Wall Street Prep Accounting-Exam 2023 with complete solutions

Liquidity Ratios - ANSWER-measures of a firm's short-term ability to meet its current obligations Profitability Ratios - ANSWER-measures of a firm's profitability relative to its assets (operating efficiency) and to its revenue (operating profitability) Activity Ratios - ANSWER-Measure of efficiency of a firm's assets Solvency Ratios - ANSWER-Measure of a firm's ability to pay its obligations Inventory Turnover - ANSWER-COGS / avg inventory Receivables Turnover - ANSWER-revenue / average accounts receivable DSO (Days Sales Outstanding) - ANSWER-AR/Credit Sales * days in period days in period/receivables turnover A/P turnover - ANSWER-COGS / Average A/P PPP (payables purchasing period) - ANSWER-days in period/ Accounts payable turnover Current Ratio - ANSWER-current assets/current liabilities Quick ratio (acid test) - ANSWER-Cash and AR divided by current liabilities Gross profit margin - ANSWER-gross profit/revenue operating margin - ANSWER-operating profit/revenue net profit margin - ANSWER-net income/revenue asset turnover - ANSWER-revenue/ average assets return on assets (ROA) - ANSWER-Net Income / Average Assets return on equity (ROE) - ANSWER-net income/ total equity Basic EPS - ANSWER-(Net Income - Preferred Dividends)/(Weighted Average of Shares Outstanding) Diluted EPS - ANSWER-diluted net income / weighted average diluted shares outstanding dividend yield - ANSWER-dividends/net income debt to EBITDA - ANSWER-Total Debt/EBITDA interest coverage ratio - ANSWER-EBIT/ interest expense fixed charge coverage - ANSWER-(EBIT + Lease charges)/(Interest Payments + Lease charges) Debt to Total Assets - ANSWER-Total Debt/Total Assets debt to equity - ANSWER-total liabilities/total equity cash from operations (CFO) - ANSWER-uses net income as a starting point and converts accrual base net income into cash flow from operations via a series of adjustments cash from investing activities (CFI) - ANSWER-capital expenditures / asset sales and purchases cash from financing activities (CFF) - ANSWER-new borrowing / pay down of debt / new issuance of stock / share repurchases / issuance of dividends working capital - ANSWER--CFO -increase in current assets = cash outflow -increase in current liabilities = cash inflow asset write downs / impairments - ANSWER--added back to CFS via CFO Increases in A/R, inventory, prepaid expenses, other current assets should be _____________ net income to get to CFO - ANSWER-subtracted increases in A/P, accrued expenses, other current liabilities should be ____________ net income to get to CFO - ANSWER-added gains on sale of assets - ANSWER-subtracted from CFO stock based compensation - ANSWER-added to CFO Common CFI inflows/outflows - ANSWER-- capital expenditures - purchases of intangible assets + asset sales + sales of debt/ equity security - purchases of debt/equity security Common CFS inflows/outflows - ANSWER--Issuance / repayment of debt (cash inflow / outflow) -Common stock issued / repurchased (cash inflow / outflow) -Payment of common & preferred dividends (cash outflow) Assumptions of Accounting - ANSWER-accounting entity, going concern, measurement, periodicity principles of accounting - ANSWER-1. Historical Cost 2. Revenue Recognition 3. Matching Principle 4. Full Disclosure constraints of accounting - ANSWER-1. Estimates and judgements 2. materiality 3. consistency 4. conservatism Form 10-K - ANSWER-Publicly traded companies must file a report at the end of every fiscal year which includes a thorough overview of their businesses and finances as well as financial statements Form 10-Q - ANSWER-At the end of each quarter of the fiscal year (for the first three quarters) publicly traded companies file a report with the SEC including financial statements and non-financial data Form 8-Q - ANSWER-Required filing any time a company undergoes or announces a materially significant event such as an earnings press release, an acquisition, disposal of assets, bankruptcy, etc. Form 14A - ANSWER-Required filing prior to company's annual shareholder meetings S-1 Registration - ANSWER-IPO The only parts of a financial statement that a financial analyst will need to pay attention to: - ANSWER-oPart 1, item 1. Business oPart 2, item 6. Selected financial data oPart 2, item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation