Accounting & Finance Interview Questions
How does increasing accounts receivables impact the company and it's balance sheet?
"If the company's account receivables continue to increase it can adversely affect the cash flow, which means the company will not have enough money to operate."
Under US GAAP accounting give a listing of asset/liabilities that use "Mark to Market" accounting?
"Mark to Market"= valuing assets by the most recent market price. Actual Market Value - Cash and Cash Equivalents - Short-term investments - Accounts payable - Equity Investments considered trading securities or "available for sale." (ie. Stocks and Bonds for Investment" Estimated Market Value - Net Accounts Receivables (net of estimate of likely bad debt.) - Accrued and Estimated Liabilities
Accrual Accounting - Define - What GAAP principle does this relate to?
- A system of accounting required by GAAP where revenue is is recorded when earned regardless of when payment is received and expenses are recorded when incurred regardless of when payment is made. - Matching Principle
Discuss how accounting rules are made and who makes them?
- Accounting rules give guidance on how you should *record and report* on financial activities US Companies - The rules for called *Generally Accepted Accounting Principles* or *GAAP* - The rules are made by the FASB (Financial Accounting Standards Board) NON US COmpanies - International Financial Reporting Standards (IFRS) (International equivalent of GAAP) - International Accounting Standards Board (IASB). (International equivalent of FASB)
Internal Audit Department - What is it? - Which 3 areas does it evaluate and suggest improvements for? - Name 3 specific types of work IA departments undertake?
- An independent, objective assurance and consulting activity within a company - Evaluates and suggest improvements for the effectiveness of 1) risk management, 2) management controls, and 3) the organizations governance. - 1) risk exposure analyses, 2) operational & financial audits, and 3) advisory/consulting engagements SKIP
Depreciation - What is it? - Name 3 common methods?
- Any decrease or loss in value caused by age, wear, or market conditions Straight-line depreciation; Accelerated depreciation; Units-of-Production method
Intangible Assets - What are they? - Give 3 examples
- Assets that have no physical or tangible characteristics. - patents, copyrights and goodwill *(excess purchase price over identifiable assets and liabilities acquired by the purchaser)*
Although debt is cheaper than equity, why might a company choose to issue stock instead?
- Cash Flow Risk => debt needs to be serviced i.e. principal and interest repayments need to be made, irrespective of whether the firm is making a profit or a loss or general economic conditions. - The more debt the more costly it becomes => When the company becomes over-leveraged, the cost of raising additional debt becomes more and more expensive. This is because the earlier lenders would have laid the first claim on the company's assets. The subsequent lenders will thus charge more interest as the lending becomes riskier. Credit ratings also deteriorate as more and more debt capital is raised.
Debit and Credits - What is their abbreviations? - What is different about them? - Give detail effects of debits and credits on financial statements?
- Debit abbreviation is "dr" and credit abbreviation is "cr". - 2 things 1) Depending on the type of account being debited or credited, the account will increase or decrease. 2) when referring to T accounts DR on LEFT and CR on the RIGHT - See Chart
What Is ERP Software?
- Enterprise resource planning system - helps organizations track information across all departments and business functions
Under US GAAP accounting give a listing of asset/liabilities that use "Historical Cost" accounting?
- Long-term Tangible Assets (depreciated) - Recorded Intangible Assets (amortized) - Goodwill (not amortized) Note: These assets can be written down if their value is deemed to have been permanently impaired, but are never written up.
EBIT - aka? - Equation
- Operating Income - Net Earnings (Income) before interest & tax
Overhead - define - give 5 examples - How is overhead accounted for
- Overhead expenses are all costs (usually FIXED COST) on the income statement except for direct labor, direct materials, and direct expenses. - Accounting fees and department, advertising, insurance, interest, legal fees, labor burden, rent, repairs, office supplies, taxes, telephone bills, travel expenditures, and utilities. - For GAAP all overhead is expensed in the period incurred. For managerial/cost accounting is can be estimated and adding to inventory cost (to reflect the entire cost of producing a product) but at the end of the period any under or over applied overhead is expensed to the P&L giving the same effect.
Sarbanes-Oxley Act - What is it? - Name 3 things that it requires?
