2023 Wall Street Accounts Course Exam With Answers (222 Solved Questions)

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1/ 29Wall Street Prep Accounting Crash Course Exam1.What is Accounting?:Accounting is the language of business; it is astandard set of rules for measuring a company's financial performance.Assessing a company's financial performance is important for:The firm's officers (managers and employees)InvestorsLendersGeneral publicStandard financial statements serve as a "yardstick" of communicatingfinancial performance to the general public.2.Why is Accounting Important?:Enables managers to make corporatedeci- sionsEnables the general public to make investment decisions3.Who Uses Accounting?:Used by a variety of organizations - frogovernment to non-profit organizations to small businesses tocorpor We will discuss accounting rules as they pertain to publicly-traded c4.Accounting Regulations:Accounting attempts to standardize financialinforma- tion and follows rules and regulationsThese rules are called Generally Accepted Accounting Principles (GAAP)In the US, the Securities and Exchange Commision (SEC) authorizes the FinancialAccounting Standards Board (FASB) to determine accounting rulesm thefederalationsompanies

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2/ 29GAAP comes from the Statements of Financial Accounting Standards(SFAS) issued by the FASB5.An Overview of the SEC:A US federal agency established by the USCongress in 1934Primary mission is "to protect investors and maintain the integrity of tmarkets"Division of Corporate Finance oversees FASB6.An Overview of FASB:Established in 1973 as an independent body to carryout the function of codifying accounting standards on the behalf of the SComposed of seven full-time members appointed for five years bythe Account Foundation (FAF)Decisions are influenced by:7.International Financial Reporting Standards (IFRS):Over 100 countries, in-cluding the EU, UK, Canada, Australia, and Russia, have adopted a unified setof international accounting standards (IFRS)Although we have seen unprecedented convergence over the last few yearsbe- tween US GAAP and IFRS, some differences remainheEC

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8.Assumption 1: Accounting Entity:A company is considered a separate"living" enterprise, apart from its ownersIn other words, a corporation is a "fictional" being9.Assumption 2: Going Concern:A company is considered a "going concern"for the foreseeable future; it is assumed to remain in existence indefinitely10.Assumption 3: Measurement:Financial statements can only showmeasurable activities of a corporation such as its quantifiable resources, itsliability, amount of taxes it is facing, etc.11.Assumption 4: Periodicity:Companies are required to file annual andinterim reportsIn the US, quarterly and annual financial reports are requiredAn accounting year (fiscal year) is frequently aligned with the calendar year12.Four Underlying Assumptions of Accounting:(1) Accounting Entity(2) Going Concern(3) Measurement(4) Periodicity13.Principle 1: Historical Cost:Financial statements report companies'resources at an initial historical costWhy?Represents the easiest measurement method without a need for appraisal andrevaluationMarking resources up to fair value allows for management discretion andsubjectivity, which US GAAP attempts to minimize by using historical costNote: IFRS allows you to write up the asset to fair value, but most companiesuse historical value anyways

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14.Principles2and3:AccrualAccounting(RevenueRecognitionandMatch- ing Principle):Governs the company's timing in recording its revenues(i.e. sales) and associated expenses2) Revenue Recognition: Accrual basis of accounting dictates that revenuesmust be recorded when earned and measurable3) Matching Principle: Under the matching principle, costs associateda product must be recorded during the same period as revenue generated fromthat productExercise Answer: 1) 1/4/15; 2) 1/4/1515. Why can't companies immediately record these revenues and expenses?-:Accordingtotherevenuerecognitionprinciple,acompanycannotrecordrevenue until that order is shipped to a customer (only then, is the revenueactually earned) and collection from that customer is reasonably assuredwith making

