frankly resolute adventures (FRA)

Question 1

Accounting equation

Answer 1

Liabilities + Contributed capital + Beginning retained earnings +
Revenue – Expenses – Dividends

Question 2

Asset Accounts:

Answer 2

Cash
Investments
Prepaid rent (cash paid for rent in advance of recognizing the expense)
Rent deposit (cash deposited with the landlord, but returnable to the
company)
Office equipment
Inventory
Accounts receivable

Question 3

Liability Accounts:

Answer 3

Unearned fees (fees that have not been earned yet, even though cash has
been received)
Accounts payable (amounts owed to suppliers)
Bank debt

Question 4

Equity Accounts:

Answer 4

Contributed capital
Retained earnings
Income
Revenue
Expenses
Dividends

Question 5

In assessing the financial
impact of each event and converting these events into accounting transactions, the
following steps are taken:

Answer 5

1 Identify which accounts are affected, by what amount, and whether the
accounts are increased or decreased.
2 Determine the element type for each account identified in Step 1 (e.g., cash is
an asset) and where it fits in the basic accounting equation. Rely on the economic characteristics of the account and the basic definitions of the elements to
make this determination.
3 Using the information from Steps 1 and 2, enter the amounts in the appropriate
column of the spreadsheet.
4 Verify that the accounting equation is still in balance.

Question 6

On an unclassified balance sheet, how are items ordered?

Answer 6

In order of liquidity (assets) and how likely they are to be paid off (liabilities)

Question 7

How are sales split?

Answer 7

Into two parts; revenue to be received & cost of goods sold

Question 8

How is borrowing split?

Answer 8

Cash increases, liability reflects amount owed to bank

Question 9

Under accrual accounting, expenses are recorded when

Answer 9

incurred, not paid

Question 10

How is each business activity recognised ?

Question 11

In summary, the balance sheet provides

Answer 11

information at a point in time (financial
position), whereas the other statements provide useful information regarding the activity during a period of time (profitability, cash flow, and changes in owners’ equity).

Question 12

Accrual accounting requires that

Answer 12

revenue be recorded when earned and that expenses
be recorded when incurred, irrespective of when the related cash movements occur. The
purpose of accrual entries is to report revenue and expense in the proper accounting
period.

Question 13

Unearned revenue / deferred

Answer 13

arises when a company receives cash
prior to earning the revenue.

Question 14

Unbilled revenue / accrued

Answer 14

arises when a company earns revenue prior to receiving cash but has not yet recognized the revenue at the end of an accounting
period.

Question 15

Prepaid expense

Answer 15

when a company makes a cash payment prior to recognizing an expense.

Question 16

Accrued expenses arise

Answer 16

when a company incurs expenses that have not yet been
paid as of the end of an accounting period

Question 17

Business activities can be classified into three groups:

Answer 17

operating activities,
investing activities, and financing activities.

Question 18

Companies classify transactions into common accounts that are components of the five financial statement elements:

Answer 18

assets, liabilities, equity, revenue, and
expense.

Question 19

The core of the accounting process is the basic accounting equation:

Answer 19

Assets = Liabilities + Owners’ equity.

Question 20

The expanded accounting equation is

Answer 20

Assets = Liabilities + Contributed capital
+ Beginning retained earnings + Revenue – Expenses – Dividends.

Question 21

The accounting system tracks and summarizes data used to create financial statements:

Answer 21

the balance sheet, income statement, statement of cash flows, and
statement of owners’ equity. The statement of retained earnings is a component
of the statement of owners’ equity.

Question 22

Accruals are a necessary part of the accounting process and are designed to

Answer 22

allocate activity to the proper period for financial reporting purposes.

Question 23

The results of the accounting process are financial reports that are used by

Answer 23

managers, investors, creditors, analysts, and others in making business decisions.

Question 24

An analyst uses the financial statements to make judgments

Answer 24

on the financial health of a company.

Question 25

operating cycle

Answer 25

average time between the acquisition of materials and supplies and the realization of cash through sales of the product for which the materials and supplies were acquired. The cycle operates from cash through inventory, production, and receivables back to cash. Where there are several operating cycles within one year, the one-year period is used. If the operating cycle is more than one year, the longer period is used.