- Regulations passed by Congress in 2002 to try to to protect investors from the possibility of fraudulent accounting activities by corporations. - 1) The act requires that top managers personally certify the accuracy of financial reports. If a top manager knowingly or willfully makes a false certification, he can face 10 to 20 years in prison. 2) requires public companies to perform extensive internal control tests and include an internal control report with their annual audits. 3) strengthens the disclosure requirement. Public companies are required to disclose any material *off-balance sheet arrangements*, such as operating leases and special purposes entities.
Contribution Margin - Equation - What does it mean?
- Revenue - Variable Costs - "Contribution" represents the portion of sales revenue that is not consumed by variable costs and so contributes to the coverage of fixed costs.
Opportunity Cost - Define - Give an example of considering opportunity cost in capital budgeting?
- What you give up when you make one choice over another - It is unwise for a company to invest $1 million in a project earning $3 million if that same investment prevents it from investing the $1 million in another opportunity that would earn $10 million. In this case, the Opportunity Cost can be defined as the loss of incremental profit of $7 million ($10 million potential profit lost minus the $3 million earned).
Libor - What is it? - What is the current LIBOR rate? - Which of the Libor rates was implied in the question above? Explain! - How has it been trending?
- a benchmark rate that some of the world's leading banks charge each other for short-term loans. It stands for Intercontinental Exchange London Interbank Offered Rate and serves as the first step to calculating interest rates on various loans throughout the world. - 2.3% - The most commonly quoted rate is the three-month U.S. dollar rate (usually referred to as the "current LIBOR rate"). Explanation: interest rate at which banks in London are prepared to lend to one another in American dollars with a maturity of 3 months.
How can you explain the basic accounting equation?
Assets = Liabilities + Shareholders Equity.
Define balancing in accounting?
Balancing means to equate both sides of the T-account i.e. the debit and credit sides of a T-account must be equal/balanced.
Bank Reconciliation
A report that accounts for (reconciles) the differences between the bank statement and the balance in cash on the general ledger
A company has learned that due to a new accounting rule, it can start capitalizing R&D costs instead of expensing them. This question has four parts to it: Part a) What is the impact on EBITDA? Part b) What is the impact on Net Income? Part c) What is the impact on cash flow? Part d) What is the impact on valuation?
See Link as discussed: https://www.wallstreetoasis.com/forums/capitalized-rd Answer: Part a) EBITDA increases by amount capitalized; Part b) Net Income increases, amount depends on depreciation and tax treatment; Part c) Cash flow is almost constant - however, cash taxes may be different due to depreciation rate and therefore cash flow could be slightly different Part d) Valuation is constant - except for cash taxes impact/timing on NPV
EBITDA
Earnings before interest, taxes, depreciation, and amortization
Define Accrued Expenses
Expenses have been incurred but the vendors invoices have not been received or entered yet
What are the 5 main subcategories of a Financial Management system within an ERP?
General Ledger Accounts Receivable Accounts Payable Banking / Cash Management Time and Billing
What are differing measures of profitability Margins that you can compute from the Income Statement?
Gross Profit EBIT EBITDA Net Profit Margin or Net Income Margin Note: Margins are just dividing the measure by Revenue (ie. Gross Profit Margin = Gross Profit ÷ Total Revenue)
Gross Profit Margin
Gross Profit Margin = Gross Profit ÷ Total Revenue
What is Financial Accounting?
The field of accounting that focuses on providing information for external decision makers.
When evaluating projects using NVP or comparing IRR, which discount rate which should be used in Capital Budgeting?
The firm's Cost of Capital (ie. WACC)
Under what type of account does the unearned revenues fall?
The unearned revenues falls under "Liability" account.
How do you record PP&E and why is this important?
There are essentially 4 areas to consider when accounting for Property, Plant & Equipment (PP&E) on the balance sheet: initial purchase depreciation additions (capital expenditures) dispositions In addition to these four, you may also have to consider revaluation. For many businesses, PP&E is the main capital asset that generates revenue, profitability and cash flow.
Why would two companies merge? What major factors drive mergers and acquisitions?
There are many reasons: to achieve synergies (cost savings), enter new markets, gain new technology, eliminate a competitor, and because it's "accretive" to financial metrics. [Learn more about accretion in M&A. An accretive acquisition will increase the acquiring company's earnings per share (EPS). Accretive acquisitions tend to be favorable for the company's market price, because the price paid by the acquiring firm is lower than the boost that the new acquisition is expected to provide to the acquiring company's EPS.]
