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WALL STREET PREP: ACCOUNTING CRASH COURSE
ACTUAL EXAM QUESTIONS AND CORRECT ANSWERS GRADED A+ 2024
“What is Accounting? - CORRECT ANSWER Accounting is the language of business; it is a
standard set of rules for measuring a company's financial performance. Assessing a company's financial performance is important for: The firm's officers (managers and employees) Investors Lenders General public Standard financial statements serve as a "yardstick" of communicating financial performance to the general public."
"Why is Accounting Important? - CORRECT ANSWER Enables managers to make corporate
decisions Enables the general public to make investment decisions"
"Who Uses Accounting? - CORRECT ANSWER Used by a variety of organizations - from the
federal government to non-profit organizations to small businesses to corporations We will discuss accounting rules as they pertain to publicly-traded companies"
"Accounting Regulations - CORRECT ANSWER Accounting attempts to standardize financial
information and follows rules and regulations These rules are called Generally Accepted Accounting Principles (GAAP) In the US, the Securities and Exchange Commision (SEC) authorizes the Financial Accounting Standards Board (FASB) to determine accounting rules GAAP comes from the Statements of Financial Accounting Standards (SFAS) issued by the FASB"
"Four Underlying Principles in Accounting - CORRECT ANSWER (1) Historical Cost
(2) Accrual Accounting: Revenue Recognition (3) Accrual Accounting: Matching Principle (4) Full Disclosure"
"Constraint 1: Estimates & Judgments - CORRECT ANSWER Certain measurements cannot be
performed completely accurately, and must therefore utilize conservative estimates and judgments"
"Constraint 2: Materiality - CORRECT ANSWER Inclusion and disclosure of financial
transactions in financial statements hinge on their size and effect on the company performing them Note: Materiality varies across different entities"
"Constraint 3: Consistency - CORRECT ANSWER Each company has to prepare financial
statements using measurement techniques and assumptions which are consistent from one period to another"
"Constraint 4: Conservatism - CORRECT ANSWER Financial statements should be prepared
with a downward measurement bias Assets and revenues should not be overstated, while liabilities and expenses should not be understated"
"Four Underlying Constraints in Accounting - CORRECT ANSWER (1) Estimates &
judgments (2) Materiality (3) Consistency (4) Conservatism" "T/F: GAAP requires that firms show recorded values for acquired intangible assets such as
patents and trademarks on their financial statements - CORRECT ANSWER True!
GAAP requires that firms only show measurable activities, such as the value of acquired intangible assets Assets such as employee, customer loyalty, and internally-developed trademarks are not shown on financial statements"
"CVS Revenue Exercise - CORRECT ANSWER Note: How much you collect in cash is
irrelevant in revenue; it is how much you EARNED during the period"
"Revenue Recognition - CORRECT ANSWER Accrual accounting dictates that revenue must
be recorded only when it is earned and measurable In other words, until an order is shipped to a customer and collection from that customer is reasonably assured"
"Revenue Recognition: Multiple Deliverables - CORRECT ANSWER For sales of bundled
products, companies should assign individual values to each of the bundled components This is especially relevant in the software industry (see picture)"
"Revenue Recognition: Long-Term Projects - CORRECT ANSWER Companies have some
flexibility with long-term project revenue recognition (1) Percentage of Completion Method: Revenues are recognized on the basis of the percentage of total work completed during the accounting period (2) Completed Contract Method: Rarely used in the US; allows revenue recognition only once the entire project has been completed"
Note: Valuing stock based compensation is very difficult"
"Where is SBC on the Income Statement? - CORRECT ANSWER Just like depreciation, you
won't see a line item on the I/S specifically identifying SBC expense It is included within the operating expenses in which the employee is classified However, like depreciation, you will almost always find SBC expense identified separately on the cash flow statement"
"Other Operating Expenses/Income - CORRECT ANSWER Companies will sometimes
recognize expenses (or income) on the I/S that, while still related to operating activities, are a little less typical Includes: Gains/losses on sale of fixed assets, gains/losses from a legal settlement, restructuring expenses and severance costs, losses due to inventory spoilage (inventory write-down) On the I/S: They will often be embedded within larger operating expense categories like SG&A, or in a separate line item called "Other operating expenses" Companies sometimes provide a separate disclosure in their press releases where they have more freedom to detail these items (non-GAAP reconciliation) When the expense (or income) is large, it may be identified as its own separate line item"
