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Wall Street Prep Accounting Crash Course Exam
Newest Exam 2025 | WSP Accounting Crash Course
| Featuring Topics such as Accounting Equation,
Financial Statements (Income Statement, Balance
Sheet, Cash Flow), and Journal Entries
What is accounting ---------CORRECT ANSWER-----------------it is the standard language of business. It is the standard set of rules for measuring a firm's financial performance. Assessing a company's financial performance is important for many groups, including:
- officers, investors, lenders, general public Standard financial statements serve as ... ---------CORRECT ANSWER-----------------it serves as a "yardstick" of communicating financial performance to the general public. Why is accounting important? ---------CORRECT ANSWER------------------ because enables managers to make corporate decisions
- it enables you to look at a set of financial figures in a standardized in compared across different companies
- also to make sound investments The order of Generally Accepted Accounting Principles (GAAP) ---------CORRECT ANSWER-----------------1. the US gov called the Securities and Exchange Commission (SEC) authorizes the Financial Accounting Standard Board (FASB) to determine US accounting rules
- the FASB then communicates these rules through the issuance of statements of Financial Accounting Standards (SFAS). These statements make up the body of accounting rules known as the Generally Accepted Accounting Principles (GAAP)
- These rules have been developed to provide guidelines for financial accounting in order to ensure that business present their financial information in a fair, consistent, and straightforward basis. Financial statements must be prepared according the GAPP. Summary: Accounting follows GAAP which are guidelines for measuring and presenting financial information in fair, consistent, and straighforward basis. About the International Financial Reporting Standards (IFRS) ---------CORRECT ANSWER------------------ over 100 countries, including the EU, UK, Canada,
This excludes things like: customer loyalty, employee satisfaction, environmental awareness - as they are difficult to quantify 4th assumption: periodicity - companies are required to file annual and interim reports (less than one year)
- quarterly reports and annual financial reports are required
- an accounting year (fiscal year) frequently does not align with calendar year What are the major underlying principles ---------CORRECT ANSWER----------------- Principle 1: Historical cost
- it is the easiest measurement method w/o a need for any appraisal and revaluation Principle 2 and 3: Accural Accounting (Revenue recoginition and matching principle)
- #2: accrual basis of accounting dictates that revenues must be recorded when earned and measurable
- #3: under the matching principle, costs associated with making a product must be recorded during the same period as revenue generate from that product.
- #4: Full disclosure
- companies must reveal all relevant economic information that they determine to make a difference to its users. The essence of driving the reason for accural accounting: ---------CORRECT ANSWER-----------------is that GAAP wants to give investors and consumers a better picture of how profitable the business is if you were present the original expense divorced from the corresponding revenue, it would be very difficult for an investor to understand what the core profitability is of the business. ofc the downside is that you are not seeing whats happening to cash, but FASB and GAAP have an answer for that in the form of the cash flow statement What are the major underlying accounting constraints ---------CORRECT ANSWER-- ---------------Constraint 1: Estimates and Judgements
- certain measurements cannot be performed completely accurately, and must therefore utilize conservative estimates and judgements ( like bad debt acc) Constraint 2: Materiality
- 10 - k usually provides the most detailed overview of companies financial operations and regulations governing them you can go to www.sec.gov to look a company's 10-k Annual report vs 10-k ---------CORRECT ANSWER-----------------annual report is a "polished" annual report, however, the complete 10-k is the primary document for company data About 10 - Q (Quarterly) ---------CORRECT ANSWER------------------ at the end of each quarter of their fiscal year (for the first three quarters of a fiscal year), publicly- traded companies also file a report with the SEC which includes financial statements and non-financial data.
- must be filed within 40-45 days of quarter end 10 - K vs 10-Q whats the difference? ---------CORRECT ANSWER-----------------1. Both 10 - k and 10-Q include financial statements, important footnotes and management commentary on the state of the business, but 10-Ks are generally more detailed filing than 10-Qs
- A 10-K will usually contain more details regarding stock options, fixed and intangible assets, debt, and future expectations and include extensive
management as well as commentary on the state of the business (management discussion & analysis "MD&A")
- 10-K reports are audited by an independent firm while 10-Q filings are reviewed by a CPA but are unaudited About form 8-k ---------CORRECT ANSWER------------------ a required filing any time a company undergoes or announces a materially significant event
- for ex: earnings press release, an acquisition, a disposal of assets, bankruptcy, etc 8-ks are usually filed within 4 days of the event about form 14-A (Proxy statement) ---------CORRECT ANSWER------------------ a required filing prior to companies' annual shareholder meetings
- it contains detailed information about top officers and their compensation
- the form often solicits shareholder votes (proxies) for board nominees and other important matters
- anything that requires a shareholder vote about an S-1 filing ---------CORRECT ANSWER------------------ S-1 Registration filed by a company when it decides to go public and sell securities and an Initial Public offering (IPO). This document includes the prospectus - the company document outlining the companies' operations to help investors make an informed decision about investing.
