M2 Pillars

Question 1

What is Net profit margin

Answer 1

Net income (/) Sales

Question 2

Times Interest Earned

Answer 2

EBIT (/) Interest Expense dont forget to ADD BACK interest expense and income tax from NI. DO NOT SUBTRACT.

Question 3

Days In Inventory

Answer 3

Ending Inventory (/) Cogs/365

Question 4

Days in sale of AR

Answer 4

AR (/) Sales/365. We take AR at ending not average

Question 5

AR Turnover & AR Turnover “Ratio”

Answer 5

Average AR (x) Turnover ratio
AR Turnover Ratio is net sales (/) Average AR.

Question 6

Return on assets

Answer 6

NI (/) Average assets

Question 7

Return on Equity

Answer 7

NI (/) Average Equity

Question 8

How do you adjustment corrections of periods?

Answer 8

Adjust for correction NET OF TAX on RE

Question 9

What happens when Inventory is understated?

Answer 9

NI is understated, we have to increase RE by amount NET OF TAX

Question 10

Per GAAP what happens when F/S have a change in reporting entity

Answer 10

F/S that have a change in reporting entity should have a restatement of all periods

Question 11

What type of measurement is Fair Value?

Answer 11

Market based measurement

Question 12

Is fair value an exit price or a selling price?

Answer 12

FMV is the price that would be received when selling in an ORDERLY transaction

Question 13

What is the principle market?

Answer 13

Most active market by ALL suppliers

Question 14

How do you find accrued Interest? or interest payable as of

Answer 14

Take the interest rate of loan times the principle to get Interest expense
Take interest expense multiply by WASCO if there are months remaining in the year.
If a payment is made in July, Interest payable is from July to Dec therefore 6/12 WASCO times Interest expense is the payable.

Question 15

What are trading securities considered?

Answer 15

Both CA and quick ratio assets

Question 16

Main difference between a payable and expense

Answer 16

Expense is what the company owes, payable is actual cash exchanged for that expense which may not always be the same.

Question 17

How are effects of a change in principle that cant not be separated from estimate treated?

Answer 17

They are treated as a change in estimate in continuing operations.

Question 18

Task: convert fact pattern into an accrual basis and set up entries for them.

Answer 18

You are given a TB and a fact pattern, Use the TB to know what accounts are going to be effect. Use the fact pattern to know how much.

Question 19

How do a JE for Equipment that was fully expensed?

Answer 19

DR Equip: CR Tools expense

DR DEP expense; CR Accum dep

Removing tools expense, setting up asset and deprecating the asset.

Question 19

How do a JE for inventory left over? Assume what is left over is bought on account.

Assume some of the inventory left over has been sold but still owed on account

Answer 19

DR Inventory ; CR AP

DR COGS; CR AP

Question 20

How do a JE for a sale on account

Answer 20

DR AR ; CR Cash

Question 21

How do a JE for prepaid insurance that was fully expensed?

Answer 21

DR Prepaid ; CR Admin expense
Set up prepaid, remove from expense account

Question 22

Task: what is the tax payable from this fact pattern

Answer 22

Determine accrual NI, take tax rate and factor in prepayments.

Question 23

How do you report property, land, and goodwill

Answer 23

All at historical assuming no impairment

Question 24

When determining fair values what do you check for?

Answer 24

Fair value hierarchy: Level 1 Identical Level 2 observable level 3 mgmt determined. Newly purchased assets have to fall in one of these buckets.