"Non Operating Income and Expenses - CORRECT ANSWER Everything below operating
profit is not directly related to the operations of the business"
"Above vs. Below the Line - CORRECT ANSWER Above the Line: Everything above Operating
Income on the I/S that's tied to the core operations of a business Below the Line: Everything below Operating Income"
"Interest Expense - CORRECT ANSWER Payments the company makes for its outstanding
debt Corporations make regular interest payments on debt owed to banks or other lenders"
"Interest Income - CORRECT ANSWER A company's income from its cash holdings and
investments (stocks, bonds, and savings accounts)"
"Net Interest Expense - CORRECT ANSWER Sometimes, interest income and expense are
netted against one another when presented on the I/S"
"Other Non-Operating Income / Expenses - CORRECT ANSWER INCOME
Companies may generate income from non-operating activities: Increases in value and gains on sale on certain financial investments EXPENSES
Represents expenses that are not tied to the core operations of the business or are unusual: Decreases in value and losses on sale on certain investments and debt, currency exchange losses Non-Operating Income and Expenses are often netted together on the I/S"
"Tax Expense - CORRECT ANSWER Under US GAAP and IFRS, companies report tax expense
as a separate line item usually right below a line item called 'Pretax Income' or 'Income before provision for income taxes' Tax expense doesn't equal the actual cash taxes paid! Because of the ability of companies to defer certain taxes, the tax expense recognized on the I/S does not equal actual cash taxes they have to pay for the same period"
"Net Income - CORRECT ANSWER The final measure of profitability on the on the I/S
Represents income after all expenses have been paid out AKA Net earnings, net profit, bottom line"
"Shares Outstanding - CORRECT ANSWER Represent the number of shares of common stock
outstanding One share of common stock represents one unit of ownership of a public company Shareholders are generally entitled to vote on the selection of directors and other matters and to receive dividends in proportion to the number of shares they own Shares Outstanding = Shares Issued - Treasury Stock"
"What can companies do with profits? - CORRECT ANSWER Distribute dividends
Reinvest in the business through new purchases, acquisition, etc. Pay down existing debt obligations or other liabilities Sit on it (grow a pile of cash)"
"Dividend Presentation on the I/S - CORRECT ANSWER Common dividends are usually
presented below net income and EPS on an income statement"
"Earnings Before Interest and Taxes (EBIT) - CORRECT ANSWER Analysts often use
operating income or EBIT to compare the performances of businesses"
"Earnings Before Interest and Taxes, Depreciation, & Amortization (EBITDA) - CORRECT
ANSWER An even more popular metric than EBIT for analyzing companies
Why? (1) D&A is a huge noncash expense for fixed asset and intangible asset intensive businesses, and stripping out the biggest noncash expense provides a more accurate picture of "real" profits during the year
Sales that a company has made on credit Ex. Insurance companies resulting from pharmacy sales; banks for customer credit card transfers that take in excess of seven days to process Linked to revenues on the I/S"
"Inventories - CORRECT ANSWER Any unfinished or finished goods that are waiting to be
sold and the direct costs associated with the production fo these goods"
"Assets Exercise - CORRECT ANSWER Note: Internally generated intangible assets are NOT
considered assets on the B/S"
"Liabilities & Equity - CORRECT ANSWER Represent the company's sources of funds (how it
pays for assets) Liabilities: What the company owes to others (1) They must be measurable (2) Their occurrence is probable Equity: Sources of funds through... (1) Equity investment (2) Retained earnings (what the company has earned through operations since its inception)"
"Accounts Payable (A/P) - CORRECT ANSWER A company's obligations to suppliers for
services and products already purchased for them, but which have not been paid (unpaid bills for services obtained on credit from them) Current liability Note: No cash is used in the purchase of the inventory"
"Accrued Expenses - CORRECT ANSWER Expenses like employee compensation that the
company has incurred, but for which it has not yet paid Ex. Year-end bonus, earned wages owed to employees, insurance, rents, taxes, dividends, litigation costs, etc. Note: A company must recognize expenses on the I/S when the resources provided by those expenses were provided, not when the expense is due"
"Short Term vs. Long Term Debt - CORRECT ANSWER Short Term Due within 12 months
Long Term Due more than 1 year"
"Preferred Stock - CORRECT ANSWER Stock that takes priority over common stock and has
