Interpeting Quality and Consistency of Balance Sheet and Income Statements

Question 1

Four Factors to Considrer Whenever you Assess Asset Quality

Answer 1

Restrictions on the use of the asset
Net Realizable value of the asset in normal course of business or liquidation of the company
Company’s ability to operate without the asset
Time Required to convert to cash.

Question 2

Questions Regarding Cash

Answer 2

1. Are there any restrictions on use
2. Is the amount of cash adequete
3. Is the amount typical for the company at all times.

Question 3

Marketable Securities

Answer 3

1. Are securities really marketable?
2. Are securities reported in their full amount or net of related debt.
3. How are securities classified

Question 4

Securtities Classifications-Held to maturity securities

Answer 4

Held-to-maturity-reflected as amortized cost on the balance sheet with any realized gains and losses taken as income when sold.

Question 5

Securities Classifications- Trading Securities

Answer 5

Company intends to sell in the short-term. Must reported at fair value Realized and unrealized gains and losses must be taken into current period income

Question 6

Securities Classifications - Available for Sale Securities

Answer 6

Must be recorded at fair value, realized gains and losses must be taken into current period income, unrealized gains and losses must be includein Other Comprehensive Income.

Question 7

Accounts Receivable Questions

Answer 7

1. What is the number of accounts
2. Is there a concentration
3. What are terms?
4. What are credit standards and procedures
5. Are the receivables for completed or ongoing work
   6 Is there any additional work required7. What does aging reveal
   7.What is company’s bad debt experience

Question 8

Question for Inventory

Answer 8

1. What is composition of inventory
2. what is required to maintain inventory
3. Is there damanged inventory
4. What is accounting method to assign the cost of inventory
5. What is current market value
6. Has the company respected GAAP’s low of cost or market rule

Question 9

Companies are required to useAR: The Alllowance Method

Answer 9

Companies must estimated probable losses
Set up and allowance for bad debts reflects the estimated amount of futre uncollectable
Adjust the estimated amount of future uncollectable account with each perods contribution

Question 10

Factors In Inventory Assessment

Answer 10

Stage of Completion
Maintenance
Accounting Method
Current Market Value
Lower of Market or Cost Rule

Question 11

Deferred Tax Assest

Answer 11

Represent Tax Dedcution that a company expects to realize value from in the future
Common causes: Loss carryforward
Temporary difference between when an expense is recognized by GAAP and when the IRS allows it.

Question 12

Intangible Assets

Answer 12

Provide future benefit to the company, but have no physical presence.
Not all intangible assets are amortized
Non-amortizable assets are subject to annual impairment tests.
Amortizing intangible assets are also subject to impairment tests.
Generally not good repayment sources

Question 13

Three Types of Liabilities

Answer 13

Current
Non-Current
Deferred

Question 14

Common Types of Notes Payable

Answer 14

Stockholders
Former Owners
Suppliers

Question 15

Evaluating Accounts Payable

Answer 15

Determine who suppliers are.
Determine if goods purchased are in short supply
Determine Aging of Paybles
Determine if Sales Discounts are being taken
Obtain a credit report
Learn detail of affiliate payables.

Question 16

Long-Term Obligations to Affiliated Parties

Answer 16

Are effectively considered short-term obligations.

Question 17

Interpreting Fluctuations In Income Taxes Payable

Answer 17

Increases can indicate failure to pay taxes during the year, or poor tax planning.

Question 18

Types of Contingencies

Answer 18

Take or pay - purchaser of goods agrees to purchase under a contract.
Litigation- Company has been sued.

Question 19

Equity Accounts of a Sole Proprietorship

Answer 19

Balance Sheet Displays: Owners initial investment, undistributed earnings.
One individual goes into business
When owner dies, business dies

Question 20

General Partnership

Answer 20

Balance Sheet Displays:
Any partners initial invest and earnings not withdrawn
One or more individuals go into business together
Disbands on death of a partner
Each partner is fully liable.

Question 21

Limited Liability Partnerhship

Answer 21

States dictates what is displayed
Businesses must register with the state
LLP usually reserved for professionals
Not liable for wrongful conduct
Liable for debts of partnership that existed prior to registration, but not new debts

Question 22

Limited Liability Company

Answer 22

Balance Sheet mandated by the state
One or more individuals enter into an operating agreement
File a certificate of organization
Members manage business
Members have no personal liability

Question 23

Limited Partnership

Answer 23

Balance Sheet similar to General Partnership
General Partnership manages business
Limited partnerships contribute capital
Not active in business
Liable only to extent of investment

Question 24

Joint Venture

Answer 24

Investors to into business for a specific project
When project is completed JV is dissolved
Taxed individually

Question 25

Corporation

Answer 25

Balance Sheet Displays:
Capital Stock
Additional paid-capital
Retain Earnings Capital Stock

Question 26

Bill and Hold Sales

Answer 26

Sales where the customer does not take delivery of product. Subtract from sales and AR.

Question 27

What are the major expense catagories

Answer 27

COGS
Operating Expenses
Income Taxes

Question 28

Business Practices that Enhance Quality of Earnings

Answer 28

Maintenance and Replacement of Equipment
Offering Good Benefits and Compensattion
Planning, Research and Development
Bad Debt Provisions and Quick Charge offis

Question 29

Interest Expense Evaluation

Answer 29

Compare interest expense to an increase in overall profitability.