fsa midterm study sheet

8/2/2019 FSA MIdterm Study Sheet

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GAAP have been adopted in order to achieve a presentation of financialinformation that is understandable by users as well as relevant and reliable fordecision making.Two authorites SEC and FASB (financial accounting standards board)SEC regulates US companies that issue securities to the public and requires

issuance of a prospectus for any new security offering. Annual Reports (10-k)Quarterly Reports (10-Q). 8-K Reports (IASB adoption of uniform international accounting standards.

Financial Statements 1. Balance Sheet/Statement of financial position shows assets, liabilities andstockholders equity of the firm on a particular date, such as the end of a quarter ora year.

2. Income or earning statemtn results of operations revenues, expenses, netprofit or loss, and net profit or loss per share per accounting period.

3. Statement of stockholders Equity Beginning and ending balances of all accountsthat appear in the stockholders equity section of the balance sheet

4. Statement of Cash flows provides information about the cash inflows andoutflows from operating, financing, and investing activities during an accountingperiod.

Why Would an individual learn to read and interpret financial statements?Individuals cannot necessarily rely on auditors and management of firms to offer

honest information about the financial well-being of firms.

Which of the following organizations write accounting rules?FASB, SEC, and IASB

What is the goal of the IASB?To have a worldwide acceptance of a set of international financial reportingstandards.What are the basic financial statements provided in an annual report?Balance Sheet, income statement, statement of cash flows, and statement ofstockholders equity.

What items are included in the notes to the financial statements?Summary of accounting policies, changes in accounting policies if any, and detailabout particular accounts.What does and unqualified auditors report indicate?Financial statements present fairly the financial position the result of operationsand the changes in cash flows for the company.


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Which of the following statements is false?

1.1What types of questions can be answered by analyzing financial statements?Would an investment generate attractive returns?

What is the degree of risk inherent in the investmenet?Should existing investment holdings be liquidated?Will cash flows be sufficient to service interest and principal payments tosupport the firms borrowing needs?Does the company provide a good opportunity for employment, futureadvancement, and employee benefits?How well does this company compete in its operating environment?Is this firm a good prospect as a customer?

1.7What causes an auditors report to be qualified? Adverse? A disclaimer of

opinion? Unqualified with explanatory language?Unqualified report states that the financial statements present fairly in allmaterial aspects, te financial position, the results of operations and the cashflows for the accounting period in conformity with GAAP.Qualifiede front page of an audit done by a professional auditor. A qualifiedopinion suggests that the information provided was limited in scope and/or thecompany being audited has not maintained GAAP accounting principlesDisclaimer of opinion means the auditor cannot evaluate the fairness ofstandards of the statement sand therefore experesses no opinion on them. Lackif independence by the auditor will also result in a disclaimer of opinion.Unqualified with explanatory language a consistency departure due to a

change in accounting principle, uncertainty caused by future events such ascontract disputes and lawsuits, or events that the auditor wishes to describebecause they may present business risk and going-concern problems.Unqualified reports with explanatory language result in additional paragraphs tothe standard report.

1.8 Why is the management discussion and analysis useful to the financialanalyst?The management discussion and analysis is useful to the financial analystbecause it contains information that cannot be found in the financial data. Thecontent of this section includes coverage of any favorable or unfavorable trends

and significant events or uncertainties in the areas of liquidity, capital resources,and results of operations.1.9 What is a proxy statement, and why is it important to the analyst?The proxy statement is a document that the sec requires companies to solicitshareholder votes. The proxy statements contains voting procedures andinformation, background information about the company s nominated directors,director compensation, executive compensation, and any proposed changes incompensation plans, the audit committee report, and a breakdown of audit and


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nonaudit fees paid to the auditing firm. This information is important inassessing who manges the firm and how management is paid and potentialconflict of interest issues.The proxy statement is useful becauses it helps by providing information aboutthe longevity and compensation of top management as well as corportate

governance, audit related matters, director and executive compensationincluding option grants, and related party transactions.

1.12 Research FASB project to redesign the format of financial statements.

he purpose of this joint project is to establish a standard that will guide theorganization and presentation of information in the financial statements.The results of this project will directly affect how the management of anentity communicates financial statement information to users of financialstatements, such as present and potential equity investors, lenders, andother creditors. The boards goal is to improve the usefulness of the

information provided in an entitys financial statements to help users makedecisions in their capacity as capital providers.

1. Phase A would address the statements that constitute a complete set offinancial statements and the periods for which they are required tobe presented. [See above]

2. Phase B would address more fundamental issues relating topresentation and display of information in the financial statements,including aggregating and disaggregating information in eachprimary financial statement, defining totals and subtotals, and

reconsidering the use of a direct or an indirect method of presentingoperating cash flows. [In process]

Phase C would address the presentation and display of interim financialinformation in U.S. generally accepted accounting principles (GAAP).The IASB also may reconsider the requirements in IAS 34, InterimFinancial Reporting. [Not yet started]

1.14 Inel(a) We are the world's largest semiconductor chip maker, based on

revenue. We develop advanced integrated digital technology products,primarily integrated circuits, for industries such as computing andcommunications.

