Wall Street Oasis - Technical Guide
Exam Questions & Answers63
What is the main difference between futures contracts and forward contracts? - ANSWERS-
Futures are highly standardized in all their terms so as to be traded publicly on the exchanges.
Forwards are privately negotiated, customizable contracts that can be revised to suit the buyer
and seller, which is why they must be traded over the counter.
Days Receivables Outstanding
- Equation
- Why use? - ANSWERS-DRO= (AR/Sales)*365
- An efficiency measure of the A/R function/department. Due to the high importance of cash in
running a business, it is in a company's best interest to collect on its outstanding account
receivables as quickly as possible.
Days Payables Outstanding - ANSWERS-DPO=(AP/CoGS)*365
Days Inventory Outstanding - ANSWERS-DIO=(inv/CoGS)*365
Inventory Turnover Ratio - ANSWERS-CoGS/Inventory
Accounts Receivable Turnover Ratio - ANSWERS-sales/AR
Accounts payables turnover ratio - ANSWERS-CoGS/AP
,Bond yield - ANSWERS-The interest rate associated with a bond relative to the bond's current
market price.
Bond face value - ANSWERS-Also known as the par value; the bond's price when it's first issued.
How does a bond's face value differ from its price? - ANSWERS-After issuance, price of the bond
fluctuates in accordance with changes in interest rates. The face value remains fixed.
As the bond's price fluctuates, the price is described relative to the original par value. The bond
trades at either at a premium (above par value) at a discount (below par value).
Describe the 3 financial statements and discuss the connections each has to the others? -
ANSWERS-*Balance Sheet*
The balance sheet shows a company's *assets, its liabilities and shareholders' equity*. It is a
snapshot of a company at one point in time.
*Income Statement*
The income statement outlines the company's *revenues and expenses*. It shows their
*profit/loss over* a *period of time*.
*B/S and I/S Connections*:
1) Interest Expense is calculated based on debt held on B/S
2) Revenue and Expense accounts at the end of a reporting period are closed (zeroed) out with
the net debit (loss) or credit (profit) adjusted to the retained earnings account in the equity
section of the B/S
3) Depreciation and Amortization is calculated based on property, plant, and equipment (PP&E)
from the Balance Sheet. A $10 increase in depreciation expense will result in a $10 reduction in
net PP&E and a $10 x (1-T) in net income.
,*C/F Statement*
The cash flow statement uses information from both B/S and I/S to show the cash flows from
operating, investing and financing activities over a PERIOD OF TIME.
*C/F connections to I/S & B/S*
1. Net Income is the first line of the statement of cash flow in the indirect method
2. Adjust for non-cash items (like Depreciation and Amortization) from the Income Statement.
3. Indirect method => The changes in the line items of the B/S are analyzed to determine if they
are a source or use of cash.
4. Beginning Cash on the CF Statement is cash from the prior period's Balance Sheet, and Ending
Cash on the CF statement is Cash on the current period's Balance Sheet.
football graph - ANSWERS-
If you could use only one financial statement to evaluate the financial state of a company, which
would you choose?
- Give 3 reasons why? - ANSWERS-- Cash Flow Statement (Most investors believe that "cash is
king")
1) *Can sustain its operations* - Shows company's liquidity in terms of how much cash it is using
and generating. If unable to generate cash, NI and BS Assets are irrelevant. Would be be to pay
your employees, your vendors, and maintain operations.... and unless you're the guy who can
say I told you so, nobody on the street likes to see the words Chapter 7 or Chapter 11 in a
headline.
, 2) *Valuation Metric* - The first steps of a DCF valuation is to derive forecasted free cash flows.
3) *Investor Value* - If a company is consistently generating more cash than it is using, the
company will be able to increase its dividend, buy back some of its stock, reduce debt, or
acquire another company. All of these are perceived to be good for stockholder value.
Retained Earnings
a) What does it represent?
b) Discuss the 2 adjustments to R/E? - ANSWERS-a) The portion of a corporation's profits that
has not been paid out as dividends to shareholders.
b)
1) Net Income or Loss
The closing entries of a corporation include closing the income summary account to the
Retained Earnings account. If the corporation was profitable in the accounting period, the
Retained Earnings account will be credited; if the corporation suffered a net loss, Retained
Earnings will be debited.
Dividends
2) Dividends Declared
When dividends are declared by a corporation's board of directors, a journal entry is made on
the declaration date to debit Retained Earnings and credit the current liability Dividends
Payable. As stated earlier, it is the declaration of cash dividends that reduces Retained Earnings.
