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Transcript of CBF Exam Review - Webinars, Webcasts, LMS, eLearning ... Review/CBF ExamRev_FinStat · 2 CBF Exam...

  • 11

    CBF Exam ReviewCBF Exam Review

    Financial StatementsFinancial Statements

    Part 1Part 1

    Tom Shimko, CCETom Shimko, CCE

  • 22

    CBF ExamCBF Exam

    1. Tests consists of 140 questions1. Tests consists of 140 questions

    -- 101 multiple choice questions101 multiple choice questions

    -- 39 true/false questions39 true/false questions

    2.2. Subject matter coveredSubject matter covered-- Business Law (law of contracts and Business Law (law of contracts and

    negotiable instruments)negotiable instruments)

    -- Credit LawCredit Law

    -- Financial Statements : Interpretation Financial Statements : Interpretation and Credit Risk Assessment and Credit Risk Assessment

    3. Answer 70% of the test correctly and you3. Answer 70% of the test correctly and youre re a CBFa CBF

  • 33

    Confucius say:Confucius say:

    Financial statements never lie, but liars Financial statements never lie, but liars make up financial statements.make up financial statements.

  • 44

    Generally Accepted Accounting Generally Accepted Accounting

    Principles (GAAP)Principles (GAAP)

    FASB: Rule making bodyFASB: Rule making body

    SEC : Ultimate control to regulateSEC : Ultimate control to regulate

    Rules can differ by industry to some Rules can differ by industry to some extentextent

    Rules evolve over timeRules evolve over time

    Rules are flexibleRules are flexible

    GAAP versus GAP GAAP versus GAP Games Accountants Games Accountants PlayPlay

  • 55

    Traditional Assumptions of the Traditional Assumptions of the

    Accounting ModelAccounting Model

    Business entityBusiness entity

    Going concernGoing concern

    Time periodTime period

    Monetary costMonetary cost

    ConservatismConservatism

    RealizationRealization

    MatchingMatching

    ConsistencyConsistency

    Full disclosureFull disclosure

    MaterialityMateriality

    Industry practicesIndustry practices

    Transaction approachTransaction approach

    Cash basisCash basis

    Accrual basisAccrual basis

  • 66

    Realization PrincipleRealization Principle

    Concept that generally recognizes revenue Concept that generally recognizes revenue when the earning process is virtually when the earning process is virtually

    complete and the exchange of value can complete and the exchange of value can

    be objectively determined.be objectively determined.

  • 77

    Materiality ConceptMateriality Concept

    The concept that exempts immaterial The concept that exempts immaterial items from the concepts and principles items from the concepts and principles

    that bind the accountant and allows these that bind the accountant and allows these

    items to be handled in the most items to be handled in the most

    economical and expedient manner.economical and expedient manner.

    Materiality varies by the size of the Materiality varies by the size of the company.company.

  • 88

    AuditorAuditors Reports Report

    Management is responsible for preparation Management is responsible for preparation of the financial statementsof the financial statements

    Auditors (CPAs) provided an independent Auditors (CPAs) provided an independent opinion of the financial statementsopinion of the financial statements

    CPAs test for the fairness of the financial CPAs test for the fairness of the financial statementsstatements

  • 99

    Types of Audit OpinionsTypes of Audit Opinions

    Unqualified Unqualified

    QualifiedQualified

    AdverseAdverse

    Disclaimer of opinionDisclaimer of opinion

  • 1010

    Accrual Basis of AccountingAccrual Basis of Accounting

    Revenue is recognized when realized and Revenue is recognized when realized and expenses are recognized when incurred.expenses are recognized when incurred.

    Realization and matching concepts.Realization and matching concepts.

  • 1111

    The Financial StatementsThe Financial StatementsBalance SheetBalance Sheet

    * * Shows the financial position at a point in Shows the financial position at a point in time time -- Stock of resourcesStock of resources

    Income StatementIncome Statement

    * Profit or loss for the accounting period* Profit or loss for the accounting period

    * Flow of resources* Flow of resources

    Statement of Retained EarningsStatement of Retained Earnings

    *Reconciles the change in retained earnings*Reconciles the change in retained earnings

    *Captures income statement in the balance *Captures income statement in the balance sheetsheet

    Statement of Cash FlowsStatement of Cash Flows

    *Separates cash flows into operating *Separates cash flows into operating activities, investing activities and financing activities, investing activities and financing activities *sources and uses of fundsactivities *sources and uses of funds