oPart 2, item 8. Financial statements and supplementary data Revenue - ANSWER-Represents proceeds from the sale of goods and services produced or offered by a company Revenue Recognition: Multiple Deliverables - ANSWER-For sales of bundled products, companies should assign individual values to each of the bundled components Revenue Recognition: Long-term projects - ANSWER-1. Percentage Completion Method 2. Completed Contract Method Percentage Completion Method - ANSWER-revenues are recognized on the basis of the percentage of total work completed during the accounting period Completed Contract Method - ANSWER-allows revenue recognition only once the entire project has been completed (rarely used in the US) COGS - ANSWER-Represents company's direct cost of manufacture or procurement of a good or service for a company to sell to generate revenue Examples of COGS - ANSWER-Merchandise inventory Manufactured goods inventory •Raw material costs •Direct labor costs •Factory overhead Shipping and delivery costs Any other costs associated with the generation of revenue Depreciation of fixed assets Gross Profit = ________ - ___________ - ANSWER-Net revenue, COGS SG&A - ANSWER-Operating expenses not covered in COGS Examples of SG&A - ANSWER--A store lease expense for a retail business -Salaries and commissions of sales people and cashiers -Marketing and advertising expenses -Administrative, IT, and office support staff -Equipment used for selling (cash register) -Executive salaries -Legal expenses R&D - ANSWER-R&D expenses stem from a company's activities that are directed at developing new products or procedures Depreciation Expense - ANSWER-Quantifies wear and tear of a physical asset through systematic decrease of historical value Useful Life of Fixed Assets (examples) - ANSWER-Plants and buildings 15-40 yrs Machinery & Equipment 3-20 yrs Furniture & Fixtures 5-10 yrs Computer Software & Hardware 3-5 yrs Is land depreciated? - ANSWER-no Depreciation is included within ____________ depending on whether the asset being depreciated is directly tied with manufacture or procurement or selling or marketing - ANSWER-COGS or SG&A Depreciation and amortization are a ________ expense - ANSWER-non-cash Straight Line Depreciation - ANSWER-Annual depreciation expense = (original cost- salvage value)/useful life Accelerated Depreciation Methods - ANSWER--calculates a greater amount of depreciation in early years -declining balance, sum of years digits, units of production Amortization Expense - ANSWER-Allocation of the cost of intangible assets over the number of years that these assets are expected to help generate revenue for the company Types of Intangible assets - ANSWER-Customer lists Franchise, membership, licenses Patents and technology Trademarks and good will are __________ because they are considered to have indefinite useful life - ANSWER-not amoritzed Expenses associated with developing intangible assets are_____________as they are incurred - ANSWER-fully expensd Stock based compensation expense - ANSWER-Expense of employee's salaries are embedded within the expense categories based on the employee's job function -same with stock based compensation Other operating expenses/income - ANSWER-Gains/losses on sales of fixed assets Gains/losses from legal statements Restructuring expenses and severance costs Inventory write down Non-operating income and expenses - ANSWER--Everything below operating profit -Interest Expense -Interest Income -Usually represnted as Net Income Expense Other non-operating income/expensea - ANSWER--income: increases in value and gains on sale on certain financial instruments -expenses: decreases in value and losses on sale on certain investments and debt Tax expense does not equal actual cash taxes paid - ANSWER-Because of the ability of companies to defer certain taxes, tax expense companies recognize on their income statement does not equal acutal cash taxes paid that period Net Income - ANSWER-Measure of profitability on income statement income after all expenses have been paid out Shares Outstanding = - ANSWER-Shares issued - Treasury Stock Treasury stock - ANSWER-stock that has beein issued then repurchased Basic shares outstanding - ANSWER-includes only actual shareholders Diluted shares outstanding - ANSWER-include impact of potentially dilutive security