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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
who are suppliers of credit
bank credit analysis, credit rating agencies, consulting firms
26
other financing other than bank loan
lease financing publically traded debt
27
credit risk analysis purpose
quantify potential credit losses
28
steps of credit risk analysis
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
29
what is loss given default
amount that could be loss if company default
30
what is the priority pf claims
admin cost
31
what do credit terms include
credit limit, collateral, repayment terms, covenants
32
what does a longer loan term mean
greater chance of default. greater credit risk, higher cost of debt financing
33
what is coverage analysis
companies ability to generate additiional cah to cover principal and interest paym,ents
34
what ratios are used for coverage analysis
times interest earned, EBITDA coverage, cash from operations to total debt, free operating cash flow to total debt
35
what inputs go into a credit ratings
macroeconomic statistics, industry data, company specific information
36
what is the credit rating reform act
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
how many rating registered rating organizations are there(NRSRO)
9 out of almost 100
38
key drivers of internal growth
increased sales volume price increases new product development new market with existing products
39
features of internal revenue growth
low risk sustainable build on existing strength con: relatively slow
40
what ratio is used for identifying the difference between internal and external revenue growth and how do you tell
asset turnover internal:increase external :not much change
41
key drivers of external revenue growth
mergers and acquisition: same industry-vertical(supplier and distributor), horizontal(competitors) cross industry-diversification
42
features of external revenue growth
quick immediate revenue increase con: high risk- integration challenges, significant capital investment may increase leverage or decrease equity
43
recurring vs nonrecurring revenue
recurring: predictable+long term linked to core business nonrecurring: one time/irregular
44
types of nonrecurring revenue
one time sales, asset sales, discontinued business segments
45
how to report a discontinued operation
company reports it on the bottom of IS separate continuing+discontinued on current and prior BS+IS
46
criteria for discontinued operation
disposal must represent strategic shift for companyhave major effect on companies financial result
47
what is customer concentration
extent that a companys revenue is dependent on a small number of customers
48
what does high customer concentration mean
revenue volatility if key customers leave
49
why is assessing customer concentration important
highlights vulnerabilities company might face if it loses one or more major customer
50
what is seasonality in revenue and example
predictable fluctuations that repeat consistently each year can be found through quarterly reports Eg. retail tourism, ski resorts
51
what is volatility is revenue and example
unpredictable revenue variation over time high volatility could mean underlying risk eg. oil, gas
52
what is included in sales allowance
rights of return, sales discount from volume purchases, retailer promotion
53
what affect on FS would occur is the firm disposed all returned products
the company would only adjust revenue and not COGS
53
what does analyzing gross sales tell you when theres sales allowance
pricing pressure on net sales percentage of sales allowance to gross sales increases as pricing pressure increases
54
how can the sale allowance be determined be det
allowance as a percentage of gross sales and compare previous dollar amount of estimate for sales returns to actual amount
55
average rate of additions charged to gross sales
sum of additions charged/sum of gross sales apply it to determine adjusted amount for BS and IS accounts
56
how to restate income statement using adjusted numbers for additions charged
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
revenue recognition rules
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
when is unearned revenue common
companies that recieve advanced payments sell gift cards sell membership/subscription
59
what can you assume is defered revenue liabilities decrease
companies current reported revenue was collected from customers in previous period future declines in revenue and profit
60
what can you assume is defered revenue liabilities increase
predict future increases in revenue and profit
61
how do you write off an uncollectible amount
adjust allowance and ar account
62
what happens if AR grows quicker than sales
longer ar turnover longer dso not favourable since it has more lenient terms and credit quality is deteriorating
63
why would a allowance decrease
credit quality has improved company is underestimating allowance amount
64
how can managers use allowance accounts to help the company
to help meet net sales or earnings target using bad debt expense
65
average rate of allowance to gross accounts recievable
allowance for doubtful accounts/gross accounts receivable
66
inventory methods
FIFO LIFO Average costs
67
balance sheet effects from LIFO
LIFO inventories are marked lower than under FIFO
68
LIFO cash flow effects
it reduces cash flow so firms use it to reduce taxes since its COGS would be higher
69
why does IFRS ban LIFO
lack of representational faithfulness distortion of financial result - lead to lower reporting earnings than real performance inconsistent with economic reality non comparability
70
BS adjustments for converting LIFO to FIFO inventory
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
IS adjustments
decrease COGS by increase in reserve increase tax expense by increase*tax rate increase net income by difference
72
why is analyzing DIO important
inventory quality asset utilization
73
what is an optimal DIO with all else equal
low DIO cause more cash flow since you sell faster
74
when is each depreciation method used
straight- generate revenue evenly units of production- wear out cause of use declining-more efficient in earlier years
75
when is an asset considered impaired
if sum of undiscounted cashflow is less than net book value of an asset
76
why do companys restructure
to turn company around, usually in response to poor performance, mounting debt, shareholder pressure
77
goal of restructuring
positively impact companies long term financial performance
78
restructuring costs
asset write downs employment severance or relocation costs exit cost
79
when do you require write down of assets
fair value
80
what does analyzing ppe turnover do
determine productivity: how capital intensive the company is and what level of ppe is needed to generate a dollar of revenue
81
what is an optimal ppe turnover rate
higher since it implies lower capital investment for a given level of dales

afm 212 (3 decks)

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