Financial Statement Analysis and Valuation – Practice Test | U.S. Accounting Course | Comprehensive Q&A Review

  "Par value received from the original sale of common stock to investors - CORRECT ANSWER Common stock *par value is 1 dollar but sells at 30 dollars then next month it is up to 40 dollars it" "We sell 100 common stock shares at a $4 dollars a share and par value is 1 dollar. - CORRECT ANSWER Book value = $100 dollar APIC= $300 (400-100) Treasury stock ($500) (negative 500) *Company just bought back their stock (this is because they believe its undervalued and can drive back the stock price and then reissue more stock)" "Value received from the original sale of preferred stock to investors; fewer ownership rights compared to common stock - CORRECT ANSWER Preferred stock *Get dividends first" "Amounts received from the original sale of stock to investors in excess of the par value of stock - CORRECT ANSWER Additional paid-in capital" "Amount the company paid to reacquire its common stick from shareholders - CORRECT ANSWER Treasury stock" "Accumulated net income profit that has not been distributed to stockholders as dividends - CORRECT ANSWER Retained earnings" "Accumulated changes in asset and liability fair values that are not reported in the income statement. - CORRECT ANSWER Accumulated other comprehensive income or loss" "What equity is involved with contributed capital and what is involved with earned capital - CORRECT ANSWER Contributed: -Common stock -Additional paid in capital -Preferred stock -Treasury stock Earned: -Retained earnings -Accumulated other income/loss" "______ is computed by multiplying the number of shares outstanding common shares by the company's stock price - CORRECT ANSWER Market value" "Income Statement - CORRECT ANSWER " "An income statement reports on ________ and lists amounts for sales (revenue) less all expenses and costs over a period of time - CORRECT ANSWER Operating activities" "______ are the usual and customary costs a company incurs to supper its operative activities that include COGS, selling expenses, depreciation expense, and engineering expenses - CORRECT ANSWER Operating expenses" "_______ relate to the company's financing and investing activities that include interest expense , interest or dividend income, and gains and losses from the sale of securities - CORRECT ANSWER Non-operating expenses" "Sales less expenses = - CORRECT ANSWER Bottom line" "______ are the usual and customary costs that a company incurs to support its main business activities - CORRECT ANSWER Operating expenses" "Operating expenses - CORRECT ANSWER 1)Costs of goods sold -Material costs -Labor costs -Overhead 2)Selling expenses 3)Depreciation expense 4)Research and development expense (Engineers)" "_____ represents assets the company received from issuing stock to stockholders Example: The balance sheet of UA account at the beginning of the year was 508.4 During the year, UA sold additional shares for 22 and recorded miscellaneous adjustments of 106.3. What is the year-end balance for contributed capital - CORRECT ANSWER Contributed capital *636.7 million" "______ represents the cumulative total amount of income the company has earned and that has been retained in the business (Ending retained earnings= beginning retained earnings + Net income for period- Dividends for period) - CORRECT ANSWER Retained earnings" "______ Reports the change in a company's cash balance over a period of time. (cash inflows and outflows from operating, investing, and financing activities over a period of time) - CORRECT ANSWER Statement of cash flows" "The following financial information is from Nike for May 31, 2015 ($Millions). -Prepare Nike's balance sheet as of May 31, 2015 2) Prepare an income statement and statement of cash flows for Nike for the year ended May 31, 2015. Short term liabilities= 6334 Cash flows from financing = (2,873) Revenues = 30,601 Stockholder's equity = 12,707 Cash inflows from operations = 4,680 SG&A expenses = 9,892 Long-term assets = 5,624 Cash flows from investing = (175) Cost of goods sold = 16,534 Cash, beginning- year = 2,220 Tax expense = 932 Short-term assets= 15,976 Interest income= 30 Long-term liabilities = 2,559 Cash, ending year = 3,852 - CORRECT ANSWER Balance Sheet: Nike Inc. Balance sheet ($ millions) May 31, 2015 Short term assets.. 