F2 (Notes, SEC Reporting, Ratios)

Question 1

Notes to FS disclosures (relevant to decision makers & integral part of FS)

Answer 1

• change in SE
• contingency
• off BS contracted obligations
• pension plan
• post BS but before FS issued
• related party
• significant est/risk
• products, customers’ geography

Question 2

Firm PC’s:

Answer 2

• legally enforceable agreements to purchase a specific amount of goods at some time in the future
• must be disclosed in FS or notes
• if price > MV and expected that loss will occur when purch is made, the loss should be recog’d at time of decline in price (conservatism)

Question 3

disclosures for depreciable assets and DE should be made in FS or notes:

Answer 3

• DE for period
• balance of major classes of depreciable assets
• AD allowances y classes/total
• methods used by major classes in computing DE

Question 4

key financial ratios are:

Answer 4

• liquidity ratio (WC, QR, CaR)
• activity ratio (AR TO, A TO, Inv TO, days sales AR & Inv TO in days, days in Inv, AP TO, etc)
• coverage ratio (DER, times int earned, Op CF/total debt, equity multiplier)
• profitability ratios (not key); return on sales, ROA, ROE, NPM
• investor ratios (EPS, PER, div payout ratio)

Question 5

liquidity ratios:

Answer 5

• WC = CA - CL
• WC ratio = CA/CL
• QR (acid) = CA-inv/CL [no PPD/inv]
• CaR (most liquid) = (CA - inv - AR)/CL

Question 6

Activity ratios:

Answer 6

• AR TO = NS/ avg AR
• AR TO days = 365/AR TO
• days sales in AR = EB AR/(NS/365)
• Inv TO = COGS/avg Inv
• Inv TO days = 365/inv TO
• days in Inv (#days to sell) = EI/(COGS/365)
• AP TO = COGS/avg AP
• days payable o/s = EB AP/(COGS/365)
• Cash conversion cycle = days in AR + days in inv + days in AP (lower the better)
• operating cycle = AR TO days + inv TO days (less is better)
• WC TO = NS/avg WC
• total A TO = NS/avg A

Question 7

Activity ratios:

Answer 7

• AR TO = NS/ avg AR
• AR TO days = 365/AR TO
• days sales in AR = EB AR/(NS/365)
• Inv TO = COGS/avg Inv
• Inv TO days = 365/inv TO
• days in Inv (#days to sell) = EI/(COGS/365)
• AP TO = COGS/avg AP
• days payable o/s = EB AP/(COGS/365)
• Cash conversion cycle = days in AR + days in inv + days in AP (lower the better)
• operating cycle = AR TO days + inv TO days (less is better)
• WC TO = NS/avg WC
• total A TO = NS/avg A

Question 8

Profitability ratios:

Answer 8

• return on sales = EBIT/NS
• ROA = NI/avg A
  (DuPont same thing; NPM * total A TO)
• ROE (ROCE) = NI/ SE
• NPM = NI/NS

Question 9

Coverage Ratios:

Answer 9

• DER = L/SE
• DAR = L/A
• times int earned (int coverage ratio) = (EBIT + int exp)/int exp
• op CF/L = op CF/L
• Equity multiplier = A/E

Question 10

Investor ratios:

Answer 10

• EPS = (NI-PD)/WACSO
• PER = price per share/ basic EPS
• div payout ratio = CD/NI

Question 11

in notes (1st/2nd), summary of significant AP’s should include:

Answer 11

methods, policies, & criteria (LIFO, FIFO, SL)

Question 12

market cap = CS o/s * mkt price:

Answer 12

Large accel > 700M
Accel > 75 < 700
small < 75

Question 13

filing deadlines for 10K & 10Q:

Answer 13

[10K]
60-75-90
(large, accel, other)

[10Q]; unaudited & reviewed
40-40-45
(large, accel, other)

Question 14

Form 8K & 3-4-5:

Answer 14

8K = major corp event reporting (acquisitions/disposals, change in sec’s, change in accountants/FS’s, and changes in corp governance/mgt.

3-4-5 = to be filed by directors, officers, or beneficial owners for more than 10% of class of ES’s of a registered company