FSA-Unit 2

Question 1

Discontinued Operations

Answer 1

a disposal of a business unit that represents a strategic shift that has or will have, a major effect on the company’s financial results

Question 2

Discontinued (Two components) on the income statement:

Answer 2

1. New income / loss from the business prior to sale
2. any gain or loss on the actual sale of the business

Question 3

Treat Discontinued Operations as Operating or Non-operating?

Answer 3

operating - subsidiary has historically been treated as an operating asset.

non-operating - the subsidiary ceases to be part of the company’s operations once the decision is made to dispose of it

Question 4

Balance sheet shows A, L, & SE at a _____. Accounts are __________ accounts.

Answer 4

point in time, permanent accounts

Question 5

Accounting Equation

Answer 5

A = L - SE

Question 6

Assets confers expected _____ _____ _____

Answer 6

future economic benefits

Question 7

Asset must have the following:

Answer 7

1. owned or controlled by company
2. arise from past transaction or event

Question 8

current assets

Answer 8

cash, cash equivalents, short-term investments, accounts receivable (net), inventories, prepaid expenses

Question 9

long term assets

Answer 9

PPE (NET - post accumulated depreciation subtracted, long-term investments, intangible and other assets

Question 10

Most assets are reported at ______ cost

Answer 10

historical

(can’t value asset with relative certainty doesn’t recognize it on the balance sheet. Therefor significant “assets” not reflected, like knowledge-base assets - management team/supply chain/superior technology)

Question 11

liabilites are future _____ _____

Answer 11

economic sacrifices

Question 12

liability must have 2 characteristics:

Answer 12

1. unavoidable obligation
   arise from past transaction or event

Question 13

Liability can be _____ bearing (bank loan) or _______ bearing (vendor/partner)

Answer 13

interest

non-interest

Question 14

stockholder’s equity

Answer 14

capital that has been invested by the stockholders.

Directly - via purchase of stock
Indirectly - retained earnings, reinvested into the business.

Question 15

Current Liabilites

Answer 15

accounts payable, accrued liabilities (accrued expenses), unearned revenues (deferrred revenues), short-term debt, current maturities or long-term debt (current portion)

Question 16

Net Working Capital Formula

Answer 16

NWC = current assets - current liabilities

Question 17

Net working capital required to conduct business depends on the company’s ______ ______

Answer 17

operating cycle

Question 18

operating cycle (cash cycle, cash conversion cycle, CCC)

Answer 18

time btwn paying cash for goods and receiving cash from customers

Question 19

Noncurrent Liabilities

Answer 19

long-term debt (bonds, notes, debentures, mortgages, other loans), other long-term liabilities (pension, long-term tax liabilities)

Question 20

common stock

Answer 20

par value received from the original sale of common stock to investors

Question 21

Common Size Balance Sheet (Vertical analysis or Right-sizing)

Answer 21

expressed balance sheet in % by dividing every line by total assets

Question 22

Why do a common size BS?

Answer 22

compare company across years, to another comapny, or to industry

Question 23

Book value vs. Market value

Answer 23

SE (Book value, BV of Equity) - the “value” of the company per GAAP

Market value- # of common shares outstanding x company’s stock price

Differences:
1. GAAP reports historical cost of A & L, market estimate fair values.

2. GAAP excludes assets not reliably measured
3. Maket value adjusts for market characteristics
4. GAAP doesn’t consider expected future performance

Question 24

Income Statement Equation

Answer 24

Net Income = Revenues - Expenses

Question 25

Income Statement Strucutre

Answer 25

Revenue - COGS = Gross Profit
- Operating expenses = Operating Profit
-&+Nonoperating expenses
- income tax expense =
Net Income

Question 25

Accrual Accounting

Answer 25

revenues and expenses recognized are based on the foundation of - revenue recognition principle & expense recognition principle (NOT when cash received or paid)

Question 26

Expense Recognition Principle (Matching principle)

Answer 26

recognize when expenses incurred

Question 26

revenue recognition principle

Answer 26

record when performance obligation done or customer obtins control. Revenue amount company expects to receive.

