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Advanced Financial Reporting And Analysis
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business-skills
Instructions:
Answer 50 questions in 15 minutes.
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Match each statement with the correct term.
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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. Stock options - Warrants - Convertible debt - Convertible preferred stock
Potentially Dillutive Securities
Types of accounting changes...
Sources of Differences: Temporary
Discontinued Operations...
2. Nonreversal DTL - therefore it is permanent = Equity. therefore decrease in DTL = Increase in Equity - Reversal DTL - therefore it is temp = Liability
Debt covenants
IFRS Revenue Recognition
Balance Sheet
Taxation Analyst Adjustments...
3. IAS 39 Marketable securities - IAS 2 Inventories (LIFO prohibited) - IAS 16 PP&E - JV (IFRS: proportional consolidation) - IAS 38 Intangibles - IAS 18 & 11 Contruction Contracts - Extraordinary Items: Prohibited in IFRS - Cash Flow Statement
The account format of B/S
Intercorporate Investment: > 50% votes...
Diluted EPS
Convergence IFRS/US GAAP...
4. IFRS: Funded status is NOT on B/S Asset/Liability - Result in a b/s that does NOT represent econ reality - GAAP: Funded status = B/S Asset/Liability -Both disclose components of DBO - plan assets - expenses - and assumptions used to calculate pensio
Cash Flow From Financing (USA) (Source of Cash)
Implication for Analysts: Be aware of differences in tax reconcilation between periods
Funded Status US GAAP & IFRS
Footnote disclosure of Reconciliation of opening and closing carrying values...
5. Trade relief - Contingent consideration - Union concessions
Motivation to Under-report Earnings
Free Cash Flow to Equity - FCFE
Footnote Finance Liability Disclosure
Trade-Offs Qualitative Characteristics of IFRS
6. 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
Impact on the Cash Flow of a Zero Coupon Bond...
Low Quality Earnings is result of...
Financial Liability: US GAAP/Fair Market Value
Finance (capital) Lease criteria GAAP vs. IFRS
7. All other liabilities (e.g. bonds - notes payables - leases)
Installment Method...
Gross Reporting of Revenue
LIFO results in: (assuming inflationary period)
Financial Liability: US GAAP/Amortized at Cost
8. Includes: cash flow from interst Rec'd and Paid - and Dividend received. Includes all income taxes paid.
Deferred Tax Asset: (DTA)
Cash Flow From Operations (CFO) - FASB
Low Quality Earnings is result of...
Ending Inventory =
9. G = (earnings Retention rate) x (ROE) - earnings retention rate = [1-(payout ratio)] - payout ratio = Common dividends/ NI - Pref. Div.
Potentially Dillutive Securities
Sustainable Growth
Not all CF increase are Sustainable. Example of how Mgmt can Manipulate Cash Flow Statement
Calculate dividends declared...
10. For inventory that does not deteriorate with age.
Reasons to Lease...
B/S - investments
LIFO is appropriate
Impact on the B/S of a Discount Bond...
11. (GAAP) Internally created intangibles 1) (R&D) are expensed 2) Advertising 3) Software (developed to establish feasibility)
Analyst Treaments of DTL
Expensed Intangibles...
Not all CF increase are Sustainable. Example of how Mgmt can Manipulate Cash Flow Statement
FIFO ending inventory =
12. +Cash rcvd from customer - +Cash dividends rcvd - +Cash interest rcvd - +Other cash income ((trading securities) - Payment to suppliers - Cash expenses (wages etc) - Cash interest paid - Cash taxes paid
Ending Inventory =
Cash Flow From Operations (CFO) - FASB
Gain/(loss) on bond early retirement: (derecognition of debt)
Intangible Assets
13. I/S: Income statement account/Sales - B/S: Balance sheet account/ Total Assets
IASB
Amortization of Bond Premium = (in/out flow) in the indirect method CFO
Deferred Tax Liability: (DTL)
Vertical Common Size Statements...
14. EBIT/ *Gross Interest EBITDA/ *Gross Interest *(inc'd capitalized interest) - How many times is EBIT or EBITDA bigger than gross interest? Higher ratio is desired. Shows ability to cover int. payment
Net Realizable Value (NRV) (IFRS)
From creditor POV: Int. Coverage;
Gain/(loss) on bond early retirement: (derecognition of debt)
IFRS/US GAAP Frameworks: purpose of framework
15. Follows the traditional ledger account - assets on the left hand side and liabilities and equity on the right hand side.
To investigate the stability of that structure - Kilgore would be best served by looking at...
Capitalization of Interest...
The account format of B/S
The report format of B/S
16. 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
Impact on the Cash Flow of a Premium Bond...
Fraud Triangle - 3) Attitude/rationalization
Impairments recognition (GAAP)
Extended DuPont Equation...
17. 1) installment sales (If collection is certain - rev is recognized at time of sale) 2) installment method: (if collection cannot be estimated) 3) cost recovery (if collectability is highly uncertain)
Statement of Cash Flow - relevance...
