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Canadian Securities Ch 2 Capital Markets & Financial Setvices Contd > Ch2 Contd > Flashcards

Ch2 Contd Flashcards

0
Q

To protect investors exchanges can invoke 3 types of temporary withdrawals of trading privileges. These are…

A
  1. A delayed opening.
  2. A Temporary Halt in trading.

3 Suspension of trading.

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1
Q

What allows the exchanges to have considerable self regulation

A

The securities Acts

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2
Q

What is a delayed opening

A

Shortly before opening of trading, an exchange can order trading in a security to be delayed. Might arise due to a heavy volume if buy sell orders to allow traders time to sort out the orders.

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3
Q

The exchanges regulate…

A

Acceptable standards of behavior for member firms and their directors; officers and employees.

They set listing and reporting requirements for listed companies and they assist in screening statements of material fact and exchange offering prospectuses (frequently accepted by exchanges in lieu of standard prospectuses.

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4
Q

What is a halt in trading?

A

A temporary halt in the trading of a security can be ordered or arranged at any time to allow the dissemination of significant news related to a stock.

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5
Q

What is suspension of trading?

A

Trading privileges can be suspended for more than one trading session.

Imposed if a companies financial condition doesn’t meet the exchanges requirements or fails to comply with the terms of it’s listing agreement or for some other good cause.

Trading can resume if the problem is satisfactorily rectified in time.

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6
Q

During suspension of trading can the members still execute orders for the suspended security?

A

Yes on the unlisted market except securities that are suspended from trading on the Vancouver Stock Exchange.

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7
Q

A security can be delisted from the exchange for the following reasons?

A

It no longer exists. It has been called for redemption or substituted for another security as the result of a merger.

The company is bankrupt of without assets.

The public distribution of the stock is at an unacceptably low level.

The company has failed to comply with the terms of the listing agreement.

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8
Q

Describe what equities are typically listed on the unlisted equities market.

A

Junior issues.

Conservative industrial companies.

Many are speculative stocks that offer low liquidity

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9
Q

Describe the difference between a dealer market and an over the counter market.

A

Unlike auction markets where individual buyers orders are entered, a dealers market is a negotiated market where only dealers bid and ask quotations are entered by those dealers acting as market makers.

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10
Q

Describe the mechanics of a dealer (unlisted) equities market.

A

The market makers hold an inventory of securities in which they have agreed to make a market. The market makers post their bid (highest price they’ll pay) and ask (lowest price they’ll accept) quotations. When an investor wishes to purchase the unlisted stock the broker checks the bid/ask quotations of various market makers to identify the best price and contacts the market maker.

Market makers do have the right to refuse a trade.

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11
Q

What is regulated on the unlisted equities market?

A

They do not attempt to regulate companies.

They do not set listing requirements

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12
Q

What is COATS

A

The Canadian Over The Counter Automated Trading system

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13
Q

What is the CDN and what does it do?

A

The Canadian Dealers Network

Consists of a network of computers And telephones linking hundred if brokers and dealers.

Provides bid/ask prices together with high, low and closing prices and trading volume for the previous days trading.

Facilitates monitoring of trading of over the counter equities to detect abuses.

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14
Q

What can and can’t be listed on CDN

A

Those OTC ( over the counter) equities and warrants which are not listed on one of the four exchanges may be quoted through CDN provided they have at least one market maker.

Equities and warrants without a market maker can still be traded OTC, but they can’t be quoted on CDN.

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15
Q

What do Market makers do for the over the counter unlisted equities market?

A

This provides liquidity to the market.

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16
Q

What financial intermediaries are called the “four pillars” of the financial sector?

A

Banks, trust companies, insurance companies, securities dealers.

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17
Q

Federal legislation effecting financial intermediaries changed in 1992. What did this change do?

A

Removed barriers between banks, insurance industry, trust companies and securities dealers allowing them to compete more directly with each other.

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18
Q

What is a schedule 1 chartered bank?