  • 1212

    The Balance SheetThe Balance Sheet

    Accounting EquationAccounting Equation

    *Assets=Liabilities+Stockholder*Assets=Liabilities+Stockholders Equitys Equity

    Assets Assets What the firm ownsWhat the firm owns

    LiabilitiesLiabilities--What the firm owes to creditorsWhat the firm owes to creditors

    Equity Equity What the firm owes to internalWhat the firm owes to internal

    owners (shareholders)owners (shareholders)

  • 1313

    Balance SheetBalance SheetAssets:Assets:

    CurrentCurrent Assets that turnover quicklyAssets that turnover quickly

    FixedFixed LongLong--term investmentsterm investments

    OtherOther Usually intangiblesUsually intangibles

    Liabilities:Liabilities:

    CurrentCurrent Debt due within one yearDebt due within one year

    LongLong--termterm Debt due beyond one yearDebt due beyond one year

    Equity:Equity:

    Common StockCommon Stock Par value of outstanding stockPar value of outstanding stock

    PaidPaid--in capitalin capital Amount over par valueAmount over par value

    Retained earningsRetained earnings Accumulated profits less Accumulated profits less dividendsdividends

  • 1414

    CommonCommon--Size Financial Size Financial

    StatementsStatements

    A form of vertical ratio analysis that allows for a A form of vertical ratio analysis that allows for a comparison of firms with different levels of sales comparison of firms with different levels of sales

    or total assets by introducing a common or total assets by introducing a common

    denominator.denominator.

    On the balance sheet, the common denominator On the balance sheet, the common denominator is total assets or total liabilities and equity.is total assets or total liabilities and equity.

    On the income statement, the common On the income statement, the common denominator is sales.denominator is sales.

  • 1515

    ConsolidationConsolidation

    Balance sheet represents a consolidation of Balance sheet represents a consolidation of parent and subsidiariesparent and subsidiaries

    *Parent owns 50% or more of each sub*Parent owns 50% or more of each sub

    *Less than 100% ownership results in a minority *Less than 100% ownership results in a minority interestinterest

    -- Shown as a liability on the balance sheetShown as a liability on the balance sheet

    *Subsidiaries are separate legal entities*Subsidiaries are separate legal entities

    -- Subs consolidated since parent controlsSubs consolidated since parent controls

    *Non*Non--consolidated subsidiaries are shown consolidated subsidiaries are shown as investments.as investments.

  • 1616

    Current AssetsCurrent Assets

    Current assets include:Current assets include:*Cash , marketable securities, receivables, *Cash , marketable securities, receivables, inventory, prepaid expenses (noninventory, prepaid expenses (non--cash source)cash source)

    *Assets expected to be converted into cash *Assets expected to be converted into cash within 1 year or an operating cyclewithin 1 year or an operating cycle

  • 1717

    Operating CycleOperating Cycle

    Definition: Time between the acquisition of Definition: Time between the acquisition of inputs to make a product and the realization of inputs to make a product and the realization of

    cash from selling a finished product.cash from selling a finished product.

    * Measured in days* Measured in days

    -- Days outstanding in inventoriesDays outstanding in inventories

    -- Days outstanding in receivablesDays outstanding in receivables

    Conclusion: The shorter the operating cycle, the Conclusion: The shorter the operating cycle, the

    better.better.

  • 1818

    Days Sales OutstandingDays Sales Outstanding

    Accounts Rec.Accounts Rec. X 360 days = DSOX 360 days = DSO

    Net SalesNet Sales

    Inventory Carrying PeriodInventory Carrying Period

    Average InventoryAverage Inventory X 360 days = ICPX 360 days = ICP

    Cost of Goods SoldCost of Goods Sold

    DSO + ICP = Operating CycleDSO + ICP = Operating Cycle

  • 1919

    InventoriesInventories

    Inventory investment consists of: raw materials, Inventory investment consists of: raw materials, WIP and finished goodsWIP and finished goods

    Balance sheet, income statement and cash flow Balance sheet, income statement and cash flow statement affected by inventory accountingstatement affected by inventory accounting

    * FIFO more correctly states the balance sheet* FIFO more correctly states the balance sheet

    * LIFO more correctly states the income * LIFO more correctly states the income

    statementstatement

    * Average is between FIFO and LIFO*