WALL STREET PREP TEST WITH ALL ANSWERS CORRECT
1.Do fcompanies fprefer fstraight-line for faccelerated fdepreciation?: fFor
fGAAP freporting fpurposes, fcompanies fgenerally fprefer fstraight-line
fdepreciation. fThat's fbecause fa fcompany fwill frecord flower fdepreciation
fin fthe fearly fyears fof fthe fasset's flife fthan fif fthey fhad fused faccelerated
fdepreciation. fAs fa fresult, fcompanies fusing fstraight-line fdepreciation
fwill fshow fhigher fnet fincome fthan funder faccelerated fde- fpreciation.
2.Do fcompanies fdepreciate fland?: fNo, fland fis fconsidered fto fhave fan
findefinite flife fand fis fnot fdepreciated.
3.Can fcompanies famortize fgoodwill?: fUnder fGAAP, fpublic fcompanies
fare fnot fallowed fto famortize fgoodwill. fInstead, fit fmust fbe ftested
fannually ffor fimpairment.
The flonger fanswer fis fthat funder fGAAP, fpublic fcompanies fare fnot fallowed
fto famortize fgoodwill fand fmust finstead ftest fit fannually ffor fimpairment.
fHowever, fprivate fcompa- fnies fmay felect fto famortize fgoodwill. fIn
faddition, ffor ftax freporting fpurposes, fgoodwill fmay fbe famortized fover f15
fyears funder fsome fcircumstances.
4.What fis fthe fimpact fof fshare fissuance fon fEPS?: fThe fmajor fimpact fto fEPS
fis fthat fthe factual fshare fcount fincreases, fthereby fdecreasing fEPS.
fHowever, fthere fis fsometimes fan fimpact fon fnet fincome. fThat's fbecause
fassuming fshare fissuances fgenerate fcash ffor fthe fcompany, fthere fwill fbe
fhigher finterest fincome, fwhich fincreases fnet fincome fand fEPS fslightly.
fBecause freturns fon fexcess fcash ffor fmost fcompanies fare flow, fthis
fimpact fis fusually fvery fminor fand fdoesn't foffset fthe fnegative fimpact fto
fEPS ffrom fa fhigher fshare fcount.
5.What fis fthe fimpact fof fshare frepurchases fon fEPS?: fThe fmajor fimpact fto
fEPS fis fthat fthe factual fshare fcount fis freduced, fthereby fincreasing fEPS.
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,fHowever, fthere fis fsometimes fan fimpact fon fnet fincome. fThat's fbecause
fassuming fshare frepurchases fare ffunded fwith fthe fcompany's fexcess
fcash, fany finterest fincome fthat fwould fhave fotherwise fbeen fgenerated
fon fthat fcash fis fno flonger favailable, fthereby freducing fnet fincome f- fand
fEPS f- fslightly. fBecause freturns fon fexcess fcash ffor fmost fcompanies fare
flow, fthis fimpact fis fusually fvery fminor fand fdoesn't foffset fthe fpositive
fimpact fto fEPS ffrom fa flower fshare fcount.
6.How fdo fyou fcalculate fearnings fper fshare?: fEarnings fper fshare f(EPS) fis
fcalcu- flated fas fnet fincome fdivided fby fthe fcompany's fweighted faverage
fshares foutstanding fduring fthe fperiod.
There fare ftwo fways fto fmeasure fEPS f- fBasic fand fDiluted. fBasic
EPS fis fnet fincome fdivided fby fthe factual fshares, fwhile fDiluted fEPS fis fnet
fincome fdivided fby factual fshares fand fshares ffrom fpotentially fdilutive
fsecurities fsuch fas foptions, frestricted fstock, fand fconvertible fbonds for
fstock.
