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Multiple Choice section of Adventis Certification level 1 with Complete Solutions 2025-2026
Typology: Exams
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What are the three financial statements, and what do they do - ✔✔income statement, balance sheet, cf statement
they communicate the finanical conditions, results of operations, and other activties of an organization. The three finanical statements provide info to various stakeholders.
How does the board of directors use finanical statements? - ✔✔to hold mgmt acountable, make board- level decisions about corporate strategy
company mgmt-- how do they use fina statements? - ✔✔to measure performance and make strategic, operating and financial decisions
Creditors- how do they use fina statements - ✔✔to measure credit worthiness, liqudity, and bankruptcy risk
investors-- how do they use fina statements? - ✔✔to make decisions on buying or selling equity investments
acquirers-- how do they use fina statements? - ✔✔to determine valuation and make investment decisions
regulators - ✔✔they use fina statements to determine whether the company is operating according to regulations and the law
The income statement does what
what is its purpose - ✔✔the income statement presents the results of operations (profitability) over a period of time.
The purpose of the income statement is to show stakeholders whether the company made or lost money during the period reported.
Revenue(sales) is. - ✔✔the amount charged for the delivery of goods or services.
cogs is - ✔✔the direct cost of producing revenue. (RM, wages, etc.)
Gross profit is. - ✔✔revenue- cogs
it indicates how efficiently lbaor and supplies are used in the production process.
operating expenses are - ✔✔all other expenses required to run the business (marketing, travel, mgmt salaries)
Operating income, aka , is. - ✔✔EBIT
Fixed assets are - ✔✔the value of assets and property that cannot easily be converted to cash and has a useful life of greater than 1 year. Ex. Plants, property, equipment
Debt is
Equity is - ✔✔debt is the amount of obligations owed to creditors
equity is cumulative shareholder investment plus cumulative net income.
Working capital is not on the balance sheet, but it can be derived from balance sheet accounts.
Working capital is a measure of a firm's.
Its calculated as. - ✔✔efficiency & short-term financial health.
non-cash current assets - non-debt current liabilties
Non-cash current assets - ✔✔represent all assets (besides cash) that are expected to be converted into cash within one year. ex. a/r, inventory, prepaid expenses, other assets
Non-debt current liabilities. - ✔✔represent all obligations (besides short term debt) that are due within one year. ex. a/p, accrued liablities, etc.
So, if a company's non-cash current assets do not exceed non-debt current liabilties, then it may run into challenges. - ✔✔repaying creditors and suppliers in the short run.
Having a negative or positive working capital isnt necessarily a bad thing, but it does determine whether working capital is a source of cash.
The differences between debt and equity
cheap or expenseive, claims? rates of return? - ✔✔Debt is a less expensive form of capital because it is less risky. Debt owners typically have priority claims on a company's assets if the firm goes bankrupt.
Equity is more expensive and more risky, so investors require a higher rate of return to mitigate their risk. Equity holders are not guaranteed to get their investment back if the company goes bankrupt-- risky!
Net Debt -- not on balance sheet explicitly
calculation:
Net debt is primarily used in anaylsis, - ✔✔Total debt - cash.
If cash were used to pay down debt, net debt would be the resulting amount.
primarily used in credit analysis, as creditors assume the firm's cash balance could be applied to debt repayment in the event of a liqudity crunch of bankruptcy.
CF Statement shows.
It reconciles.
it breaks down cash into three categories
The CF statement is useful in determining the short-term. - ✔✔how much cash is generated or lost during a period of time. It shows how changes in balance sheet accounts and net income affect cash and breaks down cash into operating, investing, and financing activities.
It reconciles net income to change in cash.
viability of a company and the ability of a firm to pay its bills.--the company's liqudity
Cash from operating activities
Capital Expenditures are - ✔✔funds used by the firm to purchase or upgrade physical assets such as plants, property, and equipment.
Change in working capital consists of
a decrease represents
an increase represents - ✔✔the impact to cash results from all non-cash current assets and non-debt current liability accounts.
A decrease represents a source of cash and is positive on the CF statement.
An increase in working capital represents a use of cash and would be negative on the CF statement.
working capital is a that cash. - ✔✔a sponge that absorbs cash.
squeeze sponge--> decrease working cap--> more money for the business
so incr working cap, decr cash
airlines are a negative working capital business. they recieve cash long before the service.
Share repurchases helps shareholders because - ✔✔when shares are repurchased, the remaining shareholders have a higher ownership percentage. thus each shareholder has a higher portion of earnings.
