Some examples from this set of practice questions
1.
Income Statement Components and Format
Answer: - income statement components include net revenue minus COGS, SG&A expenses to make operating income - from this, interest expense, depreciation expense, and tax expense are deducted for net income - there are many other potential elements, including gains and losses from non-operating items - expenses can be grouped by nature or function, and the income statement can be single-step or multi-step in format
2.
Basic EPS Calculation
Answer: - \"common\" = GAAP term, \"ordinary\" = IFRS term = (NI - P Dividends) / Weighted Average # of Shares Outstanding - the denominator of this is a time-weighted average and reflects the impact of share issuances, share repurchases, stock splits, and stock dividends
3.
Simple vs. Complex Capital Structure
Answer: - in a complex capital structure, some debt is convertible to new common (or ordinary) shares - potential dilution of earnings is accounted for in diluted EPS, which is lower than basic EPS - a simple capital structure is one without convertible debt
4.
Discontinued Operations
Answer: - must be separately stated on the income statement, allowing an analyst to disregard the impact on future financial performance
5.
Non-Operating Items
Answer: Non-operating items will vary depending on whether the company is a financial service Non-operating items should be stated separately on the income statement Analysts who observe a significant amount of non-operating income in a company\'s reports should investigate further before making an investment decision
Some examples from this set of practice questions
1.
Investing and Financing Activities
Answer: - investing activities impact long-term assets; financing activities include LT liabilities and equity - amount of cash received from the issuance of common stock = common stock + additional paid-in capital
2.
Conversions of Cash Flows from the Indirect to the Direct Method
Answer: if an analyst wants to review trends in cash receipts and payments, but the operating activities were prepared using the indirect method, a three-step convergence can be done: 1) separate net income into total revenues and total expenses 2) remove all non-cash and non-operating items and separate the remaining items into relevant cash flow items 3) convert accrual amounts of revenues and expenses to cash receipts and payments by adjusting for increases/decreases in current assets and current liabiltiies
3.
Evaluation of Sources and Uses of Cash
Answer: - higher CFO than NI is generally a good sign - operating cash flows: indicate whether a company can generate positive cash flows from what they are in business to do - investing cash flows: tell users whether funds are being spent or generated from capital assets or LT investments - financing cash flows: disclose sources or uses of cash from LT debt or from share transactions
4.
Common-Size Cash Flow Statement
Answer: - each line item is expressed as either a percentage of total cash inflows/outflows or as a percentage of revenue - shows trends in cash flow instead of looking at total amounts
5.
Cash Flow Ratios: Performance
Answer: CF to Revenue = CFO / Net Revenue Cash Return on Assets = CFO / Avg Total Assets Cash Return on Equity = CFO / Average SE Equity The higher, the better Cash to Income = CFO / OI Cash Flow per Share = (CFO - P Dividends ) / # Common Shares Outstanding * need to be careful with this ratio with IFRS vs. GAAP; if dividends are paid to common shareholders in CFO, they need to be added back
Some examples from this set of practice questions
1.
covered interest arbitrage
Answer: Risk-free arbitrage is possible in all forward markets. The term covered interest arbitrage pertains specifically to the foreign exchange markets. When the forward rate differs from the forward rate implied by interest rate parity, traders can implement covered interest arbitrage.
2.
investment policy statement
Answer: Client description, purpose of the portfolio, and portfolio rebalancing guidelines should all be part of the investment policy statement
3.
Currency swap
Answer: The credit risk of a currency swap is generally greater than that of a similarly sized interest rate swap, due to the fact that the payments are not netted. The greatest credit risk exposure for a currency swap occurs at the end of the swap\'s life, due to the final exchange of notional principal.
4.
Random errors
Answer: Chance fluctuations are also known as
5.
Equity beta
Answer: Unlevered beta/%equity
Some examples from this set of practice questions
1.
Liability risk
Answer: The risk that managers will enter into excessive obligations on behalf of shareholders, which destroy company values. These frequently take the form of offbalance sheet obligations.
2.
DOL
Answer: =%change EBIT/%change Sales
3.
long lived assets
Answer: in general; capitalize expenditures when there is probability of future economic benefit, and expense when future economic benefit is unlikely or uncertain
4.
construction interest
Answer: interest incurred during the construction period is capitalized as the cost of the asset
5.
interest coverage
Answer: add back capitalized interest and depreciation of capitalized interest.
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