WSP-ACCOUNTING CRASH COURSE LATEST EXAM QUESTIONS AND CORRECT ANSWERS GRADED A+ 2024

WSP-ACCOUNTING CRASH COURSE LATEST EXAM QUESTIONS AND CORRECT ANSWERS GRADED A+ 2024 "Income Statement - CORRECT ANSWER -is a financial report that depicts the operating performance of a company (i.e. revenues less expenses generated - i.e. profitability) over a specific period of time (typically a quarter or year). -analysts can use THIS to identify the components and sources ("drivers") of net earnings." "Revenues/Net Revenues (Net Sales) - CORRECT ANSWER -Total dollar payment for goods and services that are credited to an income statement over a particular time period -A company may have other income streams, which are not related to its main operations Ex. Interest income earned from investments and Income received from a legal settlement" "Cost of Goods Sold - CORRECT ANSWER -represents a company's direct cost of manufacture (for manufacturers) or procurement (for merchandisers) of a good or service that the company sells to generate revenue -DOES NOT INCLUDE Ex. corporate overhead, marketing and administrative expenses, research and development, and salaries of employees not associated directly with the manufacture or procurement of a good or service" "Gross Profit (Gross Margin) - CORRECT ANSWER -Revenues - Cost of Goods Sold" "Selling, General & Administrative (SG&A) - CORRECT ANSWER -Operating costs not directly associated with the production or procurement of the product or service that the company sells to generate revenue. Payroll, wages, commissions, meal and travel expenses, stationary, advertising, and marketing expenses fall under this line item." "Operating profit (EBIT) - CORRECT ANSWER -Earnings before interest & taxes: EBITDA - D&A -Since non operating items like interest expense, interest income, and taxes can vary widely across even similar types of businesses, analysts focus on THIS" "Interest Expense - CORRECT ANSWER -is the amount the company has to pay on debt owed. This could be to bondholders or to banks. Interest expense subtracted from EBIT equals earnings before taxes (EBT)" "Interest Income - CORRECT ANSWER -A company's income from its cash holdings and investments (stocks, bonds, and savings accounts)" "Non-operating items - CORRECT ANSWER -Items peripheral to core operations. Includes gains/losses on investments and revaluation of certain financial assets and debt obligations -Includes: Interest income, interest expense" "Income Tax Expense - CORRECT ANSWER -The tax liability a company reports on the income statement" "Net Income - CORRECT ANSWER -is the final measure of profitability on the income statement. It represents income after all expenses have been paid out =EBIT - Net Interest Expense - Other Nonoperating Income - Taxes" "Shares Outstanding - CORRECT ANSWER -the total number of a company's publicly traded shares. = Shares Issued - Treasury Stock" "Basic Shares Outstanding - CORRECT ANSWER -includes only the actual shareholders" "Diluted Shares Outstanding - CORRECT ANSWER -include the impact of potentially dilutive security holders that expand the share base, like stock option holders and preferred shareholders that can convert their preferred shares to common stock" "Cash and Cash Equivalents - CORRECT ANSWER -are extremely liquid assets; examples include U.S. Treasury bills, which have a term of less than or equal to 90 days" "Account Receivable - CORRECT ANSWER -sales that a company has made on credit; the product has been sold and delivered, but the company has not yet received the cash for the sale -are linked to revenues on the income statement" "Prepaid Expenses - CORRECT ANSWER -When a company prepays for things like utilities, insurance and rents, cash is reduced, but the expense is not yet recognized on the I/S" "Average Cost - CORRECT ANSWER -COGS and ending inventory are calculated as: COGS / total number of goods" "Rising prices of Inventory - CORRECT ANSWER -COGS were higher using LIFO than FIFO. This accounting choice leads to lower net income under LIFO and thus lower taxes. The average cost lies in between." "Falling Prices of Inventory - CORRECT ANSWER -COGS were higher using FIFO than LIFO. This accounting choice leads to lower net income under FIFO and thus lower taxes. The average cost lies in between." "LIFO reserve - CORRECT ANSWER -For a company using LIFO, the difference between inventory reported using LIFO and inventory using FIFO. -All companies must report this = FIFO inv. -LIFO inv." "The link between FIFO and LIFO inventory methods - CORRECT ANSWER The LIFO Reserve allows comparison of inventories and COGS across both methods: 1. LIFO inventory + LIFO Reserve = FIFO inventory 2. FIFO COGS + LIFO Reserve = LIFO COGS -When comparing a LIFO company against a FIFO company, the LIFO reserve must be subtracted from the LIFO company's COGS to arrive at apples-to-apples profits comparisons" "lower of cost-or-market (LCM) rule - CORRECT ANSWER -dictates that if the market value of inventory falls below