A

A Canadian owned chartered bank

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19
Q

What is a schedule 2 chartered bank?

A

A foreign owned chartered bank.

They have additional reporting and restrictions imposed on them.

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20
Q

In 1980 what act changed to allow for foreign ownership of banks in Canada?

A

The Bank Act

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21
Q

What are the ownership criterion for schedule 1 banks?

A

No investor can hold more than 10% and foreign ownership is limited to 25%.

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22
Q

Can schedule 2 banks engage in all of the same activities as schedule 1 banks?

A

Yes

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23
Q

Foreign bank subsidiaries tend to focus on commercial loans to companies rather than on retail banking services to individuals. Why?

A

The loan is limited to the capital base of the subsidiary rather than the parent bank.

They lack the extensive branch system.

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24
Q

Schedule 2 banks are limited to what percent of the assets of the total banking industry? What country is exempt from this ceiling?

A

12%

USA

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25
Q

Trust companies are the only companies in Canada permitted to do this?

A

Act as trustee in charge of corporate or individual assets such as property, stocks and bonds.

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26
Q

What investment principal is most important to life insurance companies?

A

Safety of principal.

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27
Q

What investment principal is very important to chartered banks and what do they tend to invest in?

A

Liquidity

High yield long term stocks. Mortgage and long term bond markets.

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28
Q

What federal legislation governs insurance companies?

A

The Insurance Companies Act (1992)

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29
Q

The Insurance Companies Act allows insurance companies to own what types if companies?

A

Trust and loan companies.

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30
Q

What is a trusteed pension plan?

A

The employer and employee both contribute and the money’s which are managed by a trustee.

The trustee must register the plan with the appropriate provincial government department and with the federal department of revenue and manage the fund in accordance with the trusts deed.

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31
Q

What is the maximum percentage of a pension plan can be held in foreign investment?

A

20%

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32
Q

Name 2 government operated pension plans

A

The Canada Pension Plan and the Quebec Pension Fund.

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33
Q

What legislation governs credit unions?

A

The Cooperative Credit Associations Act 1992)

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34
Q

Name 2 types of investment funds

A

Open ended funds or Mutual funds

Closed ended funds

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35
Q

What is the difference between closed ended funds and opened ended or mutual funds?

A

Closed ended normally issue at start up or other infrequent periods, whereas mutual funds continually issue shares and redeem these on demand.

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36
Q

A buyer must have one of 2 kinds of accounts with a broker, what are they and how is payment made?

A

A cash account - payment must be made in full within 3 business days from the trade date.

A margin account - a portion of the amount is paid, with the balance borrowed from the broker.

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37
Q

Describe a trade known as a “cross”

A

Both the seller and the buyer are customers of the same firm. The price of the security is based on the market price. The sale is made first and it is then recorded on the exchange after it is done.

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38
Q

In Canada what is the most common way to underwrite a corporate issue, competitive tender (auction) or negotiated offer to sell the new issue?

A

Negotiated offer

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39
Q

A firms bond trading department typically trades from where?

A

There own inventory or the inventory if other firms that specialize in the issue.

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40
Q

A firms stock trading department typically trades from where?

A

The stock exchanges rather than from the firms own inventory.

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41
Q

What is a “day to day loan”, how is it secured and when is it payable?

A

A short term loan to a dealer, that is secured against the dealers treasury bill and short term Canada bond inventory. The bank can call upon the dealer for same day repayment

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42
Q

Name 2 types of “call loans” and describe when they are payable.

A

Special call - must be liquidated within 24 hours after notice is given

Other call or short loans - technically payable whenever called, but they are seldom called.

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43
Q

Which is less volatile, a “special call loan” or a “ other call or short term” loan?

A

other call it short term”

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44
Q

Does the Office of the Superintendent of Financial Institutions (OSFI)regulate the securities industry?

A

No

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45
Q

Why, in 1987, was the Financial Institutions Supervisory Committee formed?

A

To simplify the confidential exchange if information among members on all matters relating to supervising financial institutions.

