Unit 1: Ethics

Question 1

Under the Direct Method,

What categories determine net cash inflows:

What categories determine net cash outflows:

Answer 1

Cash receipts from (net cash inflows):

Customers, Sale of trading securities, Interest earned, Dividends on equity investments, Other operating cash receipts

Cash disbursements for (net cash outflows):

Inventory, Purchase of trading security, Salaries & wages, Interest expense, Taxes, Other operating cash payments

The net of these represents the ‘net cash provided by oeprating activities’

Question 2

Beginning with Accrual Basis Net Income, list the additions to arrive at the ‘net cash provided by operating activities’:

Additions:

__________ in Accounts Receivables

__________ in Inventory

__________ in Accounts Payable

__________ Expense

Amortization of bond __________

__________ on sale of plant assets

__________ on investment in equity method investees

Answer 2

Additions:

Decrease in Accounts Receivables

Decrease in Inventory

Increase in Accounts Payable

Depreciation Expense

Amortization of bond discount

Loss on sale of plant assets

Loss on investment in equity method investees

Question 3

Beginning with Accrual Basis Net Income, list the subtractions to arrive at the ‘net cash provided by operating activities’:

Subtractions:

__________ in Accounts Receivable

__________ in Inventory

__________ in Accounts Payable

Amortization of bond __________

__________ on sale of plant assets

__________ on investment in equity method investees

Answer 3

Subtractions:

Increase in Accounts Receivable

Increase in Inventory

Decrease in Accounts Payable

Amortization of bond premium

Gain on sale of plant assets

Income on investment in equity method investees

Question 4

What is the most significant provision of SOX?

Answer 4

…Adoption of a code of ethics for senior financial officers

Question 5

List users with direct interests?

Answer 5

• Investors or potential investors
• Suppliers and creditors
• Employees
• Management

Question 6

List users with indirect interests?

Answer 6

• Financial advisors and analysts
• Stock markets or exchanges
• Regulatory authorities

Question 7

Calculate COGS vs COG Manufactured

Answer 7

COGS:

Beg Inv.

+ Net Purchases

= Good Available for Sale

• Ending Inv.

= COGS

COG Manufactured:

All Manufacturing Costs during period

+ Beg Work-in-Progress

• End Work-in-Progress

Question 8

What are the two reporting components of Discontinued Operations?

Answer 8

1. Income or loss from operations of the division from the first day of the reporting period until the date of disposal
2. Gain or loss on the disposal of the divisions

Question 9

What are extraordinary items?

How must they be shown?

Answer 9

Extraordinary items are both unusual in nature and infrequent in occurrence.

They must be shown net of tax

Question 10

What do Operating Activities include?

Answer 10

The effects of transactions involved in the determination of net income.

• Cash receipts from delivery of goods or the performance of services
• Cash payments to suppliers for inventory
• Cash receipts from interest and dividends on investments
• Cash receipts from interest on loans

Question 11

What are Investing Activities?

Answer 11

• The purchase and sale of securities of other entities
• The purchase and sale of PPE
• The granting and repayment of principal on loans made to other entities

Question 12

What do Financing Activities include?

Answer 12

The effects of transactions involving liabilities and owners’ equity.

• Issuance of equity securities
• Retirement of bonds payable
• Payment of dividends

Question 13

What are common-size financial statements?

Answer 13

They restate financial statement line items in terms of a $age of a given amount.

• Net sales for income statement
• Total assets for balance sheet

Question 14

Describe Vertical and Horizontal Analysis

Answer 14

Vertical Analysis: e.g. common-size financial statments

Horizontal Analysis: amounts for several periods are stated in percentages of a base-year amount (i.e. trend percentages)

Question 15

What is the Foreign Corrupt Practices Act of 1977?

Answer 15

• All public companies must devise and maintain a system of internal accounting control
• No domestic concern may offer or authorize corrupt payments to any foreign official/candidate/country

Question 16

Identify four major aspects of business conduct.

Answer 16

1. Conflicts of interest
2. Illegal payments, bribes, or kickbacks
3. Business gifts
4. Use of inside information