following is the greatest risk of repayment?
The occurrence of the season
Ski Valley is a ski resort in the northeast. The company is requesting a line of credit from Your Bank to finance its working capital needs. Which of the following is the most important financial document needed to structure the loan?
Monthly cash budget
Clare’s Costumes is the manuf. of costumes, primarily used for Halloween and theatre. The company’s working capital cycle is highly seasonal with 75% of the revenues occuring during Sept to Nov. Your bank is preparing reporting covenants for the company’s seasonal line of credit. Which of the following is the appropriate frequency for the loan covenant monitoring?
Quarterly.
What is UCA?
Uniform Credit Analysis
Income Stmt sources/uses compared to B/S sources/uses. Match to the change in cash
What is accrual accounting?
Accrual - recognizes revenue earned and expenses incurred with accural adjustments regardless of CASH.
C/F should be calculated from accrual based f/s in order to measure actual sources and uses of funds.
Sources: \+ Revenue \+ Decrease in Asset \+ Increase in Liabilities \+ Increase in NW
Uses:
- Expenses
- Increase in assets
- Decrease in Liabilities
- Decrease in NW
What are the 4 steps to convert C/F?
1) Delete all non-cash entries from I/S
2) Modify all I/S accounts by YOY changes and related B/S items
3) Include spending not present in I/S (ie. CAPEX, Principal payments, Dividends)
4) Seperate internal and external sources of cash
What are the 3 categories of C/F?
1) Operating
2) Investing
3) Financing
Which statements do you need to determine C/F?
1) The Income Statement
2) The beginning and ending Balance Sheets for a period.
Cash repays debt.
Which type of method of c/f analysis would a short term lender usually prefer?
Short term lender = Direct Method
Long term lender = Indirect Method (though LT lenders usually prefer the direct method)
SFAS 95 allows either method. The primary purpose is to provide managers, investors, lenders and other interested parties with additional info regarding the health of the company.
What are the 2 types of CAPEX?
How is CAPEX calculated?
1) Maintenance (needs)
2) Discretionary (wants)
To calculate CAPEX: Look at the change in Gross Fixed Assets Y-O-Y OR add annual depreciation to the change in Net Fixed Assets from one year to the next.
What are the characteristics of Direct Cash Flow?
Direct C/F is known as the “top down” approach.
1) Starts with the ‘top line’ of the Income Statement (Net Sales)
2) Methodically adjusts the corresponding B/S accounts (“buddy accounts”) to highligh which changes in W/C assets are affecting the c/f generated from operations.
3) Breaks out Interest Expense
4) Breaks out CPLTD
5) Does Not include Net Income (it is buried within) (as a result, it is harder to determine the sustainable profitability and long-term debt service capacity of the customer).
What are the characteristics of Indirect Cash Flow?
Indirect C/F is known as the “Bottom up” approach.
1) Starts with the ‘Bottom’ line on the Income Statement (Net Income)
2) Interest Expenses is already included in N/I. (It’s hard to determine how comfortably a co can pay its Interest Expense).
3) Combines CPLTD with other changes in long-term debt to arrive a a “net” number for an increase or decrease in long-term debt. (Not easily determined how maturing LTD has been financed, either from new LTD or from operating C/F).
What are the 4 questions to ask regarding C/F and SFAS 95?
1) Is C/F Operations sufficient to pay Interest on all debt?
2) Is C/F Operation sufficient to repay scheduled maturities of LTD?
3) What are the co’s financing requirements after CAPEX & other LT investments?
4) How has the co financed its activities? ie. through additional debt or equity, or draw-down of cash balances?
What is Net Cash After Operations (NCAO) tell you?
Amount available under Direct C/F Statement to service Interest on Bank Debt and Dividends
Which C/F method is generally provided in the auditor’s financial reports and is self-explanatory?
Indirect C/F Method (RMA preferred)
Define Cash from Sales.
That portion of the present year’s sales collected in the present year, plus any amounts from the previous years’ sales collected during the present year.
Define Cash after Debt Amortization (CADA)
Computed by subtracting CPLTD o/s at the end of the previous year from net cash income. A positive # could mean that the co has been able to generate sufficient cash from its internal operations to meet all of its current obligations including interest & principal payments. A negative # could mean a co has to use external sources to repay debt or purchase CAPEX.
Define Financing Surplus or Requirements
Computed by subtracting fixed-asset purchases and expenditures for LT investments from CADA. This measures either the magnitude of external financing needed or the cash generated in excess of all needs of the business.
Define Net Cash Income
Computed by deducting financing costs (interest, dividends or withdrawals) from NCAO.
What is the purpose of analyzing cash flows?
1) to adjust revenues and expenses based on changes in their ‘buddy accounts’ on the B/S to determine their effect on cash flow
2) to eliminate non-cash expenses, such as deprec. and amort. from operating activities in determining c/f operations
3) to combine deprec. and amort. with changes in non-current assets and analyze effect on investing activities
4) to analyze changes in short & long-term debt and paid-in equity to determine their effect on financing activities.
Cash flow quality depends on the source and repeatability of the c/f. Important sources include:
1) those that are sustainable and reasonably predictable over 3-5 years
2) those that increase your margin of protection and indicate your customer’s economic viability.
What are 3 Desirable Sources of Cash Flow (in order - most to least)?
1) Most - authentic and repeatable revenues and related non-cash expenses
2) OK - improvements in asset efficiency and proceeds of additional equity
3) Least - Additional debt or sale of assets
To analyze the demands of c/f, you should consider what?
1) Look at the c/f stmt and identify negative flows w/in each category
2) consider whether each negative c/f is a one-time, irregular event or will be recurring
3) consider if the amount of neg c/f was typical or it is unusually low or high
4) was the negative c/f within the control of mgmt?
5) compare historical demands with historical sources and expected future demands with expected future sources.