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46
Q

What does the Canadian Investor Protection Fund cover

A

Loss due to insolvency of a member of any of the dpi siring self-regulatory organizations (the exchanges plays the investment dealers association of Canada).

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47
Q

What does the Canadian Investor Protection Fund NOT cover

A

Losses resulting from changing market values and accounts held at mutual fund companies, banks or other firms that are not members of sponsoring self-regulatory organizations

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48
Q

Where does the Canadian Investor Protection Fund get it’s assets?

A 
Through special assessment to
member firms ( max 1 % of the aggregate gross revenues of the member firms) plus a line of credit at a major chartered bank)
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49
Q

Describe the maximum Canadian Investor Protection Fund payout

A

Maximum of $500,000 with a maximum of only 60,000 of that being cash.

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50
Q

Canadian Investor Protection Fund rejects claims if those who…

A

Are not dealing at Arms length with the insolvent company or those whose dealings contributed to the insolvency.

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51
Q

What is the time limit for filing a claim with the Canadian Investor Protection Fund?

A

180 days from the bankruptcy.

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52
Q

What is the normal

Procedure that Canadian Investor Protection Fund will take if a member is insolvent?

A

Petition the court under the Bankruptcy and Insolvency Act to have a trustee appointed.

Transfer the customers accounts to another member firm

Transfer all securities registered to the customer to the customer as long as all money’s owed by the customer have been paid.

Give the customer the net equity of their account.

If the customer owes more than the firm owes him he must pay the trustee

If the claims exceed the fund, then quarterly assessments will be made upon member firms.

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53
Q

What is the IDA and what does it do?

A

The investment dealers association. They are the only national self-regulatory organization.

It is the Canadian investment dealers trade association and self regulatory organization.

It polices it’s member firms in all parts of the country in both capital adequacy as well as business conduct. The qualifying and registering process of firms is also their responsibility.

Responsible for listening to perspectives nation wide to ensure that policies and rules governing the industry reflect this diversity.

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54
Q

The IDA is made up of how many regional counsels?

A

10

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55
Q

The IDA does 3 things to promote efficient capital markets. They are?

A
  1. Market regulation - they play a key role in formulating standards and practice for the primary debt and equities markets. In particular they are the primary regulator for the fixed income market.
  2. Public policy advocate - Provide accurate information and intelligence to key provincial and federal government departments.
  3. International representative - represent Canadian interests when working with foreign securities regulators.
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56
Q

The IDA’s compliance department is responsible for…

A

Ensuring financial compliance as well as conduct of business compliance.

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57
Q

Who reviews the IDA’s regulatory actions?

A

The provincial securities commissions.

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58
Q

What does the IDA’s financial Compliance department do?

A

It audits investment dealers to ensure the firms are maintaining adequate capital in accordance with the nature of the business. If the firm is found lacking they can require action to correct the deficiency or suspend the members trading privileges.

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59
Q

What does the IDA’S’s investigations department do?

A

Investigates any complaint it receives against a member firm or it’s employee.

They have the authority to prosecute and to exact penalties in the form of fines or suspension rom the industry.

In addition, they screen new investment advisors who are employed by member firms.

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60
Q

What is insolvency?

A

The inability of a debtor to pay their debt.

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61
Q

What is the Canadian Depository for securities and what does it do?

A

It is a central clearing system that handles the daily settlement process between members.

It establishes a credit or debit cash balance for each firm and instructs each member what securities it must deliver to balance the account.

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62
Q

What are the 2 goals of the Canadian Securities Institute?

A

Increase competence of people working in the industry.

Promote a wider knowledge and appreciation of investing among Canadians.

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63
Q

Name 3 forms of business organization.

A

Sole proprietorship

Partnership

Corporation.

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64
Q

Describe a sole proprietorship and also describe it in regards to taxes and liability

A

One person running his own business

Taxed on earnings at the personal income tax rate.

Personally liable for all debts, losses and obligations.

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65
Q

Describe a partnership.

