Topic 2

Question 1

GAAP

Answer 1

Generally Accepting Accounting Principals

Question 2

Matching principle

Answer 2

Report revenues & expenses at the same time

Question 3

Historical Cost principle

Answer 3

Items that appear on the financial statements are stated at their historical cost (book value)

Question 4

Advantages of standard forms

Answer 4

Facilitates Analysis
Clarifies communication
Enhance persuasion skills

Question 5

Balance Sheet

Answer 5

Snapshot in time

(Left Hand Side) (most liquid –> least liquid)
Cash
+Marketable securities
+A/R
+Inventories
————————————————
=Current assets
+Fixed Assets (PP&E)
-Accumulated Depreciation
————————————————
=Net Fixed Assets
+Current Assets
————————————————
=Total Assets

(Right Hand Side) (most liquid –> least liquid)

  Accounts payable
 \+Accruals
 \+Notes payable
------------------------------------------------
=Current Liabilities
\+Long-term Debt (Maturity > 1 year)
------------------------------------------------
=Total Liabilities

(Right Hand Side)
  Preferred Stock
 \+Retained Earnings
 \+Common Stock
 \+Additional Paid-in Capital
------------------------------------------------
=Total Equity
\+Liabilities
------------------------------------------------
=Total Liabilities & Equity

Question 6

Income Statement

Answer 6

Over a period of time (year)

Revenues (sales)
-CGS
————————————————
=Gross Profit
-Operating Expenses
————————————————
=EBITDA (Earnings beore interest, taxes, depreciation & amortization
-Depreciation
————————————————
=EBIT
-Interest Expense
————————————————
=EBT
-Tax Expense
————————————————
=Net Income (profit or earnings)

Question 7

Statement of Cash Flows

Answer 7

Most transparent financial statement

  CFO
\+CFI
\+CFF
------------------------------------------------
=Change in cash
\+Beginning cash
------------------------------------------------
=End cash

Question 8

*Review CFO CFI & CFF Equations & Info

Answer 8

yah

Question 9

Why do ratio analysis?

Answer 9

Standardize Financial Data
Flexibility
Lead us to look in the right places
Evaluate whether the firm is maximizing shareholder wealth