Econ 118 Midterm

Where can you find audited financial statements?

10-k

Where can you find executive compensation?

10-k or definitive proxy statements

What is on the 10-Q?

Everything that’s on the 10-k but not audited

What is Form 8-k?

Summary of significant events (usually comes w/ press releases)

What is included in Definitive Proxy Statements (DEF 14a)?

who are the Board of Directors/Executives, executives’ comp, other significant matters

What can you find in the “investor relations” of a company website?

annual report (10k info), press releases/earnings call, investors presentations

What are some internet sources for financial info?

Google, Yahoo Finance, seeking alpha (free access to fin info in one place)

What should users consider?

quantitative info (10-K, 10-Qs, 8-K, proxy) and qualitative info (investor relations, other analyst opinions, news)

EBITDA

earnings before interest, taxes, depreciation and amort

What is EBITDA good for?

comparing profitability between companies

Adjusted EBITDA

includes adj for items mgmt thinks won’t impact future cash flows (earnings the way mgmt wants users to see it)

Why read the footnotes to the fin statements?

tells a story/help present the big pic

Consolidation method for B/S

parent entity records all of controlled entity’s B/S items and separates equity into NCI and owned

Consolidation for I/S

parent entity records all revs and exps then subtracts NCI

Equity method for B/S

record owned portion of controlled company as “equity method investment”

Equity method for I/S

record owned portion of income as “equity in income of unconsolidated investment”

What models is used to find the FMV of share-based comp?

Black Schole’s model

What is the avg gross margin for tech firms?

80%

What is the avg gross margin for retail firms?

30-40%

What is the avg gross margin for food firms?

10%

Why would employees with share-based comp tender shares back to FB?

allows them to get cap gain without paying cash for exercise price or selling shares (FB gets tax benefit)

What is item 6 of 10-k?

five-year summary of fin statements

What is item 7 of 10-k?

MD&A, comparison of PY and CY fin statements

How did Sunbeam/Chainsaw Al get caught for fraud?

a user of fin statements saw that revenue was being aggressively recognized

What is a type of quantitative data type?

year

What is a type of quantitative data type?

year

By how may tons heavier was the heaviest meteorite than the second heaviest meteorite?

1.99 tons

What was the city that had the heaviest recorded meteorite find?

Hoba

How many tons did the heaviest FOUND meteorite in the US weigh?

33.07 tons

What was the city that had the heaviest recorded meteorite fall?

Sinkhole-Alin

What city was the heaviest FOUND meteorite in the US located in?

Canyon Diablo

How do you calculate goodwill?

purchase price - fair val of identifiable net assets (good will is a plug)

What is the most voted for item for shareholders?

what company does the audits

Goodwill is a …

plug

Accounting for goodwill

1. mark all assets/liabs to fair value

2. repeat 1 for assets/liabs not alr on the books

3. expense deal costs/transaction costs

4. compare purchase price and net fair value acquired (if purchase price greater → goodwill, if not → bargain purchase/gain on I/S)

When to test for impairment

decrease in market price, adverse change in how asset is used/physical condition, change in useful life, change in legal/biz climate, more than expected costs to acquire/contruct, continuinlosses based on current/historical OCF losses or projection, expected disposal/sale

Where can companies cut costs when restructuring?

employees (pay severance), occupancy/leased spaces (early termination fees)

Restructuring in the 10-k

companies write an excerpt warning users that restructuring could neg impact biz

Realignment expense

costs of reducing employees/office space

Why was stock-based comp so appealing? (crack cocaine of incentives)

match of shareholder and personnel objectives, no cash, no cost and all equity at the time (now req to exp fair val of stock award, add back to OCF)

How to allocate fair value of stock-based comp

1. measure fair val at grant date (total exp)

2. determine req service period

3. allocate fair val over service period

Does the allocation of stock-based comp change with changes in stock value?

No, prev determined fair value is used regardless of current stock value

What is a potential downside of issuing stock-based comp?

potential additional shares could lead to diluted shares

What is the journal entry to account for changes in asset value due to change in FX rate?

DR Other Comprehensive Loss, CR (asset that lost value)

Derivative

contract you entered w/ value based on movement of “underlying” exposure

What are examples of derivatives?

FX rate, interest rates, commodities

How are derivatives accounted for?

reported in income (some unrealized ains/losses reported as OCI, no I'/S impact)

How is Nike’s wholesale rev recognized?

when the title and the risks/rewards of ownership have been transferred (either upon shipment or receipt depending on terms and country)

How is Nike’s retail rev recognized?

at the time of sale

How is Nike’s online rev recognized?

upon delivery

What assumptions does Nike use for inventory valuation?

stated lower of cost or market and valued at either specific-ID (if directly shipped to customers) or avg cost (bulk orders from mfg)

Why is dep exp not on the I/S?

Nike outsources mfg so all dep relates to selling and admin, and Nike classifies exp by function so def is included in demand creation exp and op overhead

What is demand creation exp?

marketing and advertising exps

Why is income tax payable > income tax exp?

bc there are differences between income tax according to GAAP (exp) and tax according to tax laws (payable), which generates DTA or DTL on B/S

Why is A/R net of AFDA?

AFDA rep est uncollectible acts and is used to reduce A/R to act for uncollectible accts

What is Nike’s largest asset and how does this reflect their strategy?

inventory, which reflects how Nike aims to be the leading seller of athletic products

What dep method does Nike use?

straight-line but likely uses accelerated dip methods for income tax reporting for tax benefits

Are the Nike brand name and “swoosh” included in intangible assets?

no bc costs to develop intangibles are expensed in the yr incurred

Where do Nike’s intangible assets come from?

mainly from acquiring Converse and Umbro (expenditures to purchase intangibles from other firms are intangible assets)

What are nike’s primary financing activities?

dividend payments and share repurchases

Cash collected

sales rev - change in A/R

Cash paid to suppliers

cost of sales + change in inventory - change in A/R

Reconcile the change in R/E

beg R/E + NI -divs - stock repurchases + adjustments (plug) = end R/E

Why is PPE relatively small % of total assets?

Nike outsources mfg and retailing so there’s little need for PPE besides for corp HQ, research, warehouses, and transport

Why is the %s for N/P and long-term debt small?

Nike has few fixed assets to use as collateral for borrowing and generates enough OCF to finance their investments