15,976 Short term liab 6,334 Long term assets.... 5,624 Long term liab 2,559 Stockholders eq 12,707 ------- ------- Total assets ...............21,600 Total liab & E... 21,600 ------- -------- ------- -------- Income Statement: Nike Inc. Income Statement ($millions) For year ended May 31, 2015 Revenues 30,601 COGS 16,534 --------- Gross Profit 14,067 SG&A expenses 9,892 --------- Income from operations 4,175 Interest income 30 -------- Income before taxes 4,205 Provision from income taxes 932 -------- Net income $3,273 Statement of Cash Flows: Nike Inc. Income Statement ($millions) For year ended May 31, 2015 Cash flows from operations 4,680 Cash flows from investing (175) Cash flows from financing (2,873) -------- Net increase (decrease) in cash 1,632 Cash, beginning year 2,220 -------- Cash, ending year $3,852" "What are the five important forces that confront the company and determine its competitive intensity - CORRECT ANSWER -Industry competition -Buyer power -Supplier power -Product substitutes -Threat of entry" "_______ requires the CFO and CEO to personally sign a statement attesting to the accuracy and completeness of the financial statements - CORRECT ANSWER Sarbanes-Oxley Act (SOX)" "What are the 5 declarations that the CEO and CFO must sign off on - CORRECT ANSWER -Both personally reviewed the annual report -No untrue statements that could make the statement misleading -Statement fairly present in all material respects the financial condition of the company- All material facts are disclosed to company's auditors and board of directors -No changes are made to internal controls unless properly communicated" "In a recent year, the total assets of Microsoft equal 193,694 million and equity is 71,997 million. 1) What is Microsofts liabilities 2)Does Microsoft receive more financing from its owners or nonowners? 3)What percentage of financing is provided by Microsoft's owners? - CORRECT ANSWER 1) 193,694 - 71,997 = 121,697 2) Receives more financing from non owners (Liability and debt) than owners (stockholders) 3) 71,997 / 193,694 = 37.17 %" "The cumulative net income that has been retained by the company (exhibit 2.4) - CORRECT ANSWER Earned capital" "Formula for Retained earnings - CORRECT ANSWER Beginning retained earnings + Net Income (or-Net loss) - Dividends = Ending retained earnings" "______ Relate to the company's financing and investing activities - CORRECT ANSWER Non-operating expenses" "Non-operating expenses - CORRECT ANSWER -Interest expense -Interest in dividend income -Gains and losses" "Foundation of accrual accounting: - CORRECT ANSWER -Revenue recognition principle -Expense recognition(matching principle)" "Revenue Recognition Principle (1) - CORRECT ANSWER Recognize revenues for goods and services provided to customers at an amount expected to receive (when earned)" "Expense Recognition (Matching) Principle (2) - CORRECT ANSWER Recognize expenses when incurred" "These two principles must: - CORRECT ANSWER -Recognize revenues in the time period earned (1) -Record all expenses incurred to generate those revenues during the same time period (2) *This then correctly reports that period" "Transitory items in the income statement - CORRECT ANSWER Exhibit 2.6 *These are not expected to recur Such as discontinued operations and extraordinary items *Transitory items aren't likely to recur so analtists focus on income from operations" "Gains or losses (and net income or loss) from business segments that are being sold or have been sold in the current period - CORRECT ANSWER Discounted operations" "Gains or losses from events that are both unusual and infrequent - CORRECT ANSWER Extraordinary items" "Statement of stockholders' Equity - CORRECT ANSWER " "Reflects financing provided from company owners - CORRECT ANSWER Stockholders' equity" "Net funding a company received from issuing and reacquiring its equity shares - CORRECT ANSWER Contributed capital" "What is involved with contributed capital - CORRECT ANSWER -Common stock -Preferred stock -Treasury stock -Additional paid-in capital (selling stock above par value)" "Cumulative net income (loss) that has been retained by the company - CORRECT ANSWER Earned capital" "What is involved with earned capital - CORRECT ANSWER -Retained earnings -Accumulated other income/loss" "Several line items and account titles are listed below. For each, indicate in which of the following finan-cial statement(s) we would likely find the item or account: income statement (IS), balance sheet (BS), statement of stockholders' equity (SE), or statement of cash flows (SCF). a.Cash asset b. Expenses c. Non cash asset d. contributed capital e. cash outflow from capital f. retained earnings g. cash inflow for stock outflow for dividends i. net income - CORRECT ANSWER a. BS b. IS c. BS d. SE e. SCF f. SE & BS g. SCF & SE h. SE and SCF i. IS" "3) Unearned liabilities - CORRECT ANSWER Obligations created when the company accepts payment in advance for goods or services it will deliver in the future; also called advances from customers, customer deposits, etc *Season ticket holders,(this is to be reported as an unearned revenue and can't be recorded until after the football game), concert tickets, etc" "4) Short-term notes payable - CORRECT ANSWER Short-term debt payable to banks or creditors" "5)Current maturities of long-term debt - CORRECT ANSWER Principal portion of long-term debt that is due to be paid within one year" "Net Working capital (Not given on test need to know) - CORRECT ANSWER -Current assets-current liabilities *Accounts receivable and inventory (assets) *Accounts payable (liability) *Lower the better because you've collected more cash and not at a liability for people not paying you back" "Companies should have enough money to cover their _______ - CORRECT ANSWER Short-term debt" "The net working capital required to conduct business depends on the company's ______ - CORRECT ANSWER Operating cycle" "Time between paying cash for goods or services and receiving cash from customers - CORRECT ANSWER Operating (cash) cycle" "Inventories purchased on credit from suppliers (AP) - CORRECT ANSWER Trade credit" "The prime objective for the operating cycle is to - CORRECT ANSWER Shorten the cycle in order to complete as many cycles as possible during the year to maximize profit and cash flow" "Steps in shortening the operating cycle - CORRECT ANSWER -Decrease Accounts receivable -Reduce inventory levels -Increase trade credit" Balance Sheet: - CORRECT ANSWER Assets = Liabilities + Equity (Investing = Nonowner financing + Equity)" "_____ and _____ are the two ways a company can finance its assets - CORRECT ANSWER -Owners Financing (Raise money from stockholders) -Non-owners Financing: (banks, creditors, suppliers)" "Investing activities are represented by the company's _______ - CORRECT ANSWER assets" "_____ are at the top of the balance sheet in order to their nearness to cash - CORRECT ANSWER Short-term assets *Cash then accounts receivable, and then inventories *Can be sold quickly" "_____ are assets that will generate cash over a long period of time - CORRECT ANSWER Long-term assets *Land, buildings, and equipment (PPE)" "Income statement - CORRECT ANSWER Revenue - Expenses = Net Income (Top line- Expenses = Bottom line)" "______ reports on a company's performance over a period of time and lists amounts for its top line revenues and its expenses - CORRECT ANSWER Income statement" "Revenues less expenses equals the bottom-line _________ amount - CORRECT ANSWER Net Income" "______ and ______ are the two basic kinds of operating expenses - CORRECT ANSWER Cost of goods sold(COGS) -Selling, general, and administrative expenses (SG&A)" "_______ include the amount paid to purchase or manufacture the goods (inventories) that it sold to customers - CORRECT ANSWER Cost of goods sold" "_______ is the overhead expenses that include salaries, marketing costs, occupancy costs, HR and IT costs, and all other operating expenses - CORRECT ANSWER SG&A" "______ reports on year-over-year changes in the equity accounts that are reported on the balance sheet - CORRECT ANSWER Statement of stockholders' equity" "______, _______, and ______ are the three categories listed on the statement of stockholders' equity - CORRECT ANSWER -Contributed capital -Retained Earnings -Other equity" "______ is the number of days the company has its cash tied up in receivables and inventories less number of days of trade credit provided to suppliers - CORRECT ANSWER Cash conversion cycle" "Obligations due after one year - CORRECT ANSWER Non-current