MODULE 3--Financial Literacy Flashcards
Why do Organizational Use Financial Reports?
Standardize data across companies and industries, allowing comparisons to be made between companies on a reasonably “apples to apples” basis
Promote consistency of communication regarding company performance and value
Provide objective information to key constituents:
* Leaders want to know how the organization is doing
* Managers need to make decisions
* Shareholders make investment choices
* Lenders determine terms for loans
* Governments regulate businesses and collect taxes
What are the Two Primary Types of Financial Reports?
Annual report
* Shows the results for a full 12-month period compared to previous years
* This time period is called the fiscal year, and often, but not always, matches the calendar year of January 1 – December 31
– Some companies have a fiscal year that is different than the calendar year, for example July 1 – June 30
3-month fiscal period
* Shows basic financial results for each three-month period (quarter) during the fiscal year
* Includes data for a given quarter compared to the same quarter the previous year, plus the current year six-month or nine-month cumulative comparable
– Quarterly reports are not as detailed as annual reports, and might not match with the full 12-month period due to changing accounting estimates over the year. In other words, four quarters of data is not necessarily a perfect match to a full year of data, but should generally be close
What is a Proxy and Definitive 14A
Definition
* A proxy statement is a document required of a company when soliciting shareholder votes.
* This statement is filed with the Securities and Exchange Commission (SEC) in advance of a company’s annual meeting of shareholders, where the filed document is also known as Form DEF 14A (Definitive Proxy Statement)
Two sections within the proxy are of specific interest and importance to the compensation professional:
* The Compensation Discussion and Analysis Section (or “CD&A), where the Compensation Committee of the Board of Directors must disclose, discuss and outline how the top executives of a company are paid.
* A section on qualitative and quantitative risk related to the company and the markets in which it conducts business.
What are the TYPES of Financial Statements?
Balance sheet
* Shows statement of financial position as of a specific date
* Lists what is owned, what is owed and the equity of an entity
* Shows the book value of a company
* Represents the financial health of a company
Income statement
* Covers a period of time
* Shows revenues earned and expenses incurred over a period of time
* Shows the profitability of a company
Cash flow statement
* Explains the change during the period in cash and cash equivalents
The cash flow statement, along with the balance sheet and the income statement, provides a
comprehensive view of the company’s financial situation
Whare are the 3 sources of Capital?
Sources of Capital
Profits
* Money that comes in from sales
Equity
* Money that investors pay to own a share of the business
Debt
* Money that is borrowed, usually in the form of loans or notes
What is the TIME VALUE of MONEY
Time Value of Money
*Present value (PV) will increase to a future value (FV) with the inclusion of time (N) and interest rate (%i).
Money in the past/money today/money in the future – Money in hand today is worth more than money promised at some future time. This is because it can be invested with interest and grow
over time.
- Future value looks at current holdings and determines how much the investment will grow over time.
- Present value looks at the desired value in the future and determines how much needs to be invested today to realize that amount.
What is Accural Accounting?
Although there are multiple accounting types, the most common for publicly held and privately owned companies is accrual accounting. With accrual accounting, revenues and expenses are
recorded when they occur, regardless of when the cash flows. For example:
Accrued revenue
* When a company ships an order to the customer with the appropriate invoice, it is recorded as a sale, even though the customer’s payment will not be received until sometime in the future.
Accrued expenses
* Payday for the final two complete weeks in December is January 10; accrued costs for two weeks are recorded in the prior year’s income statement, including base salary and related benefits (e.g., payroll taxes, health welfare and retirement benefits).
- Which of the following statements applies to annual reports?
A. Compares the current 12-month period to the same time in previous years
B. Breaks data into 3-month periods for easy comparison
C. Contains fewer details than the quarterly report
D. Always follows a January 1 – December 31 calendar
A. Compares the current 12-month period to the same time in previous years
- Which financial statement shows the book value of a company?
A. Income statement
B. Cash flow statement
C. Fiscal sheet
D. Balance sheet
D. Balance sheet
- Which of the following is an example of accrued revenue?
A. Parts are scheduled for shipping and invoicing in two weeks, and sale is recorded today.
B. Parts shipped and invoiced today are not recorded as a sale until payment is received.
C. Part shipped and invoiced today are recorded as a sale, even though payment is expected two weeks later.
D. Parts have been ordered but sale is not recorded until payment has been received.
C. Part shipped and invoiced today are recorded as a sale, even though payment is expected two weeks later.
