Deck 1

Question 1

What is current ratio?

Answer 1

Current assets divide by current liabilities
Reflect ability pay debt and generate profits near future

any current ratio below 1.00 to 1.00 signals that the company’s current liabilities exceed its current assets

Question 2

What is working capital?

Answer 2

current assets – current liabilities

Reflect ability pay debt and generate profits near future

Question 3

How to calculate age of receivables ?

Answer 3

age of receivables = receivables/sales per day

Question 4

Why is age of receivables important ?

Answer 4

indication of a company’s financial health is its ability to collect receivables in a timely
fashion.
Money cannot be put to productive use until it is received.
For that reason, companies work to encourage payments being made as quickly as possible.
The older a receivable becomes, the more likely it is to prove worthless.

Question 5

What is receivable turnover ?

Answer 5

sales/average receivables.

The higher the receivable turnover, the faster collections are being received.

Question 6

What are net receivables?

Answer 6

Net receivables are the total money owed to a company by its customers minus the money owed that will likely never be paid. … For example, if a company estimates that 2% of its sales are never going to be paid, net receivables equal 98% (100% - 2%) of the accounts receivable (AR

Question 7

Why are net receivables important?

Answer 7

tells a lot same industry - competitive advantage

Lower % net receivables to gross sales compared competitors some kind competitive advantage

Question 8

What is liquidation value?

Answer 8

Liquidation value = cash - total liabilities plus 75 percent AR plus 50 percent inventory

Question 9

When might increase in current liabilities be good?

Answer 9

conserve company assets and contribute cash flow

Question 10

What does high cash total mean?

Answer 10

The company has competitive advantage generating lots of cash
2) Just sold a business or bonds (not necessarily good)
A low stockpile of cash usually means poor to mediocre economics.

Question 11

What are 3 ways to create large cash reserve ?

Answer 11

1) Sell new bonds or equity to public
2) Sell business or asset
3) It has an ongoing business generating more cash than it burns (usually means durable competitive advantage)

Question 12

How can you test what created cash?

Answer 12

Look at 7 years of balance sheet?

Question 13

How does cash help tough economic times?

Answer 13

When a company is suffering a short term problem, Buffett looks at cash or marketable securities to see whether it has the financial strength to ride it out. Important: Lots of cash and marketable securities + little debt = good chance that the business will sail on through tough times.

Question 14

Regarding equipment financing and capital financing what indicates durable competitive moat?

Answer 14

company with durable competitive advantage doesn’t need to constantly upgrade its equipment to stay competitive.

The company replaces when it wears out.

On the other hand, a company without any advantages must replace to keep pace.

Difference between a company with a moat and one without is that the company with the competitive advantage finances new equipment through internal cash flows, whereas the no advantage company requires debt to finance.

Producing a consistent product that doesn’t change equates to consistent profits. There is no need to upgrade plants which frees up cash for other ventures. Think Coca Cola, Johnson & Johnson etc.

Question 15

Which t accounts where debits reflect an increase and credits a decrease?

Answer 15

Expenses and losses
Assets
Dividends paid

Question 16

Which t accounts credits reflect an increase and debits a decrease?

Answer 16

Liabilities
Capital stock
Revenues and gains
Retained earnings

Question 17

How many collateral securities required with retained earnings under 1 million?

Answer 17

Personal guarantee

GSA - assets business

Question 18

What debt servicing preferred ?

Answer 18

1.25 EBITA vs 1.00 interest bearing debt

Question 19

What are advantages corporation?

Answer 19

Absolve personal liability

ease by which capital stock can usually be exchanged.

Investors frequently buy or sell such shares on stock exchanges in a matter of moments.

Question 20

What are advantages of sole proprietorship or partnership?

Answer 20

Easy to create

income tax benefits

Question 21

What is material misstatement ?

Answer 21

misstatement is an error (made accidentally) or fraud (done intentionally) where reported figures or words actually differ from the underlying reality.

misstatement is judged to be material if it is so significant that its presence would impact a decision made by an interested party.

Question 22

What is risk of 2 many notes?

Answer 22

worry when there are too many pages of notes. I prefer companies that don’t need so many pages to explain what is happening. I like companies that are able to keep their operations simple.

Question 23

what other vital signs might be studied specifically in connection with a company’s receivable balance?

