Wall Street Prep.

WallStreetPrepTestWithAllAnswersCorrect m m m m m m m m




1. Do fcompanies fprefer fstraight-line for faccelerated fdepreciation?:fFor fGAAP
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freporting fpurposes, fcompanies fgenerally fprefer fstraight-line fdepreciation.fThat's
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fbecause fa fcompany fwill frecord flower fdepreciation fin fthe fearly fyears fof fthe fasset's
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flife fthan fif fthey fhad fused faccelerated fdepreciation. fAs fa fresult, fcompanies fusing
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fstraight-line fdepreciation fwill fshow fhigher fnet fincome fthan funder faccelerated fde-
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fpreciation.
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2. Dofcompaniesfdepreciatefland?:fNo,flandfisfconsideredftofhavefanfindefiniteflife
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fand fis fnot fdepreciated.
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3. Canfcompaniesfamortizefgoodwill?:fUnderfGAAP,fpublicfcompaniesfarefnot
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fallowed fto famortize fgoodwill.fInstead, fit fmust fbe ftested fannually ffor fimpairment.
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The flonger fanswer fis fthat funder fGAAP, fpublic fcompanies fare fnot fallowed fto famortize
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mfgoodwill fand fmust finstead ftest fit fannually ffor fimpairment. fHowever, fprivate fcompa-
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mfnies fmay felect fto famortize fgoodwill. fIn faddition, ffor ftax freporting fpurposes, fgoodwill
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mfmay fbe famortized fover f15 fyears funder fsome fcircumstances.
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4. What fis fthe fimpact fof fshare fissuance fon fEPS?: fThe fmajor fimpact fto fEPS fis
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mfthat fthe factual fshare fcount fincreases, fthereby fdecreasing fEPS.fHowever, fthere fis
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mfsometimes fan fimpact fon fnet fincome.fThat's fbecause fassuming fshare fissuances m m m m m m m m m m




mfgeneratefcashfforfthefcompany,ftherefwillfbefhigherfinterestfincome,fwhichfincreases fnet
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mfincome fand fEPS fslightly.fBecause freturns fon fexcess fcash ffor fmost fcompanies fare
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mflow, fthis fimpact fis fusually fvery fminor fand fdoesn't foffset fthe fnegative fimpact fto fEPS
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mffrom fa fhigher fshare fcount. m m m m




5. What fis fthe fimpact fof fshare frepurchases fon fEPS?:fThe fmajor fimpact fto fEPS fis
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fthatfthefactualfsharefcountfisfreduced,ftherebyfincreasingfEPS.fHowever,ftherefis
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mfsometimes fan fimpact fon fnet fincome.fThat's fbecause fassuming fshare frepurchases m m m m m m m m m m




mfare ffunded fwith fthe fcompany's fexcess fcash, fany finterest fincome fthat fwould fhave
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mfotherwise fbeen fgenerated fon fthat fcash fis fno flonger favailable, fthereby freducing fnet m m m m m m m m m m m m




mfincome f- fand fEPS f- fslightly.fBecause freturns fon fexcess fcash ffor fmost fcompanies
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mfare flow, fthis fimpact fis fusually fvery fminor fand fdoesn't foffset fthe fpositive fimpact fto
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mfEPS ffrom fa flower fshare fcount.m m m m m




6. How fdo fyou fcalculate fearnings fper fshare?: fEarnings fper fshare f(EPS) fis fcalcu-
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1 f/ f26m m

