Term
| What might cause operating profit to be greater than operating cash flow? |
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Definition
| Typically, operating cash flow well operating profit as a result of typically large non-cash expenses (e.g., depreciation and amortization) that are add-backs to operating cash flows. Operating profit would be higher than operating cash flow if there is non-cash revenue generated (e.g., Accounts receivable balances have increased from the prior year) and/or cash expenses paid that were not included within the current year's income statement (e.g., prior year accounts payable/accruals/other working capital balances are paid down). |
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Term
| How is property, plant, and equipment accounted for? |
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Definition
| At historical cost if used in trading activities, or if held for sale at fair value. If at historical cost it is depreciated under a consistent method to include straight-line and a unit of measure such as hours used. |
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Term
| How is inventory accounted for? |
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Definition
| Under a consistent method of LIFO, FIFO, weighted average cost, or specific identification. Changing methods from year to year is generally not acceptable and requires retrospective restatement if a change is adopted. |
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Term
| Journal entry for repaying a loan to a bank is Dr Bank Loan Cr Cash. |
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Definition
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Term
| Journal entry for amortization of an intangible is Dr Intangible asset Cr Amortization expense. |
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Definition
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Term
| T/F Investing cash outflows lead to a reduction in equity? |
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Definition
| False, investing cash outflows affect other areas of the balance sheet such as property plant and equipment. |
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Term
| An expense is a debit entry |
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Definition
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Term
| An accrual reduces operating cash flow |
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Definition
| False, assuming he means an increase in accruals it increases cash (Think of it as instead of using cash you're using credit, thus cash is not used) |
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Term
| The double journal entry for receipt of amounts owed by a customer is Dr Accounts Receivable Cr Cash |
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Definition
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Term
| The asset ‘Investment in Associates’ reduces when the Associate pays a dividend |
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Definition
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Term
| An increase in a company’s share price is recorded as a credit in equity |
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Definition
| False, noting a credit to equity would come only from an issuance of equity (Selling initial or subsequently authorized shares on the market, as in an IPO). |
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Term
| If reported profit is 67, including depreciation expense of 15, and if inventory increases by 120 and payables by 92, how much is operating cash flow? |
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Definition
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Term
| A company reports cost of goods sold of 180, a 60% gross profit margin, and operating expenses of 50 (including depreciation of 10). If the company has interest cover of 5 and a tax rate of 50%, how much profit after tax does it report? |
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Definition
| 88 (180 / .4 (If 60% gross profit margin then cost of goods is 40%) = $450 in revenue - $180 in cost of goods sold = $270 gross profit. $270 - $50 in operating expenses = $220, which equals EBIT. If interest coverage is 5, take EBIT of $220 / 5 = $44. $220 - $44 = $176 pre-tax profit. $176 x (1-tax rate) = $88) |
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Term
| A company has cash of 200, accounts receivables of 80, accounts payables of 140, inventory of 60, plant and equipment of 240 and a loan from the bank of 110. What is the value of the company’s net assets? |
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Definition
| 330 (200 + 80 - 140 + 60 + 240 - 110) |
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Term
| If, during 2014, revenue in the income statement is 210, cash received from sales made in 2013 is 20, and cash received in total is 190, by how much has the balance of accounts receivable changed? |
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Definition
| Per solutions answer is overall net increase of 20. If we start with ending accounts receivable of X, reduce for the 20 received in 2014 related to 2013, assume the 2014 sales of 210 and total cash received includes the 20 already mentioned it would seem ending 2014 accounts receivable should have gone up 20 (x - 20 + 210 - 170). |
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Term
| During 2014, a company sells 10 units of product for €120. During the year, the company spent the following amounts of money: purchase of 15 units of inventory for €60; payment for advertising €10; salary payments for selling and marketing staff €35. One unit of inventory became damaged and could not be sold. How much profit did the company report in 2014 |
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Definition
| 31 (120 revenue - 40 COGS (15 / 60 = $4 per unit cost x 10 sold) - 10 - 35 - 4 (Obsolete and damaged inventory must be expensed when known)) |
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Term
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Definition
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Term
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Definition
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Term
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Definition
| Current assets - current liabilities, also current operating assets - current operating liabilities (Removes cash, financial assets, other notes, so just include receivables and inventory and payables and provision) |
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Term
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Definition
| Current assets / current liabilities |
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Term
| Quick ratio (Also called acid test) |
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Definition
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Term
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Definition
| EBIT (Earnings before income and taxes) / interest expense |
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Term
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Definition
| (Average receivables/sales)x 365 |
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Term
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Definition
| Cost of Goods Sold / Avg. Inventory |
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Term
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Definition
(Average payables/operating
expenses)x365 |
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Term
| Cash inflows of a business always affect its profits. |
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Definition
| False, as an example if cash is paid from a customer in the following year against previous accounts receivable there is no effect on profits |