Can you name different branches of accounting?
There are three branches of accounting named as "Financial Accounting" "Management Accounting" "Cost Accounting"
How does an inventory write-down affect the three statements?
This is a classic finance interview question. On the balance sheet, the asset account of Inventory is reduced by the amount of the write-down, and so is shareholders' equity. The income statement is hit with an expense in either COGS or a separate line item for the amount of the write-down, reducing net income. On the cash flow statement, the write-down is added back to Cash From Operations (CFO) as it's a non-cash expense (but must not be double counted in the changes of non-cash working capital).
CAGR a) Stands for? b) Define? c) Equation d) Practice: If sales grew from $1,000 in the year 2001, when a store opened, to $2,100 in 2012, what is the CAGR? e) What is CAGR similar to?
a) Compound average annual growth rate b) the percentage rate at which any figure, (ie. units sold, a population, or an investment) must grow in each year to reach a given end value over a certain amount of time. (Note that this is not the only growth path to grow from a beginning number to an ending number, but it is the only growth path that is the same growth rate every year.) c) [(Ending Value ÷ Beginning Value)^(1 ÷ Number of Years)] - 1. d) Answer: [(2,100 ÷ 1,000)^(1 ÷ 11)] - 1 = 2.1^(0.090909) = 7.0% Thus, the CAGR between 2001 and 2012 was 7.0%. e) CAGR is very similar in concept to Internal Rate of Return (IRR), which is the annual rate of return on an investment if its value grows by a specific multiple over a specific amount of time.
Variable Expenses a) Define b) Give Examples c) How are VE impacted by increasing sales/production volumes
a) Expenses that are impacted by changes in production or sales levels b) - Raw Materials - Direct Labor Expenses (wages and benefits) - Delivery costs. c) rise proportionately as volume increases, so Variable Expenses per unit remain constant.
Fixed Expenses a) Define b) Give examples c) How are FE impacted by increasing sales/production volumes
a) Expenses that do not typically fluctuate regardless of the production or sales levels. b) - Rent - Insurance - Mortgage Payments - Corporate Overhead Expenses. c) They dont change as these expenses can be viewed as "unavoidable," at least in the short-term.
Statement of Cash Flows a) Define? b) What are the main Categories Displayed? c) Describe the Indirect Method of calculating the SOCF
a) Financial statement that displays cash inflows (receipts) and cash outflows (payments) over a period of time b) Operating activities - business activities accounting to cash Investing activities - sale and purchase of equipment or property Financial activities- issuance or sale of stocks and bonds used to finance the business c) i) Start in Net Income ii) Adjust for Non Cash Items (eg. add back depreciation) iii) Adjust and categorize changes in the balance sheet accounts to the categories (eg. and increase in A/R is a use of cash) Adam go here and review picture https://www.accountingtools.com/articles/2017/5/17/cash-flow-statement-indirect-method
Capital Budgeting a) What is it? b) What are the 3 most common tools used for it? c) A Capital Budgeting decision should satisfy what 3 criteria?
a) Process of analyzing alternative investments and deciding which assets to acquire or sell. b) Payback Period Net Present Value (NPV) Internal Rate of Return (IRR) c) 1) Must consider all of the project's cash flows. 2) Must consider the Time Value of Money 3) Must always lead to the correct decision when choosing among Mutually Exclusive Projects. https://quizlet.com/110064299/fin-man-chap-11-the-basics-of-capital-budgeting-flash-cards/
Payable cycle? a) what is it? b) Steps
a) Procurement to Payment Cycle (starts with purchasing and ends with payment) b) - Order the Goods (Purchase Order) - Verify Receipt and Inspect (Packing Slip compared to PO) - Receive Invoice and match to PO - Enter Purchase to Payables (Dr. Inventory and Cr. A/P) - Pay according to terms (ie. discount period etc..)
