65- sec. 9: Financial Reporting

Cash Flow Statement

3 components to generating cash flow 1. operating activities -cash receipts, income from interests or dividends 2. investing activities -purchase and sale of securities, land, equipment, assets 3. financing activities -payment of dividends, issuing stock or bonds

When an analyst adds back the current year's depreciation to the net income, she is computing the company's A) cash flow from operations B) net value of fixed assets C) cash flow from investments D) earnings per share

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

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? A) Retained earnings B) Working capital C) Dividends payable D) Capital surplus

A Retained earnings are increased to the extent that company profits (net income) are undistributed—in essence, retained. Capital surplus comes from original investors purchasing stock at a price in excess of stated or par value. Working capital is not a balance sheet account; it is a computation. When the dividend is declared, it becomes a current liability (dividends payable), but this question is asking for the portion of the income that is not going to be paid out. U9LO1

Issuance of which of the following would most likely increase the leverage in a company's capital structure? A) Common stock B) Bonds C) Warrants D) Preferred stock

B Leverage is the use of borrowed money. This is reflected in a company's debt-to-equity ratio. Of these choices, the only one that is borrowed money is the bonds. U9LO1

Debts that will come due more than 1 year after the date on the balance sheet are known as A) deferred charges B) accounts payable C) fixed (or long-term) liabilities D) current liabilities

C

Capital Structure

Capitalization= the combined sum of long term debt and equity securities Capital structure= the relative amounts of debt and equity that compose a company's capitalization -long term debt + equity Builds capital structure with equity and debt including the following 4 elements: long term debt, capital stock (common and preferred), capital in excess of par, retained earnings (earned surplus)

Convertible Security

Corporate security with the option to convert the security for a specified number of shares of the company's common stock -When an investor converts a convertible debt security into shares of common stock, the amount of liabilities decreases, and OE increases

Cash v. Accrual Accounting

Cash: When a company only recognizes a sale when payment is made Accrual: When a company recognizes a sale when the sale is made

One of the components of a cash flow statement is cash flow from investing activities. Included would be A) cash proceeds from issuing stock or bonds. B) payments to retire bonds and the payment of dividends. C) cash receipts (money coming in) from items such as interest and dividends. D) transactions and events involving the purchase and sale of land, buildings, and equipment.

D Investing activities include transactions and events involving the purchase and sale of securities, land, buildings, equipment, and other assets not generally held for resale as a product of the business. The proceeds from issuing securities (stocks or bonds) is a financing activity as is using funds to retire bonds and/or pay dividends. Cash receipts are included in cash flow from operating activities, even when it is generated through investments such as interest or dividends. U9LO2

Components of a company's net worth would include all of these EXCEPT A) fixed assets B) goodwill C) inventory D) operating income

D Net worth is all of the company's assets minus its liabilities as found on the balance sheet. Operating income is found on the income statement and is neither an asset nor a liability.

A client asks her investment adviser representative what footnotes to the financial statements are for. The best reply would be that footnotes A) contain a detailed history of the enterprise and its products or services B) serve as a bibliography indicating where additional information may be obtained C) are used to explain how the various ratios are computed because companies recognize that many shareholders do not have a financial background D) contain information that doesn't have a place in the main body of the financial statements

D There are many important financial details that cannot be properly placed in either the balance sheet or the income statement. Examples of these are the following: method of accounting used, collateral securing debt, pension liabilities and many others. Footnotes are an integral part of the financial statements and are usually found with this notation: "The accompanying footnotes to the financial statements are an integral part of these statements."

Which of the following is NOT affected by the issuance of a bond? A) Working capital B) Total liabilities C) Assets D) Shareholders' equity

D When bonds are issued, cash is received (thus increasing current assets) and long-term debt increases (increasing total liabilities). Because there is no corresponding increase in current liabilities, working capital increases. There is no effect on shareholders' equity because the increased liability is offset by the asset (cash) received. U9LO1

If a corporation issues mortgage bonds, all of the following would be affected EXCEPT A) total liabilities B) total assets C) working capital D) shareholder's equity

D When issued, the corporation receives the net proceeds in cash, increasing current assets (and thus total assets). Simultaneously, the corporation's long-term liabilities increase reflecting the debt (and thus total liabilities). Working capital increases because of the increase in current assets. Shareholder's equity, or net worth, is only affected by the sale of new equity securities or by any profit or loss generated by the corporation.

