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X Finance 3 > Finance Theory > Flashcards

Finance Theory Flashcards

1
Q

What does VAT mean?

A

Value Added Tax

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2
Q

Who receives the VAT in the end?

A

Governments

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3
Q

How do you see VAT on the balance sheet?

A
  • VAT Receivables

* VAT Payables

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4
Q

How do you see VAT on the income statement?

A

You do not

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5
Q

TRUE or FALSE

VAT is an expense for a company

A

False

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6
Q

TRUE or FALSE

All products have the same % of VAT on top of the sales price

A

FALSE

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7
Q

TRUE or FALSE

The inventory on the balance sheet is excluding VAT

A

TRUE

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8
Q

TRUE or FALSE

The trade payable account on the balance sheet is including VAT

A

TRUE

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9
Q

TRUE or FALSE

The account VAT payable on the balance sheet is a result of sales to customers

A

TRUE

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10
Q

VAT receivable is …

A

… an item on the asset side of the balance sheet. It shows the VAT that (needs to be) paid to a supplier which the compant can reclaim/receive from the government

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11
Q

VAT payable is…

A

an item on the liability side of the balance sheet. It shows the VAT that (needs to be) received from the customer whihc the company needs to pay to the government

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12
Q

What does inventory impact?

A

Directly impacts balance sheet and income statement, inventory (current asset on the balance sheet) and cost of goods sold (cost on the income statement)

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13
Q

Which two ways can you value inventory?

A
  • Current cost convention

* Historic cost convention

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14
Q

What is current cost convention?

A

By keeping track of all price changes (impractical, subjective)

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15
Q

What is historic cost convention?

A

By taking prices from the books, when purchased

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16
Q

What does FIFO mean?

A

First in First out

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17
Q

What does LIFO mean?

A

Last in First out

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18
Q

What does AVCO mean?

A

Average cost assumption

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19
Q

What does periodic mean?

A

For a whole period

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20
Q

What does perpetual mean?

A

Per sale made

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21
Q

FIFO or LIFO

Reflects replacement costs more accurately

A

FIFO

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22
Q

FIFO or LIFO

Not a good indicator of ending inventory value because goods are too old/obsolete

A

LIFO

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23
Q

FIFO or LIFO

In times of inflation lower profit and inventory valuation

A

LIFO

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24
Q

FIFO or LIFO

Allowed under both GAAP and IFRS

A

FIFO

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25
Q

FIFO or LIFO

In times of inflation higher profit and inventory valuation

A

FIFO

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26
Q

FIFO or LIFO

Not allowed under IFRS, allowed under GAAP

A

LIFO

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27
Q

Which two ratios are impacted by the inventory cost system chosen?

A
  • working capital

* current ratio

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28
Q

TRUE or FALSE

In the USA the use of LIFO is not allowed

A

FALSE

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29
Q

TRUE or FALSE

Historical cost is the most widely used cost convention

A

TRUE

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30
Q

TRUE or FALSE

Suppose two companies are identical but one uses LIFO and the other FIFO. The company using FIFO will have the higher market price per share

A

FALSE

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31
Q

What are the 3 ways of historical inventory costing?

A
  • FIFO
  • LIFO
  • AVCO
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32
Q

In times of increasing prices what will happen to the COGS when comparing FIFO and LIFO?

A

COGS will be lower using FIFO

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33
Q

Which inventory method represents current costing the most closely?

A

LIFO

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34
Q

What is a merger?

A

When two companies go together

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35
Q

What is an acquisition?

A

When one company takes over another company

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36
Q

What is a consolidated financial statement?

A

The financial statements of a group in which the assets, liabilities, equity, income, expenses and cash flows of the parent and its subsidiaries are presented as those of a single economic entity

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37
Q

What is Goodwill?

A

The difference between takeover price and book value, premium paid on top of the book value of the acquisition

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38
Q

What is Minority Interest?