DBO Funded Status =
Creative Cash Flows Accounting: Technique
Sales Basis Revenue Recognitions
18. 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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19. 1) Scale & Diversification - 2) Operational Efficiency - 3) Margin Stability - 4) Leverage
4 General Categories for Creditworthiness/Capacity...
Effects of Lease Classification on Ratios - Finance Lease
Financial Ratios based on B/S: Solvency ratio
Net Reporting of Revenue
20. Financial Services Companies: Operating activities: Interest - Dividends - G/(L) on disposal Non-Financial Services Companies: Non-operating activities: Interest - Dividends - G/(L) on disposal
Impact on the Cash Flow of a Par Bond...
Analyzing Effective Tax Rate Reconciliation
Operating vs. Non-operating Income
Return on total capital (ROTC)...
21. Primary) Relevance & Reliability - Secondary) Comparability - Lastly) Understandability - user specific
Creative Cash Flows Accounting: Technique
Asset Revaluation: IFRS
The 4 Qualitative Characteristics of FASB...
Implication for Analysts: Be aware of differences in tax reconcilation between periods
22. Trading securities - Available-for-sale - Derivatives (standalone or embedded in non-derivative intrument) - Assets with fair value exposure hedged by derivatives
Net Reporting of Revenue
LIFO results in: (assuming inflationary period)
IFRS/US GAAP Frameworks: Recognition of Elements...
Financial Assets: US GAAP/Fair Market Value
23. When Statutory tax rate does NOT equal Effective tax rate - Tax expense does note equal pretax income x statutory rate
Sources of Differences: Permanent
Deferred Tax Liability: (DTL)
ROE interpretation: if ROE is low...
Financial Assets: US GAAP/Amortized at Cost
24. FASB & IASB -LT projects under contract - reliable estimates of revenue - cost and completion time -Rev - exp and profit are recognized in proportion to total cost incurred to date - divided by total expected cost.
% of Completion
CFO - Direct/Indirect method
Financial Assets: US GAAP/Fair Market Value
The 4 Qualitative Characteristics of FASB...
25. 1) SL; 2) Double Decline balance (accelerated); 3) Units of production; 4) Tax code perscribed Modified Accelerated Cost Recovery System (MACRS)
Forecasting Financial Performance: Top Down Approach...
Depreciation Methods...
Cost recovery method...
Motivation to Understate Assets/Overstate Liabilities
26. Is more relevant than book value: Recent changes allow more liability to be recorded at FMV (IFRS & GAAP require disclosure of FMV) - Downward adj. in liability will Increase equity and decrease leverage ratio - Upward adj in liability will decrease
Tax Loss Carryforward...
Analysis: Market Value of Debt
What is the economic substance of financial (capital) lease?
Barter (IASB & FASB)
27. 1) Purpose and context 2) Data Collection 3) Data Processing 4) Analysis/Interpretation of data 5) Develop conclusions and recommendations 6) Follow-up
Inventory mangement: High T/O (low DOH) and sales growth below industry average
Financial Ration based on B/S: Liquidity Ratios
Extraordinary Items: Unusual AND Infrequent items...
Steps of F/S Analysis
28. 365/(Inv. T/O) = 365/( COGS/ Avg. Inv.)
Defined Contribution Plans
Segment Reporting
Impact on the B/S of a Discount Bond...
days of inv. on hand =
29. Return on Total Equity = NI/ Avg. Total Equity - Return on C/E = NI - Pref. Div/ Avg. Common Equity
Return on Equity (ROE)...
Sources of Differences betweent F/S & T/
Sales Basis Revenue Recognitions
Form 144...
30. Ineffective corp. ethical values; non-financial managers invovled in selection of accounting principles/estimates; History of violation; Focus on stock price and earning trends; Commitment to unrealistic/aggressive forecasts; Failure to correct known
Fraud Triangle - 3) Attitude/rationalization
Trade-Offs Qualitative Characteristics of IFRS
Form 144...
Auditor/Audit Opinion
31. 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...
B/S - Stockholders' Equity
Low Quality Earnings is result of...
Fraud Triangle - 2) Opportunity
32. Total assets TO = Revenue/Avg. total asset - Fixed asset TO = Revenue/ Avg. net fixed assets - Working Cap TO = Revenue/Avg. working captial
Defined Contribution Plans
Complex Capital Structure
Measures of Operating Performance - Efficiency Ratios...
Screening for Potential Equity Investment: Criteria
33. Change in equity from transactions from nonownership sources. Include: NI - chg in foreign currency translation adj. - chg in pension adj to funded status - chg unrealized gains/losses on derivatives contracts accounted for as hedges - chng in unrea
3 C's for Credit Analysis...
MD&A contains...
Vertical Common Size Statements...
Comprehensive income...
34. Timing differences (depreciations) - Permanent differences
Statement of Cash Flow - relevance...
Valuation Allowance...
MD&A contains...
Sources of Differences betweent F/S & T/
35. 1) Incentive/Pressure (the motive to commit fraud) 2) Opportunity (exists with weak internal controls) 3) Attitude/rationalization (mindset that fraud is justified)
Balance Sheet - formats
Measures of Operating Performance - Efficiency Ratios...
