CBF Exam Review Financial Statements Part 1 Tom Shimko, CCE 1
CBF Exam 1. Tests consists of 140 questions - 101 multiple choice questions - 39 true/false questions 2. Subject matter covered - Business Law (law of contracts and negotiable instruments) - Credit Law - Financial Statements : Interpretation and Credit Risk Assessment 3. Answer 70% of the test correctly and you re a CBF 2
Confucius say: Financial statements never lie, but liars make up financial statements. 3
Generally Accepted Accounting Principles (GAAP) FASB: Rule making body SEC : Ultimate control to regulate Rules can differ by industry to some extent Rules evolve over time Rules are flexible GAAP versus GAP Games Accountants Play 4
Traditional Assumptions of the Accounting Model Business entity Going concern Time period Monetary cost Conservatism Realization Matching Consistency Full disclosure Materiality Industry practices Transaction approach Cash basis Accrual basis 5
Realization Principle Concept that generally recognizes revenue when the earning process is virtually complete and the exchange of value can be objectively determined. 6
Materiality Concept The concept that exempts immaterial items from the concepts and principles that bind the accountant and allows these items to be handled in the most economical and expedient manner. Materiality varies by the size of the company. 7
Auditor s s Report Management is responsible for preparation of the financial statements Auditors (CPAs) provided an independent opinion of the financial statements CPAs test for the fairness of the financial statements 8
Types of Audit Opinions Unqualified Qualified Adverse Disclaimer of opinion 9
Accrual Basis of Accounting Revenue is recognized when realized and expenses are recognized when incurred. Realization and matching concepts. 10
The Financial Statements Balance Sheet * Shows the financial position at a point in time - Stock of resources Income Statement * Profit or loss for the accounting period * Flow of resources Statement of Retained Earnings *Reconciles the change in retained earnings *Captures income statement in the balance sheet Statement of Cash Flows *Separates cash flows into operating activities, investing activities and financing activities *sources and uses of funds 11
The Balance Sheet Accounting Equation *Assets=Liabilities+Stockholder s s Equity Assets What the firm owns Liabilities-What the firm owes to creditors Equity What the firm owes to internal owners (shareholders) 12
Balance Sheet Assets: Current Assets that turnover quickly Fixed Long-term investments Other Usually intangibles Liabilities: Current Debt due within one year Long-term Debt due beyond one year Equity: Common Stock Par value of outstanding stock Paid-in in capital Amount over par value Retained earnings Accumulated profits less dividends 13
Common-Size Financial Statements A form of vertical ratio analysis that allows for a comparison of firms with different levels of sales or total assets by introducing a common denominator. On the balance sheet, the common denominator is total assets or total liabilities and equity. On the income statement, the common denominator is sales. 14
Consolidation Balance sheet represents a consolidation of parent and subsidiaries *Parent owns 50% or more of each sub *Less than 100% ownership results in a minority interest - Shown as a liability on the balance sheet *Subsidiaries are separate legal entities - Subs consolidated since parent controls *Non-consolidated subsidiaries are shown as investments. 15
Current Assets Current assets include: *Cash, marketable securities, receivables, inventory, prepaid expenses (non-cash source) *Assets expected to be converted into cash within 1 year or an operating cycle 16
Operating Cycle Definition: Time between the acquisition of inputs to make a product and the realization of cash from selling a finished product. * Measured in days - Days outstanding in inventories - Days outstanding in receivables Conclusion: The shorter the operating cycle, the better. 17
Days Sales Outstanding Accounts Rec. Net Sales X 360 days = DSO Inventory Carrying Period Average Inventory Cost of Goods Sold X 360 days = ICP DSO + ICP = Operating Cycle 18
Inventories Inventory investment consists of: raw materials, WIP and finished goods Balance sheet, income statement and cash flow statement affected by inventory accounting * FIFO more correctly states the balance sheet * LIFO more correctly states the income statement * Average is between FIFO and LIFO 19
Fixed Assets Property, Plant and Equipment Produce economic benefits beyond one year Depreciated over the period of benefit Land is an exception 20
Other Assets Catch-all all category Examples: * Property held for resale * Intangible assets * Long-term investments 21
Current Liabilities Liabilities due within one year Consist of: * Accounts payable * Accrued liabilities * Short-term term bank debt * Maturities of long-term debt * Deferred taxes * Unearned revenue 22
Long-Term Debt Obligations maturing beyond one year 23
Stockholders Equity Represents ownership interest in the company Consists of: * Common Stock at par * Additional paid-in in capital * Retained earnings 24
Additional Paid-in in Capital Reflects difference between sale price of stock and par value 25
Retained Earnings Aggregate profits minus aggregate dividends paid since the inception of the business. Retained earnings = Undistributed Income 26
Financial Statements Continued in Part 2 27