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FA Exam 1 > Exam 1 > Flashcards

Exam 1 Flashcards

1
Q

Four basic financial statements

A

Balance sheet
Income statement
Retained earnings
Cash flow statement

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2
Q

Four steps of the accounting cycle

A

Identification
Valuation
Recording
Disclosure

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3
Q

Debt financing effects on company

A

Does not dilute ownership
Less expensive
Tax deductible/subsidies
Can jack up interest rate

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4
Q

Equity financing impact on the company

A

More flexible
No covenants
Demand higher returns (CAPM)

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5
Q

Why is there a need for oversight?

A

The agency problem which occurs whenever one party (principles) delegate work to another (agents)

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6
Q

Steps to analyzing financial statements

A

Choose a purpose for the analysis
Gather data (SEC and web)
Perform quantitative and qualitative data assessments on data
Predict the relevant future
Conduct sensitivity test and make decision

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7
Q

Name 2 ratio warnings

A 
Ratios for ratios sake is meaningless
Some ratios mean nothing
Act as proxy 
Can measure incorrectly
Need to be benchmarked
Only useful for the future
Basic and diluted only standardized ratios
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8
Q

Basic EPS

A

Net income/average number of shares of common sock outstanding

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9
Q

EPS diluted

A

Adjusted net income/adjusted weighted average stocks outstanding

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10
Q

Standard setters in the rest of world

A

IASB

IFRS

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11
Q

What is financial accounting?

A

The language of business

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12
Q

What is the purpose of financial accounting?

A

To communicated financial information to interested parties

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13
Q

Where is the SEC located?

A

Washington DC

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14
Q

What are other terms for lenders?

A

Debt holders
Bond holders
Creditor

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15
Q

What are other terms for investors?

A

Stockholders
Shareholders
Equity holders
Owners

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16
Q

What is the fundamental accounting equation?

A

A=L+E

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17
Q

A snapshot at a point in time…

A

Balance sheet

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18
Q

Permanent accounts are on the…

A

Balance sheet

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19
Q

… A listing of balances from the ledger.

A

Balance sheet

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20
Q

The difference between revenue and COGS is the profit on the sale. It is also…

A

Gross profit

Gross margin

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21
Q

Gross margin ratio

A

Gross margin/sales

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22
Q

A year has elapsed and a firm owes $10 in interest payment to the bank. The firm decides to pay in the near future. Where does this transaction go on the balance sheet?

A

Liabilities as interest payable 10

Owners equity as interest expense -10

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23
Q

Firm owes $7 in taxes but chooses to pay later. Where does this go on the balance sheet/journal entry?

A

Liabilities as tax payable 7

Equity as tax expense -7

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24
Q

Revenues - expenses = net is the equation for which basic accounting element

A

Income statement

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25
Q

Proper format for the income statement

A

Company name
Income statement
For the period ending
December 31, 2015

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26
Q

The “bottom line” of the income statement

A

Net income

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27
Q

Net income from the income statement is closed into

A

Retained earnings

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28
Q

The account on the balance sheet that collects all of the firm’s revenues and expenses

A

Retained earnings

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29
Q

Represents the cumulative amount of net income since the firm’s inception

A

Balance of retained earnings

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30
Q

Shows the cash flowing in and out of the firm

A

Cash flow statement

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31
Q

Three types of ways to use cash

A

Operating
Investing
Financing

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32
Q

The summation of events at a particle point in time

A

Balance sheet

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33
Q

Use “as of”

A

On balance sheet

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34
Q

Operating income includes

A

Revenues and expenses related to ongoing operations

Sales
Less COGS
Wage expense
Depreciation expense

35
Q

Operating income is also referred to as

A

EBIT

36
Q

Contains all accounts, both for the balance sheet and the income statement

A

The ledger

37
Q

Revenues and expenses are ______ accounts because they ______.

A

Temporary

Hold their accounts temporarily

38
Q

_______ accounts hold balances cumulatively over multiple periods.

A

Permanent

39
Q

Temporary accounts are _________ accounts and permanent accounts are ________ accounts.

A

Income statement

Balance sheet

40
Q

In the United States, reporting periods are ______.

A

Quarterly

41
Q

The first step of the accounting cycle is ______. Where firms must disclose ______ _______. To determine if it is a _______ or an ______.

A

Identification
Accounting events
Transaction
Event

42
Q

The second part of the accounting cycle is ______. Where firms put a ______ ______ on the period’s events. For this we use _______ _______.

A

Valuation
Monetary value
Historical cost

43
Q

The third step in the accounting cycle is _______. Firms must do this formally so that they can properly disclose the information. _________ means that the firm either __________ the event or provides a ________ ________.

A

Recording
Recording
Journalizes
Note disclosure

44
Q

The fourth step in the accounting cycle is _______ of accounting events. Firms must generate a set of ______ ______ along with the required note disclosures.