historical cost, they must be written down to market value -The loss must be recognized immediately on the income statement. The loss can be presented in COGS, in 'Other operating (or non operating) expenses' or - if it is a big write down, as a separate line item" "Property, Plant & Equipment (PPE) - CORRECT ANSWER -represent land, buildings, and machinery used in the manufacture of the company's services and products plus all costs (transportation, installation, other) necessary to prepare those fixed assets for their service -PP&E cycles out of the B/S and into the I/S as depreciation, either in COGS, SG&A or elsewhere -is reported net of accumulated depreciation on the balance sheet, such that: Net PP&E = Gross PP&E - accumulated depreciation" "Accumulated Depreciation - CORRECT ANSWER -the total amount of depreciation expense that has been recorded since the purchase of a plant asset -offsets Gross PP&E account, and the 2 accounts are aggregated together on the balance sheet as Net PP&E -If value declines needs to be written down to market value -The loss must be recognized immediately on the income statement. The loss can be presented in COGS, SG&A, 'Other operating (or non operating) expenses' or - if it is a big write down, as a separate line item. -When a company sells assets, if it receives more than the net book value it recognizes on the B/S at the time of sale, a gain is recorded on the I/S - usually as "other" operating or non operating income, or within the expense category through which the asset was being depreciated (COGS or SG&A)" "intangible assets - CORRECT ANSWER -are comprised of non-physical acquired assets -are items that have value based on the rights belonging to that company Ex. Customer Lists, Franchises, Memberships, Licenses, Patents and Technology, Trademarks and goodwill are considered to have indefinite useful life so they are not amortized" "Accrual vs cash accounting - CORRECT ANSWER Cash accounting objectively recognizes revenues when cash is received and records costs when cash is paid out; accrual accounting involves subjectivity in regards to the allocation of revenues and expenses to different periods Cash accounting is not allowed under GAAP, but for tax reporting certain businesses are allowed to use cash basis" "Non operating vs operating income and expenses on the IS - CORRECT ANSWER operating: income and expenses generated and incurred from a company's core operations nonoperating: income and expenses that are not tied to core operations of business Everything below operating profit (income) is not directly related to operations of the business; everything above is tied to core ops" "Cost of Goods Sold (COGS)/Cost of Sales (line item on IS) - CORRECT ANSWER represents a company's DIRECT cost of manufacture (for manufacturers) or procurement (for merchandisers) of a good or service that the company sells to GENERATE REVENUE COGS is a direct operating costs" "Examples and nonexamples of COGS - CORRECT ANSWER Example of COGS: merchandise inventory, raw material costs, direct labor costs, factory overhead), shipping and delivery costs, any other costs directly associated with the generation of revenue, depreciation of fixed assets Costs such as corporate overhead, marketing and admin expenses, R&D, and salaries of employees NOT directly associated with manufacture or procurement of a good or service are not included in COGS These costs are included under Selling, General & Administrative (SG&A) or other line items" "Gross Profit (line item on IS) - CORRECT ANSWER Net Revenues - COGS Represents profit after only direct expenses (COGS) has been accounted for" "SG&A (line item on IS) - CORRECT ANSWER SG&A represents the operating expenses not directly associated with the production/manufacturing or procurement of the product or service that the company sells to generate revenue Examples include: store lease expense for a retail business, salaries, legal expenses, marketing and advertising expenses" "Depreciation + where it is on Income statement/impact - CORRECT ANSWER quantifies the wear and tear of the physical asset (most types of tangible assets) through a systemic decrease (depreciation) of the assets' book (historical) value ****LAND is considered a fixed asset but is NOT depreciated (land never really affects the income statement) Where: It is NOT a line item on IS; rather it is included within COGS or SG&A. Impact: is non-cash expense and can make up significant portion of total expenses on company's IS --> adds to justification that IS is poor tool for tracking company cash position. Depr. reduces IS profits every year" "Research and Development (R&D) + location on IS - CORRECT ANSWER expenses that stem from company activities that are directed at developing new products or procedures R&D expenses include compensation for employees, equipment and facilities engaged in the R&D process it may be a seperate line item if a large expense (ie for health care, energy, tech) or just aggregated with SG&A" "straight-line