TRAINING THE STREET ACCOUNTING- FINAL EXAM
Two objectives of financial reporting - answer- relevant and reliable
Historical cost - answer- firm records the amount of the transaction
Fair value - answer- whatt the transaction is worth as of the balance sheet date, also
known as "mark to market"
Fair value hierarchy - answer- the fair value hierarchy provides insight into the priority of
valuation techniques that are used to determine fair value. The fair value hierarchy is
divided into three broad levels.
Fair value hierarchy
Level 1: quoted prices in active markets like common stock on nyse
Level 2: inputs other than quoted prices included in level 1 that are observable for the
asset or liability either directly or through corroboration with observable data.
Level 3: unobservable inputs (for example, a company's own data or assumptions). This
is the most iffy. (ex: a dcf)
Level 1 is the most reliable because it is based on quoted prices, like a closing stock
price in the wall street journal. Level 2 is the next most reliable and would rely on
evaluating similar assets or liabilities in active markets. At the least-reliable level, level
3, much judgment is needed based on the best information available to arrive at a
relevant and reliable fair value measurement.
Fv level 3 observality - answer- if an observable input has >10% impact on fair value,
then it must be level 3
Substantial doubt - answer- 75% doubt a firm wont meet obligations
Revenue - answer- sales-returns (products and services have been delivered) "top line"
Accounts recievable - answer- claim to case
Retained earnings - answer- captures revenue
Do dividends change the income statement - answer- no
Another name for income statment - answer- profit and loss
Net income= - answer- revs-expenses +/- other income (including gains and losses)
, Pg 22 - answer- make sure to double check this somehow (brad?)
Accrual accounting - answer- economic measurement is not equal to cash flow (in other
words we dont record when cash is physically moving, just the effects in accrual)
Matching principle/ accrual accounting (revenues) - answer- entities match the revenues
with the period when it is earned ; example, gift cards. When you buy a gift card, the
accounts receivable increases, and its matched with deferred revenue (liability!) On the
balance sheet until it is earned
Redo pg 28 - answer- matching with tif giftcard on cc using accrual accounting
Matching principle/ accrual accounting (expenses) - answer- entities match the expense
with the revenue; its not an expense until its sold. Example is inventory on the bal sheet
until revenue is earned (like when the person uses the gift card)
Balance sheet - answer- a firms assets and source of capital (liabilities and equity) at a
single point in time
Three rules when moving between present and future values - answer- 1) only values at
the same point in time can be meaningfully compared or combined
2) to move a cash flow forward in time you must compound it (grows)
3) to move a cash flow backward in time you must discount it (shrinks)
Fv future value - answer- the higher the interest rate or time period the larger the fv
Pv present value - answer- the higher the interest rate or time periods the smaller the
present value
Pv and fv formulas - answer- pg 323
Annuities - answer- a series of equal cash flows that occur at equal intervals of time for
a fixed number of periods ; has present and future value ; (ex: receipt, rent)
(ex: ordinary annuities "cash at the end of interval of time, like a loan , cash flows occur
at the end of each interval of time)
(ex: annuities due, like a lease, cash flows occur at the beginning of each interval of
time)
How are bonds quoted - answer- as percentage of the principal
Do bond prices move in the opposite direction from changes in int rates in bond market
- answer- yes
Coupon - answer- payment associated w bond
Two objectives of financial reporting - answer- relevant and reliable
Historical cost - answer- firm records the amount of the transaction
Fair value - answer- whatt the transaction is worth as of the balance sheet date, also
known as "mark to market"
Fair value hierarchy - answer- the fair value hierarchy provides insight into the priority of
valuation techniques that are used to determine fair value. The fair value hierarchy is
divided into three broad levels.
Fair value hierarchy
Level 1: quoted prices in active markets like common stock on nyse
Level 2: inputs other than quoted prices included in level 1 that are observable for the
asset or liability either directly or through corroboration with observable data.
Level 3: unobservable inputs (for example, a company's own data or assumptions). This
is the most iffy. (ex: a dcf)
Level 1 is the most reliable because it is based on quoted prices, like a closing stock
price in the wall street journal. Level 2 is the next most reliable and would rely on
evaluating similar assets or liabilities in active markets. At the least-reliable level, level
3, much judgment is needed based on the best information available to arrive at a
relevant and reliable fair value measurement.
Fv level 3 observality - answer- if an observable input has >10% impact on fair value,
then it must be level 3
Substantial doubt - answer- 75% doubt a firm wont meet obligations
Revenue - answer- sales-returns (products and services have been delivered) "top line"
Accounts recievable - answer- claim to case
Retained earnings - answer- captures revenue
Do dividends change the income statement - answer- no
Another name for income statment - answer- profit and loss
Net income= - answer- revs-expenses +/- other income (including gains and losses)
, Pg 22 - answer- make sure to double check this somehow (brad?)
Accrual accounting - answer- economic measurement is not equal to cash flow (in other
words we dont record when cash is physically moving, just the effects in accrual)
Matching principle/ accrual accounting (revenues) - answer- entities match the revenues
with the period when it is earned ; example, gift cards. When you buy a gift card, the
accounts receivable increases, and its matched with deferred revenue (liability!) On the
balance sheet until it is earned
Redo pg 28 - answer- matching with tif giftcard on cc using accrual accounting
Matching principle/ accrual accounting (expenses) - answer- entities match the expense
with the revenue; its not an expense until its sold. Example is inventory on the bal sheet
until revenue is earned (like when the person uses the gift card)
Balance sheet - answer- a firms assets and source of capital (liabilities and equity) at a
single point in time
Three rules when moving between present and future values - answer- 1) only values at
the same point in time can be meaningfully compared or combined
2) to move a cash flow forward in time you must compound it (grows)
3) to move a cash flow backward in time you must discount it (shrinks)
Fv future value - answer- the higher the interest rate or time period the larger the fv
Pv present value - answer- the higher the interest rate or time periods the smaller the
present value
Pv and fv formulas - answer- pg 323
Annuities - answer- a series of equal cash flows that occur at equal intervals of time for
a fixed number of periods ; has present and future value ; (ex: receipt, rent)
(ex: ordinary annuities "cash at the end of interval of time, like a loan , cash flows occur
at the end of each interval of time)
(ex: annuities due, like a lease, cash flows occur at the beginning of each interval of
time)
How are bonds quoted - answer- as percentage of the principal
Do bond prices move in the opposite direction from changes in int rates in bond market
- answer- yes
Coupon - answer- payment associated w bond
