Bootcamp

Question 1

Trading on the NYSE is executed without a specialist (ie. a market manager).
True or False

Answer 1

False

Question 2

What are the four financial statements and what order are they prepared in?

Answer 2

1. Income statement
2. Statement of retained earnings
3. Balance sheet
4. Statement of cash flows

Question 3

Stocks and bonds are two types of financial instruments, true or false

Answer 3

True

Question 4

The matching principle in accrual accounting requires that
a. Revenue be recognized when the earning process is complete and matches expenses to revenues recognized.
b. Expenses are matched to the year in which they are incurred.
c. Revenues are matched the year in which they are booked.
d. Revenue should be large enough to match expenses.

Answer 4

A. Revenue be recognized when the earnings process is complete and matches expenses to revenues recognized.

Question 5

What are the three elements of an income statement?

Answer 5

Revenues expenses, net income

Question 6

What are the elements of a balance sheet?

Answer 6

Assets, liabilities equity retained earnings

Question 7

A high-quality customer just purchased $500,000 worth of product from your company. The contract calls for immediate delivery of the product with a cash payment of $300,000 today and $200,000 to be paid 60 days. The expense associated with the product is $300,000, of which $100,000 has not been billed to your supplier. Under a cruel based accounting system, you will most likely:
- Revenues of $300,000 and expenses of $300,000
- Revenues of $300,000 and expenses of $200,000
- Revenues of $500,000 and expenses of $300,000
- revenues of $500,000 and expenses of $200,000

Answer 7

Revenues of $500,000 and expenses of $300,000

Question 8

A firm reported retained earnings of $300 in 12/31/20x2. For 12/32 20x3, the firm reports retained earnings of $400 and pays dividends of $25. What was net income in 20x3?
- 300
- 400
- 125
- 100

Answer 8

125
Dividends paid + change in retained earnings
$25 + ($400-$300)
$25 + $100

Question 9

What is the revenue recognition principle?

Answer 9

Revenue is recognized when product or service is delivered to the customer

Question 10

What is the expense recognition principle?

Answer 10

Expenses are recognized when they are incurred by the company

Question 11

Harrison Co. sold $100,000 in products 2023 and collected $70,000 from customers. The remainder was collected in 2024. The company also encourages $60,000 in expenses for 2023 and paid $40,000 in 2023 and the remainder was paid in 2024.

How much revenues and expenses are recognized in 2023?

Answer 11

Revenue equals $100,000
Ex expenses equals $60,000

Question 12

Harrison Co. sold $100,000 in products 2023 and collected $70,000 from customers. The remainder was collected in 2024. The company also encourages $60,000 in expenses for 2023 and paid $40,000 in 2023 and the remainder was paid in 2024.

What is the net income for 2023?

Answer 12

$40,000
$100,000 - $60,000 = $40,000

Question 13

What item is included in the income statement and not included in the statement of cash flows?

Answer 13

Depreciation expense

Question 14

A basic equation for the balance sheet is?
- equity= assets- liabilities
- liabilities= equity+ assets
- assets= liabilities- equity
- assets= equity- liabilities

Answer 14

Equity = assets - liabilities

Question 15

A firm reported beginning retain earnings of $10,000, net income of $150,000 and dividends of $25,000. What is the ending retained earnings?

Answer 15

$10,000 + $150,000 - $25,000 equals $135,000

Question 16

What is the basic accounting equation used in preparing the balance sheet?

Answer 16

Assets equals liabilities plus equity

Question 17

What is the statement of cash flow?

Answer 17

A statement that shows the change in cash balance for a period of time

Question 18

What are some examples of operating assets?

Answer 18

Accounts receivable
Inventory
Prepaid expenses
Current assets

Question 19

What are some examples of operating liabilities?

Answer 19

Accounts payable
Accrued expenses
Current liabilities

Question 20

Johnson company reported the following:
Net income $100,000
Depreciation $20,000
Change an operating assets $10,000
Change an operating liabilities ($4000)
Change in equipment ($25,000)
Dividends paid $5000
Change in long-term liabilities $30,000

What is the cash flow from operating activities?

