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afm 212 > week 4 (module 5) > Flashcards

week 4 (module 5) Flashcards

1
Q

what are the ocmponents to analysis of revenue?

A
  1. growth
    - internal/external
  2. quality
    - recurring/non recurring
    - customer concen/
    - seasonality/volatility
    - gross/net revenue
  3. revenue recognition policy and changes
    - Consistency in revenue recognition
    - New Accounting Standards ( IFRS 15 or ASC 606)
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2
Q

what s growth analysis in terms of internal growth?

A
  • growth achieved through the company’s existing operations

Key Drivers:
Increased Sales Volume
Price increases
New product development
New market with existing products

Features:
Low risk, sustainable, builds on existing strengths
§ Relatively slow

§ Example:
§ Tesla introduced Model 3 in 2016 and CyberTruck in 2019

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3
Q

what s growth analysis in terms of external growth?

A

Growth achieved through mergers, acquisitions, partnership or other external means

Key Drivers:
§ M&A
§ Same industry:
§ Vertical M&A: supplier, distributor
§ Horizontal M&A: competitors
§ Cross-industry- Diversification

Considerations:
§ Quick, immediate revenue increase
§ High risk due to integration challenges, significant capital investment may increase leverage or dilute equity

Example:
§ Facebook acquires Instagram in 2012 and WhatsApp in 2014
§ Microsoft acquired Activision Blizzard in 2023

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4
Q

what is recurring revenue and non recurring revenue?

A

recurring:
Predictable, long term
* Link to Core Business

Non-recurring:
* One time or irregular
* Example:
* One time sales
* Asset Sales
* Discontinued
* Need to analyze them one by one to determine their impact on earnings

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5
Q

how does the comp report divest of business segments?

A

bottom of i/s, continuting vs “discontinued operations”, segregate discont assets and liabilities on current/prior b/s

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6
Q

what 2 components does the discont operations line have

A

net income (loss) from segment’s business actvities prior to divesture

any gain/loss on sale of business

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7
Q

why segregate discont operations

A
  • they rep a transitory item
  • transitory items don’t recur, therefore largely irrelevant to predicting future performance
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8
Q

what criteria must be fulfilled for the disposal of a business unit to be classified as a discont operation

A
  • rep a strategic shift for comp
  • have major effect on comp’s fin results
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9
Q

what is customer concentration?

A

the extent to which a company’s revenue
is dependent on a small number of customers

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10
Q

why does customer concen. matter

A
  • High customer concentration can lead to revenue volatility if key customers reduce orders or leave.
  • crucial for assessing business risk. It highlights the potential vulnerability a company might face if it loses one or more major customers.
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11
Q

what is the difference between seasonalityvs volatility

A

seasonality:
predictable fluctuations with a year, repeat consistently each year
* Interpret quarterly report carefully
* Retail, Tourism, ski resorts

volatility:
* Unpredictable revenue variation over time
* High volatility indicates underlying risks
* Could be one time event
* Oil and Gas

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11
Q

what is the diff between gross and net revenue: allowance

A
  • what are varities of sales allowances?
  • rights of return, sales discounts for volume purchases, retailer promotions (point of sale price markdowns and other promotions)
  • reduce amnt of cash comp receives
  • gaap comps must report amnt of cash expected to be received (net sales)
  • compsmust deduct from gross sales expexted sales returns and pther allowance
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12
Q

what do comps provide of their sales alowances?

A

reocnciliation:
- sales returns
- slaes discounts and incentives

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13
Q

what are 3 metrics used to analyze sales allowances?

A
  1. additions charged to gross sales
    - Measures the income statement amount
    - Reveals effects of the pricing pressure on net sales
    - Expect the percentage of sales allowances to gross sales to increase (thus reducing net sales) as pricing pressure increases
  2. Allowance as Percentage of Gross Sales
    - Measures the balance sheet amount
  3. Adequacy of the allowance amount
    - Compares the dollar amount of the estimates for future sales returns to the amount actually realized professionals
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14
Q

how to adjust sales allowance estimates?

A
  • require estimates; managers pad/shave estimates
  • estimate average rate of additions charged to gross sales
  • apply av rate to determe adjusted amnts for related balance sheet and i/s accounts

av rate = add charges/gross sales

balance sheet is cumulative and each year’s balance sheet adjustment = that year’s adjustment + sum of all prior year’s adjustments

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15
Q

what are the 5 steps to revenue recognition

A
  1. identify contracts
  2. identify performance obligations
    - contractual
  3. determine transaction price
    - estimate revenue using expected selling price
  4. allocate transaction price
  5. recognize rev as when each performance obligation is satisfied
    - customer obtains control
16
Q

whta is is unearned revenue

A
  • recorded liability bc comp is obligated to deliver pre paid product/service
  • revenue is recognized when good is provided, service is completed
17
Q

what companies is deferred rev common amongst?

A
  • receive advance payments from customers
  • sell gift cards
  • memberships/subscriptions
18
Q

what does a decrease or increase in deferred revenue mean?

A

decrease: current reported rev was collect from customers in prior period
increase: predict future increases in revenue and profit

19
Q

what is aging analysis of receivables?

A
  • estimate uncollectible amounts
  • aging analysis grps a/r by number of days past due
20
Q

how to account for a/r

A
  • if comp sells goods on account for 100k and establishes an allowance for uncollectible accounts of 2900,

a/r gross = 100k
less: allowance for uncollectible accounts= 2900
a/r net = 97100

21
Q

how to write off uncollectibel account

A
  • if customer who owes comp 500 files for bankruptcy, comp records write off and adjusts allowance

a/r gross = 99500 (100k - 500)
allowance for uncoll = (2400) (2900 - 500)
a/r net = 97100

21
Q

how is the magniture of a/r measured?

A

a/r turnover = sales / av a/r
dso = 365 / a/r turnover

DSO reveals the number of days, on average, that accounts receivable are outstanding before they are paid. The DSO can be:
- Compared with the company’s established credit terms to investigate if the company’s customers are conforming to those credit terms.
- Computed over several years for the same company to investigate trends
- Compared with peer companies

22
Q

if a/r has grown more quickly than sales then:

A
  • lower a/r turnover
  • high % of a/r to sales
  • lengthening of dso
23
Q

why is the trend of a/r growing quicker than sales unfavourable?

A
  • comp is more lenient in granting credit to its customers
  • credit quality is getting bad
  • mix of prod sold changes with prods or cutsomer contracts having longer payment terms
24
Q

collecting a/r quicker increases

A

operating cash flow

25
Q

what are two potential interpretations for decrease in allowance?

A
  1. credit quality has improved
  2. comp is underestimating allowance amnt
26
Q

how to adjust afda amnt?

A
  • estimate average rate of allowance to a/r gross
  • apply average rate to determine adjusted amnts for related balance sheet and income statement accounts

afm 212 (7 decks)

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