Question 26

amortisation vs depreciation

Answer 26

amortisation: allocation of cost of long lived intangible assets
depreciation: allocation of cost of long lived physical assets

Question 27

list a few intangible assets

Answer 27

patents, trademarks, copyrights, goodwill, brand names, franchises

Question 28

goodwill is an asset that arises when

Answer 28

PV of an acquired company’s estimated future earnings, discounted at the acquiring firm’s ROI is more than the fair market value of the net assets of the acquired company

Question 29

goodwill measures

Answer 29

premium paid in excess of market value

Question 30

how to record an available for sale investment on balance sheet

Answer 30

at fair market value

Question 31

owner’s equity components

Answer 31

contributed capital
minority interest
retained earnings
treasury stock
accumulated comprehensive income

Question 32

statement of changes in shareholder’s equity

Answer 32

the statement of shareholders’ equity is a financial statement that summarises changes that occurred during the accounting period in components of the stockholders’ equity section of the balance sheet. It includes capital transactions with owners and distribution to owners.

Question 33

comprehensive income includes

Answer 33

all changes in a company’s equity during a period from sources other than owners

Question 34

comprehensive income covers

Answer 34

foreign currency translation adjustments: these result from the translation of foreign subsidiaries’ balance sheet assets and liabilities at current exchange rates when consolidating the foreign subsidiaries’ financial statements;
unrealized gains or losses on derivatives contracts which are accounted for as hedges: these are treated as ‘other comprehensive income’ and therefore bypass the income statement;
unrealized holding gains and losses on available-for-sale securities; and
certain costs related to a company’s defined benefit post-retirement plans are not recognized in the current reporting period.

Question 35

why is current ratio usually greater than the quick ratio

Answer 35

prepaids (included in current ratio) cannot be used to pay current liabilities

Question 36

five main cash flows

Answer 36

income tax payed, cash received from customers, cash payed to suppliers, interest and dividends received, dividends paid.

Question 37

items to note wrt operating activities

Answer 37

Interest and dividend revenue, and interest expenses, are considered operating activities, but dividends paid are considered financing activities. Note that interest expense is reported on the income statement while dividends flow through the retained earnings statement.
Remember that an interest/dividend item is an operating activity if it appears on the income statement. For example, payments of dividends do not appear on the income statement, and thus are not classified as operating activities.
All income taxes are considered operating activities, even if some arise from financing or investing.
Indirect borrowing using accounts payable is not considered a financing activity - such borrowing would be classified as an operating activity.

Question 38

Investing Activities

Answer 38

These include making and collecting loans and acquiring and disposing of investments (both debt and equity) and property, plants, and equipment. In general, these items relate to the long-term asset items on the balance sheet. Investing cash flows reflect how a company plans its expansions.
Examples are:
Sale or purchase of property, plant and equipment.
Investments in joint ventures and affiliates and long-term investments in securities.
Loans to other entities or collection of loans from other entities.

Question 39

Financing Activities

Answer 39

These involve liability and owner’s equity items, and include:
Obtaining capital from owners and providing them with a return on (and a return of) their investments.
Borrowing money from creditors and repaying the amounts borrowed.
In general, the items in this section relate to the debt and the equity items on the balance sheet. Financing cash flows reflect how the company plans to finance its expansion and reward its owners.
Examples:
Dividends paid to stockholders (not interest paid to creditors!). Note that the cash outflow caused by dividends is determined by dividends paid, not dividends declared. Dividends paid are not reflected in the retained earnings account. The amount is provided in the supplementary information.
Issue or repurchase of the company’s stocks.
Issue or retirement of long-term debt (including the current portion of long-term debt).
Purchase of debt and equity securities from other entities (sale of debt or equity securities of other entities) and loans to other entities (collection of loans to other entities) are considered investing activities. However, issuance of debt (bonds and notes) and equity securities is a financing cash inflow, and payment of dividend, redemption of debt, and reacquisition of capital stock are financing cash outflows.

Question 40

Non-cash Activities

Answer 40

Some investing and financing activities do not flow through the statement of cash flows because they don’t require the use of cash:
Retiring debt securities by issuing equity securities to the lender.
Converting preferred stock to common stock.
Acquiring assets through a capital lease.
Obtaining long-term assets by issuing notes payable to the seller.
Exchanging one non-cash asset for another non-cash asset.
The purchase of non-cash assets by issuing equity or debt securities.
For example, if a company purchases $200,000 of land by issuing a long-term bond, this transaction is a non-cash one, as it does not involve direct outlays of cash. Therefore, it is excluded from the statement of cash flows. These types of transactions should be disclosed in a separate schedule as part of the statement of cash flows or in the footnotes to the financial statements.

Question 41

Differences between IFRS and U.S. GAAP

Answer 41

The above discussions are based on the U.S. GAAP. Under IFRS there is some flexibility in reporting some items of cash flow, particularly interest and dividends.
Interest and dividends received:
Under U.S. GAAP, interest income and dividends received from investment in other companies are classified as CFO.
Under IFRS, interest and dividends received may be classified as either CFO or CFI.
Interest paid:
Under U.S. GAAP, interest paid is classified as CFO.
Under IFRS, interest paid may be classified as either CFO or CFF.
Dividends paid:
Under U.S. GAAP, dividends paid are classified as CFF.
Under IFRS, dividends paid may be classified as either CFO or CFF.

