Advanced Corporate Finance Exam 1 || with Right Answers.
Balance Sheet correct answers Financial Condition: stuff and who owns it - A = L + E - snapshot
of firm at given point in time - most important information on this is the Date - change in equity
equals change in assets minus change in liabilities - items listed in order of decreasing liquidity
(cash is more liquid than marketable securities, which are more liquid than AR)
Income Statement correct answers Revenues - Expenses = Earnings
Cash Flow Statement correct answers Where is the money coming from and where is it going -
Sources - Uses = Change in Cash - provides a reconciliation between the reported NI and the
actual change in the company's cash balance - sources - you can't spend cash if you can't access
cash - sources have to equal uses - most important financial statement
Yes correct answers Finance focuses on Market Value (forward looking) and Cash Flow and the
future cash flows and risk
Enterprise Value correct answers Sale price of a firm - what the firm is worth right now if you
were to buy it in its entirety - =equity+preferred stock-net debt (when acquired, acquired cash is
used to pay down target's debt) - market value of financial claims against firm/sale price of firm
Market Value of Equity correct answers The difference between market value of assets and
market value of liabilities
Yes correct answers Accountants focus on Book Value and Earnings and the past and the present
Book Value correct answers What amount should be recorded for assets and liabilities under
common accounting convention - whatever the accountants decide
Yes correct answers Book Value does not equal Market Value
Cash Basis of Accounting correct answers Revenues are recorded when cash is received and
expenses are recognized when they are paid
Accrual Basis of Accounting correct answers Revenues are recognized in the accounting period
when earned, regardless of when the cash is actually received, and expenses are recognized in
the period incurred, regardless of when they are actually paid
Yes correct answers Financial Statements say nothing about the future - must make inferences
about the future using historical financial statements
Yes correct answers Anything that reduces the value of an asset without similarly reducing the
value of a liability erodes your equity
Common Sizing correct answers Divide everything on the BS by Total Assets - useful for
comparing companies over time and companies of different size
, Current Assets correct answers Mature within one year - cash, marketable securities, AR,
inventory, prepaid expenses - grows 1:1 with COGS
Cash correct answers US dollars, usually in an interest-bearing checking account - you don't
have to do anything to cash in order to spend it - no risk, no transaction costs to monetize it
Required Cash correct answers Minimum amount of cash required to run daily operations
Excess Cash correct answers Cash not required to run daily operations - can add value through a
leveraged recapitalization
Marketable Securities correct answers Cash Equivalents - short-term investments with maturities
of less than a year - must be low risk and highly liquid - US T Bills, certificates, notes, bonds
Accounts Receivable correct answers Outstanding customer balances for goods that were sold on
credit - 2/10/net30 - represents sales but not cash - effectively a zero interest loan - grows with
sales 1:1 (if not ask for aging schedule)
Allowance for Doubtful Receivables correct answers Management estimates the dollar amount
of accounts that they will not be able to collect
Inventory correct answers Raw material, WIP, Finished goods, retailers (merchandise) - think
about perishability, obsolescence, idiosyncratic inventory - reported at the lesser of what you
paid for it or what it is worth today - grows with COGS 1:1 - (1) perishability, (2) obsolescence,
(3) idiosyncratic inventory (particular to 1 customer - prevents liquidity) could all impair
inventory
Prepaid Expenses correct answers Something that you've paid for, but haven't fully enjoyed yet -
ex. car insurance, lease on your apartment
Long Term Assets correct answers PPE (depreciation/CAPEX) - securities/investments included
because of price risk - cashier's check, commercial paper, banker's acceptances - maintenance
CAPEX driven by COGS while capacity drives CAPEX - can drive liquidity shocks if capacity
is exceeded
Property correct answers Land - no depreciation!
