Financial Reporting & Analysis - Overview

Question 1

Balance sheet equation

Answer 1

Assets = liabilities + owner’s equity

owner’s equity = contributed capital + retained earnings

Question 2

Income statement equation

Answer 2

Revenue - expenses = net income (loss)

Question 3

Ending retained earnings formula

Answer 3

1. Beginning retained earnings + net income - dividends, or

2. Beginning retained earnings + revenue - expenses - dividends

Question 4

Expanded balance sheet equation

Answer 4

Assets = liabilities + contributed capital + beginning retained earnings + revenue - expenses - dividends

Question 5

What links the income statement to the balance sheet?

Answer 5

Retained earnings adds net income - dividends to beginning retained earnings to arrive at ending retained earnings.

Question 6

Accounting for deferred revenue

Answer 6

1. Record cash receipt & establish a liability (unearned revenue)
2. Reduce liability while recording revenue

Question 7

Accounting for prepaid expenses

Answer 7

1. Record cash & establish an asset (prepaid expense)

2. Reduce asset while recording expense

Question 8

Accounting for un-billed revenue

Answer 8

1. Record revenue & establish an asset (un-billed revenue)
2. When billed, reduce asset (un-billed revenue) and increase accounts receivable
3. When paid, increase cash and reduce accounts receivable.

Question 9

IASB definition

Answer 9

1. International Accounting Standards Board.

2. Independent private body of the IFRS foundation.

Question 10

FASB definition

Answer 10

1. U.S. Financial Accounting Standards Board.

2. Source of U.S. GAAP

Question 11

IOSCO definition

Answer 11

1. International Organization of Securities Commissions

2. Members regulate > 90% of world’s capital markets (include SEC, etc)

Question 12

SEC

Answer 12

1. Created by the Securities Exchange Act of 1934.

2. Sarbanes-Oxley Act of 2002: created the Public Company Accounting Oversight Board (PCAOB) to oversee auditors.

Question 13

Form: Securities Offering Registration

Answer 13

1. Required by the 1933 Act

2. Info includes: securities being offered, info typically in annual fillings, recent audited financials, risks, etc.

Question 14

Forms: 10-k, 20-F & 40-F

Answer 14

Annual reports with audited financials, MD&A, etc

Question 15

Annual Report

Answer 15

Not required by the SEC, opportunity to market to investors. Significant overlap between this & the 10k.

Question 16

Form: Proxy Statement Form / DEF-14A

Answer 16

1. Gives right to vote on shareholder’s behalf prior to shareholder meeting.
2. Required by the SEC

Question 17

Forms: 10Q & 6K

Answer 17

1. 10Q = quarterly statement for U.S. companies.
2. 6K = semiannual report for non-U.S. companies.
3. Both includes un-audited financials, MD&A, etc

Question 18

Form: 144

Answer 18

Filed with the SEC as notice of proposed sale of restricted securities or those held by an affiliate.

Question 19

Forms: 3, 4 & 5

Answer 19

Director, officer or beneficial owners of > 10% must file
3 = initial statement
4 = changes
5 = semiannual report

Question 20

Form: 11-k

Answer 20

Annual report of employee stock purchases, savings & similar plans.

Question 21

Qualitative characteristics of financial reports

Answer 21

1. Relevant

2. Faithful representation: complete, neutral and free from error

Question 22

Definition: assets

Answer 22

What the company owns. Function of past events, but expected to generate future economic benefits.

Question 23

Definition: liabilities

Answer 23

Present obligation arising from past events. Settlement results in outflow of resources.

Question 24

Definition: equity

Answer 24

Residual interest in assets after subtracting liabilities.

Question 25

Going concern assumption

Answer 25

Assumption that companies will continue to operate into the foreseeable future. Important for a number of reasons, but one is that inventory is worth less if company is in liquidation mode.

Question 26

Definition: historical cost

Answer 26

If gifted, historical cost can be the fair value @ point received.

Question 27

Definition: amortized cost

Answer 27

Historical cost adjusted for amortization, depreciation, depletion or impairment.

Question 28

Definition: current cost

Answer 28

Cost today for asset or to settle liability.

Question 29

Definition: realizable value

Answer 29

Value if sold (asset) or settled (liability) through the normal course of business.

Question 30

Definition: present value

Answer 30

Present discounted value of future net cash flows.

Question 31

Definition: fair value

Answer 31

Amount exchanged or settled through arms length transaction by knowledgeable participants.

Question 32

Owner’s equity

Answer 32

Beginning retained earnings + contributed capital + net income - dividends