Income Tax Paid...
Fraud Triangle
36. LT D-to-E = Total LT Debt / Total Equity - D-to-E = Total Debt / Total Equity - Financial leverage ratio = Total Assets/Total Equity - Total Debt Ratio = Total Debt / Total Asset - Debt-to-Capital = Total Debt/ Total Debt + SOE - All Solvency are ove
days of sales o/s =
Financial Ratios based on B/S: Solvency ratio
Income Statement
Dilutive Securities
37. Low: P/E - P/CF - or P/S - High: ROE - ROA - growth rates of sales and earnings - Low: leverage
B/S - Long-lived assets
Screening for Potential Equity Investment: Criteria
Intercorporate Investment: > 50% votes...
4 General Categories for Creditworthiness/Capacity...
38. Working Capital = CA - CL - Working Capital TO = Rev/Avg. Working Capital - Fixed Asset TO = Rev/Avg Net Fixed Assets
Financial Liability: US GAAP/Fair Market Value
Activity Ratios
Free Cash Flow -CFO
Fundamental principles for PREPARING f/s under IFRS: (IAS No 10
39. 1) Diff tax rate in diff. tax jurisdictions (countries) (continuous)2) Permanent tax differences: tax credit - tax-exempt income - nondeductible expenses - & tax diff between capital gains and operating income. (continuous) 3)in tax rates and legisl
IFRS Revenue Recognition For Service
Finance (capital) Lease criteria GAAP vs. IFRS
Analyzing Effective Tax Rate Reconciliation
Credit Rating Process...
40. A: Increase = use cash (-) - Decrease = source cash (+) - L: Increase = source cash (+) - Decrease = use of cash (-) - E: Increase = source cash (+) - Decrease = use of cash (-)
Cash Flow: Logic (A = L + E)
Debt covenants
IFRS Revenue Recognition For Service
Income Statement
41. GAAP: direct method must disclose adj to reconcile NI to CFO. reconciliation is NOT required for IFRS. IFRS: pymts for Int & Taxes MUST be disclosed separately in the CF Stmnt under direct or indirect. Under GAAP - this can be reported in CF stmnt or
Double-decline balance (DDB)
Impact on the B/S of a Discount Bond...
Fraud Triangle - 2) Opportunity
CFO Disclosure requirement...
42. Actual cash outflow for taxes paid during current period
IFRS: Required F/S
Under Completed Contract Method...
Implication for Analysts: Be aware of differences in tax reconcilation between periods
Income Tax Paid...
43. EU & US 1) Int'l Org. of Securities Commission; 2) Goal: uniform regulation; 3) Core objectives: Protecting investor - Fair - transparent - efficient markets - Reduction of systematic risk
Footnote disclosure of Reconciliation of opening and closing carrying values...
IOSCO
Taxation Disclosure Requirements
Convergence IFRS/US GAAP...
44. More than a third of Maxwell's total sales go to its own consolidated subsidiaries High levels of related-party transactions are worrisome - particularly when those parties are not audited. But transactions within the company between subsidiaries con
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45. Selecting accounting principles to distort results - Structuring transactions to achieve a desired outcome - Using aggressive or unrealistic estimates and assumptions - Exploiting the intent of the accounting principle
Sources of Differences: Permanent
ROE interpretation: if ROE is low...
Financial Liability: US GAAP/Fair Market Value
Low Quality Earnings is result of...
46. Income Tax Expense > Taxes Payable - F/S > Tax Return - Pay less tax now but more on reversal
Balance Sheet
Deferred Tax Liability: (DTL)
LIFO is appropriate
Motivation to Understate Assets/Overstate Liabilities
47. 1) if 50% of its revenue is earned externally 2) if a business area has at least 10% of a firm's: Revenue; or Operating profit; or Use of asset 3) Business and geographical segments
The objective of f/s is to...
Segment Reporting
IFRS/US GAAP Frameworks: Measurement of Elements...
Financial Ration based on B/S: Liquidity Ratios
48. + Service Costs (recurring costs (actual)) - + Interest Costs (recurring costs (actual)) - - Expected return on plan assets (smoothed event) - +/- Amort of (gains) and losses (smoothed event) - +/- Amort of prior service costs* (smoothed event) - +/-
Fundamental principles for PREPARING f/s under IFRS: (IAS No 10
Motivation to Under-report Earnings
Add/ Sub changes to related b/s operating accounts
Net Periodic Benefit Costs
49. Net income + non-cash charges - working cap investment
Auditor/Audit Opinion
DTA Issues
Free Cash Flow -CFO
Diluted EPS
50. [net income - preferred dividends] + [convertible prf.dividends] + [convertible debt int.] (1-t) / (weighted avg. of c/s o/s) + (shares from conversion of conv. pfd. shares) + (shares from conversion of conv. debt) + (shares issuable from stock optio
Diluted EPS
CFI Analysis...
Analyzing Effective Tax Rate Reconciliation
Footnote disclosure of Reconciliation of opening and closing carrying values...
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