Net Profit Margin a) aka? b) Equation c)
a) Profit Margin or Net Income Margin b) Net Profit Margin = Net Income ÷ Total Revenue. Net Income/Sales
Elasticity of Demand and Supply a) Define b) Equation c) Practice: What is the Elasticity of Demand if an increase in the price of oranges from $1.00 apiece to $1.50 apiece causes demand for those oranges to fall from 100 units to 80 units d) In what situations would you want to use Elasticity? e) When would you tell a client it is OK to increase price? f) When would you tell a client it is best to decrease price?
a) a measure of how consumers or suppliers react to a change in price (ie. describes the tradeoff between Quantity and Price.) b) Elasticity = % Change in Quantity Demanded or Supplied ÷ % Change in Price. c) The % Change in Quantity = -20% and the % Change in Price = 50%. Elasticity of Demand = (-20 ÷ 50) = -0.4. d) Pricing optimization. Clients often ask what the impact would be on volume if they adjust the price. e) increase prices in Inelastic markets (price increases lead to a relatively small decrease in products sold) f) decrease price in Highly Elastic markets (price increases lead to a large decrease in product sold).
investment banking
banking activity of underwriting, issuing, and distributing securities
commercial banking
banking services offered to businesses
retail banking
banking services offered to individuals/households
More questions
http://static1.squarespace.com/static/5482214fe4b01f389b5bf459/t/56a157f2a2bab874f0b310ed/1453414392730/MI+400+Questions+IB+Guide.pdf
matching principle - describe
recognize expenses in the same period as the revenues they help to generate
What is assets minus liabilities?
stockholders equity.
IRR
the discount rate that forces PV of inflows equal to cost, and the NPV = 0
Weighted average cost of capital - What is it?
the weighted average of the cost of equity and the aftertax cost of debt
Investor Relations Department - What does it do in general? - Gives its functions - Who within an organization it coordinates with? - Why has the IR department became much more important? - Within Maxim Integrated in addition to the aforementioned functions name several additional responsibilities within this department?
- a department present in most medium-to-large public companies that provides investors with an accurate account of company affairs. - Functions include: a) coordinating shareholder meetings and press conferences b) releasing financial data c) leading financial analyst briefings/calls d) publishing reports to the SEC - Coordinates with a company's accounting department, legal department and executive management team (CEO, COO, CFO). - became much more important in the United States in 2002. That year, Congress passed the *Sarbanes-Oxley Act* drastically increased the reporting requirements of any company that was publicly traded on a stock market exchange. This occurred in response to a number of serious corporate scandals with shadowy accounting, shell companies, and a variety of other practices, most notably by the Enron Corporation. - Projects could include company & peer valuation analysis, preparation of investor presentations and investor targeting. SKIP
Working capital - What is it? - Why is it important?
- a financial metric calculated by CA- CL - WC is important to because it is a measure of a company's ability to pay off short-term expenses or debts. On the other hand, too much working capital means that some assets are not being invested for the long-term, so they are not being put to good use in helping the company grow as much as possible.
Return On Investment (ROI) - What is it? - The calculation for ROI is? - When used typically?
- an indicator of the profitability of an investment relative to the amount invested. - (Final Value of Investment - Cost of Investment ) / Cost of Investment - Return on Investment is used to assess the profitability on an investment for different potential investments. If a project has a lower ROI than another project, then it should be disregarded in favor of the other.
COGS - Define - Short Cut Equation
- the cost of goods sold; what you pay for what you sell - BI + Purchases - EI
NPV - What is it? - Give the equation and specify what rate you should use (give 3 options) - How would you choose your discount rate when doing NPV calculations?
- the difference between the present value of cash inflows and the present value of cash outflows over a period of time. NPV is used in capital budgeting to analyze the profitability of a projected investment or project. - n general you should be able to determine this discount rate using 1) Cost of the capital 2) Risk (Look at the industry standards for a similar investment with an "equal" risk factor) - Greater the risk, higher the discount rate. 3) (Lost) Opportunity cost of the capital
Internal Rate of Return - What is it? - What the equation
- the interest rate that makes the Net Present Value zero. OR the discount rate that forces PV of inflows equal to cost, and the NPV = 0 - *See pic for equation*
What are the two types of measurement are used in financial statements and explain?
1) Fair value accounting (aka Mark to Market Accounting - Assets and liabilities are reported at their "fair value" and gains and losses from revaluing them are reported in the income statement. Fair value is either market value or an estimate of value. 2) Historical cost accounting Assets and liabilities are reported at their historical cost (the dollar amount paid when they were acquired or incurred). In subsequent periods, those costs are amortized/depreciated to the income statement as the assets are deemed to have been used up in operations or as liabilities accrue costs. NOTE: GAAP accounting uses both types of measurement.
