Midterm 1 Review Flashcards
FASB
Financial Accounting Standards Board
GAAP
General Accepted Accounting Principle
Use Financial Statements to make inferences about…
Profitability, Leverage, Liquidity, Efficiency
Credit =
Debit =
Credit is a source of funds
Debit is a use of funds
If debt goes down that is a debit (use of funds) or credit (source of funds)?
Debit - Use of funds (you used cash to pay down debt)
Is an Asset going up a debit (use of funds) or credit (source of funds)?
Debit - Use of funds (If Asset increases, you are spending money to pay for those Assets)
Is Inventory going down a debit (use of funds) or credit (source of funds)?
Credit - Source of funds (You are gaining money by selling inventory)
What is the most volatile item on the Balance Sheet?
Perishable inventory. This is the most volatile because you know the value of it will eventually go down to 0
What is the most important assumption you will make in a financial model?
Revenue growth - it drives terminal value
What is the most important financial statement?
The statement of cash flows. It tells you where the money is coming in from and where it is going. We only care about where we are getting it from
What is fair market value?
FMV is the value of the Asset under normal market conditions
What is liquidation value?
It is the value you will get if you sell the Asset immediately, regardless of market conditions
What is the difference and similarities for FMV and Liquidation value?
For cash, FMV = LV
For a car, FMV will be very different from LV
What is cash basis accounting?
Revenues are recorded when the cash is actually recieved
What is accrual basis accounting?
Revenues are recognized in the accounting period when they are earned, does not matter if you haven’t received cash yet (this is A/R)
What is the most important item on the Balance Sheet?
The date
In what order is the Balance Sheet organized?
It is organized in decreasing liquidity
What is liquidity? What is important with the liquidity of something?
Your ability to monetize stuff (turn to cash)
Depends on:
1) Speed - how quickly you can monetize
2) Transaction cost - how much is the cost to liquidate the asset
Market value - Liquidity = Liquidity Premium
What is cash specifically?
It is a financial asset
What is the difference between required cash and excess cash?
Required cash = Not available to be spent
Excess cash - Do whatever you want with this
What are marketable securities?
A place/places to park your cash
Little risk + Highly liquid
i.e. US Treasury bills, bonds
What is driven by what? A/R, Inv, Prepaid expense, Quantity, COGS, PP&E, CapEx
A/R = Driven by sales (1:1) A/P = Driven by purchases Accrued Expenses = Driven by COGS Inventory = Driven by COGS COGS = Drive by Quantity Prepaid expense = Driven by quantity (things sold) Quantity = Driven by COGS PP&E = Driven by CapEx CapEx = Driven by Maintenance and Expansionary CapEx Maintenance Capex = Driven by COGS Expansionary CapEx = Driven by lack of capacity Patents = Driven by R&D
What is obsolescense?
Value of inventory that goes down over time
i.e. Fashion companies that have to decrease cost of clothes that aren’t selling
What is idiosyncratic inventory?
Asset that is very specific to one customer
Does land depreciate?
No, but it can be impaired
What are some identifiable intangibles?
Patents, trademarks, copyrights, franchises
These are reported on Balance Sheet
What are some unidentifiable intangibles?
Brand name, human capital
What are trademarks, copyrights, and franchises driven by?
Marketing expenditures.
What is the most difficult Asset to attain and retain?
Human capital
What is a seasonal line of credit?
Type of flexible credit arrangement (debt) that allows a business to pay its expenses even with an extreme fluctuation in revenue (i.e. seasonal businesses).
Cheaper, lower interest rate
What is the most important Liability?
Payroll
What is a committment?
Non-cancellable obligation to do something or pay something in the future
What is a contingency?
There will be a liability if this event happens
What are four ways to increase profit
Raise price, cut variable costs, cut fixed costs, cut taxes
What does it mean if something is capitalized?
Cost is subtracted over time.
Things that provide future benefits over time are capitalized
What is Gross Profit?
Sales - COGS
A measure of the power of the brand
What do we use Porter’s Five Forces for?
Industry analysis and to think about the volatility of Gross Margin
1) Threat of new entry
2) Intensity of existing competition
3) Threat of substitute products
4) Bargaining power of buyers
5) Bargaining power of suppliers
Explain R&D
Research is the expense you have to pay to get proof of concept (much riskier)
Development is manufacturing the formula
What is the formula for Retained earnings?
Net income - dividend - share re-purchases = Retained earnings
