Adventis Financial Modeling Certification (FMC) Level 1 Exam Review (Latest 2023/ 2024 Update) Questions and Verified Answers| 100% Correct
Adventis Financial Modeling Certification
(FMC) Level 1 Exam Review (Latest 2023/
2024 Update) Questions and Verified
Answers| 100% Correct
Q: revenue (sales)
Answer:
amount charged for the delivery of goods or services
Q: cost of sales (cogs)
Answer:
- direct cost of producing revenue
- Ex: raw materials, direct wages, etc.
Q: gross profit
Answer: - revenue – cogs
- indicates how efficiently labor and materials are used in the production process
Q: operating expenses
Answer: - all other expenses required to run a business
- Ex: management salaries, marketing, travel, etc.
Q: operating income (EBIT)
Answer:
- revenue – cogs – operating expenses
- indicates a company’s earning power from ongoing operations
Q: non-operating expenses
Answer: - expenses not related to regular business of the company
- Ex: interest expense, restructuring expense, etc.
Q: corporate taxes
Answer:
local and federal income taxes the company incurs
Q: net income (net earnings)
Answer: - revenue – cogs – operating expenses – non-operating expenses – taxes
- indicates increase in shareholders’ value resulting from operations
Q: what does the balance sheet show?
Answer:
an organization’s financial position at a particular point in time
Q: what does the balance sheet disclose?
Answer:
- the resources an organization controls (assets)
- the claims on those resources (liabilities and equity)
Q: what is the basic accounting equation?
Answer:
assets = liabilities + equity
Q: what is the basic accounting equation a foundation for?
Answer:
the double entry bookkeeping system
Q: what is the double entry bookkeeping system?
Answer:
there is a credit for every debit
Q: what does the accrual accounting method measure?
Answer:
the performance of a company regardless of when cash transaction occur
Q: cash
Answer:
current assets comprising currency or currency equivalents that can be accessed immediately
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financial statement communicates what?
- financial condition
- results of operations
- various other activities of an organization
how board of directors use financial data…
- hold management accountable – make board-level decisions about corporate strategy
how company management uses financial data…
- measure performance
- make strategic, operating and financial decisions
how creditors use financial data…
- measure creditworthiness
- liquidity
- bankruptcy risk
how investors use financial data…
make decisions on buying/selling equity investments
how acquirers use financial data…
- determine valuation
- make investment decisions
how regulators use financial data…
determine whether company is operating according to regulations/law
what does the income statement present?
results of operations over a period of time
what is the purpose of the income statement?
to show whether the company made or lost money during the period reported
what does the income statement indicate?
how revenues are translated into net income through subtracting expenses
revenue (sales)
amount charged for the delivery of goods or services
cost of sales (cogs)
- direct cost of producing revenue
- Ex: raw materials, direct wages, etc.
gross profit
- revenue – cogs
- indicates how efficiently labor and materials are used in the production process
operating expenses
- all other expenses required to run a business
- Ex: management salaries, marketing, travel, etc.
operating income (EBIT)
- revenue – cogs – operating expenses
- indicates a company’s earning power from ongoing operations
non-operating expenses
- expenses not related to regular business of the company
- Ex: interest expense, restructuring expense, etc.
corporate taxes
local and federal income taxes the company incurs
net income (net earnings)
- revenue – cogs – operating expenses – non-operating expenses – taxes
- indicates increase in shareholders’ value resulting from operations
what does the balance sheet show?
an organization’s financial position at a particular point in time
what does the balance sheet disclose?
- the resources an organization controls (assets)
- the claims on those resources (liabilities and equity)
what is the basic accounting equation?
assets = liabilities + equity
what is the basic accounting equation a foundation for?
the double entry bookkeeping system
what is the double entry bookkeeping system?
there is a credit for every debit
what does the accrual accounting method measure?
the performance of a company regardless of when cash transaction occur
cash
current assets comprising currency or currency equivalents that can be accessed immediately
accounts receivable
amount owed to an organization from the sale of a good or service
fixed assets
- value of assets and property that can’t be easily converted to cash
- has a useful life of greater than 1 year
- Ex: PPE
accounts payable
amount owed to an organization’s vendors
debt
amount of obligations owed to creditors
equity
cumulative shareholder investment + cumulative net income
what is working capital a measure of?