Finance Department - In Maxim Integrated rotational program give 6 duties of someone within this department.
1) Optimizing profitability and asset management 2) Gross margin maximization 3) Portfolio balancing and resource allocations 4) Improving the budgeting, forecasting and analytical process 5) Analyzing engineering spending & execution performance metrics and analysis 6) Support for mergers, acquisitions and divestitures. SKIP
When should a company consider issuing debt instead of equity?
A company should always optimize its capital structure. If it has taxable income it can benefit from the tax shield of issuing debt. If the firm has immediately steady cash flows and is able to make their interest payments it may make sense to issue debt if it lowers the WACC.
General Ledger
A ledger that list of all transactions (Drs. and CRs) for the accounting period sorted by account number and the totals of these accounts can be used to prepare financial statements (Note: the trial balance only list the ending totals for the accounts)
Explain the term account payable?
Account payable is referred as the amount company owes to its suppliers, its employees Account payable for one company may be account receivable for another firm or company.
Accounting Department - What is the function of this department?
Accounting - Ensures the accuracy of the financial reports and information used to report results to: - Internal (ie. executive management) financial reports - External a) GAAP Financial Statements (Investors) b) SEC filings
Differentiate Accounting and Auditing?
Accounting is all about recording daily business activities while auditing is the checking that whether all these events have been noted down correctly or not.
Where do generally accruals for expenses appear on the balance sheet?
Accrued expenses usually tend to be extremely short-term. So you would record them within the "current liabilities section" of the balance sheet.
Explain what is the difference between accumulated depreciation and depreciation expense?
Accumulated depreciation: It is the total amount of depreciation that has been taken on a company's assets up to the date of the balance sheet including prior periods Depreciation expense: Is the amount of depreciation that is reported on the income statement. Basically, it is the amount that corresponds only to the period of time indicated in the heading of the income statement.
Contra Account - Define - Give 2 examples
An account that reduces a related account on a financial statement - 1)The Contra Asset Account *Accumulated depreciation account*, which offsets the fixed asset account. 2) The Contra Liability Account *Bond discount account*, which offsets the bond payable account. The two accounts together yield the carrying value of the bond.
What is Cost Accounting?
Cost accounting is an accounting method that aims to capture a company's costs of production by assessing the input costs of each step of production as well as fixed costs, such as depreciation of capital equipment. Management uses these cost to compare input results to output or actual results to aid company management in measuring financial performance.
What are the requirements to be a CPA in Georgia?
EDUCATION - Bachelor's degree or higher - Total of 150 semester hours of education - Thirty (30) semester hours in Accounting above the introductory level - Twenty-four (24) semester hours in business related subjects EXPERIENCE - 1 Year (min 2,000) hours experience under the supervision of a CPA SKIP
Which is cheaper, debt or equity for a Company when raising additional captial? WHY (3 reasons)?
Debt is cheaper because: 1) in a bankruptcy liquidation debt is paid before equity and has collateral backing it *so since shareholder are taking more risk they demand a higher return* 2) Tax benefit: The firm gets an income tax benefit on the deduction for interest expense. Dividends to equity holders are not tax deductible. 3) There is limited upside potential for debt holders (they cant really benefit if the company grows significantly like shareholders can)
What is the difference between depreciation and amortization?
Depreciation => Tangible Assets (lose value of an asset due to their usage, wear and tear, outdated, etc.) Amortization => Can be for loan discount or premium or or it can be for Intangible assets (over their useful life)
Operating Profit Margin
EBIT/Sales or EBITDA/Sales
What are the 5 main Business Functions within an organization that ERP could be used for?
Financial Management - Deals with a company's accounting and financial transactions. It helps businesses prepare financial reports and maintain your books electronically. Supply Chain Management (SCM) - Improves the flow of materials throughout an organization's supply chain. Manufacturing - Is used to automate manufacturing operations and make them more efficient. Project Management - Provides managers sufficient control and visibility throughout the project life cycle, including planning, budgeting, forecasting costs and revenues, managing issues and change requests and tracking project status and performance. Human Capital Management (Human Resources) - Manages an automates the activities that are deployed around managing employees within a company.
When do you capitalize rather than expense a purchase?