A

2 or more people contributing to the business, whether it be capital or the expertise required to run the business.

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66
Q

Name 2 types of partnership

A

General partnership and limited partnership.

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67
Q

Describe a general partners role and liability

A

A general partner is involved in the day to day operation of the business and is personally liable for ALL debts and obligations incurred

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68
Q

Describe a limited partners role and liability

A

The limited partner is not involved on the daily business activity and his liability is limited to his investment into the business

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69
Q

What are the 2 downsides of both a sole proprietorship and a partnership?

A

They both have unlimited personal liability and limited ability to grow.

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70
Q

What is unique about corporations.

A

They are a distinct legal entity separate from the people who own the shares.

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71
Q

What are the 4 key financial statements found in all corporate annual reports?

A

Balance sheet

Income statement

Retained earnings statement

Statement of changes in financial position.

72
Q

What is the basic procedure for incorporation?

A

One or more persons file documents with the appropriate provincial or federal governments and pay fees. The government will then issue a charter document under which the corporation comes into existence.

73
Q

A corporations name must include what word?

A

Limited, incorporated, corporation or an abbreviation thereof or the French version.

74
Q

Where can a provincially incorporated corporation carry on business?

A

In the province where it was incorporated. It may need further licenses or registration to carry on business in other provinces

75
Q

Can a provincial law deprive a federally incorporated corporation of the powers conferred on it by the federal goverment.

A

No

76
Q

Historically there are 2 types of corporations, what are they and how do they differ.

A

Private corporation - have in their charters a restriction on the right of shareholders to transfer shares; a limitation that there can be only 50 shareholders and a prohibition from inviting members of the public to subscribe to their securities.

Public corporation - incorporated without such restrictions.

77
Q

A corporation is regulated by…

A

The federal a or provincial act under which it’s charter was issued

It’s own charter

It’s bylaws

78
Q

What is a proxy?

A

Proxy is a power of attorney given by a shareholder to a person entitling that person to vote on behalf of the shareholder at a shareholders meeting. Given for one meeting and all adjournments thereof.

A wider power of attorney nah be given to vote at all meetings.

79
Q

Is a proxy revocable?

A

Yes

80
Q

What is a voting trust?

A

A corporation that is undergoing a restructuring due to financial difficulties may be placed under the control of a few individuals through a voting trust. This is usually done for a specific period of time or until certain results are achieved.

To transfer voting control shareholders are asked to deposit there shares with a trustee. They are then given a voting trust certificate, which entitles them to to the same rights as the share did, buy without the voting privilege.

81
Q

List 3 criterion to qualify as a director of a corporation.

A

Be of Age of majority, sound mind and not an undischarged bankrupt.

82
Q

Directors may be liable for:

A

Illegal acts of the corporation done with their knowledge and consent.

Dividends that are improperly declared.

Up to 6 months employee wages

Conflicts of interest

Must act in the best interests of the corporation.

83
Q

What powers does a securities commission have over a Director?

A

Hold Liable for misrepresentations in prospectuses and other statutory fillings.

Hold liable for Insider trading

Order that they comply or cease contravening securities legislation.

Prevent certain persons from trading securities.

Order that a director or officer resign their position and prohibit them from being a director or officer of a public company for a set time.

84
Q

The Corporations Act authorizes directors to do what 3 things in relation to officers?

A

Designate the offices

Appoint the officers

Specify the duties

85
Q

I’m contrast to the directors, the officers are…

A

Corporate employees that are responsible for the day to day operations of the corporation.

86
Q

How long do officers hold office?

A

Until the annual meeting following their appointment or until removed by the directors.

87
Q

What is the typical hierarchy of a corporation?

A

Shareholders

Board of directors

Chairman of the board

President

Executive Vice President

Vps

88
Q

How is the a chairman if the board chosen and what are his duties

A

He is elected by the board

He may have any it all if the duties of the president or any other officer.

He presides over all meetings and has a great deal of influence.

