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Advanced Financial Reporting And Analysis
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Subject
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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. Same as other ratios using NI in this case substitut NI for CFO.
Cash flow ratios
IFRS: Required F/S
Intangible Assets
Financial Ratios based on B/S: Solvency (Coverage)
2. 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
Capitalization of Interest...
The objective of f/s is to...
FIFO is appropriate
FASB - Harmonization
3. 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
Taxable Income
Revaluation below historic cost...
IASB - Goals
Market Value (GAAP)...
4. Both: General agreement on objectives; focus on wide range of users - IASB: One objective for all users - FASB: Separate objectives for business entities and non-business entities.
Extraordinary Items: Unusual AND Infrequent items...
Financial Implications of Capitalizing...
IFRS/US GAAP Frameworks: objective of F/S
Inv. Valuation reporting Inventory ABOVE costs...
5. Cash Flow available for distribution to the c/s; after all obligations have been paid. CFO - fixed capital investment + net debt increase or CFO - net cap expenditure + net borrowings
Return on Assets ROA...
Free Cash Flow to Equity - FCFE
Fraud Triangle
IFRS/US GAAP Frameworks: Measurement of Elements...
6. Assets held for continuing usage in the business NOT for resale ( Invoice price - Sales Tax - Freight & Insurance - and Installation costs) 1) capitalize costs that result in higher future earnings 2) expense costs that have uncertain/NO impact on fu
Sources of Differences betweent F/S & T/
Impact on the B/S of a Zero Coupon Bond...
Asset Capitalization
Lessor Accounting Capital Lease: Sales: Direct Financing Lease
7. 1) Intention to hold >1 year (e.g. debt or equity) valued @ cost or mkt value 2) Equity accounted investments
B/S - investments
Inventory mangement: Low T/O (High DOH)...
Balance Sheet - formats
Auditor/Audit Opinion
8. 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
Straight-line depreciation (SL)
Operating Risk Ratios...
Net Periodic Benefit Costs
Effects of Lease Classification on F/S - Finance Lease
9. 1) understandability; 2) relevance; 3) reliability; and 4)comparability - No hierarchy
Impact on the B/S of a Zero Coupon Bond...
Fraud Triangle - 3) Attitude/rationalization
The 4 Qualitative Characteristics of IFRS
Which set of accounting standards requires firms to disclose estimated amortization expense for the next five years on intangible assets?
10. 1) Risk & Reward transferred; 2) No continued control; 3) Reliable measurement; 4) Probable flow of benefits; 5) Cost verifiable
% of Completion
IFRS Revenue Recognition
Cash Flow From Financing (USA) (Source of Cash)
Intangible Assets
11. 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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12. 1) Unqualified opinion (good); 2) Qualified opinion (followed GAAP except for...); 3) Adverse opinion (bad)
Auditor/Audit Opinion
Creative Cash Flows Accounting: Technique
Measures of Operating Performance - Efficiency Ratios...
Sources of Differences betweent F/S & T/
13. Both: Broadly consistent - lack fully developed concepts - FASB: Assets revaluations prohibited (except some financial instruments)
IFRS/US GAAP Frameworks: Measurement of Elements...
Form 8-K...
Taxation: Income Tax Expense
BASIC EPS
14. Financial Services Companies: Operating activities: Interest - Dividends - G/(L) on disposal Non-Financial Services Companies: Non-operating activities: Interest - Dividends - G/(L) on disposal
Free Cash Flow -CFO
LIFO is appropriate
# of days payable =
Operating vs. Non-operating Income
15. Inventory TO = COGS / Avg. Inventory - LIFO = Higher - FIFO = Lower - DOH = 365/(Inv. T/O) = 365/( COGS/ Avg. Inv.) - LIFO = lower days - FIFO = higher days - Gross Profit margin = Gross profit/ revenues - LIFO = lower - FIFO = higher
Complex Capital Structure
Inventory mangement: Low T/O (High DOH)...
Return on total capital (ROTC)...
Ratios that directly affect choice of Inventory Account...
16. NI/Avg. Total Assets - NI + Int (1-t) / Avg. Total Assets - Operating ROA: Operating INc/ Avg. Total Assets
Impact on the Cash Flow of a Discount Bond...
Effects of Lease Classification on Ratios - Finance Lease
Return on Assets ROA...
Characteristics of an effective framework
17. Share are to ensure significant influence over the company - Affiliate/Associate - Equity Method
Intercorporate Investment: 20% - 50% votes...
