L'Oreal Superday - Technical Questions

Which of the following will appear as a negative amount on a statement of cash flows that was prepared using the indirect method?

An increase in accounts receivable

Investing activities

Any cash flows from the acquisition and disposal of long-term assets and other investments not included in cash equivalents

Which organization sets accounting principles?

Financial Accounting Standards Board

Cash equivalents

Include cash held as bank deposits, short-term investments, and any very easily cash-convertible assets — includes overdrafts and cash equivalents with short-term maturities (less than 3 months)`

Net income (calculation)

Income before taxes - taxes

ROI calculation — investment method

ROI = (money gained - money spent)/money spent X100

Depreciation

Reduction in the value of an asset over time

Amortization

Spreading of payments over multiple periods

How are the 3 financial statements connected?

1. Net income from the income statement flows to the balance sheet and cash flow statement 2. Depreciation is added back and Capital Expenditure is deducted on the cash flow statement, which determines PP&E on the balance sheet 3. Financing activities mostly affect the balance sheet and cash from finalizing, except for interest, which is shown on the income statement 4. The sum of the last period's closing cash balance plus this periods cash from operations, investing, and financing is the closing cash balance on the balance sheet

What are the 5 major causes of depreciation?

1. Wear and tear - things break down over time 2. Perishability 3. Usage rights 4. Natural resource usage 5. Inefficiency/obsolescence

What are the components of an income statement?

1. revenue 2. expenses 3. Costs of goods sold (COGS) 4. gross profit 5. operating income 6. income before taxes 7. net income 8. earnings per share (EPS) 9. depreciation 10. EBITDA

Which type of journal entries are made at the end of each accounting period so that the financial statements better reflect the accrual method of accounting?

Adjusting

What is the difference between the income statement and the balance sheet?

An income statement tallies income and expenses, while a balance sheet records assets, liabilities, and equity. - income statement is over a period of time and balance sheet is a specific period

Financing activities

Any cash flows that result in changes in the size and composition of the contributed equity capital or borrowings of the entity (i.e., bonds, stocks, dividends)

Cash balance

Cash on hand and demand deposits (cash balance on the balance sheet)

What is the accrual report to the SEC that contains the financial statements of a publicly traded company?

Form 10-K

Operating Income (calculation)

Gross profit - operating expenses

Gross profit margin (calculation)

Gross profit/sales x 100

Positive Cash Flow

Indicates that a company has more money flowing into the business than out of it over a specified period. This is ideal b/c excess cash allows the company to reinvest in itself/shareholders, settle debt payments, and find new ways to grow business

Main balance sheet calculation

Liabilities + equity

Earnings per share (EPS) (calculation)

Net income/total # of shares outstanding

ROI calculation - net income method

Net income/total cost of the investment x100 (gives you as a percentage)

Net profit margin (calculation)

Net profit/sales x 100

Which financial statement reports the adjustments for foreign currency translation?

Statement of Comprehensive Income

Gross profit (calculation)

Total revenue - COGS

Expenses

the amount of money a business spends during a reporting period

Walk me through the Balance Sheet

- The Balance Sheet reports a company's assets, liabilities, and shareholder's equity. In other words, the Balance Sheet tells us what a company owns vs what it owes, as well as the amount invested by shareholders at the date of publication. Unlike the Cash Flow and Income Statement, the Balance Sheet gives us financial information at at a specific point in time, typically at the end of a financial year or quarter. So, to fully analyze the figures of the Balance Sheet we compare it with Balance Sheets from previous periods. - The Balance Sheet "balances" because assets are equal to liabilities plus shareholders' equity. For example, if a company takes out a $4000 loan, its assets will increase by $4000 because they are given money, but its liabilities will also increase by $4000 since the money is eventually owed back, balancing the equation. - The Balance Sheet is an essential Financial Statement because it gives insight into a company's financial health. We can use the balance sheet to determine a company's ability to meet its short-term financial obligations by comparing its current assets to its current liabilities. We can also use the balance sheet to compare the total amount of debt to the total amount of equity. A high debt-to-equity ratio is a red flag for a company as it indicates a dangerously high level of borrowing. Lastly, the balance sheet allow us to determine the liquidity, profitability, solvency, and turnover of a company by analyzing the balance sheet over time or against competing companies.