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16.Why shouldn't a company record an expense when it actually buys theitem?:According to the matching principle, costs associated with the productionof the product should be recorded in the same period as the revenue from theproduct's sale17. US GAAP vs. IFRS Accrual Accounting:18.Principle 4: Full Disclosure:Companies must reveal all relevanteconomic information that they determine to make a difference to its usersSuch disclosure should be accomplished in the following sections of companies'reports:(1) Financial statements(2) Notes to financial statements(3) Supplementary information19.Four Underlying Principles in Accounting:(1) Historical Cost(2) Accrual Accounting: Revenue Recognition(3) Accrual Accounting: Matching Principle(4) Full Disclosure20.Constraint 1: Estimates & Judgments:Certain measurements cannot beperformed completely accurately, and must therefore utilize conservativeestimates and judgments21.Constraint 2: Materiality:Inclusion and disclosure of financial transactions infinancial statements hinge on their size and effect on the company performingthem Note: Materiality varies across different entities22.Constraint 3: Consistency:Each company has to prepare financialstatements using measurement techniques and assumptions which are consistentfrom one period to another

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23.Constraint 4: Conservatism:Financial statements should be prepared witha downward measurement biasAssets and revenues should not be overstated, while liabilities and expensesshould not be understated24.Four Underlying Constraints in Accounting:(1) Estimates & judgments(2) Materiality(3) Consistency(4) Conservatism25. Summary of Accounting Assumptions, Principles, Constrainportant are the historical cost, revenue recognition, and matching prits:Mostim- nciples

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26.Financial Reporting Overview:Presented in the companies' financial reportsand standardized by accountingCompanies must file periodic financial reports with the SEC27.Finding Financial Reports:On the sec.govwebsite UK: companieshoues.gov.ukCanada: sedar.comAlso, company websites and financial websites and services28.Form 10-K (Annual Filing):Publicly traded companies must file the 10-K atthe end of each fiscal yearIncludes a thorough overview of their businesses and finances, as well astheir financial statementsMust be filed within 60-90 days within year end, depending on filer's status(large accelerated (60)/accelerated/non-accelerated filer (90))29.Why is the 10-K important?:Required annual filing that provides the mostdetailed overview of companies' financial operations and regulations governingthem30. Annual Report vs. 10-K:31.Form 10-Q (Quarterly):At the end of each quarter of their fiscal year (for thefirst three quarters), publicly-traded companies file a report with the SEC whichincludes financial statements and non-financial data

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Must be filed within 40-45 days of quarter end32.10-K vs. 10-Q:33.Form 8-K:A required filing any time a company undergoes or announcesa materially significant event such as an earnings press releaseUsually filed within 4 days of the event34.Form 14A (Proxy Statement):A required filing prior to a company'sannual shareholder meetingContains detailed information about top officers and their compensationsOften solicits shareholder votes (proxies) for Board nominees and otherimportant matters35.Other Financial Reports:S-1, S-4, and 20-F

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36.Part 1 of the 10-K:37. Part 2 of the 10-K:The red meat of the 10-K38. Parts 3 and 4 of the 10-K:39. Where can you find the latest share count on a 10-K?:At the bottom ofthe cover page40. Business Section of the 10-K:Allows you to get to know a companyGenerally Includes: Company background, business strategy, productdescriptions, markets and distribution, competition, distribution networks41. MD&A Section of the 10-K (Item 7):Reviews what happened during theyear, what their expectations are, etc.42. Selected Financial Data of the 10-K (Item 6):Includes the most importantfinancial highlights43. Financial Statements Section of the 10-K (Item 8):Includes: B/S, CFS,I/S, etc.44. T/F: GAAP requires that firms show recorded values for acquired intangi-ble assets such as patents and trademarks on their financial statements:

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True! GAAP requires that firms only show measurable activities, such as the valueof acquired intangible assetsAssetssuchasemployee,customerloyalty,andinternally-developedtrademarks are not shown on financial statements45. The Income Statement is designed to measure...:The profits of a firm overa period of time46. What is the Income Statement?:A financial report that depicts the operatingperformanceofacompany(i.e.revenueslessexpensesgeneratedorprofitability) over a specific period of time (quarter or year)AKATheConsolidatedStatementofEarnings,ProfitandLossStatement(P&L), Statement of Revenues and Expenses