Answer 23

ability to collect receivables in a timely fashion.
Money cannot be put to productive use until it is received.
older a receivable becomes, the more likely it is to prove worthless.

Question 24

If company officials notice that the average age of accounts receivable is getting older,
what type of remedial actions can be taken?

Answer 24

Require a tighter review of credit worthiness before selling to a customer on credit.

Work to make the company’s own accounting system more efficient so that bills (sales invoices) are sent to customers in a timely manner

Offer a discount if a customer pays quickly.

Send out second bills more quickly.

more aggressive collection policy

Question 25

When you are studying a company’s accounts receivable, what types of information tend to catch your attention?

Answer 25

First, how long does it take for the company to collect its
accounts receivable especially compared to previous periods
radical changes have some logical explanation.

Second, how lenient is the company in offering credit?
Are they owed money by weak customers or a small concentration of customers?

Third, does the company
depend on interest income and late charges on their accounts receivable for a significant part of their revenue? Some companies claim to be in business to sell products but they are really finance companies because they make their actual profits from finance charges that are added to the accounts receivable.

Question 26

What vital signs should be determined in connection with inventory when examining the financial health and prospects of a company?

Answer 26

Gross profit percentage.

number of days inventory is held

inventory turnover

Question 27

What is gross profit percentage?

Answer 27

dividing the gross profit for the period by net sales

sales – sales returns and discounts = net sales

net sales – cost of goods sold = gross profit

gross profit/net sales = gross profit percentage

Not correlated net income

Question 28

What are possible reasons for gross profit to fall?

Answer 28

costs rising more quickly than the sales price of the merchandise?

change occurred in the types of inventory being sold?

reduction in the gross profit offset by an increase in sales?

Question 29

Why do companies want to Companies want to turn their merchandise into cash as quickly as possible?

Answer 29

goods could get damaged, stolen, or go out of fashion. Such losses can be avoided through quick sales.

as long as merchandise is sitting on the shelves, it is not earning any profit for the company.

Question 30

How is number of days inventory is held is found?

Answer 30

two steps.

cost of goods sold/365 days = cost of inventory sold per day

Then, this daily cost figure is divided into the average amount of inventory held during the period.

average inventory/cost of inventory sold per day = number of days inventory is held

Question 31

What is inventory turnover?

Answer 31

cost of goods sold/average inventory = inventory turnover

The larger the turnover number, the faster inventory is selling.

Question 32

If analyzing two similar companies and discover that one has applied FIFO while the other uses LIFO?

Answer 32

Long run - more interested in how they are investing their cash inflows and the quality of
the management

Short run - company use FIFO as reported profits will be higher for the short term if there is inflation and may believe that he can capitalize on that short-term phenomenon

Question 33

What does comparison of market capitalization and book value tell?

Answer 33

Divergence historical value and fair value

Question 34

What is fixed asset turnover ?

Answer 34

indicates the efficiency by which a company uses its property and equipment to generate sales revenues.

company has large amounts reported for various fixed assets but fails to create high revenue balances, the ability of management to make good use of those assets has to be questioned.

= net sales for a period / average net book value property and equipment (fixed asset

Question 35

What are risks of how goodwill value?

Answer 35

subjective
credible information.?
cannot borrow against it.

Question 36

What are the most common reasons for one company to buy the ownership shares of another company?

Answer 36

market price of these shares will appreciate in value and/or dividends will be received before the money is needed for operations.

gain some degree of
influence over the other organization. Eg) move into new industries or geographical areas, become bigger players in their current markets, gain access to valuable assets, or simply eliminate competitors

Question 37

What 2 ratios measure management efficiency in using resources?

Answer 37

Total asset turnover and

Return on assets

Question 38

What is total asset turnover?

Answer 38

management’s efficiency at generating sales. Sales must occur before profits can be earned from normal operations.
If assets are not well used to create sales, profits will probably never arise.

total asset turnover = sales revenue/average total assets

Question 39

What is return on assets ?

Answer 39

Return on assets.

Probably one of the most commonly used vital signs employed in studying the financial health of a company is return on assets, often known as ROA. It is simply net income divided by average total assets and is viewed by many as an appropriate means of measuring management’s efficiency in using company resources.

return on assets (ROA) = net income/average total assets

Some analysts modify the income figure in this computation by removing interest expense to eliminate the impact of different financing strategies.