Defined Benefit Plans
Cash Flow From Financing (USA) (Source of Cash)
Fraud Triangle - 2) Opportunity
18. 1) Firms adds a lease asset and a lease liability to b/s = amounts - 2) Recognize int. expense on liability and depreciation exp on asset - Since Int. exp + depre > lease pymt in the early years. This decreases NI - and Profitability ratios.
Valuation Allowance...
Market Value (GAAP)...
Financial Lease Reporting
Component depreciation;
19. ROE = (NI/EBT)x(EBT/EBIT)x(EBIT/Rev)x(Rev/Asset)x(Asset/Eqty) or (tax burden)x(int. burden)x(EBITmargin)x(Aset TO)x(Fin Lvg)
Extended DuPont Equation...
B/S - investments
DTA/DTL: Effect on Net Income when Tax Rate decreases...
Forecasting Financial Performance: Top Down Approach...
20. Net income + non-cash charges - working cap investment
Capitalization of Interest...
Defined Contribution Plans
Amortization of Bond Premium = (in/out flow) in the indirect method CFO
Free Cash Flow -CFO
21. Taxes payable + chg deferred Tax as per Financial Report
DBO Funded Status =
IFRS/US GAAP Frameworks: objective of F/S
Taxation: Income Tax Expense
Forecasting Financial Performance: Top Down Approach...
22. 1) Evaluating equity investments for a portfolio; 2) Evaluating potential M&A; 3) Evaluating a subsidiary of a parent company; 4) Deciding on private equity/ venture cap investment 5) Determine creditworthiness - borrowing; 6) Extending credit to
Reasons to Lease...
Roles of financial reporting & analysis include...
Operating vs. Non-operating Income
CFO - Indirect method steps...
23. Actual cash outflow for taxes paid during current period
Forecasting Financial Performance: Application
Income Tax Paid...
Motivation to Understate Assets/Overstate Liabilities
Cash Flow From Investing (USA) (Assets)
24. 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
IFRS/US GAAP Frameworks: purpose of framework
FIFO is appropriate
3 C's for Credit Analysis...
Which set of accounting standards requires firms to disclose estimated amortization expense for the next five years on intangible assets?
25. All DTA and DTL are classified as noncurrent under IFRS - Under U.S. GAAP - deferred tax assets and liabilities are classified as current or non-current according to the classification of the underlying asset or liability. Under IFRS - deferred tax a
One major difference between the presentation of deferred tax assets and liabilities under IFRS and under U.S. GAAP is that...
Fraud Triangle - 1) Incentive/Pressure
Vertical Common Size Statements...
ROE interpretation: if ROE is low...
26. 1) Incentive/Pressure (the motive to commit fraud) 2) Opportunity (exists with weak internal controls) 3) Attitude/rationalization (mindset that fraud is justified)
Screening for Potential Equity Investment: Criteria
Net Periodic Benefit Costs
Fraud Triangle
Asset Capitalization
27. Carrying amount of the liability minus the amount that will be deductible in the future.
Inventory Valuatoin (LCM)
FASB - Harmonization
Tax base on a liability
Debt covenants
28. Shows the performance of the company over a reporting period.
Income Statement
MD&A contains...
DBO Funded Status =
Intercorporate Investment: < 20% votes...
29. Nature of liability; Maturity dates; Stated and effective int. rates; Call and conversion features; covenants; security pledged as collateral; Amount of Debt maturity in each of the next 5 years; Fair value of o/s instrutments
Footnote Finance Liability Disclosure
Impact on the B/S of a Zero Coupon Bond...
Inventory mangement: High T/O (low DOH) and sales growth below industry average
IOSCO
30. Periodic: Inventory and COGS determined at p/e - Perpetual: Inv. & COGS updated for each sale (no purchase account need) - Cost flow method impact: FIFO = same for both - LIFO = different - Avg. cost = different - FIFO & LIFO relationship remain
Balance Sheet
Inventory Systems...
IASB - Goals
Return on Equity (ROE)...
31. Higher share price - Lower borrowing cost - Higher incentive compensation
IFRS/US GAAP Frameworks: Recognition of Elements...
Creative Cash Flows Accounting: Motivation
Revaluation below historic cost...
Deferred Tax Asset: (DTA)
32. 1) Purpose and context 2) Data Collection 3) Data Processing 4) Analysis/Interpretation of data 5) Develop conclusions and recommendations 6) Follow-up
Steps of F/S Analysis
Effects of Lease Classification on F/S - Operating Lease
FIFO ending inventory =
Form DEF-14A...
33. 1) Show each item as a % of Net Revenue 2) Show each inflow as a % of total inflows 3) Show each outflow as a % of total outflow
Common Size Statement
Creative Cash Flows Accounting: Technique
Types of accounting changes: accounting estimate
Gain/(loss) on bond early retirement: (derecognition of debt)
34. 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)
The account format of B/S
Form 144...
