Financial Modelling Ch.1 Review Questions and Correct Answers
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Course
Financial Modelling
Institution
Financial Modelling
Income statement summarizes the firms performance over a set period of time; reports the uses of assets and capital, what our shareholders earn over a time period
Expenses include all the costs that the firm undertakes to create the revenues. This includes labor, materials, selling cost, depreciat...
Financial Modelling Ch.1 Review
Questions and Correct Answers
Income statement ✅summarizes the firms performance over a set period of time;
reports the uses of assets and capital, what our shareholders earn over a time period
Expenses ✅include all the costs that the firm undertakes to create the revenues. This
includes labor, materials, selling cost, depreciation, interest, and taxes.
Gross profit ✅Sales less Cost of Goods Sold. It summarizes the firm's performance
prior to paying overhead, selling and administrative, or other fixed expenses
Sales ✅refers to the net dollars from selling the product. In simplest terms, it is the
price per unit sold times the numbers of units sold
Cost of goods sold ✅an expense that captures the cost of labor and materials that
directly go into making the product. We often think of this as the firm's variable cost
because it increases with sales volume
Ebit ✅Gross Profit less Selling and Administrative, Depreciation, Overhead, and
Extraordinary Items. From a finance perspective, this is a critical number as it
represents the firm's performance prior to any payments made to investors
Selling and administrative expenses ✅refer to the expenses from marketing,
advertising, and administrative positions within the firm. These costs do not usually
directly increase with sales volume and are often considered fixed costs for the firm
Depreciation ✅the method that the Internal Revenue Service allows firms to write off
the use of an asset. When a firm purchases a fixed asset, there is typically no
immediate tax deduction on the cost. Rather, the firm expenses the use of the asset
over its economic life
Amortization ✅the method that a firm writes off the use of intangible assets over their
useful life. Intangible assets include patents, licenses, trademarks, copyrights, and
goodwill. Non-cash expense that firms sometimes use as a tax shield
Extraordinary items ✅expenses that the firm considers one-time events. This could be
as trivial as gains or losses from obsolete inventory or as complicated as the loss from a
disaster
Earnings before taxes ✅represents the amount of income that will be taxed by the IRS.
EBIT - interest expense
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