If the purchase will be used in the business for more than one year, it is capitalized and depreciated.
Do on scratch paper 1)Mention the types of accounts involved in double entry book-keeping? (List 5) 2) For each of the above what is the effect of a debit and credit in terms of increasing and decreasing?
Income Statement 1) Revenue accounts Dr ⬇︎ / Cr⬆︎ 2)Expense accounts Dr ⬆︎ / Cr ⬇︎ Balance Sheet 3) Asset accounts Dr ⬆︎ / Cr ⬇︎ 4) Liability accounts Dr ⬇︎ / Cr⬆︎ 5_ Shareholders Equity / Capital accounts Dr ⬇︎ / Cr⬆︎
Give the 2 classifications of Capital Budgeting projects and define both?
Independent Project - is a project whose *cash flows are not affected by the accept/reject decision for other projects*. Thus, all Independent Projects which meet the Capital Budgeting criterion should be accepted. Mutually Exclusive - cash flows of one project can have an impact on the cash flows of another so typically only one, i.e., the best project can be accepted.
IRR - What is it? - What is the IRR rule?
Internal Rate of Return - A rule when deciding whether to proceed with a project or investment. It states that if the internal rate of return (IRR) on a project or an investment is greater than the minimum required rate of return, typically the cost of capital, then the project or investment should be pursued. Conversely, if the IRR on a project or investment is lower than the cost of capital, then the best course of action may be to reject it. Example: IRR Project A = 16.61% IRR Project B = 5.23% If the company's cost of capital is 10%, management should proceed with Project A and reject Project B.
What is balance sheet?
It is a statement that states all the liabilities and assets of the company at certain point in time.
Deferred revenues
It is an amount that was received by a company in advance of earning it. It is recorded as a liability
Define salvage value (residual value) in accounting?
It is the residual value of an asset. The residual value is the value that any asset holds after its estimated life time.
Are you familiar with any recent accounting pronouncements / changes?
Know the bolded and just read the rest *ASC 606 is the new revenue recognition standard* that affects all businesses that enter into *contracts with customers to transfer goods or services* Publicly held businesses must abide with the requirements in ASC 606 by *December 15, 2017*. (Year more for nonpublic) ASC 606 breaks the contract process into the following 5 steps: 1) Identify the contract with a customer 2) Identify the performance obligations in the contract 3) Determine the transaction price 4) Allocate the transaction price across the contract's separate performance obligations 5) Recognize revenue when or as the entity satisfies a performance obligation
Deferred expenses
Money was paid for goods or services which have not yet been received. It is recorded as an asset
Why is understanding a Company's Fixed vs. Variable Cost structure important?
Necessary to perform Break-Even Analysis
NPV
Net present value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows over a period of time.
What happens on the income statement if inventory goes up by $10?
Nothing. This is a trick question, only the balance sheet and cash flow statements are impacted.
Long-term liabilities
Obligations that a company expects to pay more than one year in the future.
How are the FASB rules issued?
Old way => a standards-based model (with thousands of individual standards) New way => to a topically based model (with roughly 90 topics) called the Accounting Standards Codification
By saying, perpetual or periodic inventory system; what do we mean?
Perpetual Inventory System - the accounts are adjusted on continual basis. Periodic inventory system - the accounts are adjusted periodically
Define Public accounting?
Public accounting offers audits and CPAs to review company financial records to ensure accountability. It is for general public.
When looking at the profitability of an investment, what other factors do you consider besides Net Present Value (NPV)?
ROI, IRR
Gross Profit - Give equation
Revenue - COGS
List out some of the examples/types of liability accounts?
Short Term: Accounts Payable Accrued Expenses(salaries & interest) Short-term Loans/Notes Payable Unearned or Deferred Revenues Current Portion of Long-term Debt Long Term: Bonds Payable (less discount)
Define Marginal Cost?
Suppose you have to produce *an additional unit of output*. The estimated cost of additional inputs to produce that output is actually the marginal cost.
Net Income - give equation
Total revenue less TOTAL expenses (Assumes total revenue is greater or is would be Net Loss)
Name the 8 roles of a Companies Treasury Department?
