CFA Level I Vol 3

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CFA Level I Vol 3
2013-09-12 15:26:14
CFA Level Vol

CFA Level I Vol 3
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  1. Difference between cash flows and profit?
    Cash flow = cash receipts minus disbursements 

    Profit = Incomes minus expenses
  2. What is in a complete set of financial statements?
    • 5 items:
    • Balance Sheet
    • Income Statement
    • Statement of changes in equity
    • statement of cash flowstements
  3. What is the basic underlying equation for the income statement?
    Revenue + other income - expenses = net income
  4. What is gross profit?
    Sales revenue - Cogs
  5. What are diluted shares?
    Number of shares that would exist if all diluted shares were exercised. (stock options and convertible bonds)
  6. Difference between operating, investing and financing activities?
    • Operating activities - day to day
    • Investing activities - Long term asset acquisition and disposal
    • Financing activities - cash flows relating to obtaining or repaying capital used in business
  7. What is in a Management's Commentary?
    Management discusses issues of concern including the nature of business, past results and future outlook. It is required by the SEC for listed companies and the SEC specifies what must be in it (p26)

    • The IASB provided guidance for a commentary:
    • 1. Nature of business
    • 2. Managements objectives and strategies
    • 3. company's significant resources, risks and relationships
    • 4. results of operations
    • 5. critical performance measures
  8. In an auditor's opinion, what is an unqualified opinion, qualified opinion, adverse opinion and a disclaimer of opinion?
    Unqualified - financial statements are fairly represented

    Qualified - Scope limitiation or exception to accounting standards

    Adverse- F statements materially depart from accounting standards and are not fairly presented

    Disclaimer of opinion- Occurs when auditors are unable to issue and opinion
  9. What is an allowance for bad debts?
    Account for uncollectable amounts
  10. What is owner's equity origin equation?
    Owners' equity =contributed capital + ending retained earnings

  11. Ending retained earnings equation?
    Ending retained earnings = Beginning retained earnings + revenues - expenses - dividends
  12. What is a statement of retained earnings?
    Shows the link between the balance sheet and the income statement
  13. What is an unclassified balance sheet?
    Does not show subtotals for current assets and current liabilities
  14. What are unearned fees (revenue)? liability or asset?
    They are a liability that you record when you were paid for a service/asset but you havent delivered it yet
  15. Describe the difference between accrued revenue, accrued expenses, deferred revenue and prepaid expenses. (know examples!)
    Accrued accounting states that expenses be recorded when incurred and revenue be recorded when earned.

    • Accrued revenue- earns revenue prior to receiving cash. 
    • Accrued expenses- incurs expenses that have not yet been paid
    • Deferred revenue- company receives cash prior to earning the revenue
    • Prepaid expense- company takes a cash payment prior to recognizing an expense
  16. Which reading is skipepd in these cards?
    READING 24!!!
  17. What is the difference between grouping by nature and grouping by function?
    • grouping by nature- ex. depreciation
    • grouping by function- ex. cogs
    • pg.144 - unclear definition
  18. What is the difference between the percentage of completion method and completed contract method in recording revenue and costs in long term contracts?
    Percentage of completion- if 20% of work is complete, record 20% of the revenue

    Completed contract- do not report any income until contract is subtsantially finished
  19. What are installment sales and what is the difference between installment method and cost recovery method?
    Installment sales- sales in which installment are paid over extended periods of time

    Installment method- same as percentage of completion. recognize percentage of profit that is equal to percentage of work completed

    Cost recovery method- do not record profit until installments cover all costs. then record all income as profit
  20. When do you report net revenue vs gross?
    To report gross revenue: the company si the primary obligor under contract, bears inventory risk, credit risk, can choose supplier and has reasonable lattitude to establish price

    Otherwise, use net. 

    ex. some internet companies do not hold inventory (ebay). these companies would use net. Amazon who does hold invetory would use gross reporting.
  21. Matching principle vs period costs
    IFRS refers to a "matching concept". Expenses associated with revenues must be recognized together

    Period costs less directly match revenue. they are reflected in the period the company makes the expenditure or incurs the liability to pay
  22. Direct write-off method
    To recognize a loss when a customer defaults. Under GAAP, you must use the matching principle and estimate in advance, how much of your revenue is going to default
  23. straight-line method vs double declining balance depreciation
    straight line= (cost- residual life)/useful years

    Double declining - figure out straightline. figure out what percent that would come out to each year. Double the percent and take of the doubled percent each year.