ADVENTIS FMC LEVEL 1 WITH 100% CORRECT ANSWERS

financial statement communicates what? - financial condition - results of operations - various other activities of an organization how board of directors use financial data... - hold management accountable - make board-level decisions about corporate strategy Brainpower Read More Previous Play Next Rewind 10 seconds Move forward 10 seconds Unmute 0:03 / 0:15 Full screen how company management uses financial data... - measure performance - make strategic, operating and financial decisions how creditors use financial data... - measure creditworthiness - liquidity - bankruptcy risk how investors use financial data... make decisions on buying/selling equity investments how acquirers use financial data... - determine valuation - make investment decisions how regulators use financial data... determine whether company is operating according to regulations/law what does the income statement present? results of operations over a period of time what is the purpose of the income statement? to show whether the company made or lost money during the period reported what does the income statement indicate? how revenues are translated into net income through subtracting expenses revenue (sales) amount charged for the delivery of goods or services cost of sales (cogs) - direct cost of producing revenue - Ex: raw materials, direct wages, etc. gross profit - revenue - cogs - indicates how efficiently labor and materials are used in the production process operating expenses - all other expenses required to run a business - Ex: management salaries, marketing, travel, etc. operating income (EBIT) - revenue - cogs - operating expenses - indicates a company's earning power from ongoing operations non-operating expenses - expenses not related to regular business of the company - Ex: interest expense, restructuring expense, etc. corporate taxes local and federal income taxes the company incurs net income (net earnings) - revenue - cogs - operating expenses - non-operating expenses - taxes - indicates increase in shareholders' value resulting from operations what does the balance sheet show? an organization's financial position at a particular point in time what does the balance sheet disclose? - the resources an organization controls (assets) - the claims on those resources (liabilities and equity) what is the basic accounting equation? assets = liabilities + equity what is the basic accounting equation a foundation for? the double entry bookkeeping system what is the double entry bookkeeping system? there is a credit for every debit what does the accrual accounting method measure? the performance of a company regardless of when cash transaction occur cash current assets comprising currency or currency equivalents that can be accessed immediately accounts receivable amount owed to an organization from the sale of a good or service fixed assets - value of assets and property that can't be easily converted to cash - has a useful life of greater than 1 year - Ex: PPE accounts payable amount owed to an organization's vendors debt amount of obligations owed to creditors equity cumulative shareholder investment + cumulative net income what is working capital a measure of? - a company's efficiency - short term financial health working capital equation non-cash current assets - non-debt current liabilities what does a positive or negative working capital indicate? whether it's a source or use of cash what can happen if a company's non-cash current assets < non-debt current liabilities? may run into challenges repaying creditors and suppliers in the short run non-cash current assets - non-cash assets expected to be turned into cash within one year - Ex: accounts receivable, inventory, prepaid expenses, other assets non-debt current liabilities - all obligations besides short-term debt that are due within one year - Ex: accounts payable, accrued liabilities, other obligations what is a less expensive form of capital? debt because it's less risky what types of claims to debt owners have? priority claims on company's assets if company goes bankrupt what is a more expensive form of capital? equity because equity holders aren't guaranteed to get their investment back if the company goes bankrupt what requires a higher rate of return, debt or equity? equity net debt total debt - cash what is net debt primarily used in? credit analysis because creditors assume that the company's cash balance could be applied to debt repayment in the event of a liquidity crunch or bankruptcy what does the cash flow statement show? - how much cash is generated or lost during a period of time - how changes in the balance sheet and net income affect cash what does the cash flow statement reconcile? net income to change in cash what is the cash flow statement useful for in determining - a company's viability; it's ability to pay bills - liquidity cash from operating activities - cash generated by a company's normal business operations - Ex: net earnings, depreciation and amortization, change in working capital cash from investing activities - acquisition and disposal of long-term investments (PPE and M&A) - Ex: capital expenditures, acquisitions cash from financing activities - cash flow between organization and its owners and creditors - Ex: debt/equity issuances (change in debt), dividends, share repurchases beginning cash balance ending cash balance for previous period of time change in cash sum of cash from operating, investing, and financing activities ending cash balance sum of beginning cash balance and change in cash depreciation and amortization method of allocating the cost of an asset over its useful life for both accounting and tax purposes how is depreciation and amortization shown on the income statement? as an expense why doesn't depreciation and amortization represent a decrease in cash? it doesn't represent a decrease in cash because cash only leaves the company during the initial purchase of the asset (CapEx) what does depreciation and amortization represent in terms of cash on the cash flow statement? a source of cash capital expenditures (CapEx) funds used by a company to purchase/upgrade physical assets (PPE) what does CapEx represent in terms of cash on the cash flow statement? a use of cash what does a decrease in working capital represent? a source of cash what does an increase in working capital represent? a use of cash share repurchase re-acquisition of an organization's own stock 2 paths for share repurchases 1. organization retires the stock 2. keep them as treasury stock what happens to the ownership percentage and portion of earnings for shareholders when shares are repurchased? they increase what are share repurchases a form of? returning capital to shareholders irregularly as opposed to a regular dividend program dividends distribution of cash how are dividends most often derived? from a dividend per share amount as directed by the board of directors