liabilities" "List the following non-current liabilities - CORRECT ANSWER -Long term debt -Other long term maturities" "1) Long-term debt - CORRECT ANSWER Amounts borrowed from creditors that are scheduled to be repaid that one year in the future *bonds,mortgages, long term loans" "2) Other long-term liabilities - CORRECT ANSWER various obligations, such as pension liabilities and long-term tax liabilities, that will be settled a year or more into the future" "Financing provided from company owners often referred to as RESIDUAL INTEREST - CORRECT ANSWER Stockholder's equity" "Equity consists of: - CORRECT ANSWER -Contributed capital -Earned capital (retained earnings)" "The net funding a company received from issuing and reacquiring its shares - CORRECT ANSWER Contributed capital" "Stockholders' equity value of the company determined by GAAP - CORRECT ANSWER Book Value (More reliable)" "Computed by the number of outstanding common share by the per share market value - CORRECT ANSWER Market value (More relevant)" "Stockholders' equity is always measured at ________ - CORRECT ANSWER Book value" "Reports on cash inflows and outflows from operating, investing, and financing activates over a period of time - CORRECT ANSWER Statement of Cash Flows" "Net cash flows from operating activities are related to the - CORRECT ANSWER -Income statement - current asset and current liabilities section of the balance sheet *Current assets: AR and Inventories *Current liabilities: AP" "Net cash flows from investing activities are related to the - CORRECT ANSWER Relate to the long-term asset section of the balance sheet *PPE" "Cash flows from insurance of and payments toward borrowing and equity - CORRECT ANSWER Net cash flows from financing activities" "Net cash flows from financing activities are related to the - CORRECT ANSWER Long term liabilities and stockholders' equity sections of the balance sheet" "Accounting cycle - CORRECT ANSWER 1) Analyze transaction and prepare (Post entries) 2)Prepare and post accounting adjustments 3)Prepare financial statements from trial balance 4)Close all temporary accounts" "The zeroing out of revenue and expense accounts by transferring their ending balances to retained earning - CORRECT ANSWER Closing process" "What are the 3 closing schedules - CORRECT ANSWER -Gregorian calendar -5-4-4 (5 weeks, 4 weeks, 4 weeks) -4-4-5 (4 weeks, 4 weeks , 5 weeks)" "Financial statement effects template - CORRECT ANSWER Balance sheet: -Transaction: cash asset + non cash asset = liabilities + contributed capital + earned capital Income statement: Revenues - Expenses = Net income *Earned capital = net income" "Cash assets are reduced by 100, and wage expense of 100 is reflected in the income statements, which reduced income and retained earnings - CORRECT ANSWER " "______ Reflect advance cash payments that will ultimately become expenses - CORRECT ANSWER Prepaid expenses" "______ Reflect cash received from customers before any services or goods are produced - CORRECT ANSWER Unearned revenues *Liabilities" "Receive 5,000 cash in advance for future services - CORRECT ANSWER + 5000 for cash asset + 5,000 liabilities (unearned revenue)" "Recognition of 5,000 services revenue earned - CORRECT ANSWER -5,000 liabilities -5,000 AR" "______ are expenses incurred recognized on the income statement, even though they are not yet paid in cash - CORRECT ANSWER Accrued expenses *current liability" " - CORRECT ANSWER Accrued revenues *Current asset (AR)" " "Related net income to the average investment by stockholders - CORRECT ANSWER RETURN ON EQUITY 1)Net income/ average Stockholder's Equity 2) Operating return + Non-Operating return *ROE *Higer values are generally favorable (efficient in generating income on new investments)" "Return from the company's operating activities linked to revenues and expenses from the company - CORRECT ANSWER Operating return" "Return on net operating assets (RNOA) - CORRECT ANSWER =NOPAT / Average NOA" "Operating revenues less operating expenses (costs of sales, SG&A expenses, and taxes) - CORRECT ANSWER Net operating profit after tax (income statement)" "Operating assets less operating liabilities - CORRECT ANSWER Net operating assets (Balance sheet) NOA = Operating assets-Operating liabilities *MUST KNOW FORMULA" "**Must know