module 1

Question 1

Four Types of Business Activities

Answer 1

▪ Plan business activities
▪ Finance those activities
▪ Invest in those activities
▪ Then engage in Operating activities

Question 2

investing activities

Answer 2

companies acquire land,
buildings and equipment, grow the business with
new products and services, or acquire other
companies to expand into new markets.

Question 3

financing activities

Answer 3

companies raise cash to fund the operating and investing activities. This includes
selling stock to equity investors and borrowing from banks and other lenders.

Question 4

operating activities

Answer 4

companies hire and train
employees, manufacture products, deliver services,
market and sell their products and services, and
manage after-sale customer support.

Question 5

Form 10-K

Answer 5

the audited Annual Report
▪ Four financial statements
▪ Explanatory notes
▪ Management’s discussion and analysis (MD&A)

Question 6

Form 10-Q

Answer 6

the unaudited Quarterly Report
▪ Summary versions of the four financial statements
▪ Limited additional disclosures

Question 7

Benefits of Disclosure

Answer 7

The benefits of supplying accounting information
extend to a company’s capital, labor, input, and output
markets.
▪ Cost of capital
▪ Recruiting efforts in labor markets, and
▪ the ability to establish superior Supplier-customer relations in the input and output markets

Question 8

Costs of Disclosure

Answer 8

1. Preparation and dissemination of financial
information
 2.Competitive disadvantages – revealing
proprietary information
3. Litigation potential
4. Political costs

Question 9

SEC’s Regulation Fair Disclosure

Answer 9

Goal is to curb the practice of selective

disclosure by public companies.

Question 10

Balance Sheet

Answer 10

Reports a company’s financial position at a point in time:
▪ Resources (assets): what the company owns
▪ Sources: where the assets are financed
▪ NONOWNER (liabilities) financing from banks, creditors and suppliers
▪ OWNER (equity) financing from stockholders

Question 11

Income Statement

Answer 11

Reports on a company’s performance over a
period of time and lists:
▪ Top line Revenues (also called sales)
▪ Expenses
Revenues – Expenses = Net Income
Net income – also known as
▪ Earnings
▪ Net earnings
▪ Profit
▪ Bottom line

Question 12

gross profit =

Answer 12

= Revenues – Cost of goods sold

Question 13

SG&A

Answer 13

the overhead of the company, including
▪ Salaries
▪ Marketing costs
▪ Occupancy costs
▪ HR and IT costs
▪ All the other operating expenses the company incurs.

Question 14

Operating Income

Answer 14

The ability of companies to create barriers to
competitive pressure, by patent protection, or effective
marketing, etc. is a key factor in determining their level
of profitability.

net revenues - COGS - SG&A

Question 15

Statement of Stockholders Equity

Answer 15

Reports on year-over-year changes in the equity
accounts that are reported on the balance
sheet

Question 16

Contributed Capital

Answer 16

the stockholders’ net contributions to the company,

Question 17

retained earnings

Answer 17

net income over the life of the company minus all dividends ever paid.

Question 18

Statement of Cash Flows

Answer 18

Reports cash inflows and outflows from three types of
activities:
• Operating
• Investing
• Financing

Question 19

The income and the balance sheet are linked via…

Answer 19

retianed earnings

Question 20

statement of stockholder’s equity and balance

sheet both have

Answer 20

Retained earnings, contributed capital, and

other equity balances

Question 21

Statement of cash flows is linked to the income

statement as

Answer 21

net earnings

Question 22

GAAP allows companies choices in

Answer 22

in preparing financial statements. and financial statements comprise numerous estimants

Question 23

SOX

Answer 23

Both the CEO and CFO have personally reviewed the annual
report.
▪ There are no untrue statements of a material fact that would
make the statements misleading.
▪ Financial statements fairly present in all material respects the
financial condition of the company.
▪ All material facts are disclosed to the company’s auditors and
board of directors.
▪ No changes to its system of internal controls are made unless
properly communicated.

Question 24

Return on Assets

Answer 24

A company’s profitability must be assessed
with respect to the size of its investment
▪ Return on Asset (ROA) - defined as net income for
that period divided by the average total assets
during that period.
-profitability and productivity

Question 25

Return on Equity

Answer 25

Return on equity (ROE) - defined as net income
divided by average stockholders’ equity, where
average equity is commonly defined as
(beginning-year equity + ending-year equity)/2
▪ Company earnings are compared to the level of
stockholder investment
▪ ROE reflects the return to stockholders

Question 26

Porters Five Forces

Answer 26

1. industry competition
2. bargaining power of buyers
3. bargaining power of suppliers
4. threat of subsitiution
5. threat of entry

Question 27

Barriers to Entry

Answer 27

▪ Patents, copyrights and other legal protections
▪ Regulatory and licensing barriers
▪ Scarce resources

Question 28

Product Service differentiation

Answer 28

Technological innovation and Product design

▪ Marketing, distribution, and after-sale customer support

Question 29

Cost Leader

Answer 29

Access to low-cost raw materials or labor
▪ Manufacturing or service efficiency
▪ Manufacturing scale efficiencies
▪ Greater bargaining power with suppliers
▪ Sophisticated IT systems