Midterm exam review- ACCT 447 PDF

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Review for the midterm exam in financial statement analysis (acct 447) with Redman....

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Midterm Exam 1. Calculate RNOA (financial statements and excerpts of notes will be provided). - Must classify the balance sheet and income statement into operating and nonoperating components to implement formula RNOA = (NOPAT/Average NOA) NOPAT = NOPBT + tax shield on non-op - tax provision NOPBT = Gross Profit - Total Operating Expenses Tax Shield on Non-Op = Non op taxable income * tax shield rate (statutory fed + state) 2. Primary driver of operating return- profit margin or asset productivity (volume) Compare NOPM to NOAT NOPM = NOPAT / Revenue NOAT = Revenue / Avg NOA Net Operating Assets = Operating Assets - Operating Liabilities - Find net operating assets: Total operating assets - Total operating liabilities - Take the average of the current year and previous year to find avg NOA - Then plug into the NOAT formula

3. Overall company profit driven by operating activities or non operating activities (ROE vs. RNOA) RNOA = (NOPAT/Average NOA) ROE = (Net Income/ Average Stockholders’ Equity) ROE: non operating part RNOA/ROE

4. Liquidity analysis - ability to generate cash on a short-term notice “Which year is the company more liquid?” → then you need to go determine what ratios to look at - For liquidity analysis, look at current ratio and quick ratio - Generally, a higher liquidity ratio is better (indicates the company is more capable of paying back what they owe) Current Ratio = (Current Assets / Current Liabilities) Quick Ratio = (Cash + Marketable Sec + A/R) / Current Liabilities Had to include restricted cash on the online portion for quick ratio

5. Coverage Analysis- ability to generate profit and cash to cover the fixed charges from debt

“Which company is better able to pay interest out of its current profits in 2019?” - Can look at things like Times Interest Earned ratio, EBITDA Coverage Ratio, Cash from Ops to Total Debt, Free OCF to Total Debt - Generally with these ratios, higher is better (smaller denominator compared to numerator) Times Interest Earned = EBIT / Interest Expense EBITDA Coverage Ratio = EBITDA / Interest Expense Cash from Ops to Total Debt = Cash from Ops / (ST + LT Debt) Free OCF to Total Debt = (Cash from Ops - Capex) / (ST + LT Debt) 6. Is the company more owner-financed or non-owner financed Compare debt/ equity ratios Can look at total liabilities to SHE 7. A/R collection period - Same as Days Sales Outstanding - Use gross A/R for all A/R calculations - Gross AR minus allowance for bad debt is equal to net AR - See p.81 of Flowserve: Use AR number before allowance for doubtful accounts to find your average Days of Sales Outstanding (DSO) = (Average A/R * 365) / Sales 8. Foreign currency disclosure- how did U.S perform (strengthened or weakened) “Is the US dollar strong or weak based on company income statement?” Currency charge generally means strong currency (dollar strength) - Comprehensive loss → US dollar was stronger as compared to the other currencies involved - Comprehensive income → means the US dollar was weaker 9. Which company derived the largest percentage of its operating return from margin/volume? (NOA, Revenues, NOPAT provided) - 4-5 companies Need to compare NOPM to NOAT NOPM = NOPAT / Revenue NOAT = Revenue / Average NOA Find Average NOA from NOA (given) 10. Look at a company’s disclosure and make judgement about risk 11. Reasons why companies need credit (Investing, Financing, Operating) Operating: (p. 4-3) - Many companies have cyclical operating cash needs - Ex: companies that manu inv have to pay for materials and labor months before they sell their product and collect revenue

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Purchases made long before expected sales, need credit to cover intervening months Investing: - Companies routinely require large amounts of cash for investments including purchases of new equip and property (capex) Financing: - Companies occasionally need credit for financing activities such as issuance of debt for repayment of maturing debt obligations or the repurchase of common stock 12. Purpose of credit risk analysis Determine the amount of loss a company can have (p.4-7) - The overarching purpose of credit risk analysis is to quantify expected credit losses to inform lending decisions - Expected credit losses are the product of two factors: the chance of default and the size of the loss given default. (Debtors ability to pay down debt * size of loss upon default) Expected Credit Loss = Chance of Default * Loss Given Default 13. Z-score interpretation Given a Z-score, what does it mean (p. 4-32) - Anything greater than 3 is healthy and there is low bankruptcy potential in the short term - 2.99 - 1.80 : Gray area- company is exposed to some risk of bankruptcy; caution is advised - Less than 1.80 : Company is in financial distress and there is a high bankruptcy potential in the short term 14. Credit rating interpretation (investment vs junk bond) Given rating - what does it qualify as

15. R&D- which company is more R&D intensive Can use R&D discussion in MD&A For FLS it was in Note 1 - Significant Accounting Policies and Accounting Developments R&D / Sales...