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Financial Statements > Final Exam > Flashcards

Final Exam Flashcards

1
Q

Flow Ratio

A

(current assets-cash)/(current liabilities-short term debt)

Flow ratio of 1.0 means company can finance all of its non-cash current assets without any extra cash investment

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2
Q

Altman Z-score

A

bankruptcy prediction ratio
Z =1.2(Working Capital/Total Assets)+1.4(Retained Earnings/Total Assets)+3.3(EBIT/Total Assets)+0.6(Market Value of Equity/Book Value of Total Liabilities)+0.999(Sales/Total Assets
Z-score2.90 nonbankruptcy

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3
Q

Short Term Liquidity

A

necessary to not go out of business

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4
Q

Current Ratio

A

current assets/current liabilities (2:1 good benchmark, but should vary by industry)

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5
Q

Drawbacks of Current Ratio

A

assumes the current asset will always give us cash
A/R: if money is tied up with a couple of people, we won’t receive those
Inventory: assuming we turnover all the inventory and assume it will be sold at book value, not market value
Anything prepaid: won’t give us cash back ever
Supplies: won’t be sold unless the firm is liquidating assets

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6
Q

Quick Ratio

A

(Cash+cash equivalents+marketable securities+A/R)/Current liabilities
1:1 is good, but Giacomino doesn’t like it

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7
Q

Day’s Sales in Receivables

A

A/R/(Sales/360)
Want to be lower than competition
Tells us the average number of days it takes to collect receivables
Reasons for lower number: sales incentives, late fees, credit terms, collection

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8
Q

Inventory Turnover

A

COGS/Average Inventory

Want this to be as high as possible

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9
Q

Number of Days in Inventory

A

want this to be as low as possible

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10
Q

Reasons for Inventory Turnover to be High and Days in Inventory to be Low

A

better advertising
how much inventory a company holds at one time
inventory methods (LIFO, Weighted Average, FIFO)

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11
Q

Days Purchases in A/R

A

want this to be as long as possible without incurring interest

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12
Q

ROA

A

measures operating efficiency/performance. Reflects return from all financing
RNOA=NOPAT/NOA
5% is a good benchmark
10% for RNOA

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13
Q

ROE

A

uses the book value of stockholder equity

10% good benchmark

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14
Q

ROCE

A

return on common equity
If ROCE is higher than ROA, it reflects favorable impacts of leverage
Net income-pref. dividends/(beg. equity + end equity)/2

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15
Q

LT Solvency

A

ability to cover long-term obligations

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16
Q

Financial Leverage

A

ROE/ROA

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17
Q

Sufficiency

A

used to describe the adequacy of cash flows for meeting a company’s needs

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18
Q

Efficiency

A

how well a company generates cash flows relative to other periods or companies

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19
Q

Cash Flow Adequacy

A

sufficiency ratio
measures a company’s ability to generate sufficient cash to pay debts, reinvest in operations and make distributions. Want value over 1
Cash from operations/(long term debt paid+purchases of assets+dividends paid)

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20
Q

Cash Flow to Sales

A

shows the percentage of each sales dollar realized as cash from operations
approximate return on sales (lower for companies with a smaller margin)
Cash from operations/Sales

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21
Q

Operations Index

A

compares cash from operations to income from continuing operations (larger for companies with more plant and equipment)
Cash from Operations/Income from Continuing Operations

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22
Q

Cash Flow Return on Assets

A

measures of the return on assets used to compare companies on the basis of cash generation (as opposed to income generation) from assets
Cash from Operations/Total Assets

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23
Q

Cash Flow Analysis

A

99% use the indirect method
Reasoning: more convenient and firms were already using something similar to it when they were told they needed to either direct or indirect

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24
Q

Cash Flow from Operating Activities

A

want to see it be higher than net income
should be positive
contributes to investing activities
look for major adjustments in net income from D&A, restructuring, impairment losses, goodwill write-downs, major changes in inventory, receivables and payables

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25
Q

Cash from Investing Activities

A

inflows show shrinkage in business, outflows show growth

PPE expenditures should exceed D&A

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26
Q

Cash from Financing Activities

A

outflows show shrinkage of debt/equity

Inflows show growth in financing

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27
Q

Life Cycle Chart

A

Inception: low NI, high Cash from Financing, low cash from operations, low FCF and low Cash from Investing
Growth: growing NI, declining CFF, growing CFO, growing FCF stable CFI
Maturity: topping out NI, topping out CFO, declining CFF, increasing FCF, increasing CFI
Decline: decreasing everything

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28
Q

3 Issues with Presenting Derivatives on Financial Statements

A

Identifying instruments that qualify as derivatives
The disclosure risk of loss
How to value derivatives

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29
Q

Three Classifications of Debt

A

Held-to-maturity
Trading
Available-for-sale

30
Q

Held-to-Maturity

A

securities acquired with both the intent and ability to hold to maturity. All unrealized gains and losses are not recognized in either net income or comprehensive income

31
Q

Trading

A

securities acquired for short-term or trading gains. All unrealized gains and losses are recognized in net income

32
Q

Available-for-Sale

A

securities neither held for trading nor being held-to-maturity

33
Q

Purchasing Bonds Journal Entries (Investment in $100,000, 10yr, 5% bonds)

A 
7/1/15
(dr.)Investment in Bonds 104,000
(cr.) Cash 104,000
12/31/15
(dr.) Cash 2,500
(cr.) Interest revenue 2,300
(cr.) Interest in bonds 200
34
Q

Market Value Stock Example

A 
7/1/15
(dr.) Investment in Stock 3,000
(cr.) Cash 3,000
12/31/15
(dr.) Investment in Stock 3,000
(cr.) Appreciation 3,000
35
Q