special rights (priority over dividends and claims on assets in bankruptcy) Often structured to include the possibility of conversion into common stock at a pre-set exchange rate, enabling investors to benefit from a set dividend, but participate in the upside if the company's common equity value increases"
"Retained Earnings - CORRECT ANSWER Total company earnings / losses since its
inceptions less all dividends Remember: The I/S is connected to the B/S through RE All income on the I/S increases retained earnings on the balance sheet (credits) All expenses on the I/S decrease retained earnings (debits) In addition, all common and preferred dividends decrease retained earnings (debits) Conceptually, RE represents the cumulative earnings that have been "retained" by the business, after taking into account all the dividend payments ever made"
"Liabilities Exercise - CORRECT ANSWER Remember: The occurrence has to be probable and
the impact must be measurable Dividends are not liabilities"
"The Accounting Equation - CORRECT ANSWER Every transaction can be viewed as having
two sides -- the source of funds, and the way the funds were used (use of funds) It is because of this equivalence sources and uses of funds that assets will always equal liabilities and equity by definition"
"Double Entry Accounting - CORRECT ANSWER Records the two sides of every economic
event - 1) The funding source; 2) How the funds are used Every transaction is recorded through the use of a "credit" (source of funds) and an offsetting "debit" (use of funds) such that total debits always equal total credits in value Double-entry accounting is depicted through the use of a "T account" to track each source and use of funds in a transaction Debit: Increases in assets, decreases in liabilities & equity - left side of T account Credit: Increases in liabilities & equity, decreases in assets - right side of T account"
"Why is Double-Entry Accounting Important? - CORRECT ANSWER It facilitates
understanding of the relationship between assets (resources) and liabilities/shareholders' equity (funding) of a company The I/S, B/S, and CFS are connected; the relationship among these three statements and their impact on one another can be initially "illustrated" through debits and credits"
"Income Statement and Balance Sheet Connections - CORRECT ANSWER The I/S is linked to
the B/S via retained earnings in shareholders' equity All income on the I/S (revenue, interest income, etc.) increases retained earnings on the balance sheet (credits) All expenses on the I/S (COGS, SG&A, tax, etc.) decrease retained earnings (debits)"
"Income Statement Impact on the B/S: Revenue - CORRECT ANSWER If paid collected
entirely in cash
"Current vs. Non-Current B/S Exercise - CORRECT ANSWER "
"Are interest payments on a loan a liability? - CORRECT ANSWER NO! Interest expense is
recognized on the I/S with a corresponding reduction to cash. Only the principal of the loan is recognized as a liability."
"How would you characterize a long-term bank loan due this year? - CORRECT ANSWER A
current liability Long term debt migrates from a long term liability to a current liability on the B/S once it becomes due within 12 months"
"Cash and equivalents - CORRECT ANSWER Cash equivalents are extremely liquid assets (ex.
US treasury bills) You'll also see marketable securities included in this line item or broken out separately"
"Prepaid Expenses - CORRECT ANSWER When a company prepays for things like utilities,
insurance and rents, cash is reduced but the expense is not yet recognized on the I/S under the accrual concept Instead, they are recognized on the B/S as assets to reflect that the company now has the right to the future services"
"Inventory - CORRECT ANSWER Represent goods waiting to be sold and direct and
sometimes indirect costs associated with the production or procurement of these goods Merchandiser The products procured for resale Manufacturer Includes the costs of producing the finished inventory: raw materials, work-in- process (direct labor and factory overhead) Inventory cycles out of the B/S and into I/S as COGS Before inventory get expensed as COGS and are matched to the revenues they help generate (matching principle), they are part of the company's inventories on the B/S"
"Inventory Exercise - CORRECT ANSWER "
"Inventory Costing (LIFO vs. FIFO vs. Average Cost) - CORRECT ANSWER First In, First Out
(FIFO): Cost of the inventory first purchased (first in) is the cost assigned to the first inventory to be sold (COGS - first out); remaining inventory reflect the latest costs Last In, First Out (LIFO): The items purchased last (last in) are the first to be sold (COGS - first out). Therefore, the cost of inventory most recently acquired (ending inventory - last in) is assigned to COGS (first out); ending inventory reflects cost of the first purchased inventories Average Cost: COGS and ending inventory are calculated as = COGS / Total number of goods"
"Inventory Costing Exercise - CORRECT ANSWER "
"Why do companies choose LIFO? - CORRECT ANSWER The tax benefit of LIFO is what