Answer 20

$106,000 in flow

CFO= 100,000 + 20,000 - (10,000- (-4000))
CFO= 100,000 + 20,000 - (14,000)

Question 21

Why is the balance sheet known as a permanent statement?
- because the statement is sent to the SEC
- because the other statements are reset at the end of the fiscal year
- because it is printed out and archived
- Because it persists in the minds of shareholders

Answer 21

Because the other statements are reset at the end of the fiscal year

Question 22

How do you calculate the change and retained earnings?
- ending retained earnings - change in cash
- EBIT divided by total assets + dividends
- EBIT - change in cash - dividends
- net income - dividends

Answer 22

Net income - dividends

Question 23

Harrison reported net PPE of $5000 last year and this year the firm reported net PPE of $4500. The depreciation last year and this year were $400 and $300 respectively.

What is the cash flow from investing activities?

Answer 23

$200 inflow
CFI= ((4500-5000) + 300) x (-1)
CFI= (-500 + 300) x (-1)
CFI= -200 x (-1)

Question 24

Are debts known as long-term liabilities or equities

Answer 24

Long-term liabilities

Question 25

Are stocks known as long-term liabilities or equities

Answer 25

Equities

Question 26

If changing common stock is $35,000 and changing long-term liabilities is ($15,000) and dividends paid our $5000, what is the cash flow from financing activities?

Answer 26

$15,000 in flow CFF= -15,000 + 35,000 - 5,000

Question 27

What will an investment of $10,000 made today at 8% simple interest for three years and nine months will yield in principle and interest at the time of maturity?

Answer 27

$13,000 Principle + interest 3 years and 9 months - 3 + (9/12)= 3.75 years $10,000 + (10,000* 0.08* 3.75)

Question 28

Gordon growth model

Answer 28

Value equity based on dividend growth rates and does not incorporate risk

Question 29

What is the formula for the Gordon growth model? When would you use this formula?

Answer 29

Expected dividend = recent dividend * (1 + growth rate) If the question says that the dividend was paid recently or dividend was just paid then you have to compute expected dividend before you compute price or required return

Question 30

A stock is expected to pay a dividend of five dollars and the dividend is expected to grow at 4%. If the required rate of return is 10%, what is the maximum that should be paid for the stock today? Price = expected dividend / (required return - growth rate)

Answer 30

Price = $5/(.10-.04) =$83.33 Price = expected dividend / (required return - growth rate)

Question 31

A stock just paid a dividend of five dollars and the dividend is expected to grow at 4%. If the required rate of return is 10%, what is the maximum that should be paid for the stock today? Price = expected dividend / (required return - growth rate)

Answer 31

Expected dividend = recent dividend * (1 + growth rate) Expected dividend= $5 (1 + .04) =$5.20 Price = expected dividend / (required return - growth rate) Price = 5.20 / (.10 - .04) = $86.67

Question 32

When would you use expected dividend formula?

Answer 32

When the question says just paid or recently paid

Question 33

A stock is expected to pay a dividend of five dollars and the dividend is expected to grow at 4%. If the investor paid $40 for the stock today, what is the expected rate of return on the stock? Required return = (expected dividend / price) + growth rate

Answer 33

16.5% Required return = (5/40) + .04 =0.165 or 16.5%

Question 34

A stock just paid a dividend of five dollars and the dividend is expected to grow at 4%. If the investor paid $40 for the stock today, what is the expected rate of return on the stock? Expected dividend = recent dividend * (1 + growth rate) Required return = (expected dividend / price) + growth rate

Answer 34

17% Expected dividend = recent dividend * (1 + growth rate) Expected dividend = 5(1+.04)=5.2 Required return = (expected dividend / price) + growth rate Required return = (5.20/40) + .04 =0.17 or 17%

Question 35

What is the CAPM model?

Answer 35

Values equity based on unexpected return and risk

Question 36

What is beta?

Answer 36

A measure of risk. Beta > 1 means the stock is more volatile than the market. Beta < 1means the stock is less volatile than the market.

Question 37

What is the expected rate of return for a stock where the treasury bills are returning 2.5% and the market has a hole, is returning 15%. The stock has a beta of 1.25? Expected return = risk free rate + (beta x market risk premium) Market risk premium = market return - risk free rate

Answer 37

Expected return = risk free rate + (beta x market risk premium) Market risk premium = market return - risk free rate Expected return = 0.025 + (1.25*(0.15-0.025)) = 0.181 or 18.1%

Question 38

Treasury rate is the same as risk free rate True or false

Answer 38

True