Equity Strategy Stock Example

A 
7/1/15 (25% ownership)
(dr.) Investment in Stock 1,500,000
(cr.) Cash 1,500,000
12/31/15 (company income=600,000 Div.=300,000
(dr.) Investment in Stock 150,000
(cr.) Investment Income 150,000
(dr.) Cash 75,000
(cr.) Investment in Company 75,000
36
Q

WorldCom

A

Wall Street praise as a “fast-growth” company (only achievable by external acquisition)
Stop acquiring, growth slows

37
Q

Bernie Ebbers’ Strategy (WorldCom)

A

positive impact on EPS, acquire the company
Lowers EPS, don’t acquire the company
Operating expenses would be treated as a capital asset of the company

38
Q

Line Cost Reserves (WorldCom)

A

company drew down “rainy day” reserves to make the company appear more profitable

39
Q

Restatement of WorldCom Earnings

A

Involved over 1,500 people and required over 3,000,000 accounting entries

40
Q

Role of Analysts in Building the Stock Market Bubble

A

dot.com bubble

Wall Street under scrutiny for recommending stock prices beyond what their fundamentals support

41
Q

Jack Grubman (Salomon)

A

hyped telecom stocks (AT&T)

Cynthia Cooper said he was tight with Ebbers and Sullivan (WorldCom) and was WorldCom’s biggest fan on Wall Street

42
Q

Quid Pro Quo (Grubman and Citigroup)

A

Grubman asked Sandy Weil for help with 92nd Street School and he said fresh look at AT&T was going well
Citigroup pledged to donate $1 MM over 5 years to the preschool and Jack upgraded AT&T’s rating

43
Q

Solyndra

A

solar panel company who filed for bankruptcy in 2011
back and forth across the political aisle
Silicon prices declining killed their business

44
Q

CFO’s with Big Signatures

A

there exists a correlation between the size of a CFO’s signature and more aggressive accounting and weaker internal controls

45
Q

Financial Leverage Index

A

FLI=ROE/ROA

FLI>1, positive for shareholders

46
Q

Shiller P/E Ratio

A

Price per Share/EPS(historical)

47
Q

Solvency

A

Debt/Total Assets

48
Q

Investment Grade

A

Above BBB/Baa

49
Q

Weiss Report

A

Claimed their results helped predict bankruptcy in companies
Problems: simple statistic sampling, small numbers of companies, all went bankrupt, only had clean opinion, need larger sample size of companies

50
Q

5 Reasons Why the Stock Rally has Stalled in 2016

A 
Stocks had a big run in the last 7 weeks
Profit outlook is bleak
Stock market isn't cheap
Interest rate policy remains a wildcard
Political Risk is elevated
51
Q

Why do we rarely see sell ratings?

A

Most stocks trend up
Excellent fundamentals
Lack of Sell ratings makes it sound worse
Most investors are long-only
Most companies won’t talk to analysts who rate them sell

52
Q

Uline Backorder Rate

A

0.5%

53
Q

DSO and COW (Uline)

A

Day sales out and customers ordered wrong

54
Q

Dan Geigler

A

WTC when it was hit
Over 90% of a portfolio’s return is due to asset allocation
Fundamental analysis tells us what to buy, technical analysis tells us when to buy (point and figure charting)

55
Q

Market’s Natural Rotation (Geigler)

A

Small Cap Growth, Small Cap Value, Large Cap Value, Large Cap Growth (then restarts the cycle)

56
Q

Craig Schmutzer

A

Revenue for commercial banks=interest rates x quantity

Banking more stable than tech, but not as stable as many believe

57
Q

5 C’s of Credit Extention (Schmutzer)

A

Character (People)
Cash Flow - does hist. cash flow support pro-forma debt
Conditions - proper loan structure for underlying purpose of borrowing
Collateral - secondary source of loan repayment after cash from operations
Capital - balance sheet net worth

58
Q

No Influence Equity Holding

A

Less than 20% holding

59
Q

Significant Influence Holding

A

b/w 20-50% holding
Equity method requires investors initially to record investments at cost and later adjust the account for the investor’s proportionate share

60
Q

Controlling Interest

A

> 50% ownership

Holding company needs to prepare consolidated financial statements

61
Q

Fair Value Option

A

carrying value on balance sheet at fair value

All unrealized gains and losses included in net income

62
Q

Ethics vs. Morals

A

Ethics refer to rules provided by an external source (codes of conduct in workplaces or principles in religions)
Morals refer to an individual’s own principles regarding right and wrong

63
Q

Capital Structure

A

sources of financing and its economic attributes

64
Q

Working Capital

A

Excess of current assets over current liabilities

65
Q

Net Trade Cycle

A

days in A/R+days in inventories-days in A/P

66
Q

Times Interest Earned Ratio

A

Measures a company’s ability to cover its debt payments

(Income+tax expense+interest expense)/interest expense

67
Q

A/R Turnover

A

Net sales on Credit/Avg. A/R

68
Q

FCF

A

NI-Dividends-CapEx

69
Q

Financial Flexibility

A

the ability to take steps to counter unexpected interruptions in the flow of funds (qualitative)

70
Q

New Working Format for Presenting Financial Statements

A 
I. Statement of Financial Position, Statement of Comprehensive Income, Statement of Cash Flow
Business
     Operating Cash Flows
      Investing Cash FLows
Financing
      Financing Asset Cash Flows
      Financing Liability Cash Flows
Income Taxes
Disc Operations
71
Q

Cash Conversion Cycle

A

expresses the length of time, in days, that it takes for a company to convert resource inputs into cash flows

Financial Statements (2 decks)

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