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47. Why is the Income Statement Important?:Facilitates the analysis of acom- pany's growth prospects, cost structure, and profitabilityAnalysts use it to identify the components and sources ("drivers") of net earnings48. Major Income Statement Line Items (Pt. I):49. Major Income Statement Line Items (Pt. II):50. Ways to Measure Profitability:EBITDA & Operating Profit (EBIT)51. Bottom Line:Net income on the Income Statement52. Revenue:Represents proceeds from the sale of goods and servicesproduced or offered by a companyNot all income is revenueInterest income earned from investments and income received from a legal settle-ment are not considered revenueAKA Sales, turnover, net sales, net revenues, top line53. Top Line:Revenues on the Income Statement54. CVS Revenue Exercise:Note: How much you collect in cash isi revenue; it is how much you EARNED during the period55. Revenue Recognition:Accrual accounting dictates that revenue mustbe recorded only when it is earned and measurablerrelevantin

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In other words, until an order is shipped to a customer and collection from thatcustomer is reasonably assured56. Revenue Recognition: Multiple Deliverables:For sales of bundledproducts, companies should assign individual values to each of the bundled coThis is especially relevant in the software industry (see picture)57. Revenue Recognition: Long-Term Projects:Companies have someflexibility with long-term project revenue recognition(1) Percentage of Completion Method: Revenues are recognized ont percentage of total work completed during the accounting period(2) Completed Contract Method: Rarely used in the US; allows revenuerecognition only once the entire project has been completed58. Matching Principle:Expenses should be "matched" to revenuesThe costs of manufacturing a product are matched to the revenue generatedfrom that product during the same periodmponentshe basis of

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59. Accrual Accounting:Revenues are recognized and recorded when an eco-nomic exchange occurs, while expenses are recognized when the associatedrev- enues are recognized, not necessarily when cash is exchanged60. What would happen if we recognized expenses when they are incurredlike revenue?:Shows an inaccurate depiction of a company's profitability61. Accrual vs. Cash Accounting:Although the benefits of the accrual methodare apparent, it has the limitation that analysts cannot track objectively tof cashThe cash flow statement allows analysts to reconcile these differencCash accounting is more objective; accrual accounting is moresubjective62. Cash Accounting:Not allowed under GAAP but used for tax reportingfor certain businessesObjectively recognizes revenues when cash is received and records costswhen cash is paid out63. Revenue Manipulation:Because of accrual accounting, revenuer can be subjectiveThis "wiggle room" creates potential for manipulation in the form ofshift from one period to anotherWhile revenue recognition methods are almost always explained inco footnotes, when there is suspicion of "shenanigans," these shouldbe r64. Cost of Goods Sold / Cost of Sales:A company's direct cost of manufacture(for manufacturers) or procurement (for merchandisers) of a good or service thatthe company sells to generate revenuehemovementesecognitioningrevenuesmpanies'marketingunders),

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COGS do not include administrative costs such as corporate overhead,andadministrativeexpenses,R&D,andsalariesofemployees(included Selling, General, & Administrative Expenses or other lineitems)For a Manufacturer Inventory, direct labor, factory overhead (indirectcost & delivery costsFor a Merchandiser Inventory, shipping & deliverycosts For a Service Provider Direct service costs65. COGS Exercise:Cashiers and management offices are a part ofS esR&D is its own line item66. Gross Profit:Represents profit after only direct expenses (COGS) havebeen accounted for:Gross Profit = Net Revenues - COGSIn Exercise: $100M in revenues - $40M in inventories used up - $2M i$58M (Remember the matching principle!)G&Aexpens-n shipping =

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67. Selling, General, & Administrative Expenses:Operating expenses that arenot included in cost of goods sold are allocated to categories titled 'Selling,general & administrative expenses' (SG&A) but may also include terms like moperating expenses in the titleRepresents the operating expenses not directly associated with the production orprocurement of the product or service that the company sells to generaterevenue68. SG&A Exercise:69. Research & Development (R&D):R&D expenses stem from acompany's activities that are directed at developing new products orproceduresResearch-intensive industries like healthcare, energy, and technology oftenidentify R&D expenses separately because they are so large; other companiesaggregate R&D expenses within Other Operating Expenses or SG&AIncludes: Compensation for employees, equipment, and facilities engaged inthe R&D process70. Depreciation Expense:Accrual accounting dictates that we spread the costof an asset evenly over the useful life of the asset so that costs are matperiod when revenue is earned as a result of using theasset The resulting annual expense is called depreciationQuantifies the wear and tear from the use and passage of time of the pthrough a systematic decrease of the assets' book (historical) value71. Depreciation Exercise:arketingandched to thehysicalasset

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