Income Statement
- What are the 4 main - ANSWERS-Study Pic
Exam Questions & Answers63
What is the main difference between futures contracts and forward contracts? - ANSWERS-
Futures are highly standardized in all their terms so as to be traded publicly on the exchanges.
Forwards are privately negotiated, customizable contracts that can be revised to suit the buyer
and seller, which is why they must be traded over the counter.
Days Receivables Outstanding
- Equation
- Why use? - ANSWERS-DRO= (AR/Sales)*365
- An efficiency measure of the A/R function/department. Due to the high importance of cash in
running a business, it is in a company's best interest to collect on its outstanding account
receivables as quickly as possible.
Days Payables Outstanding - ANSWERS-DPO=(AP/CoGS)*365
Days Inventory Outstanding - ANSWERS-DIO=(inv/CoGS)*365
Inventory Turnover Ratio - ANSWERS-CoGS/Inventory
Accounts Receivable Turnover Ratio - ANSWERS-sales/AR
Accounts payables turnover ratio - ANSWERS-CoGS/AP
,Bond yield - ANSWERS-The interest rate associated with a bond relative to the bond's current
market price.
Bond face value - ANSWERS-Also known as the par value; the bond's price when it's first issued.
How does a bond's face value differ from its price? - ANSWERS-After issuance, price of the bond
fluctuates in accordance with changes in interest rates. The face value remains fixed.
As the bond's price fluctuates, the price is described relative to the original par value. The bond
trades at either at a premium (above par value) at a discount (below par value).
Describe the 3 financial statements and discuss the connections each has to the others? -
ANSWERS-*Balance Sheet*
The balance sheet shows a company's *assets, its liabilities and shareholders' equity*. It is a
snapshot of a company at one point in time.
*Income Statement*
The income statement outlines the company's *revenues and expenses*. It shows their
*profit/loss over* a *period of time*.
*B/S and I/S Connections*:
1) Interest Expense is calculated based on debt held on B/S
2) Revenue and Expense accounts at the end of a reporting period are closed (zeroed) out with
the net debit (loss) or credit (profit) adjusted to the retained earnings account in the equity
section of the B/S
3) Depreciation and Amortization is calculated based on property, plant, and equipment (PP&E)
from the Balance Sheet. A $10 increase in depreciation expense will result in a $10 reduction in
net PP&E and a $10 x (1-T) in net income.
,*C/F Statement*
The cash flow statement uses information from both B/S and I/S to show the cash flows from
operating, investing and financing activities over a PERIOD OF TIME.
*C/F connections to I/S & B/S*
1. Net Income is the first line of the statement of cash flow in the indirect method
2. Adjust for non-cash items (like Depreciation and Amortization) from the Income Statement.
3. Indirect method => The changes in the line items of the B/S are analyzed to determine if they
are a source or use of cash.
4. Beginning Cash on the CF Statement is cash from the prior period's Balance Sheet, and Ending
Cash on the CF statement is Cash on the current period's Balance Sheet.
football graph - ANSWERS-
If you could use only one financial statement to evaluate the financial state of a company, which
would you choose?
- Give 3 reasons why? - ANSWERS-- Cash Flow Statement (Most investors believe that "cash is
king")
1) *Can sustain its operations* - Shows company's liquidity in terms of how much cash it is using
and generating. If unable to generate cash, NI and BS Assets are irrelevant. Would be be to pay
your employees, your vendors, and maintain operations.... and unless you're the guy who can
say I told you so, nobody on the street likes to see the words Chapter 7 or Chapter 11 in a
headline.
, 2) *Valuation Metric* - The first steps of a DCF valuation is to derive forecasted free cash flows.
3) *Investor Value* - If a company is consistently generating more cash than it is using, the
company will be able to increase its dividend, buy back some of its stock, reduce debt, or
acquire another company. All of these are perceived to be good for stockholder value.
Retained Earnings
a) What does it represent?
b) Discuss the 2 adjustments to R/E? - ANSWERS-a) The portion of a corporation's profits that
has not been paid out as dividends to shareholders.
b)
1) Net Income or Loss
The closing entries of a corporation include closing the income summary account to the
Retained Earnings account. If the corporation was profitable in the accounting period, the
Retained Earnings account will be credited; if the corporation suffered a net loss, Retained
Earnings will be debited.
Dividends
2) Dividends Declared
When dividends are declared by a corporation's board of directors, a journal entry is made on
the declaration date to debit Retained Earnings and credit the current liability Dividends
Payable. As stated earlier, it is the declaration of cash dividends that reduces Retained Earnings.
Income Statement
- What are the 4 main - ANSWERS-Study Pic
