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afm 212 > Other stuff > Flashcards

Other stuff Flashcards

1
Q

users of financial statements

A

Management, investors and analysts, creditors lenders and rating agencies, regulatory agencies,

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2
Q

question from management analyzing FS

A

What product lines geographic areas or other segements performing well compared to competiution and benchmarks

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3
Q

question from investors or analysts analyzing FS

A

what are expected future profits, cash flows , dividends that are factored into stock price model?
is the company solvent and can meet financial obligations
how do expectations about the economy and environment affect the company

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4
Q

question from creditor, lender, rating agencies analyzing FS

A

should we extend credit in form of loan or line of credit for inventory purchase?
what interest rate is reasonable for company based on FS
are they complying with current loan covenants

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5
Q

what are the types of business activities

A

operating, investing, financing

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6
Q

what is notice to reader

A

organizing info from management with no verification for internal use, simple to create, low cost, no assurance

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7
Q

what is review engagement

A

inquiry and analytical procedure to provide limited assurance, at moderat cost, intermediate complexity and used for small companies seeking loan or private companies with external investors

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8
Q

what is audit engagement

A

inquiry and analytical procedure to provide reasonable assurance for publuc companies, large private companies issuing bonds or requiring loans, at high cost and complex

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9
Q

what are porters five forces

A

barrier to entry, existing competition, threat of substitute products, bargaining power of buyers, bargaining power of suppliers

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10
Q

parts oif economic cycle

A

expansion>peak>recession>depression>trough>recovery

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11
Q

external factors affecting industries

A

economic environment , international, political environment, social environment, technology

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12
Q

product life cycle stages

A

introduction>growth>maturity>decline

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13
Q

list the two statments each would be found on:
cash
expenses
noncash assets
contributed capital
cash outflow for CAPEX
retained earnings
cash inflow for stock issued
cash outflow for dividends
revenue

A

cash: BS, SCF
expense: IS
noncash assets: BS
contributed capital: BS
cash outflow for CAPEX: SCF
retained earnings: BS,SE
cash inflow for stock issued: SE, SCF
cash outflow for dividends:SE, SCF
revenue: IS

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14
Q

how to achieve competitive advantage

A

barriers to entry
product/service differentiation

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15
Q

how is vertical analysis done

A

all accounts expressed as a % of assets/revenue

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16
Q

how is horizontal analysis done

A

amounts expressed as % of base year

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17
Q

limitations to ratio comparison

A

GAAP limitations (accounting rules that may omit assets), company change in strategy, statments are challenging to analyze, no analysis can accuratly capture all qualitative aspects

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18
Q

why dont you include noncontrolling interest

A

Because your calculating for parent company and want to reflect position for parent company

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19
Q

what does decreasing gross profit margin mean

A

competitive intensity has increased
product line lost appeal
product cost have increased
product mix have changed
volume has declined and fixed cost hasnt

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20
Q

What does CCC mean and what amount is good

A

average days to buy inventory on credit, sell inventory on credit, collect receivables, pay AP
prefer lower cycle cause then operating cycle is generating profit and cash flow quickly
must finance for amount of days cash is tied up
it can be negative is dpo is much longer so they can invest the cash it recieves from product sales for CCC days before they pay suppliers

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21
Q

how to improve ppe turnover

A

divesting unproductive assets, joint venture to share assets, selling production facilities awith agreements to purchased finish goods from new owner
sale and leaseback of buildings

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22
Q

what is credit analysis

A

process of evaluating ability and willingness of a borrower sucg as a corporation gov or individual to meet financial obligations

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23
Q

why do individuals demand credit anlysis

A

Operating : cyclical operating cash
financing: bank loans or bond matures, funds to repurchase
investing activities: purchase of PPE or acquisition

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24
Q

types of bank loans

A

revolving credit line: cash available for seasonal shortfuls
line of credit
term loans: PPE
mortgages

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25
Q

who are suppliers of credit

A

bank credit analysis, credit rating agencies, consulting firms

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26
Q

other financing other than bank loan

A

lease financing
publically traded debt

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27
Q

credit risk analysis purpose

A

quantify potential credit losses

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28
Q

steps of credit risk analysis

A
  1. evaluate nature and purpose of loan - its use
  2. assess macroeconomic environment and industry conditions: porters 5 forces
  3. perform financial analysis-profitability+coverage, liquidity,solvency/leverage
  4. perform prospective analysis: use projected cash flow to estimate ability to repay obligations
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29
Q

what is loss given default

A

amount that could be loss if company default

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30
Q

what is the priority pf claims

A

admin cost<secured creditors<priority unsecured creditor(wages, benefits taxes)<unsecured creditor(bondholder,supplier,customer)<subordinated debt holder<prefered shareholder<common shareholder

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31
Q

what do credit terms include

A

credit limit, collateral, repayment terms, covenants

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32
Q

what does a longer loan term mean

A

greater chance of default. greater credit risk, higher cost of debt financing

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33
Q

what is coverage analysis

A

companies ability to generate additiional cah to cover principal and interest paym,ents

34
Q

what ratios are used for coverage analysis

A

times interest earned, EBITDA coverage, cash from operations to total debt, free operating cash flow to total debt

35
Q

what inputs go into a credit ratings

A

macroeconomic statistics, industry data, company specific information

36
Q

what is the credit rating reform act

A

signed in 2006 and says that credit rating agency needs at least 3 years of experience befor registering and separates ratingfrom other business activities like consulting and provides increased transparency with more dusclosures and track records

37
Q

how many rating registered rating organizations are there(NRSRO)