89
Q

Who is typically the CEO of a corporation?

A

The president or the chairman of the board.

90
Q

How is the president of a corporation chosen and how does he excercise his authority?

A

He is appointed and responsible to the board of directors.

He exercises his authority through other officers and through department heads.

91
Q

In a corporation who is “second in command?

A

The executive Vice President.

92
Q

Who is typically the chief operating officer ?

A

The executive Vice President

93
Q

How are Vice President chosen and what are their duties?

A

They are appointed to head specific areas.

94
Q

The money to start a corporation is often raised by issuing common or preferred shares. This form the companies.,.

A

Capital stock OR Equity capital

95
Q

What are authorized shares?

A

The maximum number of common or preferred shares which a corporation may issue under the terms if it’s charter b

96
Q

Usually more shares are authorized than are issued to allow for additional fund raiding in the future. T/F

A

True

97
Q

What are issues shares?

A

That part of the authorized shares that have been issues by the corporation.

98
Q

What are outstanding shares?

A

The portion of the issued shares which still remain in the hands of investors.

Ie a company may repurchase some of it’s issued shares and that will lower the number of outstanding shares.

99
Q

What are 2 ways that a corporation increase or decrease their number of authorized shares?

A

They amend their charter

Corporations acts have made it possible for corporations to issue an unlimited number of shares for an unlimited amount of money.

100
Q

What does n.p.v stand for?

A

No par value

101
Q

What acts say that corporate shares must be n.p.v.

A

The federal and some provincial corporations acts

102
Q

How is par value of a share commonly expressed?

A

As a dollar value on the face of it

103
Q

The use if par value shares can be misleading because…

A

There is no fixed relationship between the par value on the share and the market value.

104
Q

A corporation may raise money by issuing bonds, this form of financing is called…

A

Debt financing

105
Q

Funds raised by debt financing differ from equity financing because

A

Funds raised by debt securities represents a loan that must be repaid.

106
Q

Name 2 types of long term debt financing used by corporations.

A

Mortgage bonds - secured by land and properties owned by the corporation.

Debentures - backed by the general credit of the corporation. The corporations ability to repay it’s obligations are considered sufficient without a specific pledge of its assets

107
Q

What are 8 advantages of incorporation?

A
  1. Limited liability of shareholders
  2. Continued existence (death of a sole proprietor, withdrawal of a partner)
  3. Transfer of ownership is easy (shares are liquid)
  4. Ability to finance (shares and debt instruments)
  5. Taxation ( legitimate deferal or avoidance)
  6. Growth (suited to manage large capital and growth)
  7. It is a legal entity (it can sue)
  8. Professional management ( and management is elected so if they don’t do a good job they are easy to change)
108
Q

What are 4 disadvantages of incorporation?

A
  1. Loss of flexibility - corporations are subject to many rules, regulations and statutes
  2. Taxation - possibility of double taxation when after tax profits are distributed to shareholders they also have to pay.
  3. Expenses - cost of incorporation plus annual fees for audits, corporate tax returns etc
  4. Capital withdrawal - statutes for redemption and purchase of shares by corporations must be carefully followed.
109
Q

How is shareholder equity calculated?

A

Assets - liabilities = Shareholder Equity

110
Q

What is another term for share equity?

A

Book Value

111
Q

Does book value indicate the amount the shareholders will receive?

A

No, they may receive more of less depending on the companies earning power and prospects.

112
Q

Define current assets

A

Cash and assets which can be turned into cash right away or which in the normal course of business will be turned into cash in the near future (normally 1 year)

113
Q

Name 5 broad groups of current assets

A

Cash

Marketable securities

Receivables (less allowance for doubtful accounts)

Inventories

Prepaid expenses

114
Q

Are inventories valued at original cost or current market Value?

A

Whichever is lower

115
Q

Name 3 commonly used methods for valuing inventory

A

Average cost of all items.