A

Disclosure

Financial statements

45
Q

_______ are not considered expenses. Therefore, they do not appear on the _______ _______.

A

Dividends

Income statement

46
Q

_______ reduce retained earnings just like expenses, but do so indirectly.

A

Dividends

47
Q

______ entries update account balances. They are made at the end of the period, just before the closing entry.

A

Adjusting

48
Q

_______ ______ is a contra-account. It’s purpose is to let investors know approximately how old the equipment, as measured by the amount of _______ that has been recorded.

A

Accumulated depreciation

Depreciation

49
Q

What is the formula for interest?

A

Interest = principleratetime

50
Q

To _______ means that an asset increases, while ______ means that the owners’ equity deceased.

A

Capitalize

Expense

51
Q

When some thing is capitalized…

A

One asset is replaced by another.

52
Q

When something is expensed…

A

Both assets and owners’ equity are decreased.

53
Q

The _____ _____ depreciation method involved recording an equal amount of depreciation each year.

A

Straight line

54
Q

Accounting has a “_____ ______” which allows for some discretion when capitalizing and expensing items. If something is considered ________ a firm will probably just go and expense it.

A

Materiality threshold

Immaterial

55
Q

Peripheral activities are reported on a ____ ____ (simply as a ______), while central activities are reported as _____ _______, or on a ______ basis (revenues less COGS).

A

Net basis
Gain
Two numbers
Gross

56
Q

Overall, the purpose of the SEC is…

A

To ensure that full and fair disclosures are made to all investors before initial offerings and then afterwards in the secondary markets.

57
Q

What is the main part of the registration statement?

A

The prospectus

58
Q

What is included in the prospectus?

A

Audited financial statements
Description of the intended use of the money raised through stock offering
Description of the risks of securities
Description of the lines of business in which the firm operates

59
Q

After the registration statement, what are the major subsequent filings included?

A

Form 10-K
Form 10-Q
Form 8-K
Proxy

60
Q

The ______ ______ dictates when firms may recognize revenue.

A

Revenue principle

61
Q

Firms recognize revenue when 1)…. And 2)….

A

It has been earned

It has been realized or is realizable

62
Q

To have earned revenue, the firm must…

A

Performed a service or delivered a product.

63
Q

______ refers to cash sales, meaning that the firm got paid at the point of sale.

A

“Realized”

64
Q

______ refers to credit sales and the the receivable that arises.

A

“Realizable”

65
Q

…. Also says that firms may not book sales, even if the customer has paid cash, if the firm has not yet earned the revenue.

A

The revenue principle

66
Q

A consulting firm receives and up front payment of $100 for services to be rendered later. Where does this go on the ledger?

A

Assets cash 100

Liabilities unearned revenue 100

67
Q

The ______ ______ (also called the _______ ______) says to book the expense when the benefit is received regardless of the timing of the cash flow.

A

Matching principle

Expense principle

68
Q

Another term for unearned revenue is…

A

Deferred revenue.

69
Q

The firm earns the $100 deferred revenue from a previous sale by performing the products or service. Where does this go on the ledger?

A

Liabilities deferred revenue -100

Equity revenue 100

70
Q

A firm accrues a $100 expense. Where does this go on the ledger?

A

Liabilities payable 100

Equity expense -100

71
Q

Prepaid expenses are ______.

A

Assets

72
Q

The firm pays a $200 prepaid expense. What effect does this have on assets?

A

No effect
Prepaid expense 100
Cash -100

73
Q

… Pertains mainly to the measurement of asset purchased.

A

The cost principle

74
Q

Assets are recorded on the balance sheet at their _____, which means their _____ _____, or ______ ______ ______.

A

Cost
Cash value
Cash equivalent value

75
Q

The cash equivalent principle means the _____ ______ of future cash flows.

A

Present value

76
Q

… Requires inclusion of all cash or cash equivalent outlays to bring the asset to its place of intended use by the firm. Thus, the cost of a machine would include not only the invoice price, but also shipping and installation.

A

The cost principle

77
Q

The disclosure principle pertains both to ______ is disclosed and _____.

A

What

How

78
Q

What is the “manifestation” of the full disclosure principle?

A

The classified presentation of the financial statements

79
Q

What are the two predominant agency issues covered in the book?

A

“Adverse selection”

“Moral hazard”

80
Q

How do we try to mitigate agency issues?

A

Effective hiring
Incentive contracting
Monitoring

81
Q

We practice _______ in accounting in order to show the worst-case scenario to alert lenders and investors about the downside of their loans and investments.

A

Conservatism

82
Q

The two significant ways that conservatism manifest itself in financial accounting are…

A

Recognition of contingent losses

Expensing costs associated with intellectual property

83
Q

A firm is sued for $100, and it is probable they will lose. Assuming the amount is also material, the firm would book the following:

A

Liabilities continent liability 100

Equity contingent loss -100

FA Exam 1 (1 decks)

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