makes it preferable for many US companies over FIFO accounting in periods of rising inventory prices Why? LIFO leads to lower net income, which leads to lower taxes"
"LIFO Reserve - CORRECT ANSWER When companies use the LIFO method, their footnotes
must disclose what the value of their inventories would have been under the FIFO method; this difference is called the LIFO Reserve The LIFO reserve allows comparison of inventories and COGS across both methods: LIFO Inventory + LIFO Reserve = FIFO Inventory FIFO COGS + LIFO Reserve = LIFO COGS In Practice: When comparing a LIFO company against a FIFO company, the LIFO reserve must be subtracted from the LIFO company's COGS to arrive at apples-to-apples profits comparisons"
"Writing Down Inventories - CORRECT ANSWER The B/S shows assets like inventories at
historical (acquisition) cost -- companies can't mark them up to market value under GAAP Can they be marked down if inventory is destroyed, deteriorates or becomes obsolete? Yes! Under US GAAP, the lower of cost-or-market (LCM) rule dictates that if the market value of inventory falls below historical cost, they must be written down to market value The loss must be recognized immediately on the Income Statement in COGS or 'Other operating (or non operating) expenses' or a separate line item On the Balance Sheet, there is a decrease in retained earnings (Equity) and inventory (Asset)"
"Property, Plant & Equipment - CORRECT ANSWER Land, buildings, and machinery used in
the manufacture of the company's services and products plus all costs (transportation, installation, other) necessary to prepare those fixed assets for their service PP&E cycles out of the B/S and into the I/S as depreciation, either in COGS, SG&A, or elsewhere PP&E is reported net of accumulated depreciation on the balance sheet, such that: Net PP&E = Gross PP&E - accumulated depreciation Where Gross PP&E is the historical cost of all PP&E"
"Accumulated Depreciation - CORRECT ANSWER Netted away from gross PP&E to arrive at
net PP&E on the balance sheet Accumulated depreciation is a contra account, which is an offsetting account to an asset (contra accounts also exist for liabilities and shareholders' equity) Increases in a contra account reduce the associated asset account"
"Goodwill Balance During the Year - CORRECT ANSWER "
"Liabilities - CORRECT ANSWER The company's obligations to others that will be met
through the use of cash, goods, or services Qualifications: (1) Measurable (2) Probable occurrence (3) The transactions from which these obligations arise have taken place Categories: (1) Current Liabilities: Due within 1 year - reported in order of maturity, by amount, or in the event of liquidation (2) Long-term Liabilities: Not due within a year"
"Deferred (Unearned) Revenue - CORRECT ANSWER Revenue received for services not yet
provided by the company A sizeable liability for software companies and companies that sell long-term memberships A current liability if the revenus is expected to be recognized within the year; otherwise, a long- term liability"
"Types of Current Liabilities - CORRECT ANSWER Short Term Debt: Owed by the company
that are due within 1 year Current Portion of Long-Term Debt: Portion of long-term debt which is due within 1 year"
"Long Term Debt - CORRECT ANSWER A long-term liability that is often a sizeable liability
Note: Interest expense is a reduction to retained earnings and does not affect debt balance"
"Leases - CORRECT ANSWER Many companies make lease payments for their equipment,
office space, and retail locations Lease payments are defined contractually upfront between the lessee (the company making lease payments) and the lessor (the company collecting lease payments) Under IFRS, virtually all leases are accounted for as finance leases Under US GAAP, leases can be accounted for as operating leases or finance leases (see image) Basically, if the lease is basically a transfer of ownership, it is a finance lease"
"Finance Leases - CORRECT ANSWER An accounting approach that recognizes the lease as
debt and the underlying asset as PP&E on the lessee's balance sheet Lease as Debt: Like debt, leases are long-term obligations to make payments to another party. Unlike debt, lease payments don't usually include explicit interest payments; Instead, the interest fees are implied and baked into the total lease expense Initial Balance Sheet Impact: Finance leases initially are recognized as a liability on the B/S (just like debt) with the corresponding asset as PP&E
Note: Unlike debt, companies have to estimate the initial liability as the present value of all future lease payments, using a discount rate assumption"
"Finance Leases: Over the Life of the Lease - CORRECT ANSWER Conceptually, the asset is
