Part 1 The art of Finance

Question 1

Price-to-Earnings Ratio Method

Answer 1

A way of evaluating a company’s worth by looking at the company’s earnings and comparing it to the market value of similar companies on the public market

Question 2

Discounted Cash Flow Method

Answer 2

A way of evaluating a company’s worth by looking at the cash generated by the company every year and using an interest rate to determine what the stream of future cash is worth today.

Question 3

Goodwill

Answer 3

During acquisition, it is the difference between the net assets and the amount of money the acquiring company pays for them.

Question 4

Balance Sheet

Answer 4

Assets, liability, and owners’ equity at a given time. e.g. what is owed, owned, and worth.

Question 5

GAAP

Answer 5

Generally Accepted Accounting Principles: includes all the rules, standards, and procedures that companies use when preparing their financial statements.

Question 6

FASB and AICPA

Answer 6

Financial Accounting Standards Board & American Institute of Certified Public Accountants: boards that establishes GAAP rule

Question 7

True or False: GAAP rules are held as a global standard

Answer 7

False, US uses GAAP rules other nations provide their own accounting.

Question 8

What are the four principles of conservatism that allow a sale to be recorded?

Answer 8

Evidence that arrangement exists, delivery or services have been rendered, seller’s price to the buyer is fixed/determinable, collectability is reasonably assured

Question 9

Define GAAP Key Principle: Monetary Units and Historical Cost

Answer 9

all items in fi nancial statements are expressed
in monetary units, and that the price paid for an asset is the basis for determining its value (historical cost). Historical cost does not apply to financial assets such as stocks and bonds.

Question 10

Define GAAP Key Principle: Conservatism

Answer 10

The expectation that accountants will apply losses immediately to financial statements, but gains only when they are absolutely certain the gain actually happened.

Question 11

Define GAAP Key Principle: Consistency

Answer 11

Making certain that accounting methods and assumption are consistently used unless something in the business warrents a change.

Question 12

Define GAAP Key Principle: Full Disclosure

Answer 12

Relating to consistency, the act of disclosing any changes made to an accounting method or assumption

Question 13

Define GAAP Key Principle: Materiality

Answer 13

“something significant” that would affect the judgment of investors. Material events must be disclosed

Question 14

Name all five of the GAAP Key Principles

Answer 14

Monetary units and Historical cost; Conservatism; Full Disclosure; Materiality; Consistency

Question 15

IFRS

Answer 15

International Financial Reporting Standards

Question 16

Profit is based on _____

Answer 16

Revenue

Question 17

Define “cash”

Answer 17

Money a company has in the bank or anything the company owns that can readily be turned into cash.