B/S - short-term investments
Sarbanes-Oxley Management Report...
35. Slow moving or obsolete inventory
Inventory mangement: Low T/O (High DOH)...
Inventory Cost Flow Methods...
To investigate the stability of that structure - Kilgore would be best served by looking at...
Trade-Offs Qualitative Characteristics of IFRS
36. Low: P/E - P/CF - or P/S - High: ROE - ROA - growth rates of sales and earnings - Low: leverage
Screening for Potential Equity Investment: Criteria
Impact on the Cash Flow of a Zero Coupon Bond...
CFO - Direct method
Complex Capital Structure
37. Assess liquidity - solvency and financial flexibiliy
Statement of Cash Flow - relevance...
Types of accounting changes: prior period adjustments
Extended DuPont Equation...
Fraud Triangle - 1) Incentive/Pressure
38. 1) Basis for measurement; 2) carrying value of inventory by category; 3) Amount of inventory carried at FV less cost to sell 4) Write-downs & reversals (discussion of circumstance that led to reversal); 5) Inventories pledged as collateral for liabil
Fundamental principles for PREPARING f/s under IFRS: (IAS No 10
B/S - Stockholders' Equity
CFO - Indirect method steps...
Measurement of A & L disclosure in footnotes
39. Reported BELOW the line. Operations mgmt has decided to dispose of but: 1) has not yet done so or 2) did so in CY after it generated profit/(loss) Must be physicallly and operationally distinct from firm. Analyst must determine effects on future inco
Asset Revaluation: IFRS
IFRS: Required F/S
Creative Cash Flows Accounting: Technique
Discontinued Operations...
40. LIFO after-tax profit + (change in LIFO reserve)(1 - t)
Form DEF-14A...
From creditor POV: Int. Coverage;
Income Statement
FIFO after-tax profit =
41. Primary) Relevance & Reliability - Secondary) Comparability - Lastly) Understandability - user specific
Impact on the B/S of a Zero Coupon Bond...
Extraordinary Items: Unusual AND Infrequent items...
The 4 Qualitative Characteristics of FASB...
Inventory Cost Flow Methods...
42. CFO: cash interest expense - CFF: increased by amount rcvd at issuance and decreased by payment made at redemption
Impact on the Cash Flow of a Par Bond...
Convergence IFRS/US GAAP...
FIFO results in: (assuming inflationary period)
Dilutive Securities
43. Meet Analyst Expectations - Meet debt covenants - Incentive compensation
Valuation allowance
Motivation to Over-report Earnings
Cash Conversion Cycle =
Sources of Differences: Temporary
44. CFO = NI - means high quality of earnings but may be affect by the stage of business cycle and firm's life cycle - CFO > NI - means premature recognition of revenue or delayed recognition of expenses.
Operating vs. Non-operating Income
CFO Analysis...
Common Size Statement
Impact on the B/S of a Discount Bond...
45. Held for continuing use within the business (not for resale) 1) investment property; 2) Assets held for sale; 3) Natural resources; 4) PP&E
Deferred Tax Asset: (DTA)
Financial Ratio based on I/S...
B/S - Long-lived assets
Cash Flow From Operations (CFO) - IFRS
46. 1) 3rd party pressure: 1) analyst/institutional expectations; 2) need to obtain finance; 3) listing requirements; 4) Debt covenants; 5) Transactions 2) Directors' Financial Position: 1) Equity interest; 2) Stock options; 3) Personal debt guarantees.
Motivation to Under-report Earnings
# of days payable =
Inventory Valuatoin (LCM)
Fraud Triangle - 1) Incentive/Pressure
47. 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.
Gross Reporting of Revenue
Low Quality Earnings is result of...
Fraud Triangle - 2) Opportunity
Cash Flow From Investing (USA) (Assets)
48. US Gaap: lower of cost or market value - (does NOT allow subsequent reverasals) - IFRS: lower of cost or NET realizable value - (allows subsequent reversals)
Inventory Valuatoin (LCM)
Simple capital structure
Calculate dividends declared...
Intercorporate Investment: > 50% votes...
49. 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
An Increase in the Valuation Allowance Account...
Potentially Dillutive Securities
IOSCO
Financial Ration based on B/S: Liquidity Ratios
50. 365/(AP T/O) = 365/(purchases/ Avg. AP)
The account format of B/S
# of days payable =
Intercorporate Investment: 20% - 50% votes...
Return on total capital (ROTC)...
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