A

9 out of almost 100

38
Q

key drivers of internal growth

A

increased sales volume
price increases
new product development
new market with existing products

39
Q

features of internal revenue growth

A

low risk
sustainable
build on existing strength
con: relatively slow

40
Q

what ratio is used for identifying the difference between internal and external revenue growth and how do you tell

A

asset turnover
internal:increase
external :not much change

41
Q

key drivers of external revenue growth

A

mergers and acquisition: same industry-vertical(supplier and distributor), horizontal(competitors)

cross industry-diversification

42
Q

features of external revenue growth

A

quick immediate revenue increase
con: high risk- integration challenges, significant capital investment may increase leverage or decrease equity

43
Q

recurring vs nonrecurring revenue

A

recurring: predictable+long term linked to core business
nonrecurring: one time/irregular

44
Q

types of nonrecurring revenue

A

one time sales, asset sales, discontinued business segments

45
Q

how to report a discontinued operation

A

company reports it on the bottom of IS
separate continuing+discontinued on current and prior BS+IS

46
Q

criteria for discontinued operation

A

disposal must represent strategic shift for companyhave major effect on companies financial result

47
Q

what is customer concentration

A

extent that a companys revenue is dependent on a small number of customers

48
Q

what does high customer concentration mean

A

revenue volatility if key customers leave

49
Q

why is assessing customer concentration important

A

highlights vulnerabilities company might face if it loses one or more major customer

50
Q

what is seasonality in revenue and example

A

predictable fluctuations that repeat consistently each year
can be found through quarterly reports
Eg. retail tourism, ski resorts

51
Q

what is volatility is revenue and example

A

unpredictable revenue variation over time
high volatility could mean underlying risk
eg. oil, gas

52
Q

what is included in sales allowance

A

rights of return, sales discount from volume purchases, retailer promotion

53
Q

what affect on FS would occur is the firm disposed all returned products

A

the company would only adjust revenue and not COGS

53
Q

what does analyzing gross sales tell you when theres sales allowance

A

pricing pressure on net sales
percentage of sales allowance to gross sales increases as pricing pressure increases

54
Q

how can the sale allowance be determined be det

A

allowance as a percentage of gross sales
and compare previous dollar amount of estimate for sales returns to actual amount

55
Q

average rate of additions charged to gross sales

A

sum of additions charged/sum of gross sales
apply it to determine adjusted amount for BS and IS accounts

56
Q

how to restate income statement using adjusted numbers for additions charged

A

find the difference in reported amount and amount calculated using the average rate and find the difference
for decrease- increase net sales and decrease sales allowance and then account for increased income tax expense and tax liabilities. then charge the rest of the increase to net income and retained earnings

57
Q

revenue recognition rules

A

identify contract with customer
identify performance obligation in contract
determine transaction price
allocate transaction price to each performance obligation
recognize revenue when performance obligation is satisfied

58
Q

when is unearned revenue common

A

companies that recieve advanced payments
sell gift cards
sell membership/subscription

59
Q

what can you assume is defered revenue liabilities decrease

A

companies current reported revenue was collected from customers in previous period
future declines in revenue and profit

60
Q

what can you assume is defered revenue liabilities increase

A

predict future increases in revenue and profit

61
Q

how do you write off an uncollectible amount

A

adjust allowance and ar account

62
Q

what happens if AR grows quicker than sales

A

longer ar turnover
longer dso
not favourable since it has more lenient terms and credit quality is deteriorating

63
Q

why would a allowance decrease

A

credit quality has improved
company is underestimating allowance amount

64
Q

how can managers use allowance accounts to help the company

A

to help meet net sales or earnings target using bad debt expense

65
Q

average rate of allowance to gross accounts recievable

A

allowance for doubtful accounts/gross accounts receivable

66
Q

inventory methods

A

FIFO
LIFO
Average costs

67
Q

balance sheet effects from LIFO

A

LIFO inventories are marked lower than under FIFO

68
Q

LIFO cash flow effects

A

it reduces cash flow so firms use it to reduce taxes since its COGS would be higher

69
Q

why does IFRS ban LIFO

A

lack of representational faithfulness
distortion of financial result - lead to lower reporting earnings than real performance
inconsistent with economic reality
non comparability

70
Q

BS adjustments for converting LIFO to FIFO inventory

A

Increase inventory by LIFO reserve
Increase tax liabilities by tax rate applied to reserve
increase retained earnings by difference between LIFO reserve and tax

71
Q

IS adjustments

A

decrease COGS by increase in reserve
increase tax expense by increase*tax rate
increase net income by difference

72
Q

why is analyzing DIO important

A

inventory quality
asset utilization

73
Q

what is an optimal DIO with all else equal

A

low DIO cause more cash flow since you sell faster

74
Q

when is each depreciation method used

A

straight- generate revenue evenly
units of production- wear out cause of use
declining-more efficient in earlier years

75
Q

when is an asset considered impaired

A

if sum of undiscounted cashflow is less than net book value of an asset

76
Q

why do companys restructure

A

to turn company around, usually in response to poor performance, mounting debt, shareholder pressure

77
Q

goal of restructuring

A

positively impact companies long term financial performance

78
Q

restructuring costs

A

asset write downs
employment severance or relocation costs
exit cost

79
Q

when do you require write down of assets

A

fair value<book value

80
Q

what does analyzing ppe turnover do

A

determine productivity: how capital intensive the company is and what level of ppe is needed to generate a dollar of revenue

81
Q

what is an optimal ppe turnover rate

A

higher since it implies lower capital investment for a given level of dales

afm 212 (2 decks)

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