Question 42

Free cash flow

Answer 42

CFO - capital expenditure

Question 43

FCFF

Answer 43

NI + NCC + Int (1 - Tax rate) - FCInv - WCInv

Question 44

NCC (net non cash charges)

Answer 44

CFO + Int (1 - Tax rate) - FCInv

Question 45

FCFF

Answer 45

CFO + Int (1 - Tax rate) - FCInv

Question 46

FCFE

Answer 46

Cash available to stockholders after payments to and inflows from bondholders. This is the cash flow from operations net of capital expenditures and debt payments (including both interest and repayment of principal).

FCFF + Net borrowing - Int ( 1- Tax rate)

NI + NCC + Net borrowing - FCInv - WCInv

CFO + Net borrowing - FCInv

Question 47

dupont analysis

Answer 47

three steps
multiply sales / sales & then assets / assets

ROE= Net Income / Shareholder Equity

​ROE=NPM×Asset Turnover×Equity Multiplier
where:
NPM=Net profit margin, the measure of operating
efficiency
Asset Turnover=Measure of asset use efficiency
Equity Multiplier=Measure of financial leverage
​
ROE= Net Income/Sales × Sales/Shareholders’ Equity

​that’s broken into two components: net profit margin, equity turnover ratio

​​

ROE=
Sales
Net Income
​
×
Assets
Sales
​
×
Shareholders’ Equity
Assets
​
ROE=NPM×Asset Turnover×Equity Multiplier
​

​

​

Question 48

COGS

Answer 48

Beginning Inventory+P−Ending Inventory

Question 49

FIFO cogs

Answer 49

The earliest goods to be purchased or manufactured are sold first. Since prices tend to go up over time, a company that uses the FIFO method will sell its least expensive products first, which translates to a lower COGS than the COGS recorded under LIFO. Hence, the net income using the FIFO method increases over time.

Question 50

roce

Answer 50

the amount of profit or net income a company earns per investment dollar

roe = net income / shareholder equity

roa * common earnings leverage * financial structure leverage

Question 51

interest coverage / times-interest-earned ratio

Answer 51

operating profit / interest expense

Question 52

cash conversion cycle / net trade cycle

Answer 52

DOH + DOS - days payable

Question 53

average collection period

Answer 53

net accounts receivable / average daily credit sales

Question 54

operating cycle

Answer 54

inventory period + accounts receivable period

Question 55

inventory turnover

Answer 55

cogs / average inventories

Question 56

2/10 n/30

Answer 56

2% discount if payment made within 10 days, if not then within 30 days.

Question 57

operating expense ratio

Answer 57

operating expenses / revenues

Question 58

receivables turnover ratio

Answer 58

sales / receivables

Question 59

inventory turnover ratio

Answer 59

cogs / inventory

Question 60

asset turnover ratio

Question 61

quick ratio

Answer 61

(current assets - inventory ) / current liabilities

Question 62

profit margin

Answer 62

net income / sales

Question 63

inventory accounting two basic issues

Answer 63

Determine the cost of goods available for sale: Beginning Inventory + Purchases.

Allocate the cost of total inventory costs (cost of goods available for sale) between two components: COGS on the income statement and the ending inventory on the balance sheet. Note that COGS = (Beginning Inventory + Purchases) - Ending Inventory. The cost flow assumption to be adopted includes specific identification, average cost, FIFO, LIFO, etc. This issue will be discussed in subsequent subjects.

Question 64

Weighted Average Cost

Answer 64

Average cost = (beginning inventory + purchases) / units available for sale
Ending inventory = average cost x units of ending inventory
COGS = cost of goods available for sale - ending inventory

Question 65

FIFO

Answer 65

FIFO is the assumption that the first units purchased are the first units sold. Thus inventory is assumed to consist of the most recently purchased units. FIFO assigns current costs to inventory but older (and often lower) costs to the cost of goods sold.

Question 66

LIFO

Answer 66

LIFO is the assumption that the most recently acquired goods are sold first. This method matches sales revenue with relatively current costs. In a period of inflation, LIFO usually results in lower reported profits and lower income taxes than the other methods. However, the oldest purchase costs are assigned to inventory, which may result in inventory becoming grossly understated in terms of current replacement costs.
LIFO is not allowed under IFRS. In the U.S., however, LIFO is used by approximately 36 percent of U.S. companies because of potential income tax savings.

