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Test your basic knowledge |
Advanced Financial Reporting And Analysis
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Study First
Subject
:
business-skills
Instructions:
Answer 50 questions in 15 minutes.
If you are not ready to take this test, you can
study here
.
Match each statement with the correct term.
Don't refresh. All questions and answers are randomly picked and ordered every time you load a test.
This is a study tool. The 3 wrong answers for each question are randomly chosen from answers to other questions. So, you might find at times the answers obvious, but you will see it re-enforces your understanding as you take the test each time.
1. NI/Avg. Total Assets - NI + Int (1-t) / Avg. Total Assets - Operating ROA: Operating INc/ Avg. Total Assets
FASB - Harmonization
Return on Assets ROA...
Return on total capital (ROTC)...
B/S - Long-lived assets
2. Higher share price - Lower borrowing cost - Higher incentive compensation
Low Quality Earnings is result of...
Bond Issuance Cost under GAAP/IFRS
Creative Cash Flows Accounting: Motivation
B/S - short-term investments
3. CV of Op. Inc = std dev. EBIT/ Mean EBIT - CV of Revenue: std. dev Rev/ mean Rev. - Operating Leverage = %chg in EBIT/ %chg in Sales
Operating Risk Ratios...
Under Completed Contract Method...
B/S - Long-lived assets PP&E
Analysis: Market Value of Debt
4. Cash Flow available for distribution to all investors (stockholders & debt holders) CFO + int(1-t) - fixed capital investment or [FCFF calculated from NI = NI + noncash charged + (Int exp(1-tax rate) - net cap investment - working capital invt.]
The report format of B/S
Under Completed Contract Method...
Free Cash Flow to the Firm - FCFF
IASB
5. Funds from Operations to debt = NI adj for non cash items/ total debt - Free operating CF to Total Debt = CFO - Capex / total debt - Total Debt to EBITDA = total debt / EBITDA - Return on Capital = EBIT / Capital - Total debt to total debt + equity =
B/S - Long-lived assets
Asset Capitalization
Credit Analysis: Ratios
Low Quality Earnings is result of...
6. 1) Increase comparability; 2) Reduce expense of overseas capital; 3) Reduce the expense of producing consolidated accounts
FASB - Harmonization
Finance (capital) Lease criteria GAAP vs. IFRS
Impact on the Cash Flow of a Discount Bond...
Characteristics of an effective framework
7. CFO: no impact - CFF: increased by amount rcvd at issuance and decreased by payment made at redemption - CFO is lower (b/c no impact) and CFF is higher
Return on total capital (ROTC)...
Inv. Valuation reporting Inventory ABOVE costs...
Impact on the Cash Flow of a Zero Coupon Bond...
Steps of F/S Analysis
8. Shows sales and cost of goods sold.Under GAAP: 1) must be primary obligor under the contract; 2) bear inventory and credit risk; 3) have the ability to choose its supplier; 4) have reasonable latitude to set the price.
Inventory Systems...
Deferred Tax Asset: (DTA)
Gross Reporting of Revenue
Financial Ration based on B/S: Liquidity Ratios
9. Loss that could not be deducted on the tax return in current period but may be used to reduce taxable income and taxes payable in future (i.e. warranty)
Tax Loss Carryforward...
Fraud Triangle - 2) Opportunity
Intercorporate Investment: < 20% votes...
Revaluation above historic cost...
10. 1) Responsibility to establish and maintain adequate internal controls 2) Mgmt's framework for evaluating internal controls 3) Assessment of the effectiveness of internal controls over the last operating period 4) Statement of auditor's attestment 5)
Credit Rating Process...
Funded Status US GAAP & IFRS
Sarbanes-Oxley Management Report...
FIFO results in: (assuming inflationary period)
11. Beginning Inv. (BI) + Purchases (P) = Available for Sale - Available for sale - COGS = Ending Inventory (EI)
Balance Sheet
Ending Inventory =
Screening for Potential Equity Investment: Criteria
Asset Revaluation: IFRS
12. CFO: cash interest expense - CFF: increased by amount rcvd at issuance and decreased by payment made at redemption - CFO is lower CFF is higher
Impact on the Cash Flow of a Premium Bond...
Inventory Valuatoin (LCM)
Traditional DuPont Equation...
Low Quality Earnings is result of...
13. Under GAAP 1) Purchased patentes - copyrights - franchises - licenses - brands - and trademarks 2) Direct response advertising 3) Goodwill arising from transactions - (Proceeds - FMV net assets required = goodwill) 4) Software development costs once
Capitalized Intangibles...
Cash Flow: Logic (A = L + E)
FIFO ending inventory =
Income Tax Paid...
14. Fair Value of Plan Assets - Defined Benefit Obligation (DBO) - Fair Value > DBO: overfunded (asset on B/S - GAAP) - Fair Value < DBO: underfunded (liability on B/S - GAAP) - (Funded Status = Economic Position of Plan)
days of inv. on hand =
Sources of Differences: Temporary
DBO Funded Status =
Debt covenants
15. When a company prepares a proxy statement for its shareholders prior to the annual meeting or other shareholder vote - it also files the statement with the SEC as Form DEF-14A.
