Module 1

Question 1

What are the 3 activities companies engage in?

Answer 1

Operating
Investing
Financing

Question 2

Strategic Plan
(Business Strategy)

Answer 2

How a company plans to achieve its goals and objectives
How a company brings value to its customers and itself.

Question 3

Use of Financial Statements
Investors and Equity Analysts

Answer 3

Judge the company’s profitability and financial strength
Make reasonable estimates of the value of the company’s equity securities (stakeholder stock)

Question 4

Use of Financial Statements
Lenders and Credit Analysts

Answer 4

Assess the company’s ability to repay its debts
Determine how to manage credit risk associated with the company’s debt securities

Question 5

Use of Financial Statements
Company Managers

Answer 5

Inform decisions on:
1. Where to invest scarce resources
2. How to finance those investments
3. How to maximize the company’s profitability
4. How much cash to maintain

Question 6

Answers from Financial Statements
Managers and Employees

Answer 6

What product lines have performed well?

Question 7

Answers from Financial Statements
Investment analysts and information intermediaries

Answer 7

What expectations about the company’s future profit and cash flow should we use as input into the printing of its stock?

Question 8

Answers from Financial Statements
Creditors and suppliers

Answer 8

Is company in compliance with the contractural terms of its existing loan covenants?

Question 9

Answers from Financial Statements
Stockholders and directors

Answer 9

Is company management demonstrating good stewardship of the resources that have been entrusted to it?

Question 10

Answers from Financial Statements
Customers and Strategic Partners

Answer 10

Is the strategic partnership providing reasonable returns to both parties?

Question 11

Answers from Financial Statements
Regulators and Tax Agencies

Answer 11

What regulated price is appropriate given the company’s financial condition?

Question 12

Assets

Answer 12

Liabilities + Shareholder Equity

Question 13

Shareholder Equity

Answer 13

Assets - Liabilities
Contributed Capital + Earned Capital (Retained Earnings)

Question 14

Contributed Capital

Answer 14

Common Stock + Preferred Stock - Treasury Stock

Question 15

Retained Earnings (Earned Capital)

Answer 15

Net Income - Dividends Paid

Question 16

Income Statement
Components

Answer 16

Net Revenues (Sales)
- Cost of Goods Sold (COGS)
Gross Profit
- Selling, General and Administrative (SGA) Expenses
Operational Income (EBIT)
- Interest
- Taxes
Net Income

Question 17

Statement of Stockholder’s Equity
Components

Answer 17

Contributed Capital
Retained Earnings (beginning) + Net Income - Dividends = Retained Earnings (ending)
Other Equity

Question 18

Statement of Cash Flows
Components

Answer 18

Operating Cash Flow
Investing Cash Flow
Financing Cash Flow
Net Increase in Cash
Cash (beginning)
Cash (ending)

Question 19

Sarbanes-Oxley Act (SOX)

Answer 19

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 all company’s auditors and board of directors
No changes to its system of internal controls are made unless properly communicated