depreciated (or amortized) over its useful life (or lease term, if shorter), while the lease liability accrues interest during the year and is then reduced by lease payments (like principal payments with debt) On the I/S, both depreciation expense and an implied interest expense reduces net income Depreciation/Amortization Expense: The asset initially recognized is depreciated via straight- line depreciation over the term of the lease Interest Expense: The discount rate x The lease liability balance Main Takeaway: The B/S initially treats the finance lease as a debt-like liability and the underlying asset as an owned asset Over the life of the lease, the I/S impact does not capture the rent but wants us to break up the lease payments into two components: interest and depreciation fees Note: Compared to the lease expense, the overall depreciation + interest expense will be higher early in the lease and lower later in the lease because the interest expense is higher when the lease liability is high"
"Operating Leases - CORRECT ANSWER Applies to leases where the lessee doesn't have
economic ownership of the lease Initial B/S Impact: Same as finance leases; initially are recognized as a liability on the B/S (just like debt) with the corresponding asset as PP&E (Right of Use Assets) I/S Impact Over Lease Term: I/S is reduced by the rent ("lease") expense Straight-line Lease: If lease payments grow each year, the I/S will recognize an annual straight line expense - creates a disconnect between the cash outlay and the accrual-based expense recognized"
"Operating Leases - Lease Liability - CORRECT ANSWER Lease liability is treated identically
under operating and finance lease accounting (interest accruing and being reduced by lease payments) The lease asset is reduced by depreciation expense but the calculation is different Depreciation: The rent expense, net of the interest expense Note: The lease liability and lease asset may not be exactly equal but will be very similar"
"Equity - CORRECT ANSWER A major source of funds via:
(1) Preferred stock issuance (2) Equity investment (net of share repurchases "treasury stock") (3) Retained earnings (what the company has earned through operations since its inception)"
"When inventories are overstated, what is the effect on net income? - CORRECT ANSWER
Current assets are overstated COGS are understated Net income is overstated"
"Is land held for investment part of PP&E? - CORRECT ANSWER No, it is reported on the B/S
as an investment"
"The Cash Flow Statement (CFS) - CORRECT ANSWER A required financial statement that
provides insight that the I/S cannot - namely, exactly how much cash a company generates and from what activities Reconciles net income to a company's actual change in cash balance over a period in time (quarter or year) Thus, the CFS and I/S must both be used and fully understood by analysts"
"Structure of the Cash Flow Statement - CORRECT ANSWER Companies have two options for
reporting cash flows: (1) Direct Method (2) Indirect Method - Virtually all choose this one Both approaches requires cash flows to be classified into three components: (1) Cash from Operations (CFO): Uses net income as a starting point and converts accrual-based net income into cash flow from operations via a series of adjustments (i.e., non-cash and accrual) (2) Cash from Investing Activities (CFI): Capital expenditures / asset sales and purchases (3) Cash from Financing Activities (CFF): New borrowing / pay-down of debt / new issuance of stock / share repurchases; Issuance of dividends"
"Cash from Operations - CORRECT ANSWER How much cash went into the company's
pocket as a result of operations? Ignores non-cash income (credit sales, write-ups) and expenses (D&A, credit purchases) Start at net income and back all the non-cash expenses and income out of net income to get at "cash income" or "cash from operations""
"CFO: Depreciation - CORRECT ANSWER Often the biggest adjustment to get from net
income to CFO is depreciation expense, because it is usually the largest noncash expense included within net income"
"CFO: Working Capital - CORRECT ANSWER The other major adjustment from net income to
CFO that is for a specific grouping of B/S line items Current assets like A/R, inventories, prepaid expenses are call "working capital" assets Current liabilities like A/P, accrued expenses, deferred revenue are called "working capital" liabilities
Both represent assets and liabilities that are tied up in the ordinary course of operations Note: Increases in assets represent a usage of funds (cash outflow); increases in liabilities represent a source of funds (cash inflow)"
"CFO: Increases in assets & liabilities - CORRECT ANSWER Increases in assets represent a
usage of funds (cash outflow) Increases in liabilities represent a source of funds (cash inflow)"
"CFO: Other Items - CORRECT ANSWER Asset write downs / impairments: Since write
downs or asset impairments are recognized as an expense on the I/S, they represent a noncash expense that must be added back on the CFS within CFO"
"Getting to Cash From Operations - CORRECT ANSWER Increases in A/R, inventory, prepaid
expenses, other current assets should be subtracted from net income to get to CFO Increases in A/P, accrued expenses, other current liabilities should be added to net income to get to CFO"
"Cash from Operations Exercise - CORRECT ANSWER "