What is in Part 2 of the 10-k ---------CORRECT ANSWER-----------------Part 2 Item 5: Market for Registrants Common Equity, Related Stockholder matters, and Issuer Purchases of Equity securities Item 6: Selected financial data Item 7: Management's discussion and analysis of financial condition and results of operations Item 7A: Quantitative and qualitative disclosures about market risk Item 8: Financial statements and supplementary data Item 9: changes in and disagreements with accountants on accounting and financial disclosure Item 9A: Controls and Procedures Item 9B: Other info
- part 2 is the section of 10-K where companies have to file their management discussion and analysis as well as their financial statements and all their footnotes, which they call supplementary data
- item 6 "selected financial data" generally the company think it is the most important financial highlight - quick highlevel sense of the company
- item 8 is generally where all the financial statements are located and after that is where the financial footnotes are which is the final red meat in a 10-k
- as a analyst you will be spending most your time in item 6,7,
- we spend most of our time, understanding the business in part 1 then divining straight into the part 2 and the financial statements, What is in Part 3 & 4 of the 10-k ---------CORRECT ANSWER-----------------Part 3 and 4
- which include disclosures about executive compensation, audit results What is item 7, MD&A in part 2 of the 10-k? ---------CORRECT ANSWER---------------- -- it is when the company really goes through what happened during the year and they even identify expectation in a detailed financial standpoint What is the income statement? and why is it important? ---------CORRECT ANSWER-----------------the income statement is a financial report that depicts the operating performance of a company over a specific period of time (typically a quarter or year) (rev less exp - i.e. profitability) sometimes referred to as:
- the consolidated statement of earnings
- the Profit and loss (P&L) statement
- Statement of Revenues and Expenses
What is the matching principle? ---------CORRECT ANSWER-----------------States that expenses should be "matched" to revenues. In other words, the costs of manufacturing a product are matched to the revenue generate from that product during the same period. *It doesn't matter how many new inventories were purchases - what matters are the inventories used up in generating the revenue what is COGS (cost of goods sold)? ---------CORRECT ANSWER-----------------it represent's a company's direct cost of manufacture of goods or service that the company sells to generate revenue examples of COGS ---------CORRECT ANSWER-----------------merchandise inventory manufactured goods inventory raw materials cost direct labor costs factory overhead shipping and delivery costs
** any other costs directly associated with the generation of revenue depreciation of fixed assets What is gross profit? ---------CORRECT ANSWER-----------------Gross Profit represents profit after only direct expenses (COGS) have been accounted for - REV-COGS NET REVENUE - COGS = GROSS PROFIT Operating expenses that are not included in COGS are allocated to? --------- CORRECT ANSWER-----------------Selling, general, & administrative expenses (SG&A) or include terms like marketing and operating expenses in the title What does SG&A represent? ---------CORRECT ANSWER-----------------represents the operating expenses not directly associated with the production of the product or service that the company sells to generate revenue R&D expenses are? ---------CORRECT ANSWER-----------------these are expenses that stem from a company's activities that are directed at developing new products or procedures
what are accelerated depreciation methods? and examples ---------CORRECT ANSWER-----------------which calculate a greater amount of depreciation in earlier years than later years some examples: declining balance, sum of years digits, units of production ** but most companies use / prefer straight line depreciation because it recognizes lower depreciation in earlier years than accelerate depreciation companies like showing lower depreciation because it shows higher profits on the income statement that they show to investors what is amortization? ---------CORRECT ANSWER-----------------it is the cost of intangible assets over the number of years that these assets are expected to help generate revenue for the company *represents depreciation for intangible assets Stock based compensation expense ---------CORRECT ANSWER-----------------when a company compensates an employee with stock (like stock options or restricted stock), the value of that compensation (called "stock-based compensation" or SBC) is recognized as an expense in the same expense category as the employee's regular cash compensation However like depreciation, you will almost find SBC expense identified separately on the cash flow statement
what are interest expense ---------CORRECT ANSWER-----------------payments the company makes for its outstanding debts what is interest income ---------CORRECT ANSWER-----------------a company's income from its cash holdings and investment (stocks, bonds, and savings accounts) *often presented on the income statement as Net Interest expense what does everything above operating income consider as on the income statement ---------CORRECT ANSWER-----------------it is consider as the core operations / activites toward the business and the operating income is the line before all the "noise" or unnecessary info the "unnecessary info" is more so tied to how you are funding your business what is net income ---------CORRECT ANSWER-----------------it is the final measure of profitability on the income statement. It represents income after all expenses have been paid out. also called "bottom line", net earnings, net profit
EPS measures how much of the total current period profits belong to each shareholder basic EPS function ---------CORRECT ANSWER-----------------net income / basic shares outstanding diluted EPS ---------CORRECT ANSWER-----------------net income / diluted shares outstanding diluted eps is usually lesser than basic eps diluted EPS is the favored approach because it is more economically "real" Earnings Per share has to presented on a weighted average share basis.... but what is a weighted average presentation ---------CORRECT ANSWER----------------- since the total number of shares outstanding fluctuates as shares from other securities are converted or the company repurchases shares, companies usually show the number of shares outstanding on the income statement as weighted average of the amount of shares outstanding during the period of the income statement (quarter or year) what are dividends ---------CORRECT ANSWER-----------------represent a portion of a company's net income that is returned to shareholders, typically on a quarterly basis, in the form of cash
pros and cons of using EBITDA ---------CORRECT ANSWER-----------------1. (pro) D&A is a huge noncash expense for fixed asset and intangible asset intensive businesses and stripping out the biggest noncash expense provides a more accurate picture of "real" profits during the year
- (con) since companies can use different useful life assumptions and even depreciation methods to calculate D&A this can significantly skew the comparison of operation profitability across two otherwise identical firms. EBITA is a blend of accrual and cash accounting where is depreciation and amortization when looking for EBIT / EBITDA --------- CORRECT ANSWER-----------------since D&A is not usually disclosed explicitly on the income statement, analysts have to go to the cash flow statement to get D&A and simply add it back to EBIT what is the income statment ---------CORRECT ANSWER-----------------it is a summary of a company's profitability over a certain period of time why is net income important ---------CORRECT ANSWER-----------------net income is an important indicator of a company's operating performance