depreciation method - CORRECT ANSWER annual depreciation expense = original cost - salvage value / useful life (total yrs asset expected to remain in service) method that depreciate assets evenly over their useful lives, and this approach is called the "straight-line method" *There are other accelerated depreciation methods" "Amortization - CORRECT ANSWER Amortization is the allocation of the cost of intangible assets over the number of years that these assets are expected to help generate revenue for the company (basically depr. but for intangible assets instead of fixed). Is also a non-cash expense --- the expense does not depict any actual cash outflow (payment) Is not a line item on IS" "Internally-generated intangible assets + amort. - CORRECT ANSWER Expenses associated with internally developing intangible assets like patents, customer lists, trademarks are expensed fully as they are incurred (no amortization) Since companies are not allowed to write up the value of intangible assets (historical cost and conservatism), companies with very valuable trademarks and patents (Coke, GE, Apple) do not recognize or amortize these assets What is recognized on the balance sheet is ACQUIRED intangible assets → those are what are amortized" "Interest Expense - CORRECT ANSWER Interest expense are payments the company makes for its outstanding debt just like the interest we pay on credit cards, corporations must make regular interest payments (expense) in debt owed to banks/other lenders" "Interest Income - CORRECT ANSWER A company's income from its cash holdings and investments (stocks, bonds, and savings accounts)" "Net interest expense (income) - CORRECT ANSWER sometimes, interest income and expense are netted against one another (since they are the inverse of each other, and usually one is bigger than the other) it is presented on the IS" "Tax Expense (line item) + what does it equal - CORRECT ANSWER Under US GAAP and IFRS, companies report tax expense as a separate line item usually right below a line item called "Pretax Income" or "Income before provision for income taxes"" "Why doesn't Tax expense equal the actual cash taxes paid - CORRECT ANSWER Two different accounting rules when handling the calculation of the tax expense on the IS (GAAP, IFRS book rules) and the calculation of cash taxes (country tax code rules) → primarily differences around how depreciation is calculated, when revenues are recognized, and how losses are treated Because of the ability of companies to defer certain taxes, the tax expense companies recognize on their IS does not equal that actual cash taxes they have to pay for the same period" "Net Income (line item) - CORRECT ANSWER final measure of profitability on the IS -- it represents income after all expenses have been paid out; Also called net earnings, net profit, bottom line" "shares outstanding + weighted avg presentation - CORRECT ANSWER Shares Outst. = shares issued - treasury stock represent the number of shares of common stock outstanding; one share represents one unit of ownership --> shareholders exist among public and private companies alike shaares that have been issued, but subsequently repurchased by the company are called treasury stock and are NO longer outstanding Weighted average presentation: Since the total number of shares outstanding fluctuates as shares from other securities are converted or the company repurchases shares, companies usually show the number of shares outstanding on the income statement as weighted average of the amount of shares outstanding during the period of the IS (quarter or years)" "Shares outstanding: basic vs diluted - CORRECT ANSWER There are two ways to think about who is a shareholder: basic shares out. includes only the actual shareholders diluted shares out. include the impact of potentially dilutive security holders that expand the share base, like stock option holders and preferred shareholders that can convert their preferred shares to common stock Securities that can be converted into common stock (dilutive securities) include: stock options & warrants ( the right to buy shares at predetermined price), convertible preferred stock, convertible debt" "Earnings per share (EPS) --> line item - CORRECT ANSWER A very common way that investors analyze company profits is by dividing net income by shares outstanding, and this metric is called "earnings per share" (EPS). EPS measures how much of the total current period profits belong to each shareholder Basic EPS = net income / basic shares outstanding Diluted EPS = net income / diluted shares outstanding -->Since diluted shares include all these other securities, diluted EPS will (almost) always be smaller than basic EPS; diluted EPS usually preferred as its seen as more "real"" "Common dividends - CORRECT ANSWER Net income represents the profits that a company generates during a period--> a company can decide to use those profits to make distributions to shareholders via dividends (not all public companies give