"Typical Line Items in the CFO - CORRECT ANSWER "
"Cash from Investing Activities (CFI) - CORRECT ANSWER Tracks additions and reductions
to fixed assets and investments during the year (corresponding primarily to long-term asset side of the balance sheet) Most Common Inflows/Outflows: Capital expenditures (outflow) Purchases of intangible assets (outflow) Asset sales (inflow) Purchases and sales of debt & equity securities (outflow/inflow)"
"Cash from Financing Activities (CFF) - CORRECT ANSWER Tracks changes in the
company's sources of debt and equity financing (corresponding primarily to the liabilities and shareholders' equity side of the B/S) Most Common Inflows/Outflows: Issuance / repayment of debt (inflow / outflow) Common stock issued / repurchased (inflow / outflow) Payment of common & preferred dividends (outflow)"
"The CFS is a Magnifying Glass - CORRECT ANSWER The CFS is a magnifying glass on the
cash line of the B/S CFS identifies the year-over-year change of every B/S line item that affects cash
Includes cash, A/R, inventories, and A/P Conceptually: The amount of days that it takes between when a company initially puts up cash to get (or make) stuff and getting the cash back out after you sold the stuff"
"Net Operating Cycle (Cash Conversion Cycle) - CORRECT ANSWER A related concept to the
operating cycle that factors in credit purchases Operating cycle - payables payment period"
"Formulas Required to Calculate the Operating Cycle - CORRECT ANSWER "
"Managing Working Capital - CORRECT ANSWER Companies with significant working
capital considerations must carefully and actively manage capital to avoid inefficiencies and possible liquidity problems Perfect Storm: (1) Retailer bought a lot of inventory on credit with short repayment terms (2) Economy is slow, customers aren't paying as fast as was expected (3) Demand for the retailer's product offerings change and some inventory flies off the shelves while other inventory isn't selling"
"Working Capital Exercise - CORRECT ANSWER "
"Financial Statement Ratio Analysis - CORRECT ANSWER Financial statement analysis
relies on looking at relationships (ratios) between 2 or more financial statement accounts and seeing how those ratios change over time, and how they compare across companies or industries Categories of Ratios: (1) Liquidity ratios (2) Profitability ratios (3) Activity ratios (4) Solvency ratios (coverage)"
"Activity Ratios - CORRECT ANSWER Measure how efficient a company is at using its assets"
"Inventory Turnover - CORRECT ANSWER If you need $50 in inventory jto support $1,000 in
COGS that means you carry very little inventory; can be advantageous because you do not need large amounts of cash for inventory requirements until a sale is actually made Had you needed large inventory purchases prior to the sale, you would have had to tap other financing sources like debt"
"Receivable Turnover & DSO - CORRECT ANSWER Identical conceptually to inventory
turnover If you collect very fast from customers, you immediately get cash
If you wait a long time for customers to pay, cash that you need for other activities would have to come from somewhere else (like debt) Receivable turnover = Revenue / Average accounts receivable Another way to express the relationship between A/R and sales is days sales outstanding (DSO) = (AR/Credit sales) x days in period Note: You want DSO to be low"
"AP Turnover and Payables Payment Period - CORRECT ANSWER Measures how quickly a
company pays its vendors Generally, the longer credit terms provide a company with more flexibility If the average DSO is greater than the average PPP, cash from customers takes longer to collect than the term your vendors have provided you - implies that you cannot rely on receivables alone to fund your short term credit terms so you'll need to access other capital sources"
"Activity Ratios Exercise - CORRECT ANSWER Exercise 3 = 46 days
Note: DSO should be low; Inventory turnover should be high; PPP should be high"
"Liquidity Ratios - CORRECT ANSWER Gauge the ability of a company to cover short term
financing needs Rough Rule of Thumb: A current ratio > 1 is good; it implies that there are more liquid assets than short term liabilities, reflecting a healthier level of liquidity The Flip Side: Companies with very strong working capital management can operate effectively with lower liquidity ratios, enabling them to fund activities more efficiently"
"Profitability Ratios - CORRECT ANSWER "
"Operating Margin - CORRECT ANSWER Like GPM but captures operating (non-direct)
expenses like SG&A Operating profit / Revenue Higher margin = better"
"Net Profit Margin - CORRECT ANSWER Like GPM but captures all non-operating
income/expenses Net income / Revenue Higher margin = better"
"Asset Turnover - CORRECT ANSWER Revenue / Average assets
A business with $500 in assets and $1,000 in revenue has a 2x asset turnover - could be far more capital intensive than a business that achieves the same sales with only $100 in assets Alternatively, it could just have a lot more cash"