FIFO - first in first out (most commonly used in Canada

LIFO - last in first out. Acceptable for accounting but not for income tax)

116
Q

In times of increasing prices, which method will provide higher inventory and higher prices, LIFO or FIFO?

A

FIFO

117
Q

What are miscellaneous assets?

A

Assets that are neither current or fixed.

118
Q

What are fixed asserts and how are they valued?

A

Land, buildings, machinery, tools that are used in the day to day operations of the business.

Their value lies in their use on production of goods and services for sale rather than their sale value. They are not intended to be sold.

119
Q

Fixed assets are shown on the balance sheet as net book value. What is this?

A

Original cost, including installation, depreciated yearly.

120
Q

What happens when a fixed asset is sold?

A

The original cost and related depreciation are removed from the balance sheet. The difference between the sale price of the fixed asset and that assets net book value is a profit or loss which is treated as non- operating income or expense.

121
Q

What is depreciation

A

With the exception of land fixed assets wear out over time and lose their usefulness, so the cost of fixed assets is spread out over their years of usefulness. To be considered are the original cost, it’s expected life and it’s scrap/salvage value.

122
Q

Name 2 methods used in Canada to calculate depreciation.

A

The straight line method

  • an equal amount is charged to each period.
  • most common

The declining balance method.
- a fixed percentage (usually double the straight line value) is applied to the outstanding balance to determine what amount will be applied in the subsequent period.

123
Q

What is the formula for annual depreciation using the straight line method?

A

Cost - salvage value / number of years

124
Q

What is the formula for depreciation rate using the straight line method?

A

Total cost / number of years

125
Q

How is declining balance depreciation calculated?

A

Total cost - double the straight line depreciation rate

The following years the remaining cost - double the straight line depreciation rate

126
Q

What is depletion?

A

A term similar to depreciation that is applied to resource assets, for example ever time oil is extracted from a site the value if that site lessens.

127
Q

What is capitalizing?

A

The recording of an expenditure as an asset rather than an expense. This is done to allow for the spreading of the expense over more than one accounting period.

128
Q

Name 2 items that are commonly capitalized

A

Capitalized leases
- the the item that is leased is treated as if the leases had actually acquired the property.

Capitalized interest
- interest costs are capitalized instead of expensing them at times when no revenue is being generated, for example the exploration Phase in oil.

129
Q

What are deferred charges?

A

These charges represent payments made by the company for which the benefits will extend to the company over a period of years. Similar to prepaid expenses but over a longer term.

130
Q

What is amortization?

A

The gradual writing off of deferred charges and intangible assets.

131
Q

What are intangible assets?

A

Assets that can’t be touched weighed or measured. They comprise valuable legal rights essential to the operation of the company. Ie copyrights, patents, goodwill, trademarks etc

132
Q

What are current liabilities?

A

Debts incurred by a company in the ordinary course of its business which have to be paid in a short time - a year at most.

133
Q

What are deferred income taxes

A

Deferred taxes represent the difference between taxes paid under the income tax act and the tax provision that a company makes based on accounting income.

134
Q

What are consolidated balance sheets.

A

The parent companies figures are combined with those of it’s subsidiaries into a single joint statement.

This applies even of the parent company owns less that 100% of the subsidiary.

135
Q

What is a minority interest?

A

In a consolidated balance sheet if the parent company owns less than 100% of the subsidiary the part NOT owned is shown as a minority interest.

136
Q

What is deferred income?

A

When a company receives payment for goods or services that it has not yet provided it creates an obligation to deliver these items in the future and as such the unearned portion represents a liability to the company and is shown as such.

137
Q

What is long term debt?

A

Debt that, unlike current debt, is not due within a year.

Typically described in detail if the type of security provided on the loan, the interest rate, when the debt becomes repayable and what sinking fund provision, if any, is made got repayment.

138
Q

What is a sinking fund?

A

The amount set aside each year for repayment of the debt.

139
Q

What does shareholder equity represent on a balance sheet?

A

The amount that shareholders have at risk in the business.

140
Q

What part of shareholder equity is share capital?

