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Adventis FMC Level 1 Exam Complete Solutions
| Already Passed| Verified
financial statement communicates what? - ✔✔- financial condition
- results of operations
- various other activities of an organization how board of directors use financial data... - ✔✔- hold management accountable - make board-level decisions about corporate strategy how company management uses financial data... - ✔✔- measure performance
- make strategic, operating and financial decisions how creditors use financial data... - ✔✔- measure creditworthiness
- liquidity
- bankruptcy risk how investors use financial data... - ✔✔make decisions on buying/selling equity investments how acquirers use financial data... - ✔✔- determine valuation
- make investment decisions
how regulators use financial data... - ✔✔determine whether company is operating according to regulations/law what does the income statement present? - ✔✔results of operations over a period of time what is the purpose of the income statement? - ✔✔to show whether the company made or lost money during the period reported what does the income statement indicate? - ✔✔how revenues are translated into net income through subtracting expenses revenue (sales) - ✔✔amount charged for the delivery of goods or services cost of sales (cogs) - ✔✔- direct cost of producing revenue
- Ex: raw materials, direct wages, etc. gross profit - ✔✔- revenue - cogs
- indicates how efficiently labor and materials are used in the production process operating expenses - ✔✔- all other expenses required to run a business
- Ex: management salaries, marketing, travel, etc. operating income (EBIT) - ✔✔- revenue - cogs - operating expenses
cash - ✔✔current assets comprising currency or currency equivalents that can be accessed immediately accounts receivable - ✔✔amount owed to an organization from the sale of a good or service fixed assets - ✔✔- value of assets and property that can't be easily converted to cash
- has a useful life of greater than 1 year
- Ex: PPE accounts payable - ✔✔amount owed to an organization's vendors debt - ✔✔amount of obligations owed to creditors equity - ✔✔cumulative shareholder investment + cumulative net income what is working capital a measure of? - ✔✔- a company's efficiency
- short term financial health working capital equation - ✔✔non-cash current assets - non-debt current liabilities what does a positive or negative working capital indicate? - ✔✔whether it's a source or use of cash
what can happen if a company's non-cash current assets < non-debt current liabilities? - ✔✔may run into challenges repaying creditors and suppliers in the short run non-cash current assets - ✔✔- non-cash assets expected to be turned into cash within one year
- Ex: accounts receivable, inventory, prepaid expenses, other assets non-debt current liabilities - ✔✔- all obligations besides short-term debt that are due within one year
- Ex: accounts payable, accrued liabilities, other obligations what is a less expensive form of capital? - ✔✔debt because it's less risky what types of claims to debt owners have? - ✔✔priority claims on company's assets if company goes bankrupt what is a more expensive form of capital? - ✔✔equity because equity holders aren't guaranteed to get their investment back if the company goes bankrupt what requires a higher rate of return, debt or equity? - ✔✔equity net debt - ✔✔total debt - cash what is net debt primarily used in? - ✔✔credit analysis because creditors assume that the company's cash balance could be applied to debt repayment in the event of a liquidity crunch or bankruptcy
ending cash balance - ✔✔sum of beginning cash balance and change in cash depreciation and amortization - ✔✔method of allocating the cost of an asset over its useful life for both accounting and tax purposes how is depreciation and amortization shown on the income statement? - ✔✔as an expense why doesn't depreciation and amortization represent a decrease in cash? - ✔✔it doesn't represent a decrease in cash because cash only leaves the company during the initial purchase of the asset (CapEx) what does depreciation and amortization represent in terms of cash on the cash flow statement? - ✔✔a source of cash capital expenditures (CapEx) - ✔✔funds used by a company to purchase/upgrade physical assets (PPE) what does CapEx represent in terms of cash on the cash flow statement? - ✔✔a use of cash what does a decrease in working capital represent? - ✔✔a source of cash what does an increase in working capital represent? - ✔✔a use of cash share repurchase - ✔✔re-acquisition of an organization's own stock
2 paths for share repurchases - ✔✔1. organization retires the stock
