Series 65, Unit 7: Financial Reporting

Owner's equity + liabilities = ?

Assets

Where can you find reports filed with the SEC for publicly traded companies?

EDGAR Electronic data gathering, analysis, & retrieval of SEC filings

Where is depreciation accounted for in the income statement?

Its an expense in costs of goods sold (COGS)

What is the 10-Q used for?

Quarterly report of the 10-K Contains unaudited financial statements

What is a company's capitalization?

Sum of long-term debt & equity securites

What is an "unqualified opinion"?

That means the auditor has no qualms about certifying the audit. On the other hand, a qualified opinion means the auditor has some reservations about the accuracy or completeness of the information contained in the report.

Please note the three terms above that we have put in boldface for you. Revenue (or sales), cost of goods sold, and pre-tax income are the three primary components of an income statement. Think of it simply like this: the income statement shows (1) what came in, (2) what went out, and (3) how much is left (before taxes).

Think of it simply like this: the income statement shows (1) what came in, (2) what went out, and (3) how much is left (before taxes)

What is the 10-K used for?

a comprehensive overview of the company's business & financial condition. Includes statements audited by an independent accountant. *once a year

What are the three types of shareholder equity?

capital stock at par, capital in excess of par, & retained earnings

An analyst comparing revenues with expenses is most likely analyzing

cash flow

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 will primarily use items from the ________________, while cash flow from financing activities will use ________________________ items.

income statement balance sheet *Make sure you know which one the question is asking about. For example, liquidating an outstanding bond issue (paying off the debt) will have a profound impact on cash flow, and that uses information from the balance sheet (cash for the payoff, and no more debt remaining)

What does the financial statements of a company tell an IAR?

shows their profitability, liquidity, financial strength, and operating efficiency.

What makes a liabilitiy/asset long term?

time frame is over 12 months

What is the 8-K used for?

to report newsworthy events to the SEC

What is the difference between cash & accrual acounting?

**Timing of when revenues/expenses are recognized** Cash accounting is recorded when it is received. Accrual accounting is recorded when it is "booked"

An analyst is reviewing the financial statements of Penta, Ltd. Over the period shown, Penta has sales of $5 million, a net profit of $1.5 million, annual bond interest charges of $500,000, and total assets of $2 million. Penta's net profit margin is

30% Profit margin = net profit ÷ sales $1.5 million ÷ $5 million = 30%. Profit margin is based on operating costs. Because interest on bonds is a fixed expense, it is not included in the computation. As is often the case, there is more information supplied than needed.

What are the three forms filed with the SEC that are generally used for fundamental analysis?

8-K, 10-K, 10-Q

Which of the following corporate actions will lead to an increase in a company's owners' equity? A. Issuing $10 million of 6% $100 par preferred stock B. Issuing $10 million of 4% debentures C. Payment of a cash dividend to common shareholders D. Redemption of outstanding debt securities at a price in excess of par value

A.

As a result of corporate transactions, a company's assets remain the same and its owners' equity decreases. Which of the following statements is true? A. Prepaid expenses decrease. B. Total liabilities increase. C. Accrued expenses decrease. D. Net worth increases.

B.

A corporation calls in $5 million of its outstanding 6% bonds. The call price is 103. The effect on the balance sheet is all of the following except: A. long term liabilities decrease B. current liabilities decrease C. current assets decrease D. owner's equity decreases

B. There is no change to current liabilities. Cash is used to pay for the called bonds. That reduces current assets. Those bonds, a long-term liability, are no longer on the books, so the long-term liabilities decrease. Because the company had to pay $5,150,000 to eliminate $5 million in debt, the net worth drops by that extra $150,000.

What are footnotes?

Found at the bottom of your statement and can be several pages long... (ex. potential litigation for patent infringement, other legal actions, accounting methods used, and off-book debt)

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

Securities Exchange Act of 1934

KPT, Inc., is preparing to report its net income for the past year. An increase in which of the following causes a decrease in the reported net income? Tax rate Cash dividend Interest charged on bank loans

Tax rate & interest charge on bank loans Higher taxes mean less net income. Interest charged on loans is an expense item; increasing it lowers operating income. Dividends are paid out of retained earnings and have no effect on the net income the company reports.

The _______________ reports what resources (assets) a company owns and how it has funded them. How the firm has financed the assets is revealed by the ________________________—for example, long-term debt and owners' equity (preferred stock, common stock, and retained earnings). (capital structure, balance sheet)

balance sheet capital structure

How do you find a company's working capital?

current assets - current liabilities

Dividends receive on investments held by a corporation are part of cash flow from which activities?

operating **Even though one would think this would be part of investing activities, the accounting industry puts them into operating activities.

What are the three components of cash flow?

operating activities investing activities financing activities

What do assets - liabilities equal?

owner's equity

What are some instances in which an 8-K needs to be filed with the SEC?

Change in management, name change, mergers/acquisitions, bankruptcy, major new product intro, sale of a product line, when a director resigns over a disagreement **Within 4 business days of this event for domestic issuers**

(T/F) Under current accounting practice, deferred tax credits are treated as a liability.

True.

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

total assets & total liabilities From an accounting standpoint, once a corporation declares a cash dividend, it becomes a current liability on the company's balance sheet. When that dividend is paid, cash—a current asset—is decreased by the amount of the dividend. Payment of the dividend removes it from the balance sheet as a current liability. Therefore, there is no change to the company's working capital (current assets minus current liabilities) because they are both reduced by the same amount. The total assets (of which cash is one) and the total liabilities (of which the dividend payable is one) both decrease. Because assets and liabilities are changed by an identical amount, there is no change to shareholders' equity (net worth).

Which is taxed twice? Interest on debt payments or dividends?

Dividends Interest payments reduce a corporation's taxable income, whereas dividend payments to stockholders are paid from after-tax dollars. Because they are taxable as income to stockholders, dividends are taxed twice, whereas interest payments are taxed once as income to the recipient.

Which items would change if a company declared a cash dividend? Working capital Total assets Total liabilities Shareholders' equity

working capital, total liabilities, equity The key word is declared. Liabilities increase when a dividend is declared, and total assets decrease when it is paid. A declared dividend (but not yet paid) would increase current liabilities (and would therefore decrease working capital). It would increase total liabilities (this is a pending obligation) and reduce shareholders' equity because retained earnings would be decreased by the dividend. Total assets would not be affected until the dividend is actually paid.