- a company’s efficiency
- short term financial health
working capital equation
non-cash current assets – non-debt current liabilities
what does a positive or negative working capital indicate?
whether it’s a source or use of cash
what can happen if a company’s non-cash current assets < non-debt current liabilities?
may run into challenges repaying creditors and suppliers in the short run
non-cash current assets
- non-cash assets expected to be turned into cash within one year
- Ex: accounts receivable, inventory, prepaid expenses, other assets
non-debt current liabilities
- all obligations besides short-term debt that are due within one year
- Ex: accounts payable, accrued liabilities, other obligations
what is a less expensive form of capital?
debt because it’s less risky
what types of claims to debt owners have?
priority claims on company’s assets if company goes bankrupt
what is a more expensive form of capital?
equity because equity holders aren’t guaranteed to get their investment back if the company goes bankrupt
what requires a higher rate of return, debt or equity?
equity
net debt
total debt – cash
what is net debt primarily used in?
credit analysis because creditors assume that the company’s cash balance could be applied to debt repayment in the event of a liquidity crunch or bankruptcy
what does the cash flow statement show?
- how much cash is generated or lost during a period of time
- how changes in the balance sheet and net income affect cash
what does the cash flow statement reconcile?
net income to change in cash
what is the cash flow statement useful for in determining
- a company’s viability; it’s ability to pay bills
- liquidity
cash from operating activities
- cash generated by a company’s normal business operations
- Ex: net earnings, depreciation and amortization, change in working capital
cash from investing activities
- acquisition and disposal of long-term investments (PPE and M&A)
- Ex: capital expenditures, acquisitions
cash from financing activities
- cash flow between organization and its owners and creditors
- Ex: debt/equity issuances (change in debt), dividends, share repurchases
beginning cash balance
ending cash balance for previous period of time
change in cash
sum of cash from operating, investing, and financing activities
ending cash balance
sum of beginning cash balance and change in cash
depreciation and amortization
method of allocating the cost of an asset over its useful life for both accounting and tax purposes
how is depreciation and amortization shown on the income statement?
as an expense
why doesn’t depreciation and amortization represent a decrease in cash?
it doesn’t represent a decrease in cash because cash only leaves the company during the initial purchase of the asset (CapEx)
what does depreciation and amortization represent in terms of cash on the cash flow statement?
a source of cash
capital expenditures (CapEx)
funds used by a company to purchase/upgrade physical assets (PPE)
what does CapEx represent in terms of cash on the cash flow statement?
a use of cash
what does a decrease in working capital represent?
a source of cash
what does an increase in working capital represent?
a use of cash
share repurchase
re-acquisition of an organization’s own stock
2 paths for share repurchases
- organization retires the stock
- keep them as treasury stock
what happens to the ownership percentage and portion of earnings for shareholders when shares are repurchased?
they increase
what are share repurchases a form of?
returning capital to shareholders irregularly as opposed to a regular dividend program
dividends
distribution of cash
how are dividends most often derived?
from a dividend per share amount as directed by the board of directors
what is the difference between share repurchases and dividends?
- dividends don’t affect ownership percentages
- represent a pure check to shareholders
what are sticky dividends?
companies choose to have a dividend program where dividends are constantly distributed to shareholders
how can removing a sticky dividend program affect the company?
it can show signs of trouble for the company
change in debt
represents any debt issuances or repayments
EBITDA
- gives an indication of a company’s current operational profitability
- one of most commonly used metrics
why is EBITDA widely used when assessing the performance of a company?
it allows for comparison of profitability between companies in a wide range of industries
what does EBITDA exclude?
- affects from different forms of financing
- different political and tax jurisdictions
- different rules surrounding depreciation and amortization
free cash flow
- see what cash is available for distribution to creditors and shareholders
- ONE OF MORE IMPORTANT METRICS TO USE FOR VALUATION
free cash flow equation
cash flow from operations – CapEx
financial ratios
useful indicators of a firm’s performance and financial situation
what is the starting point for financial ratios?
past ratios in order to forecast into the future
how can financial ratios be expressed?