- keep them as treasury stock what happens to the ownership percentage and portion of earnings for shareholders when shares are repurchased? - ✔✔they increase what are share repurchases a form of? - ✔✔returning capital to shareholders irregularly as opposed to a regular dividend program dividends - ✔✔distribution of cash how are dividends most often derived? - ✔✔from a dividend per share amount as directed by the board of directors what is the difference between share repurchases and dividends? - ✔✔- dividends don't affect ownership percentages
- represent a pure check to shareholders what are sticky dividends? - ✔✔companies choose to have a dividend program where dividends are constantly distributed to shareholders how can removing a sticky dividend program affect the company? - ✔✔it can show signs of trouble for the company
- multiple (x) liquidity ratios - ✔✔indicate a company's ability to meet its short-term financial obligations who cares about liquidity ratios? - ✔✔those extending short-term credit such as banks 2 liquidity ratios - ✔✔1. current ratio
- cash ratio current ratio - ✔✔indicates whether a company's short-term assets are readily available to pay off short-term liabilities current ratio formula - ✔✔current assets / current liabilities normal current ratio - ✔✔between 1.50-3. cash ratio - ✔✔indicates a company's ability to use cash to pay of its current liabilities cash ratio formula - ✔✔cash / current liabilities normal cash ratio - ✔✔between 0.20-1. efficiency ratios - ✔✔indicate how effectively a company utilizes its assets
2 efficiency ratios - ✔✔1. days receivable
- asset turnover days receivable ratio - ✔✔average number of days an invoice is in accounts receivable before collection days receivable ratio formula - ✔✔accounts receivable / revenue X 365 days receivable ratio of 60 means... - ✔✔company's invoices on average are paid down in 60 days asset turnover ratio - ✔✔- amount of revenues generated per dollar of assets
- measures company's efficiency in turning assets into revenue asset turnover ratio formula - ✔✔revenue / assets asset turnover ratio of 2.5 means... - ✔✔for every dollar of assets, a company earns $2.5 of revenue profitability ratios - ✔✔profits made by company relative to its assets, equity, or revenue (metrics) what do profitability ratio metrics tell us? - ✔✔1. outperformance vs peers
- opportunities for improvement
return on equity ratio formula - ✔✔net income / shareholders equity a return on equity ratio of 17% means... - ✔✔for every $1 invested, $0.17 of net income is produced credit ratios - ✔✔measure a company's ability to meet its long term obligations debt/EBITDA ratio - ✔✔- total leverage
- probability of defaulting on debt debt/EBITDA and net debt/EBITDA ratios of 2.5x means... - ✔✔it will take 2.5 years to pay off debt net debt/EBITDA ratio - ✔✔- net leverage
- probability of defaulting on debt but taking into account cash balance to be used to pay off debt debt/equity ratio - ✔✔proportion of debt and equity used to finance a company's assets debt/equity ratio of 25% means... - ✔✔for every $1 owned by shareholders, $0.25 is owed to creditors EBITDA interest coverage ratio - ✔✔how easily a company can pay interest on outstanding debt EBITDA coverage ratio of 2.0x means... - ✔✔company is producing 2 times the cash flow needed to pay off interest expenses
market ratios - ✔✔- measure investor response to owning a company's stock
- help to understand how investors value a company what are market ratios an indicator of? - ✔✔company's ability to generate profits and build assets enterprise value - ✔✔sum of all claims on a company (overall value) independent of capital structure equity value (market value/market cap) - ✔✔value of all the shares outstanding (current value attributable to shareholders) price/earnings ratio - ✔✔how much investors are willing to pay per dollar of earnings (affected by leverage) p/e ratio of 15x means... - ✔✔investors are willing to pay $15 for every $1 of net income earnings per share - ✔✔amount of earnings attributable to a share of common stock eps of $2.45 means... - ✔✔$2.45 was earned for every share of stock dividend yield - ✔✔- dividend per share/ share price
- return on a share of stock
- debt decreases impact of submitting an invoice to a customer on financial statements - ✔✔- accounts receivable increases
- revenue increases impact of receiving an invoice payment on financial statements - ✔✔- cash increases
- accounts receivable decreases impact of paying a bill on financial statements - ✔✔- cash decreases
- accounts payable decreases impact of purchasing equipment on financial statments - ✔✔- cash decreases
- fixed assets increases