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f49
,7.A fcompany facquired fa fmachine ffor f$5 fmillion fin f2003 fand fhas fsince
fgener- fated f$3 fmillion fin faccumulated fdepreciation. fIn faddition, fthe fPP&E
fnow fhas fa ffair fvalue fof f$20 fmillion. fAssuming fGAAP, fwhat fis fthe fvalue fof
fthat fPP&E fon fthe fcompany's fbalance fsheet?: fThe fshort fanswer fis f$2
fmillion. fExcept ffor fcertain fliquid ffinancial fassets fwhich fcan fbe fwritten fup
fto freflect ffair fmarket fvalue, fcompanies fmust fcarry fthe fvalue fof fassets fat
ftheir fhistorical fcost.
8.Do fyou famortize fintangible fassets?: fIntangible flike fcustomer flists,
fcopyrights fand fpatents f- fassets fthat fhave fa ffinite flife f- fare famortized,
fwhile fothers flike ftrade- fmarks f(and fgoodwill) fare fconsidered fto fhave
findefinite flives fand fare fnot famortized.
9.How fdo fcapital fleases faffect fthe fthree ffinancial fstatements?: fLeases
ftreated fas fcapital fleases f(as fopposed fto foperating fleases) fcreate fan
fasset fand fassociated fliability ffor fthe fthing fthat fis fbeing fleased. fFor
fexample, fif fa fcompany fleases fa fbuilding ffor f30 fyears, fthe fbuilding fis
frecognized fas fan fasset fon fthe flessee's fbalance fsheet fwith fa
fcorresponding fdebt-like fliability. fThe fincome fstatement fimpact fis fthe
fdepreciation fexpense fassociated fwith fthe fbuilding, fas fwell fas finterest
fexpense fassociated fwith fthe ffinancing.
10.How fdo foperating fleases faffect fthe fthree ffinancial fstatements?: fUnder
fUS fGAAP, fcompanies fcan fchoose fto faccount ffor fleases fas foperating for
fcapital fleases. fOperating fleases fprimarily fonly fimpact fthe fincome
fstatement. fWhen fleases fare faccounted ffor fas foperating fleases, flease
f(rent) fpayments fare ftreated fas foperating fexpenses flike fwages fand
futilities: fRegardless fof fwhether fyou fsign fa f1-year flease for fa f30-year
flease, fevery ftime fyou fpay fthe frent, fcash fis fcredited fand fan foperating
fexpense fis fdebited.
The fonly fsignificant fbalance fsheet fimpacts fhave fto fdo fwith ftiming
fdifferences fbetween fpayments f(prepaid fand faccrued frent) fand fthe
fmatching fof frent fpayments fto fwhen fthe ftenant fbenefits ffrom fthat frent
f(leading fto fbalance fsheet faccruals ffor fsmoothing fof frent fescalations fand
fupfront frent fincentives flike fa ffree fmonth). fStarting fin f2019, foperating
fleases fwill fno flonger fbe fallowed funder fUS fGAAP.
11.How fcan fa fprofitable ffirm fgo fbankrupt?: fTo fbe fprofitable, fa fcompany
fmust fgenerate frevenues fthat fexceed fexpenses. fHowever, fif fthe
fcompany fis fineffective fat fcollecting fcash ffrom fcustomers fand fallows
fits freceivables fto fballoon, for fif fit fis funable fto fget ffavorable fterms ffrom
fsuppliers fand fmust fpay fcash ffor fall finventories fand fsupplies, fwhat fcan
foccur fis fthat fdespite fa fprofitable fincome fstatement, fthe
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f49
, company fsuffers ffrom fliquidity fproblems fdue fto fthe ftiming fmismatch fof
fcash finflows fand foutflows.
