FSA exam 2 with 100% correct answers 2024.

define financial flexibility - answer-a company ability to adapt to unforseen events solvency - answer-ability to pay long term obligation leverage - answer-using debt to increase earnings for owners operating capability - answer-a companies ability to continue operations as it has in the past 5 stages of life cycles - answer-development introduction growth maturity decline characteristics of development stage - answer-spending lots of money on R&D characteristics of companies in the introduction stage - answer-focusing on creating demand, selling, advertising, and promotion characteristics of growth stage (2 types) - answer-organic-internal expansion. uses investments in PPE external-vertical and horizontal growth. acquisitions and joint ventures characteristics of maturity stage - answer-return of capital to investors by dividends and buying back treasury stock operating capability ratios - answer-estimated life of assets estimated age of assets remaining life of assets Capex multiple how can a company be engaged in activities in more than one stage? - answer-autozone is expanding into new stores which would be growth stage but they are also buying back treasury stock and paying dividends like a mature company What are marketable securities - answer-short term investments in other companies. less than 20% ownership in another company. Can be classified as TS, AFS, or HTM equity method investments or joint ventures - answer-20-50% ownership in another company record proportional equity on books consolidated entities - answer-over 50% control in another company. record all of the A + L and proportionate share of equity difference between GAAP and IFRS on inter company investments - answer-GAAP believes if you own more than 51% then you should consolidate and if you own less than 50% list as sub. IFRS says if you believe you control then consolidate and just disclose it. Do what is right what kinds of investments can be considered HTM? - answer-investments that management intends to hold to maturity and not sell. Value them the same year to year(no mark to market or GL). Ex: Bond What kinds of investments can be classified as trading securities? - answer-trading securities are open to be actively traded. Realize a gain or loss on the income statement and mark the value to market. What kinds of assets can be classified as available for sale? - answer-AFS securities are not active but are open to be sold. The realized gain or loss is recorded as OCI because it is not within managements control. mark them to market less than 20% interest in a company - answer-deemed to have no influence mark value to market level 1 level 2 level 3 - answer-1: security that is publicly traded so has a reliable price valuation 2: not publicly traded but similar to another co so pretty reliable 3: nothing like it so must hire finance grad to value it not as reliable how do GAAP and IFRS treat noncontrolling interest? - answer-it is recorded as part of equity which financial statement is most helpful in assessing liquidity, solvency, and financial flexibility? - answer-balance sheet. It presents the financial position as of the beginning and end of a fiscal year. All other statements just explain the changes Other than current and long term how can assets be classified? - answer-investing(marketable securities) operating-everyday operations in addition to current and long term how else can liabilities be classified? - answer-operating-non interest bearing financing-interest bearing define liquidity - answer-ability to pay of ST obligations as they come due identify 3 means of obtaining liquidity - answer-cycles, cash flows, and working capital of those 3 which is the hardest to accomplish? - answer-cycles relationship between leverage, fin flex, and solvency - answer-as leverage increases, fin flex decreases and solvency decreases what value is an indicator of fin flex? - answer-treasury stock identify 3 activities that increase leverage - answer-borrow money buy stock increase dividend identify 3 activities to decrease leverage - answer-pay off debt sell stock reduce dividend What are disadvantages to leveraging with operating liabilites? - answer-difficult to raise money this way because you are relying on business relationships and using your vendors as a bank. This hurts your vendors what are disadvantages to leveraging with debt? - answer-interest expenses debt covenance rules can control you what is the difference between an operating lease and a capital lease? - answer-operating leases will not show up on the financials explain the two primary uses of preferred stock - answer-poison pill mezzanine financing why does DeGeorge refer to Tstock as one of his fav assets? - answer-provides financial flexibility and a company does not have to consult with shareholders when using it when do you record intangibles? - answer-when you buy another company identifiable intangibles - answer-things like patents or trademarks, workforce in place, customer lists goodwill - answer-like an overpayment, cannot be valued, cannot depreciate How do you expense goodwill? - answer-look for impairment each year...meaning it is no longer worth what is was before. This shouldn't happen quickly but it will eventually happen if ROA is less than cost of debt - answer-dont leverage. This means you will incur more costs than what you will recover by borrowing What is the homerun of leverage? - answer-borrowing money and buying back stock. indicates they feel good about their future largest liabilities that aren't on the books? - answer-contingencies (lawsuits) and off balance sheet financing(op. leases) ratios to assess liquidity - answer-working capital, current ratio, quick ratio, acid ratio, daily cash receipts, FCF financial flexibility, solvency, and leverage ratios - answer-debt to equity, assets, capital liabilities to equity, assets assets to equity capital lease expenses will be - answer-greater in the beginning than the end