Fsa Test 3

Front 1

How are COGS impacted?

Back 1

Increased inventory purchases in anticipation of increase demand, added manufacturing personnel, and greater depreciation from manufacturing PPE.

Front 2

How do operating expenses increase?

Back 2

Increase with revenues. Include increased costs for buyers, higher advertising costs, payments to sales personnel, costs of after sale customer support, logistics costs, and administrative costs

Front 3

How does cash increase/decrease?

Back 3

Increases with revenues in revenues as receivables are collected and decreases as parables and accruals are paid.

Front 4

How does accounts receivable increase/decrease?

Back 4

increases with increases in revenues as more products are sold on credit

Front 5

How do inventories increases/decrease

Back 5

Inventories increase in anticipation of higher sales volume to ensure a sufficient stock of inventory available for sales.

Front 6

How do PPD expenses increase/decrease?

Back 6

increases with increases in advertising and other expenditures made in anticipation of higher sales

Front 7

How does PPE increase/decrease?

Back 7

PPE is usually acquired once revenue increase is deemed sustainable and the capacity constraint is reached.

PPE assets increase with increased revenue, but with a lag.

Front 8

how does AP increase?

Back 8

Increase as inventories are purchased on credit

Front 9

How do accrued liabilities increase?

Back 9

increase concurrent with increases in revenue driven operating expenses

Front 10

How do operating assets and liabilities increase?

Back 10

increase and decrease concurrent with revenues.

Examples, deferred revenues, deferred taxes, pensions

Front 11

What does revenue forecast on the balance sheet?

Back 11

Balance Sheet:
Cash
AR
Inventory
PPD Expenses
Accured Liabls
Other operating assets and liabls

Front 12

What does revenues forecast on the income statement?

Back 12

Income Statement:
Sales
COGS
OP expense

Front 13

Forecasted revenues =

What does the growth rate depend on?

Back 13

Forecasted Revenues = Actual Revenues + (1 + Revenue Growth Rate)

Growth rate depends on growth of industry

Front 14

What are the forecasting steps?

Back 14

1. Forecast Revenues
2. Forecast operating and non-operating expenses
3. Forecast operating and non-operating assets, liabilities , and equity.
4. Adjust short term investments or short term debt to balance the balance sheet.

Front 15

What are sources of information for forecasting?

Back 15

Public disclosures via meetings and calls
Public reports: segment disclosures and MD&A

Front 16

Forecasted operating expense =

Back 16

Forecasted operating expense = Forecasted revenue * Forecasted operating expense margin

Front 17

Forecasted income taxes =

Back 17

Forecasted income taxes = Forecasted income before taxes * Forecasted effective tax rate

Front 18

Forecasted nonoperating expense =

Back 18

Forecasted nonoperating expense = nonoperating expense for prior period.

Front 19

What are the three types of investments in financial statements?

What is the accounting treatment for these types?

Back 19

Passive - Fair Value

Significant Influence - Equity Method

Control - Consolidation

Front 20

How do dividends affect the income statement for passive, significant influence, and control investments?

Back 20

Passive - dividends (and capital gains) included in income

Significant Influence - Dividends reduce investment account

Control - no effect, consolidated

Front 21

For each investment type, when does investor record income?

Back 21

Passive - interim changes in fair value if trading (afs AOCI) and receipt of dividends

Significant Influence - record income of investee equal to percent owned by investor.

Control - Income statements of investor and investee are combined.

Front 22

How are dividends from passive investments (trading and AFS) recorded in income statement?

Back 22

Both are reported as other income in income statement

Front 23

What are the bond investment classifications?

In

Back 23

Available For Sale -
Trading
Held-to-Maturity

Front 24

How interest from bond investments recorded for bonds held to maturity?

Back 24

Interest recorded as other income

Front 25

Does a change in fair value affect an investments carrying value if the equity method is being used?

Back 25

No

Front 26

How is an investee's income recorded using the equity method?

How are dividends recorded for an equity method investment?

Back 26

Debit: Investment Acct for % share income
Credit: Investment Income for % share of income

Debit: Cash for amount of dividends
Credit: Investment Acct for amount of dividends

Front 27

What does consolidation replace in the financial statements for the investor?

Back 27

1. The investment balance with assets and liabilities to which it relates

2. The equity income reported by the investor company with the sales and expenses of the investee company to which it relates.

If wholly owned:Contributed Capital and Retained Earnings will be Investor's balance after consolidation. If wholly owned, there will be a new "non-controlling interest" account to show % of subsidiary not owned.

Front 28

What is non-controlling interest?

Back 28

An account for a consolidated company with a non wholly owned subsidiary. It accounts for the percentage of ownership not owned and is a credit balance.

Front 29

Which type of lease agreement presents the lease asset and lease liability on the balance sheet?

Back 29

Capital Lease

Front 30

What are the consequences for engaging in an operating lease?

Back 30

1. NOAT looks higher since asset is not reported
2. Leverage is improved since liability is improved

Front 31

What is the process of calculating a capital lease asset and liability?

Back 31

1. Determine discount rate
2. Compute the present value of future operating lease payments
3. Adjust financials to include the present value of the lease asset and lease liability.

Front 32

Underfunded defined benefit pension plans are classified as what on the balance sheet?

Overfunded?

Back 32

Underfunded: long term liability

Overfunded: long term asset

Front 33

How does the FASB allow companies to report pension income?

Back 33

Based on expected long term returns on pension investment, and deferring the recognition on unrealized gains and losses.