A

The interest not owned by the parent company

39
Q

In which two ways can you acquire money as a company?

A
  • Equity (issue shares)

* Liability (get a loan)

40
Q

What is financial accounting?

A

Collecting & representing results of past period in the outside world

41
Q

What does limited liability mean?

A

That your private assets are protected

42
Q

What 3 things does the published annual report exist out of?

A
  • Financial report (core)
  • Report of executive board (public relations tool: all good things the company has done)
  • Additional Data (info on the division of profit)
43
Q

What is the agency theory?

A

Main feature of public companies: separation of ownership (principal) and management (agent)

44
Q

What is a stock option plan ?

A

allowing employees to own shares in the company. You will want the shares to go up which will keep management and employees motivated for the business to do well.

45
Q

What is the direct method for a cash flow statement?

A

Simple list of cash playments and receipts made during a year

46
Q

What is the indirect method for a cash flow statement?

A

Derive cash flow statement from balance sheet and income statement

47
Q

What does the principle ‘going concern’ mean?

A

Co. assumed to remain in operation unless evidence to contrary

48
Q

What does the principle ‘prudence’ mean?

A

Conservative view on profit, asset valuation and losses (cost hits in 1 year)

49
Q

What does the principle ‘realization’ mean?

A

Recognition of profit & losses on realization only

50
Q

What does the principle ‘matching’ mean?

A

Expenses presented in same period for resulting revenues made (costs are divided over the years in use, depreciation)

51
Q

What does the principle ‘consistency’ mean?

A

Consistency in composing financial statements

52
Q

What does the principle ‘accruals’ mean?

A

Revenues and expenses recognized and recorded when incurred, not when actual cash takes place

53
Q

What does the principle ‘objectivity’ mean?

A

Financial statements prepared free from personal opinion

54
Q

What does the principle ‘verifiability’ mean?

A

Possibility to check if information provided is correct

55
Q

What does the principle ‘relevance’ mean?

A

Reports should be based on what is relevant

56
Q

What does the principle ‘economic entity assumption’ mean?

A
  • Separation of business transactions from personal transactions
  • Means financial statements can be prepared for a group (consolidation)
57
Q

What does the principle ‘monetary unit assumption’ mean?

A

Allows accountants to express assets as dollar amount and also assumes, dollar does not lose purchasing power over time  combine $10,000 on fixed asset in 2016 $20,000 on fixed asset in 2020

58
Q

What does the principle ‘time period assumption’ mean?

A

Business operations and financial results can be divided into distinct periods (months, years)

59
Q

What does the principle ‘cost principle’ mean?

A
  • Transactions recorded at cost at time of transaction

* Results in intangibles not being recorded

60
Q

What does the principle ‘materiality’ mean?

A

Accounting principle can be ignored if amount is significant

61
Q

Who needs to publish ? (2)

A
  • companies with limited liability feature

* Publicly listed companies (these have more detailed regulations)

62
Q

What is a published annual report?

A

It states the affairs of a company in a past period

63
Q

What does GAAP stand for?

A

Generally Accepted Accounting Principles

64
Q

Is GAAP rules-based or principles-based

A

Rules-based

65
Q

What does IFRS stand for?

A

International Financial Reporting Standards

66
Q

Is IFRS rules-based or principles-based

A

Principles-based

67
Q

What are the 3 leverage ratios?

A
  • Debt ratio
  • Debt to equity ratio
  • Times interest earned
68
Q

What are the 3 activity ratios?

A
  • Average collection period
  • Average inventory period
  • Turnover rate
69
Q

What are the 3 liquidity ratios?

A
  • Current ratio
  • Quick ratio
  • Net working capital
70
Q

What are the 4 profitability ratios?

A
  • Margin on sales
  • Return on Equity (ROE)
  • Return on Debt (ROD)
  • Return on Investment (ROI)
71
Q

What are the 7 valuatio ratios?

