Capstone Exam 1 General Flashcards

AR growth > Rev Growth

Bill and hold

Operating cash flows < NI

Capitalization

DSO Spike

Channel stuffing

margins improve but not NI, repeat one time charges

Classification shifting

Inventory growth > sales (declining Inv Turn), Gross margin flat while cash flows drop

Overproduction

EPS rises but not NI

share buybacks (no value add)

Receivables or inventory growing faster than sales

 means cash is being consumed rather than generated (inv = losing customers) (rec = sold but cant get money)

Beneish m-score

above -1.78

Intermediary

low profit margin, but not adding value as just buying from one and selling to another

Value firm in six steps

1. Industry characteristics (strat anal)

2. Company Strategy (strat anal)

3. Accounting Quality (acc)

4. Profitability & Risk (fin)

5. Forecast statements (val)

6. Value the firm (val)

Quality concepts in six steps

1. Identify key accounting policies

2. Assess accounting flexibility

3. Evaluate accounting strategy

4. Evaluate disclosure quality

5. Identify red flags

6. Undo Distortions

Basic EPS

NI / Weight avg common shares

Diluted EPS

NI / (Weight avg common shares + unexercised securities)

DD notes

D = Merton debt short term + 1/2 long term

V = E + D

Given but know:

• E = Market value of equity

• o[E] = equity volatility

• Mew = expected return (prior year stock return)