Motivation to Under-report Earnings
Form DEF-14A...
Segment Reporting
Cash Flow: Logic (A = L + E)
16. Securities that would DECREASE EPS if exercised - If X< Avg. stock price then could be exercised - If X> Avg. stock price then will not be exercised
Forecasting Financial Performance: Top Down Approach...
% of Completion
Dilutive Securities
3 C's for Credit Analysis...
17. Depreciation exp = (cost - residual value) x (# units produced / total expected to produce)
Intangibles under IFRS...
Depreciation Methods...
Expensed Intangibles...
Units of Production Method
18. Current ratio = CA/CL - Quick/Acid test = (cash + mkt sec + AR)/CL - Cash ratio = (Cash + mkt sec)/ CL - Defensive interval = (cash + mkt sec + AR)/Daily Cash Exp - Liquidity is over current Liabilities
Stock options: Use treasury stock method
Motivation to Overstate Assets/Understate Liabilities
Market Value (GAAP)...
Financial Ration based on B/S: Liquidity Ratios
19. 365/(Inv. T/O) = 365/( COGS/ Avg. Inv.)
Inventory Systems...
days of inv. on hand =
Balance Sheet - formats
Tax base of an asset
20. Management turnover.
Extended DuPont Equation...
Which of the following characteristics should be of least concerned about management's opportunities to commit fraud?
Add/ Sub changes to related b/s operating accounts
To investigate the stability of that structure - Kilgore would be best served by looking at...
21. 1) Character: Mgmt reputation and history of repayment 2) Collateral: ability to pledge specific collateral reduces lender risk 3) Capacity: ability to replay debt. requires LT view of firms prospect.
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22. Interest Expense = Coupon + Amortization = PV of future CF x market yield @ issuance
Valuation Allowance...
Under Completed Contract Method...
Revaluation below historic cost...
Impact on the B/S of a Discount Bond...
23. Means that at least ONE of the following is true: Company has poor profit margin; Company has poor asset TO; Company is underleveraged
ROE interpretation: if ROE is low...
IASB
Trade-Offs Qualitative Characteristics of IFRS
Dilutive Securities
24. Pd after more than 1 year - notes & bonds: at PV of future CF pymets - Capital leases - Provisions - Deferred tax
Convergence IFRS/US GAAP...
B/S - Long-term Liabilities
Analyzing Effective Tax Rate Reconciliation
Asset Revaluation: IFRS
25. Both: Recognize going concern & accrual assumptions - IASB: Going concern & accruals given more prominence in framework - FASB: Going concern assumption not well developed in framework.
Effects of Lease Classification on Ratios - Operating Lease
Forecasting Financial Performance: Top Down Approach...
Inv. Valuation reporting Inventory ABOVE costs...
IFRS/US GAAP Frameworks: underlying assumptions...
26. Diff. in depreciation methods/assumptions; Diff. in inventory methods/assumptions; Diff. in treatment of the effect of exchg rate chgs; Diff. in classifications of investment securities - Goodwill: Internally Generated DON'T capitalize - Purchased =
Financial Liability: US GAAP/Amortized at Cost
Balance Sheet
Financial Assets: US GAAP/Fair Market Value
Financial Adj to Facilitate Comparison...
27. Potentially dilutive securitites [options - warrants - convertible securities]
LIFO results in: (assuming inflationary period)
Motivation to Overstate Assets/Understate Liabilities
Common Size Statement
Complex Capital Structure
28. 1) Evidence of an arrangement; 2) Completion of earnings process; 3) Price is determined or determinable; 4) Assurance of payment
SEC guidance for Revenue Recognition
Free Cash Flow -CFO
Impact on the B/S of a Par Bond...
DBO Funded Status =
29. Shows only the difference between sales and cost of goods sold Users are usually: 1) internet-based merchandising companies; 2) Sell prodict but never hold inventory; 3) Arrangement for supplier to ship directly to end customer. Discolsure policies
Net Reporting of Revenue
Ending Inventory =
Operating Lease
Form 144...
30. LIFO after-tax profit + (change in LIFO reserve)(1 - t)
4 General Categories for Creditworthiness/Capacity...
Ending Inventory =
FIFO after-tax profit =
Installment Method...
31. Efficient inventory managment
FIFO is appropriate
Operating Lease
Horizontal Common Size Statements...
Inventory mangement: High T/O (low DOH) and sales growth above industry average
32. 2 step-process 1) Recoverability: carrying value > undiscounted CF from asset's use and disposal 2) Loss measurement: Loss is the excess of carrying value over the asset's fair market value or PV of cash flows - Loss reversal for held-for-use assets
Impairments recognition (GAAP)
Taxation: Income Tax Expense
Intangibles under IFRS...
