WSP ACCOUNTING CORRECT EXAMS ANSWERS AND
QUESTIONS SET A+
✔✔Depreciation - ✔✔-quantifies the wear and tear (from use and passage of time) of
the physical asset through a systematic decrease (depreciation) of the assets' book
(historical) value
-Accrual accounting (and specifically the matching principle) dictates that we spread the
cost evenly over the life of the asset so that costs are matched to the period when
revenue is earned as a result of using the asset
-is included within COGS or SG&A, depending on whether the asset being depreciated
is directly tied with manufacture or procurement
-is a non-cash expense and can make up a significant portion of total expenses on a
company's income statement
-most companies choose to use the straight-line method
=(Original cost − Salvage value) / Useful life
✔✔Amortization - ✔✔-the process of allocating to expense the cost of an intangible
asset
-refers to acquired intangible (not physical) assets
-Expenses associated with internally developing intangible assets like patents, customer
lists, trademarks are expensed fully as they are incurred
✔✔Other Operating Expenses / Income - ✔✔-Any operating expenses not allocated to
COGS, SG&A, R&D, D&A
-Common examples include: Gains/losses on sale of fixed assets, Gains/losses from a
legal settlement, Restructuring expenses and severance costs , Losses do to inventory
spoilage (inventory write-down)
-they will often be embedded within larger operating expense categories like SG&A, or
in a separate line item
✔✔Operating profit (EBIT) - ✔✔-Earnings before interest & taxes: EBITDA - D&A
-Since non operating items like interest expense, interest income, and taxes can vary
widely across even similar types of businesses, analysts focus on THIS
, ✔✔Interest Expense - ✔✔-is the amount the company has to pay on debt owed. This
could be to bondholders or to banks. Interest expense subtracted from EBIT equals
earnings before taxes (EBT)
✔✔Interest Income - ✔✔-A company's income from its cash holdings and investments
(stocks, bonds, and savings accounts)
✔✔Non-operating items - ✔✔-Items peripheral to core operations. Includes gains/losses
on investments and revaluation of certain financial assets and debt obligations
-Includes: Interest income, interest expense
✔✔Income Tax Expense - ✔✔-The tax liability a company reports on the income
statement
✔✔Net Income - ✔✔-is the final measure of profitability on the income statement. It
represents income after all expenses have been paid out
=EBIT - Net Interest Expense - Other Nonoperating Income - Taxes
✔✔Shares Outstanding - ✔✔-the total number of a company's publicly traded shares.
= Shares Issued - Treasury Stock
✔✔Basic Shares Outstanding - ✔✔-includes only the actual shareholders
✔✔Diluted Shares Outstanding - ✔✔-include the impact of potentially dilutive security
holders that expand the share base, like stock option holders and preferred
shareholders that can convert their preferred shares to common stock
✔✔Earnings Per Share (EPS) - ✔✔-indicates how much money a company makes for
each share of its stock and is a widely used metric for corporate profits
-indicates more value because investors will pay more for a company with higher profits
-Net income / Basic Weighted Average Shares Outstanding
-Net income / Diluted Weighted Average Shares Outstanding
-Diluted is the favored approach
✔✔Stock-Based Compensation - ✔✔-compensates an employee with stock (like stock
options or restricted stock), the value of that compensation (called "stock based
compensation" or "SBC") is recognized as an expense in the same expense category
as the employee's regular cash compensation
Ex. For example, a company that pays a sales person a cash salary of $100,000 and
stock options valued at $50,000 will recognize: $150,000 in SG&A compensation (even
though only $100,000 was spent). The extra $50,000 reflects that the employee earned
an additional $50,000 in compensation (the actual payment down the road in the form of
additional shares may not happen for a while).
QUESTIONS SET A+
✔✔Depreciation - ✔✔-quantifies the wear and tear (from use and passage of time) of
the physical asset through a systematic decrease (depreciation) of the assets' book
(historical) value
-Accrual accounting (and specifically the matching principle) dictates that we spread the
cost evenly over the life of the asset so that costs are matched to the period when
revenue is earned as a result of using the asset
-is included within COGS or SG&A, depending on whether the asset being depreciated
is directly tied with manufacture or procurement
-is a non-cash expense and can make up a significant portion of total expenses on a
company's income statement
-most companies choose to use the straight-line method
=(Original cost − Salvage value) / Useful life
✔✔Amortization - ✔✔-the process of allocating to expense the cost of an intangible
asset
-refers to acquired intangible (not physical) assets
-Expenses associated with internally developing intangible assets like patents, customer
lists, trademarks are expensed fully as they are incurred
✔✔Other Operating Expenses / Income - ✔✔-Any operating expenses not allocated to
COGS, SG&A, R&D, D&A
-Common examples include: Gains/losses on sale of fixed assets, Gains/losses from a
legal settlement, Restructuring expenses and severance costs , Losses do to inventory
spoilage (inventory write-down)
-they will often be embedded within larger operating expense categories like SG&A, or
in a separate line item
✔✔Operating profit (EBIT) - ✔✔-Earnings before interest & taxes: EBITDA - D&A
-Since non operating items like interest expense, interest income, and taxes can vary
widely across even similar types of businesses, analysts focus on THIS
, ✔✔Interest Expense - ✔✔-is the amount the company has to pay on debt owed. This
could be to bondholders or to banks. Interest expense subtracted from EBIT equals
earnings before taxes (EBT)
✔✔Interest Income - ✔✔-A company's income from its cash holdings and investments
(stocks, bonds, and savings accounts)
✔✔Non-operating items - ✔✔-Items peripheral to core operations. Includes gains/losses
on investments and revaluation of certain financial assets and debt obligations
-Includes: Interest income, interest expense
✔✔Income Tax Expense - ✔✔-The tax liability a company reports on the income
statement
✔✔Net Income - ✔✔-is the final measure of profitability on the income statement. It
represents income after all expenses have been paid out
=EBIT - Net Interest Expense - Other Nonoperating Income - Taxes
✔✔Shares Outstanding - ✔✔-the total number of a company's publicly traded shares.
= Shares Issued - Treasury Stock
✔✔Basic Shares Outstanding - ✔✔-includes only the actual shareholders
✔✔Diluted Shares Outstanding - ✔✔-include the impact of potentially dilutive security
holders that expand the share base, like stock option holders and preferred
shareholders that can convert their preferred shares to common stock
✔✔Earnings Per Share (EPS) - ✔✔-indicates how much money a company makes for
each share of its stock and is a widely used metric for corporate profits
-indicates more value because investors will pay more for a company with higher profits
-Net income / Basic Weighted Average Shares Outstanding
-Net income / Diluted Weighted Average Shares Outstanding
-Diluted is the favored approach
✔✔Stock-Based Compensation - ✔✔-compensates an employee with stock (like stock
options or restricted stock), the value of that compensation (called "stock based
compensation" or "SBC") is recognized as an expense in the same expense category
as the employee's regular cash compensation
Ex. For example, a company that pays a sales person a cash salary of $100,000 and
stock options valued at $50,000 will recognize: $150,000 in SG&A compensation (even
though only $100,000 was spent). The extra $50,000 reflects that the employee earned
an additional $50,000 in compensation (the actual payment down the road in the form of
additional shares may not happen for a while).
