Chapter 9 Series 65 Financial Reporting

DCS had $7 million as its beginning-of-year retained earnings and it made post-tax profits of $3 million. The board of directors decides to pay a dividend of $1 million. Once paid, what would be the ending retained earnings?

$9 million The ending retained earnings = beginning retained earnings + net income - dividend. That means $7 million + $3 million - $1 million = $9 million.

What is the balance sheet equation?

Assets = liabilities + shareholders' equity

Which of the following statements about balance sheets are TRUE?

Balance sheets provide a snapshot of a company's financial position on a given date. Balance sheets represent the relationship between a company's assets, liabilities, and stockholders' equity

Issuance of which of the following would most likely increase the leverage in a company's capital structure?

Bonds Leverage is the use of borrowed money (aka bonds)

Current liabilities on a company's balance sheet would include

Current liabilities are those which are expected to be paid within a normal operating cycle and would include accounts payable.

A corporation ends its accounting year on September 30. It would be correct to state that it uses

Fiscal-year accounting - used to describe whenever an entity ends its accounting year on a date other than December 31.

Under SEC regulations, publicly-traded (reporting) companies are required to file all of the following except

Form 13F. Form 13F is used by money managers who manage equity portfolios with at least $100 million in equity securities.

One of the components of a cash flow statement is cash flow from investing activities. Included would be

Investing activities include transactions and events involving the purchase and sale of land, buildings, and equipment.

Which of the following would have the effect of increasing a company's cash flow?

Issuance of a bond One of the ways to increase cash flow is through financing. When a company issues a bond, it receives cash, but does not have to pay the money back until maturity, a number of years in the future

Which of the following would be included in ABC's cash flow from financing activities?

Payment of cash dividends All financing activities deal with the flow of cash to or from the business owners. Who do dividends go to? The company's shareholders and that is why they are included in financing activities

A profitable company reports net income of $10 million. A cash dividend of $7 million is declared. From an accounting standpoint, the other $3 million will be credited to which balance sheet account?

Retained earnings

A fundamental analyst would be interested in funds available for use in the business. Doing which of the following would have the greatest impact on future cash flow?

Retiring outstanding bonds

Which of the following acts requires publicly traded corporations to issue annual reports?

Securities Exchange Act of 1934

Which items change when a company pays a cash dividend?

Total assets Total liabilities

The issuance of a long-term debt instrument, such as a bond, by a company would have an immediate effect on which of the following balance sheet items?

Total assets Total liabilities Working capital

How to find equity

Total assets minus total liabilities equals shareholders' equity ($780,000 − $370,000 = $410,000).

Publicly-traded corporations are generally required to have an annual independent audit of their financial records. What is the highest opinion offered under GAAP?

Unqualified opinion or "clean" opinion is the best type of report a business can get. The term qualified means that the auditor has some reservations about the information contained in the financial statements.

A fundamental analyst is reviewing a company's financial statements. When attempting to determine their debt exposure, all of the following would be included

accounts payable outstanding principal balance on long-term debt taxes payable NOT accounts receivable (that's an asset)

Ending Retained Earnings Equation

beginning retained earnings + net income - dividends

When an analyst adds back the current year's depreciation to the net income, she is computing the company's

cash flow from operations

The owners' equity portion of a corporation's balance sheet would contain all of the following EXCEPT

net income (which is only found on the income statement) paid-in capital, preferred stock, and treasury stock are part of stockholder's equity (net worth)

A term used to describe the results of subtracting a corporation's liabilities from its assets is

owners' equity (same as net worth or shareholders equity) all interchangeable and may be on the test in different ways

Each of the following would require the filing of a Form 8-K

A) acquisition of a major asset B) a change in top management C) a change in external CPA firm engaged to perform the annual audit

What is form 10-Q

filed quarterly; deadline 40, 45 days after the end of the quarter; contains (unaudited financial statements GAAP, interim MD&A, and certain disclosures)

Net income

represents the amount of money remaining after all expenses including taxes

What is a Form 10-K?

An annual report filed with the SEC. Filing time depends on size of the company and ranges from 60-90 days after fiscal year

The SEC requires that reporting companies (those registered with the SEC) file certain information within specified time limits. Which of the following reports carries the shortest time limit?

Form 8-K These reports must be filed within four business days of the event.

Due to changes in market rates, a corporation is able to purchase some of its outstanding 20-year bonds at a discount. Which of the following is CORRECT?

Working capital is reduced. Net worth is increased.

On a balance sheet, dividends payable would fall under the category of

current liabilities —that is, an obligation that will come due within 1 year from the date on the balance sheet.

If a client has 100 shares of XYZ publicly traded stock and it undergoes a split, afterward the client will have:

no effective change in the value of his ownership share When a stock splits, the number of shares each shareholder holds increases. However, the value of each share decreases proportionately.

Components of a company's net worth would include all of these EXCEPT

operating income Net worth is all of the company's assets minus its liabilities as found on the balance sheet.

If a corporation issues mortgage bonds, all of the following would be affected EXCEPT

shareholder's equity

An analyst interested in how a purchase will affect the company's debt-to-asset ratio would examine

the balance sheet.

Balance sheets contain

the net worth of the firm at the end of the reporting period The balance sheet provides a description of the assets, liabilities, and owner's equity at the end of the reporting period. References to accounting methods used are contained in the footnotes of the balance sheet.

An analyst who wants to examine a firm's financing transactions during the most recent period is most likely to evaluate the firm's statement of

cash flows

A client asks her investment adviser representative what footnotes to the financial statements are for. The best reply would be that footnotes

contain information that doesn't have a place in the main body of the financial statements: method of accounting used, collateral securing debt, pension liabilities and many others.