divs)" "Earnings before interest and taxes (EBIT) (also called operating income/profit on IS) - CORRECT ANSWER Profit metric used to compare performance among diff businesses Since non operating items like interest expense, interest income and taxes can vary widely across even similar types of businesses, analysts focus on operating income, or earnings before interest and taxes (EBIT) Everything above EBIT is directly related to operations of business --> you dont care about debt (tied to taxes) etc" "Earnings before interest and taxes, depreciation & amortization (EBITDA) definition + importance + how to calculate - CORRECT ANSWER which starts with EBIT but adds back D&A expense The rationale for using EBITDA as a way to compare companies is twofold D&A is a huge noncash expense for fixed asset and intangible asset intensive businesses, and stripping out the biggest non cash expense provides a more accurate picture of "real" profits during the year Since companies can use different useful life assumptions and even depreciation methods to calculate D&A, this can significantly skew the comparison of operating profitability across two otherwise identical firms → can skew the compatibility of operating profitability cross otherwise identical companies Calculate: Since D&A is usually not disclosed explicitly on the IS, analysts have to go to the CFS to get D&A and simply add it back to EBIT --> Locate Operating Income on IS (EBIT), locate D&A on CFS, add D&A to EBIT to get EBITDA EBITDA is blend of accrual (since it stems from EBIT) and cash accounting (since you add back D&A) --> so caution, not perfect proxy for operating CFs" "Oper - CORRECT ANSWER " “Historical Cost - CORRECT ANSWER -Financial statements report companies' resources and obligations at an initial historical cost. This conservative measure precludes constant appraisal and revaluation" "Revenue Recognition Principle - CORRECT ANSWER -requires that companies recognize revenue in the accounting period in which the performance obligation is satisfied -Revenues must be recorded when earned and measurable -Does not matter when cash transfers occur -until that order is shipped to a customer and collection from that customer, who used a credit card, is reasonably assured" "Matching Principle - CORRECT ANSWER -Costs of a product must be recorded during the same period as revenue from selling it" "Research & Development (R&D) - CORRECT ANSWER -A company's activities that are directed at developing new products or procedures." "EBITDA(Earnings before interest, taxes, depreciation, and amortization) - CORRECT ANSWER -Gross Profit - SG&A - R&D. is a popular measure of a company's financial performance -which starts with EBIT but adds back D&A expense The rationale for using THIS as a way to compare companies is twofold: 1. D&A is a huge noncash expense for fixed asset and intangible asset-intensive businesses, and stripping out the biggest noncash expense provides a more accurate picture of "real" profits during the year. 2. Since companies can use different useful life assumptions and even depreciation methods to calculate D&A this can significantly skew the comparison of operating profitability across two otherwise identical firms" "Depreciation - CORRECT ANSWER -quantifies the wear and tear (from use and passage of time) of the physical asset through a systematic decrease (depreciation) of the assets' book (historical) value -Accrual accounting (and specifically the matching principle) dictates that we spread the cost evenly over the life of the asset so that costs are matched to the period when revenue is earned as a result of using the asset -is included within COGS or SG&A, depending on whether the asset being depreciated is directly tied with manufacture or procurement -is a non-cash expense and can make up a significant portion of total expenses on a company's income statement -most companies choose to use the straight-line method =(Original cost − Salvage value) / Useful life" "Amortization - CORRECT ANSWER -the process of allocating to expense the cost of an intangible asset -refers to acquired intangible (not physical) assets -Expenses associated with internally developing intangible assets like patents, customer lists, trademarks are expensed fully as they are incurred" "Other Operating Expenses / Income - CORRECT ANSWER -Any operating expenses not allocated to COGS, SG&A, R&D, D&A -Common examples include: Gains/losses on sale of fixed assets, Gains/losses from a legal settlement, Restructuring expenses and severance costs , Losses do to inventory spoilage (inventory write-down) -they will often be embedded within larger operating expense categories like SG&A, or in a separate line item" "Earnings Per Share (EPS) - CORRECT ANSWER -indicates how much money a company makes for each share of its stock and is a widely used metric for corporate profits -indicates more value because investors will pay more for a company with higher profits -Net income / Basic Weighted Average Shares Outstanding -Net income / Diluted Weighted Average Shares Outstanding -Diluted is the favored approach" "Stock-Based Compensation - CORRECT ANSWER -compensates an employee with stock (like stock options or restricted stock), the value of that compensation (called "stock based compensation" or "SBC") is recognized as an expense in the same expense category as the employee's regular cash compensation Ex. For example, a company that pays a sales person a cash salary of $100,000 and stock options valued at $50,000 will recognize: $150,000 in SG&A compensation (even though only $100,000 was spent). The extra $50,000 reflects that the employee earned an additional $50,000 in compensation (the actual payment down the road in the form of additional shares may not happen for a while)." "Common Dividends - CORRECT ANSWER -represents a portion of a company's net income that is returned to shareholders, typically on a quarterly basis, in the form of cash" "GAAP Income Statement - CORRECT ANSWER -This is what analysts actually have Revenue -------------------------->100 Less: COGS ----------------------->25 Less: SG&A------------------------>20 EBIT-------------------------------=55 Less: Interest expense------------>5 Pretax income-------------------->50 Less: Tax expense---------------->20 Net income---------------------->30" "The ideal income statement - CORRECT ANSWER -If analysts had this level of detail they wouldn't need the cash flow statement to calculate EBITDA for they could calculate it directly from the income statement Revenue ---------------------------------------->100 Less: Cost of Goods Sold (excluding D&A)---> 20 Less: SG&A (excluding D&A)-------------------> 15 EBITDA------------------------------------------=65 Less: D&A----------------------------------------> 10 EBIT----------------------------------------------=55 Less: Interest expense--------------------------->5 Pretax income------------------------------------=50 Less: Tax expense--------------------------------->20 Net income----------------------------------------=30" "Balance Sheet - CORRECT ANSWER -reports the company's resources (assets) and how those resources were funded (liabilities and shareholders' equity) on a particular date (end of the quarter, end of the year) -The fundamental equation in accounting is: Assets = Liabilities + Stockholders Equity" "Assets - CORRECT ANSWER -represent the company's resources. To qualify as THIS, the following requirements must be met: 1. A company must own the resource 2. The resource must be of value 3. The resource must have a quantifiable, measurable cost Ex. cash, marketable securities, accounts receivable, inventories, prepaid expenses, PP&E, intangible assets & goodwill -are presented in descending order of liquidity" "Liabilites - CORRECT ANSWER -what the company owes to others -are presented in order of when they are to be paid Ex. Accounts Payable, Accrued Expenses, Short term Debt, Long-Term Debt D" "Equity - CORRECT ANSWER -represents sources of funds through equity investments and retained earnings Ex. Preferred Stock, Common Stock, Treasury Stock, Retained Earnings" "I/S and B/S connection - CORRECT ANSWER -The income statement is connected to the balance sheet through retained earnings in shareholders' equity -All income on the income statement (revenue, interest income, etc.) increases retained earnings on the balance sheet (credits) -All expenses on the income statement (COGS, SG&A, tax, etc.) decrease retained earnings -Cash does not affect retained earnings" "Inventory - CORRECT ANSWER -represent goods waiting to be sold, and direct and (sometimes indirect) costs associated with the production or procurement of these goods -For a merchandiser, THIS is simply the products procured for resale. For a manufacturer, THIS includes the costs of producing the finished inventory: Raw materials used in the manufacture of finished inventory (i.e. oil, steel, lumber, etc.). Work-in-process: Direct labor and factory overhead used in producing the finished inventory -cycles out of the B/S and into the I/S as COGS -BEGINNING INVENTORY + PURCHASES OF NEW INVENTORY - COST OF GOODS SOLD (COGS) = ENDING INVENTORY" "Inventory Costing - CORRECT ANSWER -LIFO, FIFO, and Average are the ways to report inventory on the balance sheet. Sometimes in a specific period the price of products might increase. You can use these methods to price inventory properly and report it in the balance sheet." "First In, First Out (FIFO) - CORRECT ANSWER -Method to assign cost to inventory that assumes items are sold in the order acquired; earliest items purchased are the first sold. -The cost of the inventory first purchased (first in) is the cost assigned to the first inventory to be sold (COGS - first out). Remaining inventory reflect the latest costs" "Last In, First Out (LIFO) - CORRECT ANSWER -Method for assigning a cost to inventory that assumes costs for the most recent items purchased are sold first and charged to cost of goods sold. -The items purchased last (last in) are