While freliably fprofitable fcompanies fwho fsimply fhave fthese fworking
fcapital fissues fcan fusually fsecure ffinancing fto fdeal fwith fit, ftheoretically,
fif ffinancing fbecomes funavailable ffor fsome freason f(the f2008 fcredit
fcrisis fis fan fexample fwhere feven
4 f/
f49
1.Do fcompanies fprefer fstraight-line for faccelerated fdepreciation?: fFor
fGAAP freporting fpurposes, fcompanies fgenerally fprefer fstraight-line
fdepreciation. fThat's fbecause fa fcompany fwill frecord flower fdepreciation
fin fthe fearly fyears fof fthe fasset's flife fthan fif fthey fhad fused faccelerated
fdepreciation. fAs fa fresult, fcompanies fusing fstraight-line fdepreciation
fwill fshow fhigher fnet fincome fthan funder faccelerated fde- fpreciation.
2.Do fcompanies fdepreciate fland?: fNo, fland fis fconsidered fto fhave fan
findefinite flife fand fis fnot fdepreciated.
3.Can fcompanies famortize fgoodwill?: fUnder fGAAP, fpublic fcompanies
fare fnot fallowed fto famortize fgoodwill. fInstead, fit fmust fbe ftested
fannually ffor fimpairment.
The flonger fanswer fis fthat funder fGAAP, fpublic fcompanies fare fnot fallowed
fto famortize fgoodwill fand fmust finstead ftest fit fannually ffor fimpairment.
fHowever, fprivate fcompa- fnies fmay felect fto famortize fgoodwill. fIn
faddition, ffor ftax freporting fpurposes, fgoodwill fmay fbe famortized fover f15
fyears funder fsome fcircumstances.
4.What fis fthe fimpact fof fshare fissuance fon fEPS?: fThe fmajor fimpact fto fEPS
fis fthat fthe factual fshare fcount fincreases, fthereby fdecreasing fEPS.
fHowever, fthere fis fsometimes fan fimpact fon fnet fincome. fThat's fbecause
fassuming fshare fissuances fgenerate fcash ffor fthe fcompany, fthere fwill fbe
fhigher finterest fincome, fwhich fincreases fnet fincome fand fEPS fslightly.
fBecause freturns fon fexcess fcash ffor fmost fcompanies fare flow, fthis
fimpact fis fusually fvery fminor fand fdoesn't foffset fthe fnegative fimpact fto
fEPS ffrom fa fhigher fshare fcount.
5.What fis fthe fimpact fof fshare frepurchases fon fEPS?: fThe fmajor fimpact fto
fEPS fis fthat fthe factual fshare fcount fis freduced, fthereby fincreasing fEPS.
1 f/
f49
,fHowever, fthere fis fsometimes fan fimpact fon fnet fincome. fThat's fbecause
fassuming fshare frepurchases fare ffunded fwith fthe fcompany's fexcess
fcash, fany finterest fincome fthat fwould fhave fotherwise fbeen fgenerated
fon fthat fcash fis fno flonger favailable, fthereby freducing fnet fincome f- fand
fEPS f- fslightly. fBecause freturns fon fexcess fcash ffor fmost fcompanies fare
flow, fthis fimpact fis fusually fvery fminor fand fdoesn't foffset fthe fpositive
fimpact fto fEPS ffrom fa flower fshare fcount.
6.How fdo fyou fcalculate fearnings fper fshare?: fEarnings fper fshare f(EPS) fis
fcalcu- flated fas fnet fincome fdivided fby fthe fcompany's fweighted faverage
fshares foutstanding fduring fthe fperiod.
There fare ftwo fways fto fmeasure fEPS f- fBasic fand fDiluted. fBasic
EPS fis fnet fincome fdivided fby fthe factual fshares, fwhile fDiluted fEPS fis fnet
fincome fdivided fby factual fshares fand fshares ffrom fpotentially fdilutive
fsecurities fsuch fas foptions, frestricted fstock, fand fconvertible fbonds for
fstock.