A
  • Earnings per share (EPS)
  • Price to earnings ratio (P/E ratio)
  • Dividend yield
  • total yield
  • dividend cover
  • Market to book ratio
  • Payout ratio
72
Q

What do liquidity ratios measure?

A

the ability to pay all short-term obligations

73
Q

What do leverage ratios measure?

A

how heavily a bysiness is financed with debt

74
Q

What do profitability ratios measure?

A

how worthwile an investment is to providers of funds

75
Q

What do activity ratios measure?

A

How effectively a business is using its resources

76
Q

What do valuation ratios measure?

A

They assess the performance of the company

77
Q

What are limitations of financial ratios? (3)

A
  • Based on historical data and limited data in financial statements
  • Useful comparison with companies in similar industries
  • Companies apply accounting principles differently
78
Q

TRUE or FALSE

The Sarbanes-Oxley act is a corporate responsibility act which mandates strict rules regarding financial disclosures of the financial report to prevent financial accounting fraud.

A

TRUE

79
Q

TRUE or FALSE

An independent external auditor needs to check financial statements on its accuracy, completeness and reliability

A

TRUE

80
Q

TRUE or FALSE

A complete annual report consists out of three components: the financial report, the report of the executive board, and additional data like the proposed distribution of profit.

A

TRUE

81
Q

TRUE or FALSE

The stockholders can be identified as the agents and management as the principal when looking at agency costs.

A

FALSE

It is the other way around, the management is recognized as the agent. It is hired on behalf of the stockholders.

82
Q

TRUE or FALSE

In Anglo-Saxon countries (UK, USA) the dominant opinion is that management should not only look after the best interest of stockholders, but also of other stakeholders like employees and suppliers.

A

FALSE

83
Q

TRUE or FALSE

There is one set of accounting standards which is used worldwide.

A

FALSE

84
Q

TRUE or FALSE

When looking at R&D costs from the point of view of the prudence principle, these costs need to be taken up as expenses in the income statement straight away.

A

TRUE

85
Q

TRUE or FALSE

Long-term investments in shares or other financial titles are called securities.

A

FALSE

Securities are short-term investments in shares or other financial titles. Long-term investments are called financial assets.

86
Q

TRUE or FALSE

In economic terms the company can be seen as the owner in the case of operational lease. Therefore assets that are required under operational lease are treated as purchased assets.

A

FALSE

This is only done under financial lease.

87
Q

TRUE or FALSE

The indirect method of preparation for the cash flow statement is often less costly and time-consuming.

A

TRUE

88
Q

TRUE or FALSE

The main function of financial accounting is collecting and presenting financial data to outside partners.

A

TRUE

89
Q

TRUE or FALSE

Management accounting provides past information and has to deal with many legal constraints on how it is presented and organized

A

FALSE

Management accounting is focused on gathering, recording and modifying information for internal use which is used in decision making regarding the future. It has no legal obligations or standards it has to comply to, like IFRS.

90
Q

TRUE or FALSE

In the USA the reported profit on the income statement will not be the same as the taxable income.

A

TRUE

91
Q

TRUE or FALSE

Regulation in common law countries is mainly left to acknowledged professional organizations that dictate the rules

A

TRUE

For example the FASB, it is independent organization that establishes the US GAAP.

92
Q

TRUE or FALSE

Profit reported to the tax authorities is always the same as the profit reported in the financial statements.

A

FALSE

Although in some countries this is true, e.g. Germany, in other countries substantial differences can exist between the taxable profit and the reported profit in the annual report. A reason for this can be the difference in calculating depreciation expenses based on tax regulation/standards.

93
Q

TRUE or FALSE

In countries where banks have traditionally provided a majority of the funding, there is less need for publishing financial reporting to external stockholders.

A

TRUE

In countries where banks have traditionally provided a majority of the funding, there is less need for publishing financial reporting to external stockholders.

X Finance 3 (2 decks)

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