Plant correct answers Edifices that are built on the land
Equipment correct answers Durable machines that are either used to manufacture a product or
provide services (Book Value includes any costs required to get the PPE ready for use - lesser of
Book Value or what it is worth today (it doesn't get written up when properties appreciate, but it
gets written down as it depreciates)
Balance Sheet correct answers Financial Condition: stuff and who owns it - A = L + E - snapshot
of firm at given point in time - most important information on this is the Date - change in equity
equals change in assets minus change in liabilities - items listed in order of decreasing liquidity
(cash is more liquid than marketable securities, which are more liquid than AR)
Income Statement correct answers Revenues - Expenses = Earnings
Cash Flow Statement correct answers Where is the money coming from and where is it going -
Sources - Uses = Change in Cash - provides a reconciliation between the reported NI and the
actual change in the company's cash balance - sources - you can't spend cash if you can't access
cash - sources have to equal uses - most important financial statement
Yes correct answers Finance focuses on Market Value (forward looking) and Cash Flow and the
future cash flows and risk
Enterprise Value correct answers Sale price of a firm - what the firm is worth right now if you
were to buy it in its entirety - =equity+preferred stock-net debt (when acquired, acquired cash is
used to pay down target's debt) - market value of financial claims against firm/sale price of firm
Market Value of Equity correct answers The difference between market value of assets and
market value of liabilities
Yes correct answers Accountants focus on Book Value and Earnings and the past and the present
Book Value correct answers What amount should be recorded for assets and liabilities under
common accounting convention - whatever the accountants decide
Yes correct answers Book Value does not equal Market Value
Cash Basis of Accounting correct answers Revenues are recorded when cash is received and
expenses are recognized when they are paid
Accrual Basis of Accounting correct answers Revenues are recognized in the accounting period
when earned, regardless of when the cash is actually received, and expenses are recognized in
the period incurred, regardless of when they are actually paid
Yes correct answers Financial Statements say nothing about the future - must make inferences
about the future using historical financial statements
Yes correct answers Anything that reduces the value of an asset without similarly reducing the
value of a liability erodes your equity
Common Sizing correct answers Divide everything on the BS by Total Assets - useful for
comparing companies over time and companies of different size
, Current Assets correct answers Mature within one year - cash, marketable securities, AR,
inventory, prepaid expenses - grows 1:1 with COGS
Cash correct answers US dollars, usually in an interest-bearing checking account - you don't
have to do anything to cash in order to spend it - no risk, no transaction costs to monetize it
Required Cash correct answers Minimum amount of cash required to run daily operations
Excess Cash correct answers Cash not required to run daily operations - can add value through a
leveraged recapitalization
Marketable Securities correct answers Cash Equivalents - short-term investments with maturities
of less than a year - must be low risk and highly liquid - US T Bills, certificates, notes, bonds
Accounts Receivable correct answers Outstanding customer balances for goods that were sold on
credit - 2/10/net30 - represents sales but not cash - effectively a zero interest loan - grows with
sales 1:1 (if not ask for aging schedule)
Allowance for Doubtful Receivables correct answers Management estimates the dollar amount
of accounts that they will not be able to collect
Inventory correct answers Raw material, WIP, Finished goods, retailers (merchandise) - think
about perishability, obsolescence, idiosyncratic inventory - reported at the lesser of what you
paid for it or what it is worth today - grows with COGS 1:1 - (1) perishability, (2) obsolescence,
(3) idiosyncratic inventory (particular to 1 customer - prevents liquidity) could all impair
inventory
Prepaid Expenses correct answers Something that you've paid for, but haven't fully enjoyed yet -
ex. car insurance, lease on your apartment
Long Term Assets correct answers PPE (depreciation/CAPEX) - securities/investments included
because of price risk - cashier's check, commercial paper, banker's acceptances - maintenance
CAPEX driven by COGS while capacity drives CAPEX - can drive liquidity shocks if capacity
is exceeded
Property correct answers Land - no depreciation!
Plant correct answers Edifices that are built on the land
Equipment correct answers Durable machines that are either used to manufacture a product or
provide services (Book Value includes any costs required to get the PPE ready for use - lesser of
Book Value or what it is worth today (it doesn't get written up when properties appreciate, but it
gets written down as it depreciates)