Net operating assets - CORRECT ANSWER Operating assets-Operating liabilities" "Tax on operating profit - CORRECT ANSWER Tax expense + (Pretax net non operating expense x Statutory tax rate)" "Net operating profit after tax (NOPAT) - CORRECT ANSWER NOPBT-Tax on operating profit *NOPBT= net operating profit before tax" "Net operating profit margin (NOPM) - CORRECT ANSWER NOPM= NOPAT/ Revenues (sales)" "Reveals how much operating profit the company earns from each sales dollar - CORRECT ANSWER Net operating profit margin (NOPM)" "Net operating profit margin is affected by - CORRECT ANSWER -Level of gross profit -Level of operating expenses -Level of competition and company's willingness and ability to control costs" "Measures the productivity of the company's net operating assets (Reveals the level of sales the company realized from each dollar invested in NOA) - CORRECT ANSWER Net operating asset turnover (NOAT) *Want highest as possible" "Net operating asset turnover - CORRECT ANSWER NOAT= Revenues / Average NOA" "Disaggregation of RNOA*(ON TEST) - CORRECT ANSWER RNOA = NOPAT/Average NOA= NOPAT sales * Sales/ Average NOA *Net operating profit margin(NOPM = Sales) *Net operating asset turnover = Average NOA)" ""To be recorded on a balance sheet, an asset must... - CORRECT ANSWER -Must be owned (or controlled) by the company -Must confer expected future economic benefits that result from a past transaction or event" "The most liquid assets are called _____ and are listed first. - CORRECT ANSWER Current assets" "_____ comprise assets that can be converted to cash within a year - CORRECT ANSWER Current assets" "List the following types of current assets - CORRECT ANSWER -Cash -Short-term investments -Accounts receivable, net -Inventories -Prepaid expenses" "Currency, bank deposits, and investments with an original maturity of 90 days or less - CORRECT ANSWER Cash" "Marketable securities and other investments the company expects to dispose of in the short run - CORRECT ANSWER Short-term investments" "Amounts due to the company from customers arising from the sale of products and services on credit ("net" refers to the subtraction of uncollectible accounts) - CORRECT ANSWER Accounts receivable, net" "Goods purchased or produced for sale to customers - CORRECT ANSWER Inventories" "Costs paid in advance for rent, insurance, advertising, and other services - CORRECT ANSWER Prepaid expenses" "_____ is the quickest way to earn quick cash - CORRECT ANSWER Giving suppliers, creditors, etc discounts for the company's accounts receivable" "_______ cannot be converted to cash within a year - CORRECT ANSWER Long-term assets" "List the following types of long-term assets - CORRECT ANSWER -Property, plant, and equipment (PPE) -Long-term investments -Intangiable and other assets" "Land, factory buildings, warehouses, office build-ings, machinery, motor vehicles, office equipment, and other items used in operating activities - CORRECT ANSWER PPE" "Investments the company does not intend to sell in the near future - CORRECT ANSWER Long term investments" "Assets without physical substance, including patents, trademarks, franchise rights, goodwill, and other costs the company incurred that provide future benefits - CORRECT ANSWER Intangiable and other assets" "Assets are recorded at their ______ and not at their current ________ - CORRECT ANSWER Historical costs (original price) ; market values" "______ are more relevant while _____ are more reliable - CORRECT ANSWER Market values ; historical cost" "Balance sheets only include items that can be __________ - CORRECT ANSWER Reliably measured Ex. Micky mouse image cannot be recorded on balance sheet" "________ represent the sources of capital the company uses to finance the acquisition of assets - CORRECT ANSWER Liabilities and equity" "The balance sheet lists liabilities in order from - CORRECT ANSWER Shortest to longest maturity" "Current liabilities - CORRECT ANSWER Obligations that must be settled with a year" "1) Accounts payable - CORRECT ANSWER Amounts owed to suppliers for goods and services purchased on credit" "2)Accrued liabilities - CORRECT ANSWER Obligations for expenses that have been incurred but not yet paid *You work this week and don't get paid until next week this is an accrued liabilities for company"