Stock Splits

Does not affect OE

Which of the following would appear as assets on a corporation's balance sheet? Prepaid expenses Deferred tax credits Notes payable Notes receivable

I and IV Prepaid expenses, such as advertising, rent, or insurance, are listed as assets on the balance sheet. All receivables are assets, while payables are liabilities. Under current accounting practice, deferred tax credits are treated as a liability.

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? I. Working capital is increased. II. Working capital is reduced. III. Net worth is increased. IV. Net worth is reduced.

II and III

Which items change when a company pays a cash dividend? Working capital Total assets Total liabilities Shareholders' equity

II and III

Footnotes

In financial statements, identify significant financial and management issues that may affect the company's overall performance, such as accounting methods used, pending litigation, and management philosophy

Balance Sheet

Provides snapshot of company's financial position at a specific time assets-liabilities=OE assets=liabilities+OE *two sides must balance

Liabilities

Represents all financial claims by creditors against the corporation's assets. 2 types: 1. current liabilities -a/p, current LT debt, notes payable, accrued taxes 2.long-term liabilities -financial obligations due for payment after 12 months (bonds and mortgages)

Form 8-k

The form used by SEC registrants to report significant events that may affect the company. -change in management, change in the company's name, managers or acquisitions, bankruptcy filings FILED WITHIN 4 DAYS OF INCIDENT

Assets

What a company owns. Appear on balance sheet in order of liquidity 3 types: 1. current assets (cash, a/r, inventory, prepaid expenses) 2. fixed assets (physical assets that can be sold) -These can depreciate over time 3. other assets (intangible) -formulas, brand names, trademarks

Bond Redemption

When the bond is redeemed/repaid -liabilities on balance sheet are reduced -which decreases cash -since current asset (cash) was used to redeem long term liability (bond), working capital is reduced

2. Capital in Excess of Par

aka additional paid-in capital/paid-in surplus -The amount of money over par value that a company received when issuing its common stock Ex: if the par value was $1 per share and the stock was issued at $5 per share, there is a paid-in surplus of $4 per share

3. Retained Earnings

aka earned surplus or accumulated earnings -Profits that have not been paid out in dividends -RE represent the total of all earnings held since the corporation was formed minus dividends paid to stockholders

As a result of corporate transactions, a company's assets remain the same and its OE decreases. Which of the following statements is TRUE? a. prepaid expenses increase b. total liabilities increase c. accrued expenses decrease d. net worth increases

b We are told in the question that assets have remained the same but OE has somehow gone down. If balance sheet formula is assets - liabilities = net worth, then somehow the liabilities must have increased. Therefore, B is correct

Par Value

dollar value per share assigned when a corporation's owners (stockholders) first contributed capital -PV of common stock is an arbitrary value with no relationship to market price

1. Capital Stock at Par

preferred and common stock listed at par value

When a cash dividend on company's stock is declared,

retained earnings are lowered and current liabilities are increased

Shareholder Equity

stockholder claims on a company's assets after all of its creditors have been paid total assets-total liabilities 3 components of OE: 1. Capital Stock at Par 2. Capital in Excess of Par 3. Retained Earnings *sum of these 3= shareholders equity

Income Statement

summarizes a firm's revenues and expenses over a given period of time 3 components 1. revenues 2. COGS 3. pretax income revenue-COGS=gross operating profit or gross margin

Form 10-K

the annual report that publicly traded companies must file with the SEC -Comprehensive overview of the company's business and financial conditions -Includes financial statements that have been audited by an independent accountant

From 10-Q

the quarterly report that publicly traded companies must file with the SEC