Front 34

Pension plan assets =

Back 34

Pension Plan Assets BB
+Actual returns on investments
+company contributions to pension plan
-benefits paid to retirees
=Pension plan assets, EB

Front 35

Projected Pension Benefit Obligation =

Back 35

Projected PBO, BB
+ Service Cost
+ Interest Cost
+-Actuarial losses (gains)
- Benefits paid to retirees
= PBO, EB

Front 36

How are pensions presented on the balance sheet?

Back 36

Net Pension Asset (Liability)

Pension plan assets (at mkt value)
-PBO
=Funded Status

Front 37

How are balances in relation to revenues calculation?

Back 37

Forecasted Revenues * (actual acct balance/actual revenues)

Front 38

Are are balances calculated using turnover rates?

Back 38

forecasted revenue (or COGS) / Turnover rate

Front 39

How are balances calculated using Days Outstanding?

Back 39

Forecasted Acct Balance = DSO * (Forecasted Revenues (or COGS)/365)

Front 40

What do financial instruments include?

Back 40

Cash
Equity
Debt

Front 41

What are the components of a valuation model?

Back 41

Cost of Capital and a forecast of future payoffs

Front 42

What is cost of capital? What does it reflect? What is it based on?

Back 42

Discount rate that an investor uses to value future payoffs

Reflects the return investors expect on their investment

Based on perceived risk of investment

Front 43

In a valuation model, what are forecasts of future payoffs?

Back 43

Dividends and free cash flows, depending on model used.

Front 44

How does the dividend discount model value an investment?

Back 44

Equates current stock price to present value of all future expected dividends.

Front 45

What are the two methods of forecasting future dividends?

Which one is more realistic?

Back 45

Perpetuity - Assumes that forecasted dividends stabilize at some point in the future and remain constant thereafter. Yields and ordinary annuity with payments occurring at the end of a period through infinity.

Increasing Perpetuity - Present value of an increasing perpetuity = (dividends/(cost of capital - growth rate)

Increasing perpetuity is seen as more realistic.

Front 46

What are problems with the dividend discount model?

Back 46

- A large percentage of publicly traded companies do not issue dividends
- Some companies have unusually high dividend payouts given their profit levels: sustainability may not be possible
- Difficult to find analysts forecasts of dividends to use in model.

Front 47

What is the Weighted Average Cost of Capital?

What values does it use?

Back 47

WACC is for valuation models that assume payoffs are distributed to both equity holders and debt holders.

Uses intrinsic values (like market value) instead of numbers from financial statements.

Front 48

What is the formula for WACC?

Back 48

Cost of Debt * (market value debt/mkt value of firm) + Cost of equity * (market value of equity/mkt value of firm)

Front 49

According to Discounted Cash Flow method, what is firm value?

Back 49

Firm Value = Present Value of expected free cash flows to the firm

Front 50

Free Cash Flows to Firm =

Back 50

FCFF = NOPAT - Increase in NOA

Front 51

What are the steps of DCF valuation?

Back 51

1. Forecast and discount FCFF for the horizon period
2. Forecast and discount FCFF to the post horizon (terminal) period.
3. Sum the PV of the terminal and horizon periods to yield firm value
4. Subtract the value of firm's debt from value of firm
5. Divide that amount by shares OS to yield estimated per share stock price.

Front 52

How is firm valued under the ROPI Valuation Model?

Back 52

Firm Value = NOA + PV of expected ROPI (residual operating income)

Front 53

ROPI =

Back 53

ROPI = NOPAT - (WACC*NOA)

Front 54

What are the steps for estimating firm value under the ROPI method?

Back 54

1. Forecast and DIscount ROPI for the horizon period
2. Forecast and Discount ROPI for the terminal period
3. Sum the PV of the horizon and terminal periods then add to book value of noa to get firm value
4. Subtract net non-operating obligations from firm value to yield equity value.
5. Divide firm equity value by the number of shares outstanding to yield stock value per share.

Front 55

Under the ROPI model, what actions increase the firm value?

Back 55

Decrease NOA required to generate a given level of NOPAT

and/or

Increase NOPAT with the same level of NOA investment

Front 56

How can Net Working Capital be reduced to increase ROPI value?

Back 56

Reducing receivables
Reducing Inventories
Increasing Payables

Front 57

How can long term operating assets be reduced to increase ROPI value?

Back 57

- Sales of unnecessary PPE
- Acquisition of production and admin assets in partnerships with other firms to increase throughput.
- Acquisition of finished or semi finished goods from suppliers to reduce manufacturing assets

Front 58

How can NOPAT be increased to increase ROPI value?

Back 58

Increasing gross profit dollars
Reducing SG&A expenses

Front 59

When does ROPI model perform best?

Back 59

WHen financial statements refelect more of the assets and liabilities including off-balance sheet items.

and horizon is short

Front 60

When does DCF model perform best?

Back 60

When the firm reprots positive FCFF
When FCFF grows at a relatively constant rate
When horizon is short

Front 61

What are the advantages/disadvantages of DCF model?

Back 61

Advantages:
-Widely Accepted
-Unaffected by accrual accounting
-FCFF is intuitive

Disadvantages:
-Cash investments in PPE are treated as cash outflows, even though they create value to shareholders
- Value not recognized unless evidenced by cash flows
- Computing can be difficult since cash flows are affected by selling of investments and securitization

Front 62

What are the advantages/disadvantages of ROPI?

Back 62

Advantages:
-Focuses on value drivers like profit margin and turnover
- Uses both balance sheet and income statement accrual information
- Reduced weight on terminal period value

Disadvantages:
- Financial statements do not reflect all company assets (goodwill, R&D)
- Requires some knowledge of accrual accounting

Front 63

What are the weaknesses of using market multiple model?

Back 63

- No right measure
- No right comparitive companies
- No right way to combine comparable company data to produce a multiple.