So, share repurchases are a form of returning capital to shareholders
Dividends are - ✔✔a distribution of cash to current shareholders. they represent a pure "check" to shareholders. companies with stable CFs usually have a dividend program. Downgrading or removing dividend programs can signal trouble for a company.
Change in debt represents - ✔✔any debt issuances or repayments.
EBITDA is
it gives an indication of a firms - ✔✔earnings before interest, tax, D&A.
current profitability. WHY IS IT USED? because it allows for a COMPARISON of profitability between companies in a wide range of industries. It excludes the effects from different forms of finacning, different political and tax jurisidctions, and different rules around D&A.
Free Cash Flow - ✔✔a way of looking at a company's cash flow to see what is available for distribution to creditors and shareholders. CASh flow from operations -- Capital expenditures.
FCFF is one of the most important metrics to value a company.
financial ratios can be used to - ✔✔spot trends
analyze the impact of drivers and variables
evaluate performance
forecasting
comparison to other firms
they can be expressed as a decimal, a percent, or a multiple.
there are 5 types of financial ratios...
normal is between .2-1.
Efficiency Ratios
Days receivable
Asset Turnover - ✔✔>Days Recievable: average number of days an invoice is in accounts receivable before collection
(a/r / annual revenue) * 365
Asset Turnover: amount of revenues generated per dollar of assets; measures the efficieny of a company's use of its assets in generating sales revenue.
Total Revenue/ Total Assets
2.5 means that for every dollar of assets a company generates 2.5 dollars in revenue.
Profitability Ratios
evaluation of different metrics can help point to outperformance vs. peers or improvement opportunities. All profit (rev or net income) relative to a metric.
Gross Margin
Operating Margin
net margin
return on equity - ✔✔>Gross Margin: gross profit/ revenue
indicates how efficiently labor and supplies are used in the production process
Operating Margin: operating income/revenue
indicates a company's earning power from ongoing operations
Net Margin: net income/ revenue
indicates the increase in shareholders' equity from earnings
Return on Equity: net income/ shareholders' equity
measures profits earned for each dollar invested in a company's equity.
a ROE of 17% means that for every $1, 17 cents of net income is produced
Credit Ratios (long term obligations)
Debt / EBITDA (total leverage)
Net Debt/ EBITDA (Net leverage)
Debt to Equity
EBITDA interest coverage ratio - ✔✔>Debt/EBITDA - used to asses the probability on defaulting on debt
a ratio of 2.5 means that it will take 2.5 years to pay off debt
Net Debt/EBITDA - used to asses the probability of defaulting on debt, taking into account the cash balance
A net debt/ebitda ratio of 2.5x means that it will take 2.5 years to pay off the debt
Debt to Equity: total debt/total equity
indicates the relative proportion of debt and equity used to finance a company's assets. A debt to equity ratio of 25% means that for every $1 owned by shareholders, 25cents is owed to creditors.
Earnings per Share (EPS)
Dividend Yield
Enterprise value/ EBITDA
EV / revenue - ✔✔> Enterprise Value--shows the sum of all claims on a company (the entire firms value) and is INDEPENDENT of capital structure; capital structure changes do not affect EV
EV= Equity value +Net Debt
Equity Value--value of all the shares outstanding, or the value of the equity shareholders' portion of the company. Eq V= EV-Net Debt
or share price * shares outstanding
Price to earnings, P/E - ✔✔>Price to Earnings
Market Value/ Net Earnings
-shows how much investors are willing to pay per dollar of earnings and is affected by leverage
Dividend Yield - ✔✔>Dividend Yield
shows the return on a share of common stock.
Dividend per share/ Market price per share
EV/ EBITDA - ✔✔measures the value of common stock in a way that enables comparisons across different industires. EBIT can also be used.
EV/EBITDA multiple of 4.5x means that for every $1 of EBITDA the company is worth 4.50 dollars.
EV/ Revenue - ✔✔compares the total value of a company to its revenue
an EV/ REV multiple of 1.5x means that for every $1 of revenue the company is worth $1.
Financial Modeling Overview
-A financial model is a representation of a firm's path forward. - ✔✔financial path fwd.
The two primary objectives of financial modeling are - ✔✔1. to arm decision makers with reliable info
transaction: positive net income - ✔✔cash increases
equity increases
pay down debt - ✔✔debt decreases
cash decreases
submit an invoice to a customer - ✔✔revenue increases
a/r increases
receive payment for an invoice - ✔✔a/r decreases
cash increases