Analyst's Exam

I was cleaning out my desk this morning and found this. Last year Eventual was doing some pretty heavy-duty recruiting and I got my paws on a copy of the written test they were giving potential analysts. Do you think I have what it takes to be an analyst?

EVENTUAL PRACTICAL FINANCIAL SERVICES CORP.
Analyst Candidates' Technical Exam
October 2004
Name: Forky Fourchette III, esq., CPA

1. Which one of the three financial statements would you choose to evaluate a company? Please elaborate on your choice.
I wouldn't use any of the three financial statements. Rather, I would evaluate a company based on what floor it's on and how many windows it has. Everybody knows that the higher the floor, the more prestigious the company. Nobody respects the people on 12 or 18. For all we know, that's probably where the mail room is! But you can bet they won't put the mail room on the 52nd floor! And you need lots of big windows to enjoy the great view.

2. If UBITEA has historically been strong, what are some reasons cash flow from operations might be negative? (What are the limitations of using UBITEA as a proxy for cash flow?)
Cash flow is never negative. Getting money is a good thing no matter how you look at it. Using UBITEA can be limiting because very few people actually know what UBITEA stands for and the ones who do are probably too smart for their own good and should be fired at once before they start embezzling or money laundering and other things of that ilk.

3. Define the fed funds rate, discount rate and prime rate. What are the current levels of each?
Fed Funds rate is how much food costs for office parties over the course of the year and how many people ate at them.
Discount rate - duh! It's how much of a discount you get!
Prime rate is like prime rib and generally refers to expensive things like diamonds, furs, sports cars, and wildlife preserves.

The current levels of all these rates are looking pretty good, but, as my accounting professor might say, the 2nd Great Depression may only be weeks away so don't be too optimistic.

4. In a rising price environment, which inventory accounting method, LUFO or FUFO, provides more accurate inventory values? Why?
It's best to use a combination of the two (LUFOFUFO) to get accurate results, although I've also found that methods such as FOFFOBOFFO, GOGOGAGA, HENNYPENNY, GOOSEYLOOSEY, TURKEYLURKEY, and FOXYLOXY work just as well. Especially when there are rumors about declining overheads. I don't know why they work. They just do.

5. Would a note be more expensive for an issuer to call at "treasury flat" or "treasury +50" at the time of the call? Please explain your answer. (Hint: Think discount rate.)
One could call at either place and it would be equally expensive--Treasury Flat being a ritzy apartment complex and Treasury +50 being a fancy retirement home. My recommendation would be to review your current telephone usage and choose the plan that's right for you.

6. Describe two different methods of revenue recognition. Under what circumstances would a company choose the methods you have described?
First you check the little details like the serial number and the designs that frame the edges. Those are very difficult to forge. Then you check and see if it has that new watermark design when you hold it up to the light. Those are two ways to ensure your revenue is legit and not just "funny money". Any smart company would always use these methods.

7. In accounting for equity ownership in another firm, what conditions must qualify for the equity method?
The best ones. Pure and simple.

8. Why do you think EPFSCorp. conducts its own credit analysis even if the company has S&P or Moody's ratings?
Because they don't trust them! In this world of charlatans and snake-oil salesmen you can never be too careful. As my accounting professor says, "Chapter Eleven comes right after chapter ten, and that's the best chapter in the book."

9. Other than an increased probability of bankruptcy, describe another major disadvantage of high financial leverage?
Death. And the economic collapse of America. And global warming.

10. How would you evaluate a company differently when considering investing debt vs. equity.
I would never judge someone differently based on something as petty as that. I believe that everyone deserves an equal chance to succeed and labels like the ones mentioned above are hurtful & destructive. Instead, I would evaluate a company based on how nice the office looks, how high up it is, and how many windows it has, which are unmistakable signs of class and prestige.