Question 40

If comprehensive income is a lot different than net income and if this is result of foreign currency changes what questions come to mind?

Answer 40

How much of the difference comes from currency rate changes, and is there a way
to hedge this volatility to reduce the impact? If there is a way to hedge the risk, why did company officials
not do so?

Question 41

Why is information describing liabilities, especially the size and composition of current liabilities, considered so important when assessing the financial position and economic health of a business?

Answer 41

Liabilities represent claims to assets. Debts must be paid as they come due or the entity risks damaging its future ability to obtain credit or even the possibility of bankruptcy. To stay viable, organizations need to be able to generate sufficient cash on an ongoing basis to meet all obligations. Virtually no other goal can be more important

higher a liability total is in comparison to the reported amount of assets, the riskier the
financial position.

Sufficient cash has to be available quickly, often within weeks or months.

Question 42

Why are liabilities closely scrutinized?

Answer 42

inclusion of debts tends to make a company look riskier to
creditors and investors. Thus, the danger that officials will report an excessive amount of liabilities seems slight. Balance sheets look better to decision makers if fewer obligations are present to drain off
resources.

Question 43

Besides current ratio and working capital what other ratios regarding current liabilities can be looked at?

Answer 43

Age of accounts
cost of goods sold = beginning inventory + purchases – ending inventory,

purchases = cost of goods sold – beginning inventory + ending inventory.

purchases/365 = average purchases per day

accounts payable/average purchases per day = average age of accounts payable

compare it to previous time periods, the typical payment terms for a business in that industry, and comparable figures from other similar corporations.

Question 44

What decision making questions can be asked about current liabilities?

Answer 44

terms of the current liabilities as well as the age of those liabilities.

is the company current with its payments to vendors? Does the company have a significant amount of current liabilities
but only a small amount of current assets? Or, stated more directly, can these liabilities be paid on time?

Have current liabilities been growing while business has remained flat or grown much more slowly?

Are any of the current liabilities to organizations controlled by corporate insiders?

suspicious - I want more information.

balance sheets where there are
no potential conflicts of interest and the company is a reasonably fast payer of its debt

Question 45

What questions ask about noncurrent liabilities?

Answer 45

Is any of the debt convertible so that it could potentially dilute everyone’s ownership in the company? Is the company paying a high stated rate of interest? Why was the debt issued? In other words, how did the company use the money it received?

If the debt was issued at a low interest rate in order to make a smart acquisition, I am impressed. If the debt has a high interest rate and the money was not well used, that is not attractive to me at all.

Question 46

What is debt to equity ratio?

Answer 46

total liabilities reported by a company divided by total stockholders’ equity.

The resulting number indicates whether the company gets most of its assets from borrowing and other debt or from its opérations and owners.

A high debt-to-equity ratio indicates that a company is highly leveraged.

As that raises the level of risk but also increases the possible profits earned by stockholders. Relying on debt financing makes a company more vulnerable to bankruptcy and other financial problems but also provides owners with the chance for higher financial reward

Question 47

What is times interest ratio?

Answer 47

Normally, debt only becomes a risk if interest cannot be paid
when due. This calculation helps measure how easily a company has been able to meet its interest obligations through current operations.

Times interest earned begins with the company’s net income before both interest expense and income taxes are removed (a number commonly referred to as EBIT). Interest expense for the period is then divided into this income figure.

Question 48

What is risk of off balance sheet reporting?

Answer 48

Can be misleading

Prefer full disclosure

Question 49

What is more important than EPS?

Answer 49

Overemphasis - asset values, growth prospects, and

what a company does with the cash it is able to generate.

Question 50

What should you be cautious about with EBITA?

Answer 50

like blending net income and cash flows.

interest and taxes arereal cash expenses so why exclude them?

Earnings are earnings and that is important information.

A lot of analysts now believe that different cash flow models should be constructed for different industries. If you look around, you can find cable industry cash flow models, theater cash flow models, entertainment industry cash flow models, and the like. I think that is a lot of nonsense. You have to obtain a whole picture to know if an investment is worthwhile. While cash generation is important in creating that picture so are actual earnings and a whole lot of other financial
information.