Treasury Role-1. Cash Forecasting Generate a cash forecast (short and long-range) to determine if more cash is needed. If short than plan for debt or equity issuance. If surplus cash than plan for investment. Treasury Role-2. Working Capital Management To track and understand W/C. W/C is a key component of cash forecasting. It involves changes in the levels of current assets and current liabilities in response to a company's general level of sales. Treasury Role-3. Cash Management Combining information in the cash forecast and working capital management activities, Treasury staff is able to ensure that sufficient cash is available for operational needs. Treasury Role-4. Investment Management When the forecast shows some excess funds at, the treasury staffs are responsible for the proper investment of it. Three primary goals of the role are: (a) maximum return on investment; (b) matching the maturity dates of investments with a company's projected cash needs; and most importantly is (c) not putting funds at risk. Treasury Role-5.Treasury Risk Management The treasury staffs are also responsible to create risk management strategies and implement *hedging tactics to mitigate the whole company's risk*—particularly in anticipating (a) market's interest rates may rise and leave the company pays on its debt obligations; and (b) company's foreign exchange positions that could also be at risk if exchange rates suddenly worsen. Note: A hedge is an investment position intended to offset potential losses or gains that may be incurred by a companion investment Treasury Role-6. Credit Rating Agency Relations A company may issue marketable debt. In this case a credit rating agency will review the company's financial condition and assign a credit rating to the debt. The treasury staff would need to show quick responds to information requests from the credit agency's review team. Treasury Role-7. Bank Relation A long-term relationship can lead to some degree of bank cooperation if a company is having financial difficulties, and may sometimes lead to modest reductions in bank fees. The treasurers should therefore, often meets with the representatives of any bank that the company uses to: discuss the company's financial condition, the bank ' s fee structure, any debt granted to the company by the bank, and foreign exchange transactions, hedges, wire transfers, cash pooling, and so on. Treasury Role-8. Fund Raising Maintaining an excellent relations with the investment community for fund raising purposes, is important—from the (a) brokers and investment bankers who sell the company's debt and equity offerings; to the (b) the investors, pension funds, and other sources of cash, who buy the company's debt and equity. Monitor interest rates that the company is likely to pay on new debt offerings, the availability of debt, and probable terms that equity investors will want in exchange for their investment in the company.
Under the accrual basis of accounting, when are revenues are reported in the accounting period?
Under the accrual basis of accounting, expenses are matched with the related revenues and are reported when the expense occurs, not when the cash is paid
Accrued Revenues
Unrecorded revenues that have been earned and for which cash has yet to be received. Dr A/R Cr Accrued Rev Example: Services Billings that are billed in phases Dr Accrued Billings Cr Accrued Revenue when billed reverse earlier entry then book the A/R and Revenue acct
How do you calculate the WACC?
WACC (weighted average cost of capital) is calculated by taking the percentage of debt to total capital, multiplied by the debt interest rate, multiplied by one minus the effective tax rate, plus the percentage of equity to capital, multiplied by the required return on equity. The cost of debt is the interest rate and the cost of equity is calculated by the CAPM formuls. RROR=RF+B(RF+MR)
Give 2 typical accrued expenses that have to be recorded and the accounts in which you would record them?
Wage accrual is entered with a credit to the "wages payable account" (Typically needed when the balance sheet date falls in the middle of the payroll processing period so you have unrecorded salaries that have been incurred) Interest accrual is entered with a credit to the "interest payable account"
WACC
a weighted average of the component costs of debt, preferred stock, and common equity
Break Even Analysis a) What is it? b) What question does it answer? c) Easiest way to calculate? d) Why might we do a BE Analysis?
a) *a method of determining what sales volume must be reached before total revenue equals total costs* b) "How many units do I have to sell in order to overcome my Fixed Costs, i.e., to 'Break Even'?" c) Break-Even Number of Units = Fixed expenses ÷ (Revenue per unit - Variable Expenses per unit). Example of a Break-Even Point ABC Ltd expects to sell 10,000 units at $10 each. The variable cost per unit is $5 and the fixed cost is $15,000 per annum. Calculate the break even point in units and in sale revenue. To calculate the break-even point in units, use the formula-fixed cost divided by the contribution per unit. In this example you would divide $1,000 by contribution (which is the selling price of $10 minus the variable cost per unit of $5). $15,000 divided by $5 is 3000 units d) - *whether to develop a new product or make a capital equipment investment* - Helping in making decisions around how to price products and service and the number of units to produce
