Advanced Corporate Finance Exam 1
UPDATED ACTUAL Exam Questions and
CORRECT Answers
Balance Sheet - CORRECT ANSWER - 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 ANSWER - Revenues - Expenses = Earnings
Cash Flow Statement - CORRECT ANSWER - 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 ANSWER - Finance focuses on Market Value (forward looking) and
Cash Flow and the future cash flows and risk
Enterprise Value - CORRECT ANSWER - 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 ANSWER - The difference between market value of
assets and market value of liabilities
Yes - CORRECT ANSWER - Accountants focus on Book Value and Earnings and the past
and the present
,Book Value - CORRECT ANSWER - What amount should be recorded for assets and
liabilities under common accounting convention - whatever the accountants decide
Yes - CORRECT ANSWER - Book Value does not equal Market Value
Cash Basis of Accounting - CORRECT ANSWER - Revenues are recorded when cash is
received and expenses are recognized when they are paid
Accrual Basis of Accounting - CORRECT ANSWER - 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 ANSWER - Financial Statements say nothing about the future - must
make inferences about the future using historical financial statements
Yes - CORRECT ANSWER - Anything that reduces the value of an asset without similarly
reducing the value of a liability erodes your equity
Common Sizing - CORRECT ANSWER - Divide everything on the BS by Total Assets -
useful for comparing companies over time and companies of different size
Current Assets - CORRECT ANSWER - Mature within one year - cash, marketable
securities, AR, inventory, prepaid expenses - grows 1:1 with COGS
Cash - CORRECT ANSWER - 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 ANSWER - Minimum amount of cash required to run daily
operations
, Excess Cash - CORRECT ANSWER - Cash not required to run daily operations - can add
value through a leveraged recapitalization
Marketable Securities - CORRECT ANSWER - 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 ANSWER - 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 ANSWER - Management estimates the
dollar amount of accounts that they will not be able to collect
Inventory - CORRECT ANSWER - 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 ANSWER - Something that you've paid for, but haven't
fully enjoyed yet - ex. car insurance, lease on your apartment
Long Term Assets - CORRECT ANSWER - 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 ANSWER - Land - no depreciation!
Plant - CORRECT ANSWER - Edifices that are built on the land
UPDATED ACTUAL Exam Questions and
CORRECT Answers
Balance Sheet - CORRECT ANSWER - 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 ANSWER - Revenues - Expenses = Earnings
Cash Flow Statement - CORRECT ANSWER - 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 ANSWER - Finance focuses on Market Value (forward looking) and
Cash Flow and the future cash flows and risk
Enterprise Value - CORRECT ANSWER - 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 ANSWER - The difference between market value of
assets and market value of liabilities
Yes - CORRECT ANSWER - Accountants focus on Book Value and Earnings and the past
and the present
,Book Value - CORRECT ANSWER - What amount should be recorded for assets and
liabilities under common accounting convention - whatever the accountants decide
Yes - CORRECT ANSWER - Book Value does not equal Market Value
Cash Basis of Accounting - CORRECT ANSWER - Revenues are recorded when cash is
received and expenses are recognized when they are paid
Accrual Basis of Accounting - CORRECT ANSWER - 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 ANSWER - Financial Statements say nothing about the future - must
make inferences about the future using historical financial statements
Yes - CORRECT ANSWER - Anything that reduces the value of an asset without similarly
reducing the value of a liability erodes your equity
Common Sizing - CORRECT ANSWER - Divide everything on the BS by Total Assets -
useful for comparing companies over time and companies of different size
Current Assets - CORRECT ANSWER - Mature within one year - cash, marketable
securities, AR, inventory, prepaid expenses - grows 1:1 with COGS
Cash - CORRECT ANSWER - 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 ANSWER - Minimum amount of cash required to run daily
operations
, Excess Cash - CORRECT ANSWER - Cash not required to run daily operations - can add
value through a leveraged recapitalization
Marketable Securities - CORRECT ANSWER - 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 ANSWER - 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 ANSWER - Management estimates the
dollar amount of accounts that they will not be able to collect
Inventory - CORRECT ANSWER - 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 ANSWER - Something that you've paid for, but haven't
fully enjoyed yet - ex. car insurance, lease on your apartment
Long Term Assets - CORRECT ANSWER - 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 ANSWER - Land - no depreciation!
Plant - CORRECT ANSWER - Edifices that are built on the land