Question 67

Comparison of Inventory Accounting Methods

Answer 67

Inventory data is useful if it reflects the current cost of replacing the inventory. COGS data is useful if it reflects the current cost of replacing the inventory items to continue operations.
During periods of stable prices, all three methods will generate the same results for inventory, COGS, and earnings.
During periods of rising prices and stable or growing inventories, FIFO measures assets better (the most useful inventory data) but LIFO measures income better.
Under LIFO, the cost of ending inventory is based on the earliest purchase prices, and thus is well below current replacement cost. For many firms using LIFO, the cost of inventory may be decades old and almost useless for analysis purposes. However, the cost of goods sold is based on the most recent purchase prices, and thus closely reflects current replacement costs. As a result, LIFO provides a better measurement of current income and future profitability.
Under FIFO, the cost of ending inventory is based on the most recent purchase prices, and thus closely reflects current replacement cost. However, costs of goods sold are based on the earliest purchase prices, and this is well below the current replacement costs. The gain is actually holding gain or inventory profit. It is debatable whether this should be considered income; at least, analysts can say the underestimated COGS leads to inflated net income.
In an environment of declining inventory unit costs and constant or increasing inventory quantities, the opposite is true.
The usefulness of inventory data reported using the average-cost method lies between LIFO and FIFO.

Question 68

which inventory method generally results in costs allocated to ending inventory that will approximate current costs

Answer 68

fifo allocates most recent costs to inventory

Question 69

US GAAP - a company that uses lifo for computing taxable income must use ___ for financial reporting

Answer 69

lifo

Question 70

specific identification method

Answer 70

for the bougie stuff

The specific identification method relates to inventory valuation, specifically keeping track of each specific item in inventory and assigning cost individually instead of grouping items together – the manner of calculation that is typically done in the first in, first out (FIFO) and last in, first out (LIFO) methods.

Question 71

under which cost flow assumption is ending inventory composed of earliest purchased merchandise

Answer 71

lifo

Question 72

average cost

Answer 72

(beginning inventory + purchases) / units available for sale

Question 73

ending inventory

Answer 73

average cost * units of ending inventory

Question 74

cogs

Answer 74

cost of goods available for sale - ending inventory

Question 75

which inventory accounting method usually gives a valuation of inventory that is closest to its economic value

Answer 75

fifo

Question 76

perpetual inventory system

Answer 76

updates inventory accounts after each purchase or sale. Inventory quantities are updated continuously. When there is a sale, inventory is reduced and COGS is calculated.

Question 77

periodic inventory system

Answer 77

records inventory purchase or sale in the “Purchases” account. The “Inventory” account is updated on a periodic basis, at the end of each accounting period (e.g., monthly, quarterly). Cost of goods sold or cost of sale is computed from the ending inventory figure.

Question 78

Dutch Book Theorem

Answer 78

one of the most important probability results theories for investments, inconsistent probabilities create profit opportunities. Investors should eliminate the profit opportunity and inconsistency through buy and sell decisions exploiting inconsistent probabilities.

Question 79

deferred tax liability occurs when

Answer 79

taxable income < accounting profit
tax base > carrying value

Question 80

md&a

Answer 80

This requires management to discuss specific issues on the financial statements, and to assess the company’s current financial condition, liquidity, and its planned capital expenditure for the next year. An analyst should look for specific concise disclosure as well as consistency with footnote disclosure.
Note that the MD&A section is not audited and is for public companies only.

Question 81

Supplementary Schedules:

Answer 81

In some cases additional information about the assets and liabilities of a company is provided as supplementary data outside the financial statements. Examples include oil and gas reserves reported by oil and gas companies, the impact of changing prices, sales revenue, operating income, and other information for major business segments. Some of the supplementary data is unaudited.

Question 82

Interim reports.

Answer 82

Publicly held companies must file form 10-Q (interim report) on a quarterly basis. It is far less detailed than annual financial statements, as it contains unaudited basic financial statements, unaudited footnotes to financial statements, and management discussion and analysis.

Question 83

deferred tax asset

Answer 83

income tax payable > income tax expense

taxable income > higher accounting profit

Question 84

deferred tax liability

Answer 84

income tax payable > income tax expense

taxable income > accounting profit

Question 85

deferred tax liability

Answer 85

income tax payable < income tax expense

taxable income < accounting profit

Question 86

installment method

Answer 86

percentage of profit recognised in a given period equals percentage of total cash received during period

Question 87

cost recovery method

Answer 87

method in which a business does not recognize profit related to a sale until the cash collected exceeds the cost of the good or service sold.