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ACCT 447 - Exam 1
Exam 1
35
Accounting
Undergraduate 4
12/12/2009

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Term
financial analysis
Definition
__ is the process of evaluating financial and other info for decision making
Term
profitability analysis
Definition
__ is an evaluation of a company's return on investment (Margins & capital utilization)
Term
risk evaluation
Definition
__ is the evaluation of a company's ability to meet its committments
Term
6 step process of financial analysis
Definition
1. purpose of decision 2. corporate overview 3. financial analysis techniques 4. detailed accounting analysis 5. comprehensive analysis 6. decision or recommendation
Term
6 points of industry analysis
Definition
1. what is the industry? 2. what is the size? 3. what are the largest companies? 4. how does the business cycle affect these firms? 5. what is the competition? 6. what is the bargaining power of buyers/suppliers?
Term
3 types of business strategy
Definition
1. cost leadership 2. product differentiation 3. core competencies
Term
cost leadership
Definition
__ is low cost producers, economies of scale, low input prices, thin margins, high volume
Term
product differentiation
Definition
__ is a business strategy where specific attributes that customers value (quality, variety, service, delivery time) are met
Term
core competencies
Definition
__ is a business strategy where the company does what it does well, developing a niche strategy that supplies one segment of the market with exactly what it wants
Term
10k report
Definition
best source for a firm's strategy is the first item on the __
Term
7 financial analysis techniques
Definition
1. finc stmts 2. common-size anal. 3. finc ratios 4. time series anal. 5. comparative anal. 6. quarterly anal. (10Q) 7. models
Term
4 points of detailed acct anal.
Definition
1. does the acct info capture the underlying business reality? 2. eval acct events and disclosures, examining notes and MD&A 3. eval earnings mgmt potential 4. recast acct numbers and ratios when necessary
Term
2 points of comprehensive anal.
Definition
1. summarize key points 2. red flags are particularly important
Term
7 motives for practicing earnings management
Definition
1. mgmt compensation 2. job security for execs 3. create optimal lending environment 4. mitigate potential violation of debt covenant 5. influence ST stock price 6. meet analysts' forecasts 7. thwart takeovers and antitrust
Term
6 types of revenue manipulation
Definition
1. recording AR when the customer isn't committed or can't pay 2. channel stuffing 3. increasing sales by granting generous terms or selling to customers with low credit quality 4. not recording sufficient ABD (overstates AR) 5. over-aggressive allocation of unearned revenue 6. bill and hold
Term
6 types of expense manipulation
Definition
1. capitalizing costs that should have been expensed 2. technological feasibility 3. the allocation of joint costs (assigning inv costs to slow-moving products, leaving costs in inventory--an asset) 4. failing to write down inv on a timely basis 5. depreciation and amortization 6. understating/ignoring warranty liability
Term
related party transaction
Definition
__ is when a firm engages in sham transaction (selling to a related party and buying back next year)
Term
off-BS entities
Definition
__ create a separate legal entity not required to be consolidated and exercise influence by appointing related parties to mgmt or by being a key financier, customer, or supplier. Used to hide debt
Term
off-BS financing
Definition
__ is used to finance the acquisition of resources w/o showing associated assets or liabilities on BS. operating leases, take-or-pay contracts, sale of receivables
Term
what is the major concern when making credit decisions?
Definition
pay principle and interest when due
Term
interest rate depends on __
Definition
perceived riskiness of the firm
Term
company assets such as __ may be required for a loan
Definition
AR, inv, PPE
Term
debt covenants
Definition
__ reduce potential conflict between lenders and borrowers. protects lenders against mgmt action that might reduce the likelihood of debt repayment.
Term
affirmative covenants (4 examples)
Definition
__ are actions borrowers MUST take. 1. use loan for agreed upon purpose 2. have finc stmts audited 3. maintain insurance 4. comply with the law
Term
negative covenants (5 examples)
Definition
_ are actions borrowers CAN'T take. 1. take on more debt. limits on: 2. capital expenditures 3. loans to affiliates 4. dividends 5. share repurchases 6. mergers
Term
the __ oversees the securities market
Definition
SEC
Term
4 required documents for selling securities
Definition
1. 10k (annual) 2. 10q (quarterly) 3. proxy statement (DEF 14a) 4. form 8k (events)
Term
contents of 10k/10q
Definition
MD&A: 1. busn strategy 2. brief history 3. description of corp 4. in depth analysis of ops & finc position 5. analysis of risk mgmt 6. discussion of off BS transactions. finc stmts, notes
Term
a proxy statement is __ and contains __
Definition
a statement to shareholders before annual meeting with issues to be voted upon. extensive info on board of directors, committee, important corp governance issues. info on exec and board compensation (including stock options). info on audit: including vote on external auditor and non-audit fees
Term
an 8k is __. 5 events that trigger an 8k
Definition
a current report filed within 15 days following events. 1. change in mgmt control 2. acquisition/disposition of major assets 3. bankruptcy 4. auditor change 5. director resignation
Term
what is sox? name 6 requirements
Definition
It expanded corporate governance requirements, stressing independent directors and mandatory audit and compensation committees. 1. requires SEC oversight and new rules from the stock exchanges 2. requires mgmt to report on internal control (separation of duties) 3. requires mgmt to take personal responsibility for finc stmts 4. requires audit committee to be independent 5. requires auditor independence by limiting non-audit services 6. established PCAOB to regulate auditors and establish standards
Term
2 benefits of disclosing finc info
Definition
1. investors are uncertain about the quality of a financial instrument 2. it is costly for a firm to be mistakenly perceived as offering a low quality instrument
Term
4 disclosure costs
Definition
1. info collection, processing, and communication costs 2. competitive disadvantage costs (strategy, innovations, product lines, audit costs, geographic locals) 3. litigation costs (for financial mis-representation) 4. political costs (profit tax, antitrust litigation, protective quotas)
Term
earnings magic
Definition
__ includes all the factors that limit understanding financial reality by earnings manipulation
Term
earnings manipulation
Definition
__ are when managers have sel interest in earnings management, accounting choice is an important component
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