Unit 7 (Use of financial statements)

A commentator on a cable news show mentions that the capital structure of the Lowveh Corporation is highly leveraged. This means that the company:

has significant long-term debt. When describing a corporation's capital structure, leverage refers to the amount of long-term debt capital. Highly leveraged means the debt capital is generally more than 50% of the total capital and increases rather than decreases the default risk. Employee stock options and preferred stock dividends have nothing to do with leverage.

What is gross margin?

operating income / net sales

An analyst wishing to view a good consolidated indicator of a business's cash inflow and outflow would most likely ask to look at:

the statement of cash flows. Cash flow is the money (cash) that flows into and out of a business. It consolidates the flow of money from operating activities, investing activities, and financing activities. Working capital and current ratio are indicators of current liquidity and in the income statement reflect only income and expenses. Items such as the cash received from the issuance of securities (stocks or bonds) or a loan from a bank do not appear.

Form U5

The uniform termination notice for securities industry registration

An analyst reviewing a company's financial statements would examine the footnotes to:

discover any pending legal action against the company. Footnotes to the financial statements are used to convey off-book information such as pending lawsuits.

Under SEC rules, Form 8-K must be filed:

within 4 business days of the event. Form 8-K is used to report newsworthy events to the SEC. The reporting time limit is four business days.

All of the following corporate actions would have the effect of increasing the firm's net worth except:

issuing convertible debentures Issuing a debt security, such as a debenture, will bring in cash (an asset) but will be offset by an equal amount: the debt. Therefore, the net worth will remain the same. Issuing any equity security, preferred or common, increases the owners' equity (net worth). Being able to pay off a debt at a discount means that the current asset (cash) went down less than the long-term liability (the bond), resulting in an increase to net worth.

When a company recognizes a sale only when payment is made, it is using which form of accounting?

Cash Cash and accrual are the two major forms of accounting. In the cash method, sales and expenses are recognized when the money changes hands. With accrual accounting, the date of the transaction is used.

Form 13-F

Institutional investment managers who have discretion over $100 million or more in Section 13f securities Filed within at end of calendar quarter

Form 10-K

annually audited financial report (independent accountant)

cash flow from financing activities

cash flow from items on the balance sheet (equity financing, debt financing)

Cash flow from operating activities

cash flows directly related to sale and production of the firm's products and services (income statement)

cash flow from investing activities

cash flows from dividends and interest received from securities owned

How does calling bonds effect the balance sheet?

Lowers assets and liabilities, equity stays the same

what is net income?

operating income - interest and taxes

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

cash flow from operations. Cash flow from operations is computed by adding the year's depreciation deduction to the net income.

All of the following are considered to be components of cash flow except:

banking activities. There is no such term as banking activities in the context of cash flow. Cash flow is generated through financing (issuing stock or bonds), investing (profits from investments), and operations of the entity (the most significant of all).

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 the ownership share. When a stock splits, the number of shares each stockholder holds increases. However, the value of each share decreases proportionately. The client experiences no effective change in the value of the ownership share.

All of the following appear on a corporation's balance sheet as fixed assets except:

inventory. Inventory is considered a current asset, not a fixed asset, because the company expects to convert its inventory into cash within a short period. The other choices are fixed assets, and the company does not expect to turn them into cash (sell them) during the normal business cycle.

How do convertible bonds effect the balance sheet?

Causes liabilities to go down, and equity to go up. No change to assets.

Form 10-Q

quarterly unaudited financial reports covering the most current quarter (only 3 because last one is the 10K)

Form 8-K

the report used by publicly traded companies to disclose any material event not previously reported that is important to investors Sale of a significant asset, management change, change of name, bankruptcy filing, resignation of board member 4 business days

What is operating income?

Sales (revenue) - Expenses = operating income

An analyst wishing to check on the most recent financial performance of an SEC-registered issuer would probably examine the:

Form 10-Q. Financial reporting is done on Forms 10-K and 10-Q: the former annually and the latter quarterly. Therefore, unless it is shortly after the end of the company's fiscal year, the most recent information is going to be on Form 10-Q. For test-taking purposes, note that the question uses the term probably. With three Form 10-Qs filed each year and only one Form 10-K filed yearly, the probability is higher that Form 10-Q will be the most recent one available. The moral of this story is that you don't look for exceptions unless that is what the question is aiming for

In order to be in compliance with SEC reporting rules, a company will typically file a Form 10-Q how many times during its fiscal year?

Three times Form 10-Q is used for quarterly financial reporting. However, even though there are four quarters in an accounting year, only three forms are filed. This is because the Form 10-K, the annual report, takes the place of the fourth quarterly report.