Question 26

Gross Profit Margin

Answer 26

[ (Rev - COGS)/Rev ] x100

Question 27

operating expense margins

Answer 27

analysis of operating expenses over time and compared with peer companies

Question 28

Common Size Income Statements (Vertical Analysis or Right-sizing)

Answer 28

everything divided by total revenue (in % terms)ou

Question 29

common stock and addition paid-in capital _______ by the proceeds from the sale of stocl

Answer 29

increase

Question 30

retained earnings increase by

Answer 30

net income and decrease by dividends and by stock repurchased and retired.

Question 31

retained earnings formula

Answer 31

RE = Beginnning Period RE + Net Income - Dividends

Question 32

accumulated other comprehensive income increases and decreses by changes in ….

Answer 32

asset and liabiity fair values that are not reported in the income statement. (unrealized gains and losses that are reported in the equity section of the balance sheet.)

Question 33

The income statement meausre income using GAAP principles and provides information about the economic viability of the company’s _____ and _____.

The Statement of cash flows provides information about the company’s ability to generate _____ from those same transactions

Answer 33

products and services

cash

Question 34

cash flows from operating activities

Answer 34

from operations

Question 35

cash flows from investing activities

Answer 35

from acquisitions and divestitures of investments and long-term assets

Question 36

Cash flows from financing activities

Answer 36

from issuances of and payments toward borrowing and equity

Question 37

also review …

Answer 37

strucutre of each statement & linkage diagram

Question 38

4 step Accounting cycle

Answer 38

1. record tranactions
2. accounting adjustments (events occured but not yet recorded)
3. construct financial statements
4. close the books

Question 39

Each transaction ask:

Answer 39

1. What accounts are affected?
2. What is the direction of the effect?
3. What is the amount of the effect?

Question 40

Failure to recognize the wages owed would ______ ______ and would _______ ____ _________ for the period

Answer 40

understate liabilities (wages payable too low)

Overstate net income (wage expense too low)

So accounting adjustment NEEDED

Question 41

4 Types of Accounting Adjustments

Answer 41

1. prepaid (deferred) expenses
2. unearned (deferred) revenues
3. accrued expenses
4. accrued revenues

Question 42

prepaid (deffered) expenses

Answer 42

advance cash payments that will ultimately become expenses (look at trans. on Mod 2)

Question 43

unearned (deffed) revenues

Answer 43

cash received from customers before any services or goods are provided

Question 44

accrued expenses

Answer 44

expenses incurred and recognized on the income statement even though cash has not been paid yet

Question 45

accrued revenues

Answer 45

revenues earned and recognized on the income statement even though cash is no received yet

Question 46

Prepare Fin Stat. in this order.

Answer 46

1. Income Statement
2. Statement of Stockholders’ Equity
3. Balance Sheet
4. Statement of cash flows

Question 47

closing process

Answer 47

“zeroing out” of the temporary accounts by transferring their ending balances to retained earnings

Question 48

revenues, expenses, and dividens are ______ accounts becayse the balance at the stat of each accounting period is $0

Answer 48

temporary

Question 49

Study FSET

Answer 49

onenote reference

Question 50

Form 10-K/ 10Q

Answer 50

annual/quarterly report

Question 51

Form 20-F

Answer 51

Non-GAAP or IFRS companies annual report, provides a table that reconciles net income as reported to US GAAP net income

Question 52

Form 40-F

Answer 52

same as 20-F but for Canada

Question 53

Form 8-K

Answer 53

Wide range of corporate events, reported within 4 days.

Question 54

equity analyst reports

Answer 54

sell-side analysts provide clients with: objective analysis of company activities, forecasts for revenues and EPS, stock price target

Question 55

credit reports

Answer 55

credit rating agencies provide: objective credit analysis that evaluates a company’s creditworthiness, credit rating

Question 56

data services

Answer 56

a number of companies supply financial statement data in eay-to-download spreadhseet formats

Question 57

depletion

Answer 57

is the process of allocating a natural resource’s cost over the period of its extraction. (similar to depreciation). Computed for a period is first added to inventory and then expensed when the inventory is sold.