- decimal
- percentage
- multiple (x)
liquidity ratios
indicate a company’s ability to meet its short-term financial obligations
who cares about liquidity ratios?
those extending short-term credit such as banks
2 liquidity ratios
- current ratio
- cash ratio
current ratio
indicates whether a company’s short-term assets are readily available to pay off short-term liabilities
current ratio formula
current assets / current liabilities
normal current ratio
between 1.50-3.00
cash ratio
indicates a company’s ability to use cash to pay of its current liabilities
cash ratio formula
cash / current liabilities
normal cash ratio
between 0.20-1.00
efficiency ratios
indicate how effectively a company utilizes its assets
2 efficiency ratios
- days receivable
- asset turnover
days receivable ratio
average number of days an invoice is in accounts receivable before collection
days receivable ratio formula
accounts receivable / revenue X 365
days receivable ratio of 60 means…
company’s invoices on average are paid down in 60 days
asset turnover ratio
- amount of revenues generated per dollar of assets
- measures company’s efficiency in turning assets into revenue
asset turnover ratio formula
revenue / assets
asset turnover ratio of 2.5 means…
for every dollar of assets, a company earns $2.5 of revenue
profitability ratios
profits made by company relative to its assets, equity, or revenue (metrics)
what do profitability ratio metrics tell us?
- outperformance vs peers
- opportunities for improvement
gross margin ratio
relative to revenue, indicates how efficiently labor and supplies are used in production process
gross margin ratio formula
gross profit / revenue
what does a gross margin ratio of 35% mean…
for every one dollar of revenue, $0.35 is converted into gross profit
operating margin ratio
relative to revenue, indicates a company’s earning power from ongoing operations
operating margin ratio formula
operating income / revenue
operating margin ratio of 15% means…
for every $1 of revenue, $0.15 is converted to operating profit
net margin ratio
relative to revenue, indicates the increase in shareholders’ equity from earnings
net margin ratio formula
net income / revenue
net margin ratio of 10% means…
for every $1 of revenue, $0.10 us converted to net income
return on equity ratio
measures profits earned for each dollar invested in a company’s equity
return on equity ratio formula
net income / shareholders equity
a return on equity ratio of 17% means…
for every $1 invested, $0.17 of net income is produced
credit ratios
measure a company’s ability to meet its long term obligations
debt/EBITDA ratio
- total leverage
- probability of defaulting on debt
debt/EBITDA and net debt/EBITDA ratios of 2.5x means…
it will take 2.5 years to pay off debt
net debt/EBITDA ratio
- net leverage
- probability of defaulting on debt but taking into account cash balance to be used to pay off debt
debt/equity ratio
proportion of debt and equity used to finance a company’s assets
debt/equity ratio of 25% means…
for every $1 owned by shareholders, $0.25 is owed to creditors
EBITDA interest coverage ratio
how easily a company can pay interest on outstanding debt
EBITDA coverage ratio of 2.0x means…
company is producing 2 times the cash flow needed to pay off interest expenses
market ratios
- measure investor response to owning a company’s stock
- help to understand how investors value a company
what are market ratios an indicator of?
company’s ability to generate profits and build assets
enterprise value
sum of all claims on a company (overall value) independent of capital structure
equity value (market value/market cap)
value of all the shares outstanding (current value attributable to shareholders)
price/earnings ratio
how much investors are willing to pay per dollar of earnings (affected by leverage)
p/e ratio of 15x means…
investors are willing to pay $15 for every $1 of net income
earnings per share
amount of earnings attributable to a share of common stock
eps of $2.45 means…
$2.45 was earned for every share of stock
dividend yield
- dividend per share/ share price
- return on a share of stock
EV/EBITDA
measures value of common stock that allows comparison of companies in different industries
EV/EBITDA of 4.5x means…
for every $1 of EBITDA, the company is worth $4.50
EV/revenue
compares total value of a company to its revenue
EV/revenue of 1.5x means…
for every $1 of revenue, the company is worth $1.50
what does financial modeling refer to?
financial statement forecasting
a financial model is a representation of what?
an organization’s financial path forward and relies on historical data
2 objectives of financial modeling
- arm decision makers with reliable info
- communicate effectively to stakeholders
in financial models what drives calculations and outputs?
inputs
impact of positive net income on financial statments
- equity increases
- cash increases
impact of pay down of debt on financial statements
- cash decreases
- debt decreases
impact of submitting an invoice to a customer on financial statements
- accounts receivable increases
- revenue increases
impact of receiving an invoice payment on financial statements
- cash increases
- accounts receivable decreases
impact of paying a bill on financial statements
- cash decreases
- accounts payable decreases
impact of purchasing equipment on financial statments
- cash decreases
- fixed assets increases