Wall Street Prep Exam Questions With 100% Correct Answers

Wall Street Prep Exam Questions With 100% Correct Answers .Company A has $100 of assets while company B has $200 of assets. Which company should have a higher value?" - ANSWER-On the face of it, we simply don't have enough information to answer this question. We need certain efficiency and profitability ratios to understand how the companies are using assets to generate revenues. You: Given that we only know the total amount of assets for both company A and B and nothing else, it is impossible to say whether A or B is more valuable. Would I be able to ask you some questions about both companies? Interviewer: Sure You: Would you be able to tell me what industry these two companies operate in? Interviewer: They are both consumer products companies. You: Can I assume that both companies have similar expected asset turnover (revenue/assets), leverage, return on asset, re-investment rates and profit margins? Interviewer: Yes, let's assume this is correct. You: Okay, thank you. Based on this information, it appears that we are comparing two companies with similar returns on capital, long term growth rates, and costs of capital. Since these elements are the primary drivers of value for a business, as long as both companies generate returns above their cost of capital, the firm with the larger assets deserves a higher valuation because they are both effectively "converting" their assets into profitability with equal efficiency, given similar risks and expected growth. ."Why is the cash flow statement important and how does it compare to the income statement?" - ANSWER-The income statement shows a company's accounting-based profitability. It illustrates a company's revenues, expenses, and net income. Income statement accounting uses what is called accrual accounting. Accrual accounting requires that businesses record revenue when earned and expenses when incurred. Under accrual method, revenues are recognized when earned - not necessarily when cash is received - while expenses are matched to associated revenue - again not necessarily when cash goes out the door. The benefit of the accrual method is that it strives to show a more accurate picture of the companies profitability. However, focusing on accrual based profitability without looking at cash inflows and outflows is very dangerous, not only because companies can more easily manipulate accounting profits than they can cash profits, but also because not having a handle on cash can potentially make even a healthy company go bankrupt. Those shortcomings are addressed by focusing on the cash flow statement. The cash flow statement identifies all of the cash inflows and outflows of a business over a certain period of time. The statement utilizes cash accounting. Cash accounting is the system used to keep track of actual cash inflows and outflows. What this really means is that since not all transactions are made with cash (i.e., accounts receivable), such transactions would be backed out of the cash flow statement. Cash accounting literally tracks the cash coming into and out of the business. One final point on cash vs. accrual accounting is that the differences between the two accounting systems are temporary timing differences that will eventually converge. The key to financial analysis is to use both statements together. In other words, if you have incredibly high net income, such net income should be supported by strong cash .Addressing a low GPA - ANSWER-"Frankly, I made some bad decisions as a freshman which I have been able to partially reverse through a lot of hard work over the last few years. My very 1st semester at Notre Dame I did not manage my time well between extracurricular activities and academics and received a 1.8. After reflecting on my poor performance that semester, I realized that I needed to get my priorities in order and started to focus more of my energy on my academics. Excluding that first semester, my GPA would have been 3.5. In fact, I have continued to improve every year and over the last year I have maintained a 3.8 GPA." .Assets - ANSWER-resources a company uses to operate its business includes cash, A/R, PP&E .Balance sheet - ANSWER-snapshot of the company economic resources and funding for those resources at a given point in time (A = L + SE) .Cash flow statement - ANSWER-While cash is not necessarily received when a sale occurs, the income statement still records the sale. As a result, the income statement captures all the economic transactions of the business. The cash flow statement is needed because the income statement uses what is called accrual accounting. In accrual accounting, revenues are recorded when earned regardless of when cash is received (revenue includes sales using cash and made on credit A/R) Since we also want to have a clear understanding of the cash position of a company, we need the statement of cash flows to reconcile the income statement to cash inflows and outflows. "cash position of the company" cash from operating activities, cash from investing activities, and cash from financing activities .Cash from financing activities - ANSWER-cash related to capital raising and payment of dividends if the company issues more preferred stock, we will see such an increase in cash in this section if the company pays out dividends, we will see a cash outflow for stable, mature plain vanilla companies, there is not a preference for positive or negative cash flow in this section .Cash from investing activities - ANSWER-cash related to investments in the business (additional capex or sales of assets) for stable, mature, plain vanilla a negative cash flow from investing activities is desirable as this indicates that the company is trying to grow by buying assets .Cash from operating activities - ANSWER-mostly indirect method starts with net income and includes the cash effects of transactions involved in calculating net income. reconciliation of net income. Net income (income statement) + non-cash expenses - non-cash gains - period on period increases in working capital assets + period on period increases in working capital liability = CF from operations *for stable, mature, plain vanilla companies, a positive cash flow from operating activities is desirable