2 f/
f49
,7.A fcompany facquired fa fmachine ffor f$5 fmillion fin f2003 fand fhas fsince
fgener- fated f$3 fmillion fin faccumulated fdepreciation. fIn faddition, fthe fPP&E
fnow fhas fa ffair fvalue fof f$20 fmillion. fAssuming fGAAP, fwhat fis fthe fvalue fof
fthat fPP&E fon fthe fcompany's fbalance fsheet?: fThe fshort fanswer fis f$2
fmillion. fExcept ffor fcertain fliquid ffinancial fassets fwhich fcan fbe fwritten fup
fto freflect ffair fmarket fvalue, fcompanies fmust fcarry fthe fvalue fof fassets fat
ftheir fhistorical fcost.
8.Do fyou famortize fintangible fassets?: fIntangible flike fcustomer flists,
fcopyrights fand fpatents f- fassets fthat fhave fa ffinite flife f- fare famortized,
fwhile fothers flike ftrade- fmarks f(and fgoodwill) fare fconsidered fto fhave
findefinite flives fand fare fnot famortized.
9.How fdo fcapital fleases faffect fthe fthree ffinancial fstatements?: fLeases
ftreated fas fcapital fleases f(as fopposed fto foperating fleases) fcreate fan
fasset fand fassociated fliability ffor fthe fthing fthat fis fbeing fleased. fFor
fexample, fif fa fcompany fleases fa fbuilding ffor f30 fyears, fthe fbuilding fis
frecognized fas fan fasset fon fthe flessee's fbalance fsheet fwith fa
fcorresponding fdebt-like fliability. fThe fincome fstatement fimpact fis fthe
fdepreciation fexpense fassociated fwith fthe fbuilding, fas fwell fas finterest
fexpense fassociated fwith fthe ffinancing.
10.How fdo foperating fleases faffect fthe fthree ffinancial fstatements?: fUnder
fUS fGAAP, fcompanies fcan fchoose fto faccount ffor fleases fas foperating for
fcapital fleases. fOperating fleases fprimarily fonly fimpact fthe fincome
fstatement. fWhen fleases fare faccounted ffor fas foperating fleases, flease
f(rent) fpayments fare ftreated fas foperating fexpenses flike fwages fand
futilities: fRegardless fof fwhether fyou fsign fa f1-year flease for fa f30-year
flease, fevery ftime fyou fpay fthe frent, fcash fis fcredited fand fan foperating
fexpense fis fdebited.
The fonly fsignificant fbalance fsheet fimpacts fhave fto fdo fwith ftiming
fdifferences fbetween fpayments f(prepaid fand faccrued frent) fand fthe
fmatching fof frent fpayments fto fwhen fthe ftenant fbenefits ffrom fthat frent
f(leading fto fbalance fsheet faccruals ffor fsmoothing fof frent fescalations fand
fupfront frent fincentives flike fa ffree fmonth). fStarting fin f2019, foperating
fleases fwill fno flonger fbe fallowed funder fUS fGAAP.
11.How fcan fa fprofitable ffirm fgo fbankrupt?: fTo fbe fprofitable, fa fcompany
fmust fgenerate frevenues fthat fexceed fexpenses. fHowever, fif fthe
fcompany fis fineffective fat fcollecting fcash ffrom fcustomers fand fallows
fits freceivables fto fballoon, for fif fit fis funable fto fget ffavorable fterms ffrom
fsuppliers fand fmust fpay fcash ffor fall finventories fand fsupplies, fwhat fcan
foccur fis fthat fdespite fa fprofitable fincome fstatement, fthe
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f49
, company fsuffers ffrom fliquidity fproblems fdue fto fthe ftiming fmismatch fof
fcash finflows fand foutflows.
While freliably fprofitable fcompanies fwho fsimply fhave fthese fworking
fcapital fissues fcan fusually fsecure ffinancing fto fdeal fwith fit, ftheoretically,
fif ffinancing fbecomes funavailable ffor fsome freason f(the f2008 fcredit
fcrisis fis fan fexample fwhere feven
4 f/
f49
