WHAT YOU SHOULD KNOW FOR THE MIDTERM
The midterm will be much like last year’s midterm, except that we have also covered ratios (on last year’s final). Years before that are also generally representative. Students typically find the midterm to be reasonably straightforward (although not necessarily easy) if they had the required preparation for the course and have been following the material in class and in the assignments. The exam will focus on one case company and will cover the topics from the course so far.
Overview: Understand the relations among the three financial statements, the components of each statement and where to find information in the annual report (e.g., sales, audit opinion, dividends declared, fiscal year-end, revenue recognition accounting policy, etc.). Be familiar with the basic differences in accounting approach internationally. Problem 1.28 and the Maytag case are good examples.
Balance Sheet: Understand the function of the balance sheet, its major components (e.g. current and noncurrent assets and liabilities and shareholders' equity, and specific accounts like prepaid expenses, accumulated depreciation, etc.) and the historical cost focus of accounting. Be familiar with the basic flows through the accounts and be able to recreate the substance of what occurred on the balance sheet from financial statement data. Be familiar with differences in balance sheet format internationally. Problem 2.28, Club Med. and Yokohama/Goodyear are good examples.
Basic Income Statement: Understand the function of the income statement, its major components (e.g., revenues and expenses, cost of goods sold, selling, general and administrative expenses, depreciation expense, etc.) and the goals of the accrual basis of accounting. Understand the relations between balance sheet (permanent) and income statement (temporary) accounts and the closing process. Be familiar with revenue and expense recognition criteria. Problem 3.31, Abercrombie & Fitch and Kendal Square are good examples.
Statement of Cash Flows: Understand the basic reasons that cash flows differ from accruals and the major components of the statement of cash flows (e.g., the operating investing and financing sections). Understand why the various adjustments are made in coming up with cash flows, especially in the operations section (e.g., depreciation and loss on sale of PP&E add-backs to net income, changes in current asset and liability accounts like accounts receivable, inventories, accounts payable, etc.) Be able to interpret changes in cash based on components of the statement of cash flows and use them to evaluate the cash flows of the company. Problem 4.29, Weis Markets and Frederick’s of Hollywoodare a good examples.
Ratios: Be able to decompose return on assets and return on equity based on the decomposition discussed in class and interpret the components. If you understood the Coke/Pepsi example/handout from class, you should be in good shape.
III.Format
The exam will comprise two parts, one primarily on mechanics and one primarily on applications. The mechanics section will be one problem approximately one hour and thirty minutes in length and will ask you to forecast a set of financial statements (balance sheet, income statement and cash flow statement) for a case company based on a set of assumptions. The problem will include many transactions to test a variety of topics and partial credit will be awarded, so a weakness of a single topic should not have undue influence on your overall score.
The applications part will focus on the case company’s financial statements and will include questions on each of the applications topics listed above. The problems will be generally like those in Hirst and McAnally, with emphasis on quantitative questions (e.g., replicating underlying t-accounts and journal entries) and interpretation. Some of the HM problems assigned in class were intended to stimulate your thinking about underlying economics and group discussion and, hence, were open-ended. The exam questions will be more to the point, with more clear-cut answers.
The exam is intended to evaluate your understanding of the basic material covered in the first half of the course. It is my intention to write an exam that is accessible to everyone that had the recommended background coming into the course based on the material covered in class and the assigned problems. The exam will be open book and computers will be permitted; however, I suspect that setting up spreadsheets, etc., will be more trouble than it is worth. The exam is not intended to be time constrained if you have a reasonable grasp on the material, but it will be if you have to look everything up as you go along. If you are unclear on a question, state your assumptions and move on. If something is really unclear or you think it is wrong, I will be available during the exam to answer questions.
For additional mechanics practice problems, see the list that was given as part of the packet of revised solutions. Questions on old exams or the Hirst and McAnally cases that we did not cover in class would be good practice for the applications portions of the exam. Answers to extra Hirst and McAnally cases are available on request. The answer key to Stickney and Weill is available on the bookshelf in front of my office. However, you should not need to work additional problems if you could work the cases, assigned problems and last year’s midterm.
- Review Sessions and Exam Time
Review sessions will be held in lieu of class on Friday afternoon, starting with the 2002 midterm in Koury at 3:30. The exam will be Saturday, 9:00-12:00. If you need to take it at another time, please let me know. I will be in the hall to answer questions. If you would like to stop by after the exam, I will have some beer, sodas and munchies in my back yard (605 Bowden Road, maps to be provided) starting at about 1:30 (don’t ask why—it is a tradition with a long history). Families, friends, dogs, etc. are invited—we have sand volleyball and a pool, so bring a suit. There are plenty of activities for kids—trampoline, go cart, etc.