Cash Flow Statement - Indirect Method

- depends on the accrual accounting method in which the accountant records revenues and expenses at times other than when cash was paid or received - accountant converts net income to actual cash flow by de-accruing it through a process of identifying any non-cash expenses for the period from the income statement. The most common are depreciation and amortization

How is it possible that a company could have positive cash flow and negative net income?

1. Depreciation — depreciation expense is added back into the cash flow statement when calculating the cash flow of a company. If the company has a net loss for the period and has a large depreciation amount added back into cash flow statement —> company could record positive cash flow while also recording a loss. 2. Sale of an asset— raise capital but portion of company is lost 3. Accrued expenses - occur when a company records an expense for purchasing an asset but does not have to pay for it until the next period.

What are the four financial statements?

1. Income statement (aka P&L) 2. Balance sheet 3. Statement of Cash Flows 4. Statement of Stockholder's Equity

Liquidity

A company's ability to pay for its near-term operating needs - availability of cash to pay those near-term needs

Which accounting method will result in financial statements that report a more complete picture of a corporation's financial position and a better measure of profitability during a recent accounting year?

Accrual method

What is an income statement?

Also known as a Profit & Loss (P&L) statement. Summarizes all income and expenses over a given period, including the cumulative impact of revenue, gain, expense, and loss transactions. They are shared as quarterly and annual reports. The purpose of an income statement is to show a company's financial performance over a period. It tells the financial story of a business' activities. 1. Revenue 2. Expenses 3. Net Income 4. Earnings Per Share

Accounts Receivable/Trade receivables

Amounts owed to a company by its customers for products and services already delivered. They are reported net of the allowance for doubtful accounts

Current assets

Assets expected to be liquidated or used up within one year or one operating cycle of the business (whichever is greater). Opposite is non-current assets

Which financial statement's structure is closest to that of the basic accounting equation?

Balance Sheet

COGS

Costs of goods sold. The cost of component parts of what it takes to make whatever it is a business sells

What is working capital?

Current assets - current liabilities. It represents the operating liquidity available to a business.

Which of the following will appear as a positive amount on a statement of cash flows that was prepared using the indirect method?

Depreciation expense

EBIT

Earnings Before Interest and Taxes

What is EBITDA?

Earnings before Interest, Depreciation, Taxes and Amortization.

Which financial statement will allow you to determine the gross margin for a retailer or manufacturer?

Income statement

What information is found on the balance sheet?

Information on a company's resources (assets) and its sources of capital (equity and liabilities/debt). - helps analysts asses a company's ability to pay for its near-term operating needs, meet future debt obligations, and make distributions to owners - distinguishes between current and non-current assets and between current and non-current liabilities

Current liabilities

Liabilities expected to be settled or payed within one year or one operating cycle of the business (whichever is greater). Opposite is non-current liabilities

What are the three sections of the cash flow statement

Operating activities, investing activities, and financing activities

Income before taxes (calculation)

Operating income - non-operating expenses

Operating profit margin (calculation)

Operating profit/sales x 100

Negative Cash Flow

Outflow is higher than inflow - doesn't necessarily mean profit is lost - may be caused by expenditure and income mismatch - may be a result of company expansion

Does the heading of a balance sheet indicate a period of time or a point in time?

Point in time

What is a P&L?

Profit & loss statement, also known as an income statement or statement of operations. It is a financial report that provides a summary of a company's revenues, expenses, and profits/losses over a given period of time. It shoes a company's ability to generate sales, manage expenses, and create profits.

A corporation's net income will cause a change in which component of stockholder's equity?

Retained Earnings

What is ROI?

Return on investment. A metric used to understand the profitability of an investment. It compares how much you paid for an investment to how much you earned to value its efficiency. It helps you understand how much profit or loss your investment has earned.

Revenue

The amounot of money generated from normal business operations

Revenue

The amount of money a business takes in during a reporting period

Depreciation

The extent to which assets have lost value over time

Operating activities

The principle revenue-generating activities of an organization and other activities that are not investing or financing; any cash flows from current assets and current liabilities

What are the three main financial statements and how are they connected?

They are income statement, balance sheet, and statement of cash flows. Connection: - Net income is found on the income statement. It flows into the "cash flow from operations" on the cash flow statement. - Net income - dividends are added to retained earnings from the prior period's balance sheet to arrive at retained earnings as on the current period's balance sheet. - "Beginning cash" on the cash flow statement is cash from the prior period's Balance Sheet and "ending cash" on the Cash flow statement is cash on the current period's balance sheet

Comprehensive income

net income + other comprehensive income