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Adventis FMC Level 1 MC Practice Exam
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what is the purpose of the income statement? What does it indicate? - ✔✔to show stakeholders if the firm made or lost money during the period being reported it indicates how revenues are transformed into net income define: Revenue - ✔✔the amount charged for the delivery of goods and services define: COGS - ✔✔direct costs of producing revenue define: Operating Expense - ✔✔all other expenses required to run the business what does Operating Income indicate?
- what is the other word for it? - ✔✔Op income indicates a company's earnings power from ongoing operations
Another work for Operating profit is EBIT what does net profit indicate for the shareholder? - ✔✔indicates the increase in shareholder value resulting from the operations of the firm list the general flow of the income statement - ✔✔revenue (COGS) Gross Profit (Operating expense) Operating Income (non Op Expense) (Tax) Net Income what does the balance sheet show - ✔✔it is a financial statement that represents the financial position of the company on a particular date Balance sheet: Assets are what the company , Liabilities are what the company , and equity is the ------ ------
- of shareholders against the company - ✔✔Assets are what the company owns, Liabilities are what the company owes, and equity is the Remaining Claims of shareholders against the company Define: Debt
A negative change in working capital indicates that it is a SOURCE of cash. the firm grows on the limbs of their suppliers, and this cash received is positive is short term debt included when calculating the working capital for the firm? - ✔✔no, short term debt isn't included because working capital= (non-cash current asset)- (NON-DEBT current liabilities) which financing is cheaper for the firm and less risky for the investor: Debt or Equity Financing Explain why its less riskier? - ✔✔debt financing is cheaper and less risky debt holders have a priority claims on the firm's assets if the firm goes bankrupt while equity holder have no guarantee that they will get their investment back if the firm goes bankrupt what statements will be use to derive the metrics to calculate the working capital for the firm? - ✔✔we only need to use the balance sheet remember: WC= non cash current assets- non debt current liabs
all of these values can be found on the balance sheet net debt:
- what is it?
- what financial statements do we use to derive the metrics used to calculate it? - ✔✔net debt is a key financial metric used to determine the resulting debt the firm would have, if the firm used all its cash on hand to [ay down their debt we only need the balance sheet since: net debt = total debt-cash **both can be found on the balance sheet ** Cash Flow Statement:
- what does it show?
- what does it reconcile? - ✔✔the cash flow statement shows how changes in the balance sheet accounts and net income affect the cash balance of the firm it reconciles net income to changes in cash list the 3 types of activities on the cash flow statement - ✔✔1. cash from operations
- cash from investing
- cash from financing
the 4 most common line items are:
- Change in debt
- Dividends
- Share repurchases
- share issuances explain why depreciation and amortization is a positive value in the CF statement, and why do we add it as a source of cash? - ✔✔though depreciation is an expense, it is only there for accounting purposes. the expense of the asset was fully insured when it was purchased thus, we must add back depreciation to reflect that it is not a use of cash, rather a source of cash to say that something is a source of cash, means that that item on the CF statement will be and will Value to the firms cash account - ✔✔to say that something is a source of cash, means that that item on the CF statement will be POSITIVE and will ADD Value to the firms cash account Capital Expenditures:
- how is it calculated?
- what does it indicate about cash when there is a positive value of CAPX from year(t) to year(t-1)? - ✔✔capital expenditures= CAPX(t)- CAPX(t-1) when we have a positive value for CAPX, it means that the firm has acquired more fixed assets over the period.
- to acquire more fixed assets, the firm must have used some cash to obtain them.
THUS:
A positive value for CAPX indicated that it is a USE of cash, and should be take away value from the firm cash account true or false: Share repurchases are a SOURCE of cash, and should be reported as a POSITIVE value on the CF Statement - ✔✔FALSE: the firm must use cash to repurchase its own shares, this means that share repurchases are a USE of cash and should be a NEGATIVE number on the CF statement. explain how repurchases are a form of returning capital to equity holders? - ✔✔when the firm purchases shares, it takes away from the existing shares outstanding. shareholder holding some of the remaining shares outstanding will now have a higher earnings per share. the increased earnings is a form of returning capital to the shareholder Dividends:
- is it a source or use of cash?
- do they affect ownership percentages of the firm? - ✔✔dividends are cash payouts to shareholders of the firm, thus it is a USE of cash.
(CF from Operations) - (Capital Expenditures) Liquidity Ratios:
- What do they indicate about the firm?
- list the two mist common liquidity ratios? - ✔✔Liquidity ratios indicate the firms ability to meet short term financial obligations.
- cash ratio: Cash/Current Liabilities
- Current ratio: Current assets/ current liabilities Efficiency ratios:
- what do they indicate about the firm?
- what are the two must common efficiency ratios? - ✔✔efficiency ratios indicate how efficiently the company utilizes its assets
- asset turnover ratio
- days receivable profitability ratios:
- what do they indicate about the firm?
- list the 4 most common portability ratios - ✔✔probability ratios asses how the firm makes profit relative to its assets, equities, and ratios
- gross margin
- operating margin
- net margin
- return on equity return on equity:
- what type of ratio is it?
- how is it calculated?
- how is it interpreted? - ✔✔Return on equity:
- profitability ratio ROE= (net income)/ (shareholder equity) interpretation: for every $1 amount of equity, the firm made in net income credit ratios:
- what do they indicate about the firm?
- list the 4 most common credit ratios? - ✔✔credit ratios indicate the firms ability to meet its long term obligations.
- Debt/ EBITDA
- Debt/EBIT
- Debt to equity
- EBITDA interest cover ratio