A

The amount receives by the company for its shares AT THE TIME THEY WERE ISSUED. It is not related at all to current market price of the outstanding shares.

141
Q

What 2 things would change share capital?

A

If the company issued new shares

If the company bought back outstanding shares.

142
Q

What is contributed surplus?

A

It is shareholder equity that results results from sources other than earnings, for examples if shares sell for above the par or face value the excess becomes contributed surplus.

143
Q

What are retained earnings

A

The portion of annual earnings retained by the company after payment of all expenses and distribution of dividends.

They serve as a cushion to absorb losses incurred in bad years. If a loss is suffered in any year the loss is deducted from retained earnings.

144
Q

What is foreign currency translation adjustment?

A

This item may appear in consolidated financial statements of companies that have subsidiaries in foreign countries. The assets of these subsidiaries are valued in the currency of the country where they are resident. If significant changes in the foreign exchange rate occur it will cause the asset to be worth more or less. This adjustment is included as an adjustment in shareholder equity.

145
Q

What items are included on the balance sheet in the category of shareholder equity?

A

Share capital

Contributed surplus

Retained earnings

Foreign currency translation adjustment.

146
Q

What are 3 names for an earnings statement?

A

Income Statement
Profit and Loss Statement
Statement of Revenue and Expense

147
Q

What does an earning statement show?

A

How much revenue a company received during the year from sale of its products or services and the expenses that it incurred.

148
Q

How is profit or loss for the year defined?

A

It is the difference between the revenue a company received during the year from sale of its products or services and the expenses that it incurred.

149
Q

What are net earnings?

A

The revenue a company received during the year from sale of its products and services less the expenses that it incurred minus income tax.

Dividends may be paid to shareholders from net earnings

150
Q

What does the earnings statement reveal about a company?

A

Where the income comes from and where it is spent.

The adequacy of earnings both to assure the successful operation of the company and to provide income for holders of its securities.

The companies earning power - how much and how consistently it can earn.

.

151
Q

What 4 broad sections are found in an earnings statement?

A

Operating section (income from its main operation) - origin of income

Non-operating section (income from other than it’s main operation)- origin of income

Creditors section (relates to interest on items in the creditors section of the valance sheet) - distribution of income

Owners section. ( relates to shareholders equity in the balance sheet) - distribution of income.

152
Q

The operating section of the earnings statement should contain what 3 things?

A

The operating income received

The expenses incurred to obtain that income

The balance or net amount of that income (operating profit or loss)

153
Q

What is gross operating profit?

A

Net sales - cost of goods sold

154
Q

For investors why is it important that depreciation is properly assessed?

A

The earning of the company would be overstated.

The compAny may be living off its capital - not reinvesting sufficiently in its plant and equipment to maintain operations.

155
Q

What is net operating profit

A

Net sales - total operating expenses

156
Q

What is covered in the non-operating section of the earnings report?

A

Income received from sources not directly related to the main operation of the company. Examples are interest, dividends, rent on property that is no longer required.

Non-operating income MUST be separated from sales.

157
Q

What are extraordinary items and how should they be treated.

A

They are gains or losses that are expected to occur infrequently and are not typical of normal business activity and do not depend primarily on the decisions of management and owners.

Earnings statements must report earnings before and after inclusion of the extraordinary item.

158
Q

What does the creditors section of the earnings report contain.

A

The distribution of income to creditors. This is usually done in the form of fixed interest charges to banks and other debt holders. These charges are paid out of income before tax.

159
Q

What is in the owners section if the earnings report.

A

The shareholders are the owners and they are entitled to their share of the net earnings. Net earnings are net income - creditors charges - income tax.

NOTE
In consolidated companies the minority interest is also deducted because it does not belong to the shareholders of the parent company.

160
Q

What are the 3 methods if accounting and associated %of ownership for subsidiaries?

A

More than 50% - consolidation method of accounting.

20-50%. - equity accounting method

Less than 20% - cost accounting method

161
Q

What is equity income and where is it recorded?