Which of the following characteristics should be of least concerned about management's opportunities to commit fraud?
33. 1) Capitalize interst during construction period when building its own operating facility; 2) Interest must actually be paid by the firm; 3) Specific and general debt interest is capitalized
Intangibles under IFRS...
Amortization of Bond Premium = (in/out flow) in the indirect method CFO
Capitalization of Interest...
Defined Benefit Plans
34. Income variability lower - Profitability early years (ROE - ROA & NI) is Higher - Profitability later years: lower - Total Cash Flows: Same - CFO: higher - CFI: Lower - Leverage ratios: D/E & D/A: lower - Opposite fore Expensing
FIFO is appropriate
Operating Lease
Financial Implications of Capitalizing...
The objective of f/s is to...
35. Profit is recognized only when it exceeds estimated total cost.
Cash Flow From Operations (CFO) - FASB
Revaluation below historic cost...
Inventory Cost Flow Methods...
Cost recovery method...
36. (net income - preferred dividends)/weighted average of common shares outstanding - only income from continuing operations is considered
IASB - Goals
ROE interpretation: if ROE is low...
Finance (capital) Lease criteria GAAP vs. IFRS
BASIC EPS
37. Carrying amount of the liability minus the amount that will be deductible in the future.
Tax base on a liability
Market Value (GAAP)...
FASB
Motivation to Understate Assets/Overstate Liabilities
38. Employer promises specific payment stream at retirement - Payments are based on yrs of service - retirement age - and final salary - Employers bears investment risk - Funded by pool of assets - Complicated accounting
Defined Benefit Plans
Net Periodic Benefit Costs
Antidilutive Securities
Analyzing Effective Tax Rate Reconciliation
39. Improve ROA and Asset TO Ratios - Report higher aquisition goodwill
Analysis: Market Value of Debt
Motivation to Understate Assets/Overstate Liabilities
Sources of Differences betweent F/S & T/
Revaluation below historic cost...
40. Primary) Relevance & Reliability - Secondary) Comparability - Lastly) Understandability - user specific
Antidilutive Securities
The 4 Qualitative Characteristics of FASB...
LIFO results in: (assuming inflationary period)
B/S - Long-term Liabilities
41. Both: purpose is to assist development & revision of accting stds - IASB: Firms must consider framework if no std exists - FASB: No express requirement to consider framework
Cost included in Inventory on b/s...
IFRS/US GAAP Frameworks: purpose of framework
Motivation to Under-report Earnings
Impact on the Cash Flow of a Premium Bond...
42. 1) Land @ cost; 2) Plant & building @ historic cost less accu'm depr; 3) Equipment @ historic cost less accu'm depr 4) Intangible assets @ historic cost less accu'm amort
B/S - Long-lived assets PP&E
Financial Liability: US GAAP/Amortized at Cost
The objective of f/s is to...
Intangible Assets
43. 1) Account format (A on left and L & E on right) 2) Report format ( A - L - E presented in one column) 3) Classified B/S (ordered)
Reasons to Lease...
Financial Ration based on B/S: Liquidity Ratios
Balance Sheet - formats
The best indicator of overstating its profits is...
44. Replacement cost subject to: Upper limit = NRV - Loewr limit = NRV - normal profit margin
FIFO ending inventory =
Market Value (GAAP)...
Expensed Intangibles...
FASB - Harmonization
45. (GAAP) Internally created intangibles 1) (R&D) are expensed 2) Advertising 3) Software (developed to establish feasibility)
LIFO results in: (assuming inflationary period)
Intercorporate Investment: < 20% votes...
Taxation Disclosure Requirements
Expensed Intangibles...
46. I/S and B/S - Each line is relative to base year
Horizontal Common Size Statements...
B/S - Long-term Liabilities
IOSCO
Inv. Valuation reporting Inventory ABOVE costs...
47. 1) B/S asset increased to FMV 2) Increase above original cost to equity via revaluation surplus account (comprehensive Income)
Operating Risk Ratios...
BASIC EPS
Credit Analysis: Ratios
Revaluation above historic cost...
48. Actual cash outflow for taxes paid during current period
Income Tax Paid...
Deferred Tax Asset: (DTA)
Motivation to Over-report Earnings
Depreciation Methods...
49. 1) Calculate cash raised on exercise 2) Repurchase shares at avg. price 3) New Shares = exercised - repurchased
Extended DuPont Equation...
Impact on the Cash Flow of a Zero Coupon Bond...
Financial Implications of Capitalizing...
Stock options: Use treasury stock method
50. 1) Development of high quality - transparent and enforceable global standards; 2) Promote application of standards; 3) Take into account special needs (small & med entities & emerging markets); 4) Convergence of nat'l and int'l standards
LIFO results in: (assuming inflationary period)
Financial Ratios based on B/S: Solvency (Coverage)
Valuation Allowance...
IASB - Goals