(b) Core disiplines new products directions Unqualified with explanatory languagechange in account procedure


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chapter 2.Balance Sheet shows the financial condition or financial position of a companyon a particular date.Assets = Liabilities + Stockholders Equity.

Common size balance sheet

allows for comparision of firms with differentlevels of sales or total assets by introducing a common denominateor.Capital Expenditures TCC = Net working capital

Current Assets includes cash or those assets expected to be converted into cashwithin one year or one operating cycle, whichever is longer.Operating Cycle time required to purchase or manufacture inventory, sell theproduct, and collect the cash.Net Working Capital = Current Assets Current Liabilities

Cash and Marketable Securitues cash in any form cash awaiting deposit or in

a bank account. Marketable securities are cash substitutes. Cash that is not needand invested in the short term for a return.

Accounts Receivable Actual amount of the account allowance for doubtfulaccounts

Allowance for doubtful accounts/ AR + allowance = 4.8%Current amount prior amount /prior amount

Cost flow assumption is made in order to match the cost of products soldduring an accounting period to the revenue generated from the sales and to

assign a dollar value to the inventory remaining for sale at the end of theaccounting period.

FIFO, LIFO, AVERAGE COSTFIFO period of rising prices, balance sheet inventory is valued at current cost,but COGS on the income statement is understated.LIFO reduces a companies tax bill during inflation because produces the largestcogs expense during inflation.Straight line (Depreciable base (cost salvage value)/ depreciation period =Dep expenseCost less accumulated depreciation x twice straight line rate = dep expense.

Beginning Retained Earning +- Net income(loss) dividends = Ending RE

1. What does the balance sheet summarize for a business enterpriseFinancial position at a point in time

2. Assetts = Liabilities + Stockholders equity3. (a)4. b)


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5. b6. a7. d8. c9. b

10.c11.d12.a13.c14.b15.d16.a17.c18. c19.b20.d

21.d22.c

2.4 How can the allowance for doubtful accounts be used to assess earning quality?The allowance for doubtful accounts can be used to assess earning quality becayse aif a company expands sales by lowering credit standards, there should be acorresponding percentage increase in the allowance account.

2.7 Which inventory valuation method FIFO or LIFO will generally produce anending inventory value oon the balance sheet that is closest to current cost?

LIFO method most closely approximates the current cost of inventoryitems as theyare the most recent purchases.

2.8Discuss difference between straightline method of depreciation and the acceleratedmethods. Why do companies use didfferent depreciation methods for tax reporting.

Straight line method Cost salvage value/depreciation periodCost accumulated depreciation x twice the straight line rate2.11Annual Revenue 800,000

350,000200,000 dep130,000 reporting34%

Reporting Purpoes = 108,800Tax purposes = 85,000Reporting net income = 341,200


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Tax purposes = 165,000Reporting = $211,200Deferred tax liability 23,800 reconciles the temporary differences in expense andrevenue recognition for any accounting period.

2.13Allowance for doubtful accounts/AR + allowance1186/116,735 + 1186 = 1.01%3,311/111,903 + 3311 = 2.87z5Cuurent amount prior amount/prior amount =2.14(a)FIFO6000 + 11000 + 10,800 + 1,400 = 30,6007200 + = 17,000FIFO ending inventory = 17,000

LIFO = 7700 + 6000 =$13,700Average Cost30,600 / 3200 = 9.56

Average cost = 12,431.25

b) FIFOc) highest cost of goods sold LIFO

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FIFOB) FIFO for high tech products lifo for food products . tech industry delationary foodinflationary

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Ch 3.Income statement statement of earnings, presents, revenues, expenses, netincome, and earnings per share for an accounting period, generally a year or aquarter.

Net Sales

Total Sales revenues for each year of the three year period net of returnsand allowances.

Net Sales COGS = Gross Profit or gross margin

Gross profit expresses as a percentage of net sales is the gross profit margin.

Operating Profit (aka EBIT)


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1. c2. d3. a

4. c5. d6. a7. b8. d9. d10.b11.c12.d13.d14.c

15. d16.c17.b18.b

3.730% voting common stockpaid 500,000100,000 earning40,0000

Investment incomeIncome statement investment income = cost 12,000 30,000Balance sheet investment account cost 500,000 equity 518,000

Balance sheet investment account cost and equity methos

3.8 Four items included in a companys comprehensive incomeForeign Currency translation effectsUnrealized gains and lossesAdditional pension liabilitiesCash flow hedges

3.9 What can be found statement of stockholders equitydetails the transactions that affect the balance sheet equity accounts during anaccounting period

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Calculating profit measuresGross profit margin50,000/236,000 = 21.19%2009 = 23.08%

2008 = 29.17%

Operating profit margin201028,000/236000 = 11.86%200927,000/195,000 = 13.85%200824,000/120/000 = 20%

Net profit margin

16,000/236000= 6.78%20097.95%200811.25%

3.123.153.18

fsa midterm study sheet

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