the first to be sold (COGS - first out). Therefore, the cost of inventory most recently acquired (ending inventory - last in) is assigned to COGS (first out). Ending inventory reflects the cost of the first purchased inventories -Allowed by US GAAP, but not IFRS -The tax benefit of THIS accounting is what makes it preferable for many U.S. companies over FIFO accounting in periods of rising inventory prices" "Goodwill - CORRECT ANSWER -is the amount by which the purchase price for a company exceeds its fair market value (FMV), representing the "intangible" value stemming from the acquired company's business name, customer relations, employee morale -is effectively an accounting plug, created only if the purchase price exceeds the FMV of all the assets acquired -is not amortized, but is tested annually for loss of value -If the value of the previously acquired company declines, THIS is reduced, with a corresponding reduction to RE via the income statement, by the amount of the impairment" Income statement & why its important - CORRECT ANSWER financial report that depicts the operating performance of a company over a specific period of time Its important because it facilitates the analysis of a company's growth prospects, cost structure and profitability Analysts an use the IS to identify the components and sources (drivers) of net earnings ****also referred to as consolidated statement of earnings, the profits and loss statement, statement of revenues and expenses" "Revenue (top line on IS) - CORRECT ANSWER Revenue represents proceeds from the sale of goods and services produced or offered by a company; revenue is referred to company top line. A company can have other income not tied to core operations (income for legal settlements, cash collected, etc)" "Accrual basis is revenue must be recorded only when it is earned and measurable - CORRECT ANSWER According to the revenue recognition principle, a company cannot record revenue until it is earned -- that is, until that order is shipped to a customer and collection from that customer, who used a CC, is reasonably assured" "Revenue Recognition Method 1: Multiple deliverables - CORRECT ANSWER Fo sales of bundles products, companies should assign individual values to each of the bundled components → this is especially relevant in the software industry ex: apple selling iphone that has price of hardware + software rights --> recognize revenue of hardware immediately, but recognize software revenue evenly over several yrs" "Revenue Recognition Method 2: Long-term projects - CORRECT ANSWER Multiple methods: 1: percentage of completion method: revenues are recognized on the basis of the % of total work completed during the accounting period (eg Boeing plan example) 2: completed contract method: rarely used in US, this method allows for revenue recognition only once the entire project has been completed" "Recall matching principle in relation to revenue and expense recognition - CORRECT ANSWER States that expenses should be matched to revenues Revenues are recognized and recorded when an economic exchange occurs, while expenses are recognized when the associated revenues are recognized, not necessarily when cash is exchanged" "Stock Based Compensation Expense - CORRECT ANSWER Recall that the expense of employee salaries are embedded within the expense categories based on the employees job function (ex: salary of SWE likely to be embedded in R&D) When a company compensates an employee with stick, the value of that SBC is recognized as an expense in the same expense category as the employee's regular cash compensation---> although SBC is a non-cash expense. Therefore SBC isn't on IS as line item, its included within the operating expenses in which the employee is classied (COGS, RD, SGA) Like depreciation, you will find it in CFS despite it not being in IS" "Other Operating Expenses + where it is on IS - CORRECT ANSWER Companies will sometimes recognize expenses (or income) on the IS that, while still related to operating activities, are a little less typical. Examples include: Gains/losses on sale of fixed assets gains/losses from a legal settlement (ONLY when it is regularly occurring) If one time legal settlement, listed under "other non-operating" Restructuring expenses and severance costs Losses due to inventory spoilage (inventory write-down) unless these expenses are material, will often be embbed within larger operating expense categories like SG&A, or in a seperate line item called "other operating expenses"" "Other non-operating items / "other income (expense), net" - CORRECT ANSWER Items that are peripheral to the core operations (like interest income, interest expense, etc) → is non-operating Other examples of non-operating income include increases in value and gains on sale on certain financial investments Other example of non-operating expenses include decreases in value and losses on sale on certain investments and debt Other income and expenses can be netted on IS as "other income (expense), net""