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Term
| R&D expenditure is normally capitalised |
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Definition
| False, noting it can only be capitalized once the project becomes viable. |
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Term
| An increase in accounts receivable causes operating profit to be higher than operating cash flow |
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Definition
| True as no cash has been received |
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Term
| Accrual accounting requires a business to recognize economic events when they occur, not when cash is received or paid |
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Definition
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Term
| Software development costs can never be recognized as an asset on a balance sheet |
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Definition
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Term
| A company spends 120 on inventory, 250 on machinery, 60 on repayment of a bank loan, 70 on employee wages and 50 on rent. What was the company’s investing cash flow? |
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Definition
| -250, only the machinery spend is considered investing related |
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Term
| An item of machinery is purchased for €500. It is estimated to have a 10-year useful life, with a residual value of €100. Straight-line depreciation is used. What is the carrying amount (book value) of the machinery after 3 years? |
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Definition
| 380 (500 - 100 = 400 / 10 = 40 per year in depreciation x 3 = 120 in 3 years of depreciation, thus 500 - 120 = 380) |
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Term
| If a company reports operating cash flow of 120, investing cash flow of -50, financing cash flow of 40, depreciation of 30 and an increase in accounts receivable of 10, how much profit did it report? |
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Definition
| 100 (Trick here is to start with operating cash flows of 120 and ignore investing and financing as remember these are below operating cash flows which start with net income to begin with. So 120 - 30 in non-cash depreciation + 10 in AR increase addback (An increase in AR increases profits but is non-cash so it was reduced to arrive at operating cash flows)) |
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Term
| If a company spends cash of 90 to acquire plant and equipment, and if it also reports depreciation of 10 and an impairment loss of 30, by how much does the total value of its assets change? |
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Definition
| -40 (Purchase of the ppe is not value related) |
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Term
| If reported profit is 50, including depreciation expense of 10, an impairment loss of 10 and stock compensation of 20, and if accounts receivable increase by 40, how much is operating cash flow? |
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Definition
| 50 (Similar to question above, start with profits of 50 and add back the non-cash expenses of 40 and then reduce for the 40 increase in AR which although increases profits it does not affect cash) |
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Term
| Receivables turnover ratio |
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Definition
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Term
| Return on capital employed |
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Definition
| Earnings before Interest and taxes (EBIT) / Total assets - current liabilities (Capital employed) |
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Term
| Days inventory outstanding |
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Definition
| (Avg inventory / COGS) x 365 days |
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Term
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Definition
| Total liabilities / equity or total liabilities / assets or financial liabilities (Debt to banks mostly) / equity |
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Term
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Definition
| (Total liab - cash) / equity |
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Term
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Definition
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Term
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Definition
| Revenues / fixed assets (PPE) |
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Term
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Definition
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Term
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Definition
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Term
| Return on invested capital |
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Definition
| (EBIT x (1-tax rate)) / (Equity + debt) |
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Term
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Definition
Net Operating Profit after Tax (NOPAT)
− Increase in net working capital
− Capital expenditure (CAPEX)
+ non-cash expenses (e.g.,
depreciation)
Also, op cash flow - capex
Also, EBIT*(1-tax rate) + depr - increase in working capital - capex |
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Term
| Financing cash outflow is a debit to cash balance |
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Definition
| False, outflows of cash are on the credit side of the entry |
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Term
| Revenue is a credit to equity |
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Definition
| True, noting it only hits equity at end of year when transferring income statement net income balance to equity within retained earnings |
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Term
| Inventory is carried in the balance sheet at its market value |
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Definition
| False, it's carried at lower of cost or market value |
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Term
| Free cash flow is equal to operating cash flow after tax |
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Definition
| False, it's operating cash flow - capex |
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Term
| Reduction in working capital implies a reduction in operating cash flow |
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Definition
| False, offsetting change in working capital already taken into account in operating cash flow |
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Term
| Goodwill must be tested for impairment, but not revalued upwards |
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Definition
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Term
| Parent company does not have to consolidate its subsidiary unless at least 50% of equity is owned by the parent. |
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Definition
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Term
| Practice of conservatism in financial reporting requires that all probably litigation costs are recognized as liabilities |
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Definition
| False, it must be both probable AND estimable |
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Term
| Issuance of share increases net assets |
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Definition
| True, has no effect on liabilities, only cash and equity, thus as net assets = total assets - total liabilities the assets have gone up with no effect on liabilities |
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