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TRAINING THE STREET - FUNDAMENTALS OF ACCOUNTING AND ANALYSIS AND FINANCIAL MODELING
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TRAINING THE STREET - FUNDAMENTALS OF ACCOUNTING AND ANALYSIS AND FINANCIAL MODELING
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TRAINING THE STREET - FUNDAMENTALS OFACCOUNTING AND ANALYSIS AND FINANCIAL
MODELING
Legal structure - answer- sole proprietorship and partnerships, generally personally
liable for the obligations of the business, then there are limited liability corps and s-corps
(tax requirements of sub chapter s of chapter 1 of irs code) that have certain benefits
not granted to sole p's but limits that prevent massive accumulation of private capital
limiting their size
Then c corp or corporations that can attract a lot of capital
Aloe - answer- assets = liabilities and owners equity
Capital required to purchase assets comes from creditors and owners so liabilities and
owners equity represent creditor and investor claims on the assets
Seo - answer- initial stock offering is an ipo and subsequent sales of stock is a
seasoned equity offering
Bs and is - answer- bs is at one period of time, every time you sell something like
inventory to generate cash or use cash to buy something or sell inventory to generate
cash you are changing the state of the balance sheet but this all adds up to
consequences on the is which are shown over a period of time in aggregate
All revenues and expenses are shown as increases or decreases to owners equity
Depreciation expense is shown as a deduction in owners equity
Revenue and expense recognition - answer- if bank borrows money and owes interest
to be paid later then it must show increase in interest payable as liability and interest
expense as an equal hit to owners equity
Retained earnings - answer- collects all revenues and expenses of the firm, (in journal
entries you put them in owners equity but they end up in re), re is cumulative amount of
net income that firm has earned since inception
Dividends come out of re, thus re are cumulative earnings of the firm that are not paid
out as dividends to owners
Accrual accounting - answer- based on revenue recognition and matching principals
Revenue principle - recognize revenue after it has satisfied performance obligations,
goods or services promised to a customer in a contract (doesn't have to be a formal
doc)
Certain non cash transactions can result in revenue being recognized, payment can
come after or before satisfaction of the performance obligation, e.g. Consulting firm may
be paid upfront for a consulting project, firm records the cash in crease but the firm
doesn't record the revenue because it hasn't performed the service
, Matching principle - expenses are recognized at the same time as the revenue is
recorded
Therefore booking of rev and expenses doesn't necessarily correlate to cash flow
Cost principle - answer- assets are recorded on the balance sheet at their cost which
means their cash equivalent value inclusive of shipping insurance and installation ( all
the costs included to bring the asset to its place of intended use by the firm)
Current assets and current liabilities - answer- cash and items that will convert to cash
(a/r) or will be used or consumed within one year (inventory and prepaid expenses)
Current liabilities are liquidated within one year using current assets
Conservatism - answer- contingent losses - unrealized loss, probable loss, e.g. Being
sued
Book losses early but not gains
E.g. R&d and advertising are both intellectual property expenses, ip is an "idea" and all
ideas are expensed not capitalized (some r&d is capitalized but the threshold is high so
most r&d is expensed)
Ip is expensed because it may have future value but because of conservatism they are
deemed to be losers
Eps - answer- basic - net income / average number of shares outstanding
Diluted eps - adjusted net income / adjusted average number of shares outstanding
Convertible securities and options would dilute the eps
Firms will report gaap eps and pro forma eps which may include adjustments like a
contingent loss to eps
Net working capital - answer- current assets - current liabilities
Current ratio - current assets / current liabilities
The point is to measure a firm's liquidity, ability to pay its obligations from current assets
Restricted cash is not included as cash but is another asset because it isn't immediately
spendable, may be restricted for a purchase of a new factory or restricted by a lender
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