Week 2 + 3

Question 1

What does a balance sheet show?

Answer 1

A snapshot view of the company, showing what the company is worth at a specific moment in time

Question 2

What is the most common form of the balance sheet?

Answer 2

Assets - liabilities = Capital + retained earnings + Sales - cost

Question 3

What is double entry accounting?

Answer 3

When you make a change to one side, you should change the other. (Balance)

Question 4

What can a balance sheet help determine?

Answer 4

Whether the firm can meet its financial obligations
How much money has already been invested in the company
Whether the company is overly indebted
What kind of assets has the company purchased with its financing

Question 5

What can a profit and loss acocount help determine?

Answer 5

A review of income and expenditure over the last year
Gross sales income
Cost of sales (wages, material costs etc.)

Question 6

What is the main differences between PL sheets and balance sheets?

Answer 6

Profit and loss looks back in time whereas balance sheets are a snapshot in time.

Question 7

What is a cash flow statement?

Answer 7

It shows where money comes from and how it is spent.
Cash flow is the difference between inflows and outflows (i.e. the difference between cash receipts from the business operations and the total cash outlays incurred in carrying out these operations)

Question 8

What are financial ratios used for?

Answer 8

Analysing the performance of a business using more than one set of accounts. Convenient way to summarise large quantities of data and compare performances across firms.
Helps you ask the right questions, rarely answer them

Question 9

What does liquidity ratio measure?

Answer 9

how easily the firm can lay its hands on cash (short term)

Question 10

What does efficiency/turnover ratio measure?

Answer 10

how productively the firm is using its assets

Question 11

What does profitability ratio measure?

Answer 11

the firms return on its investments

Question 12

What does leverage ratio measure?

Answer 12

how heavily the company is in debt

Question 13

What do shareholders return ratios show?

Answer 13

return on shareholders equity

Question 14

With regards to liquidity ratios: describe a current ratio.

Answer 14

Current assets/Current Liabilities
Should be at least 1.5 and not over 3, unless the business is saving resources to launch specific investments or payments in the near future

Question 15

With regards to liquidity ratios: describe a quick ratio (acid test).

Answer 15

Current assets-Inventory/current liabilities

Measures immediate resources of a company against current liabilities.

Question 16

With regards to liquidity ratios: describe a cash ratio

Answer 16

Monitors the company’s most liquid assets. A low cash ratio may not matter if the firm can borrow on short notice

Question 17

With regards to liquidity ratios: describe net working capital

Answer 17

Roughly measures the company’s potential reservoir of cash

Question 18

What are some of the shareholder return ratios?

Answer 18

Return on equity = net profit / shareholder

Price/ earnings ratio = market value per share/ return on equity

Dividend per share = dividends/ shareholder equity

Payout ratio = Dividends/ net profit

Dividend yield = dividends per share/ market value share

Question 19

What are three different types of manipulation?

Answer 19

Earnings - Share prices decline when earnings drop.

Cash flow manipulation - manipulating the perception of a companies ability to generate cash flow from its operations

Key metrics manipulation - manipulating non GAAP metrics

Question 20

How can earnings manipulation be done?

Answer 20

Recording revenue too soon
Recording non-existent revenue
Income boosts using unsustainable activities
Shifting expenses earlier or later
Hiding expenses and losses
Shifting income

Question 21

What are warning signs of cash flow manipulation?

Answer 21

Recording bogus CFFO from a normal bank borrowing

Disclosures about selling receivables

Inflating CFFO by faking sale of recievables

Question 22

What are warning signs of key metrics manipulation?

Answer 22

Changing the definition of a key metric
Highlighting a misleading metric as a surrogate doe revenue
Divergence of trend between SSS and revenue