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Adventis FMC Level 1 Exam Complete Solutions
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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
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
impact of submitting an invoice to a customer on financial statements - ✔✔- accounts receivable 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