A

Equity income arises when a parent company claims it’s share of a subsidiary.

It is recorded in the owners section of the earnings report.

162
Q

What is equity loss and where is it recorded.

A

If a subsidiary experiences a loss the parent company will claim it’s share of the loss on it’s earning statements.

It is recorded in the owners section of the earnings report.

163
Q

What calculations need to be done in relation to equity income or equity loss if a true picture of the companies cash earnings is required?

A

In the case of equity income it needs to be deducted from the parent companies earnings.

In the case of equity loss it needs to be added in to the parent companies earnings.

164
Q

What type of funds equity income are and equity loss considers to be.

A

Non-cash

165
Q

What is the retained earnings statement?

A

It provides a record of the profits kept in the business year after year.

The profit or loss on the companies most recent year is determined in the earnings statement and then transferred to the Retained Earnings Statement.

Retained earnings are profits earned over the years that have not been paid out to shareholders as dividends. The directors have decided to reinvest them in the business.

166
Q

Where does the final retained earnings figure appear?

A

It is carried to the balance sheet where it appears in the shareholders equity section.

The retained earnings statement is a link between the earnings statement and the balance sheet.

167
Q

What does a balance sheet, an earnings statement and a changes in financial position show.

A

Balance sheet = the companies financial position at a specific point in time.

Earnings statement = the companies operating activities for the year.

Statement of change in financial position = how the company generated and spent its cash in a year.

168
Q

What 3 headings are in a statement of changes in financial position?

A

Operating activities - the companies net earnings adjusted for items such as depreciation, amortization and equity income which does not involve an outlay or receipt of cash.

Financing Activities - proceeds from issuance of shares, funds received under long term debt issues, repayment of debt etc.

Investing activities - outlays of cash to acquire fixed assets, income from investments.

169
Q

What should be included in the notes section of financial statements?

A

Accounting policies etc that would clutter the rest of the report.

170
Q

What is an auditors report?

A

Every Canadian limited company is required by law to appoint an auditor to represent shareholders and report to them annually on the companies financial statements expressing an opinion in writing on their fairness and consistency.

171
Q

How is the auditor appointed?

A

They are appointed at the companies annual meeting by resolution of the shareholders, who can also dismiss them.

A member of the Institute of Chartered Accountants may act as auditor in the province where they carry on business

172
Q

An auditors report gas 3 paragraphs what are they?

A

Introduction - financial statements covered and responsibilities of the auditor.

Scope - how the shift was conducted.

Opinion.

173
Q

In a statement if Retained Earnings what does reserve mean?

A

It means that money has been earmarked for something in the future.

174
Q

What Te the 4 types of ratios commonly used to analyze a companies financial statements?

A

Liquidity Ratios - used to judge the companies ability to meet its short term commitments.

Debt Ratios - show how well the company can deal with its debt obligations.

Profitability a Ratios - show how well management has made use of the companies resources.

Value Ratios - shoes the investor the worth of the company’s shares or the return on owning them.

175
Q

How should ratios be used?

A

They are not proofs but rather blues upon which to form a judgement.

One ratio alone foes not tell much.

Their significance may vary between different industries.

176
Q

How can ratios be compared to be of value?

A

Internally with similar ratios from the same company over a period of time.

Externally with similar companies or with industry averages.

177
Q

How are internal trend lines calculated?

A

Earnings per share value for a base period is selected and it is treated as 100. Subsequent earning per share valued are subsequently divided by the base earnings per share value and converted to 100.

Example:

EPS of 1.18 is chosen and is 100 (1.18/1.18 x 100)

EPS the following year was 1.32. 1.32/1.18 x 100 = 1.12

Each year is calculated to provide the trend line.

178
Q

What is the disadvantage of using an internal trend line?

A

It will be misleading if the initial base period is not representative.

It can’t be calculated if the Base period figure is negative.

Canadian Securities Ch 2 Capital Markets & Financial Setvices Contd (2 decks)

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