,m flated fas fnet fincome fdivided fby fthe fcompany's fweighted faverage fshares foutstanding
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m fduring fthe fperiod.
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There fare ftwo fways fto fmeasure fEPS f- fBasic fand fDiluted.fBasic
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EPS fis fnet fincome fdivided fby fthe factual fshares, fwhile fDiluted fEPS fis fnet fincome
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fdivided fby factual fshares fand fshares ffrom fpotentially fdilutive fsecurities fsuch fas
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foptions, frestricted fstock, fand fconvertible fbonds for fstock.
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2 f/ f26
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, 7. A fcompany facquired fa fmachine ffor f$5 fmillion fin f2003 fand fhas fsince fgener-
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fated f$3 fmillion fin faccumulated fdepreciation.fIn faddition,fthe fPP&E fnow fhas fa
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ffair fvalue fof f$20 fmillion. fAssuming fGAAP, fwhat fis fthe fvalue fof fthat fPP&E fon
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fthe fcompany's fbalance fsheet?:fThe fshort fanswer fis f$2 fmillion.fExcept ffor fcertain
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fliquidffinancialfassetsfwhichfcanfbefwrittenfupftofreflectffairfmarketfvalue,fcompanies
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fmust fcarry fthe fvalue fof fassets fat ftheir fhistorical fcost.
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8. Do fyou famortize fintangible fassets?: fIntangible flike fcustomer flists, fcopyrights
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fand fpatents f- fassets fthat fhave fa ffinite flife f- fare famortized, fwhile fothers flike ftrade-
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fmarks f(and fgoodwill) fare fconsidered fto fhave findefinite flives fand fare fnot famortized.
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9. Howfdofcapitalfleasesfaffectfthefthree ffinancialfstatements?:fLeasesftreated
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fas fcapital fleases f(as fopposed fto foperating fleases) fcreate fan fasset fand fassociated
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fliability ffor fthe fthing fthat fis fbeing fleased.fFor fexample, fif fa fcompany fleases fa
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fbuildingfforf30fyears,fthefbuildingfisfrecognizedfasfanfassetfonftheflessee'sfbalance
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fsheet fwith fa fcorresponding fdebt-like fliability.fThe fincome fstatement fimpact fis fthe
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fdepreciation fexpense fassociated fwith fthe fbuilding, fas fwell fas finterest fexpense
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fassociated fwith fthe ffinancing.
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10. How fdo foperating fleases faffect fthe fthree ffinancial fstatements?:fUnder fUS
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fGAAP, fcompanies fcan fchoose fto faccount ffor fleases fas foperating forfcapital fleases.
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fOperating fleases fprimarily fonly fimpact fthe fincome fstatement.fWhen fleases fare
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faccounted ffor fas foperating fleases, flease f(rent) fpayments fare ftreated fas foperating
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fexpenses flike fwages fand futilities: fRegardless fof fwhether fyou fsign fa f1-year flease for
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fa f30-year flease, fevery ftime fyou fpay fthe frent, fcash fis fcredited fand fan foperating
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fexpense fis fdebited.
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The fonly fsignificant fbalance fsheet fimpacts fhave fto fdo fwith ftiming fdifferences
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fbetween fpayments f(prepaid fand faccrued frent) fand fthe fmatching fof frent fpayments
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fto fwhen fthe ftenant fbenefits ffrom fthat frent f(leading fto fbalance fsheet faccruals ffor
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fsmoothingfoffrentfescalationsfandfupfrontfrentfincentivesflikefaffreefmonth).fStarting fin
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f2019, foperating fleases fwill fno flonger fbe fallowed funder fUS fGAAP.
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11. How fcan fa fprofitable ffirm fgo fbankrupt?:fTo fbe fprofitable, fa fcompany fmust
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fgenerate frevenues fthat fexceed fexpenses.fHowever, fif fthe fcompany fis fineffective
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fat fcollecting fcash ffrom fcustomers fand fallows fits freceivables fto fballoon, for fif fit fis
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funable fto fget ffavorable fterms ffrom fsuppliers fand fmust fpay fcash ffor fall finventories
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fand fsupplies, fwhat fcan foccur fis fthat fdespite fa fprofitable fincome fstatement, fthe
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companyfsuffersffromfliquidityfproblemsfdueftoftheftimingfmismatchfoffcashfinflows m m m m m m m m m m m m




fand foutflows.
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Whilefreliably fprofitable fcompanies fwho fsimplyfhavefthese fworking fcapital fissues fcan
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fusually fsecure ffinancing fto fdeal fwith fit, ftheoretically, fif ffinancing fbecomes
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funavailable ffor fsome freason f(the f2008 fcredit fcrisis fis fan fexample fwhere feven
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3 f/ f26m m