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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. Profit recognized is the proportion of cash collected x total expected profit Revenue = (COG provided to date/total COG to be provided) x total expected revenue
Defined Benefit Plans
Installment Method...
IFRS: Required F/S
Convergence IFRS/US GAAP...
2. Lost sales from stock outs
Inventory mangement: High T/O (low DOH) and sales growth below industry average
Comprehensive income...
Diluted EPS
IFRS/US GAAP Frameworks: F/S elements...
3. Securities that would INCREASE EPS if exercised
Depreciation Methods...
Sales Basis Revenue Recognitions
Which of the following characteristics should be of least concerned about management's opportunities to commit fraud?
Antidilutive Securities
4. Financial Services Companies: Operating activities: Interest - Dividends - G/(L) on disposal Non-Financial Services Companies: Non-operating activities: Interest - Dividends - G/(L) on disposal
Operating vs. Non-operating Income
Fundamental principles for PREPARING f/s under IFRS: (IAS No 10
Amortization of Bond Discount = (in/out flow) in the indirect method CFO
Tax base of an asset
5. FASB: No discussion of 'probables' - IASB: Asset - liabilities - are probable flows
Funded Status US GAAP & IFRS
CFI Analysis...
IFRS/US GAAP Frameworks: Recognition of Elements...
Steps of F/S Analysis
6. To improve liquidity and leverage ratios
Motivation to Overstate Assets/Understate Liabilities
Financial Ratio based on I/S...
IOSCO
Motivation to Understate Assets/Overstate Liabilities
7. 1) understandability; 2) relevance; 3) reliability; and 4)comparability - No hierarchy
ROE interpretation: if ROE is low...
Cash Flow From Financing (USA) (Source of Cash)
The 4 Qualitative Characteristics of IFRS
IASB - Goals
8. Efficient inventory managment
Inventory Cost Flow Methods...
Gross Reporting of Revenue
Credit Rating Process...
Inventory mangement: High T/O (low DOH) and sales growth above industry average
9. 1) Meet CFO (strategy; industry overview - accounting policy) 2) Tour major facilities 3) Vote on analyst recommendations (bus.& fin. risk) 4) Monitor publicly distributed ratings
The report format of B/S
Effects of Lease Classification on Ratios - Finance Lease
Credit Rating Process...
Impact on the B/S of a Zero Coupon Bond...
10. 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
Comprehensive income...
Add/ Sub changes to related b/s operating accounts
Motivation to Over-report Earnings
Impact on the B/S of a Zero Coupon Bond...
11. 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
Effective Tax Rate
Impairments recognition (GAAP)
Asset Revaluation: IFRS
FIFO results in: (assuming inflationary period)
12. All other liabilities (e.g. bonds - notes payables - leases)
Warning Signs of Earnings Manipulation
Sources of Differences betweent F/S & T/
Financial Liability: US GAAP/Amortized at Cost
Vertical Common Size Statements...
13. 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
Inventory Valuatoin (LCM)
Forecasting Financial Performance: Application
CFO - Direct method
14. LIFO after-tax profit + (change in LIFO reserve)(1 - t)
FIFO after-tax profit =
Taxation Disclosure Requirements
Expensed Intangibles...
Return on total capital (ROTC)...
15. Impairment is recorded on a Contra asset account - revalued below original cost means contra asset account is 0 1) B/S asset reduced to FMV 2) Loss take to I/S 3) Reversal of org. loss allowed I/S 4) Increase above org. cost to equity (comprehenive
Free Cash Flow to Equity - FCFE
Revaluation below historic cost...
Operating vs. Non-operating Income
Gross Reporting of Revenue
16. 1) Forecast GDP 2) Regress industry sales against GDP 3) Forecast industry sales 4) Cosider changes to firm's mkt share 5) Forecast firms sales 6) Use hisoric margins for stable firms or forecast individual expense items 7) Remove non-recurring items
Measurement of A & L disclosure in footnotes
Low Quality Earnings is result of...
Common Size Statement
Forecasting Financial Performance: Top Down Approach...
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)
Inv. Valuation reporting Inventory ABOVE costs...
Sales Basis Revenue Recognitions
Footnote Finance Liability Disclosure
Creative Cash Flows Accounting: Technique
18. Off B/S asset or liability = Footnotes disclosure - Lease payments are expensed when due via I/S - Payments are CFO outflows
Gross Reporting of Revenue
Net Periodic Benefit Costs
Effective Tax Rate
Operating Lease
19. Increase in an asset: deduct (use of cash) - Increase in a liability: add (source of cash) - Decrease in an asset: add (source of cash) - Decrease in a liability: deduct (use of cash)
IASB
Intangibles under IFRS...
LIFO results in: (assuming inflationary period)
Add/ Sub changes to related b/s operating accounts
20. Interest Rec'd - CFO/CFI Divs Rec'd - CFO/CFI Interst Paid - CFO/CFF Divs Paid - CFF/CFO Overdraft = cash - not CFF
3 C's for Credit Analysis...
Deferred Tax Asset: (DTA)
Cash Flow From Operations (CFO) - IFRS
CFO - Direct method
21. 1) Purpose and context 2) Data Collection 3) Data Processing 4) Analysis/Interpretation of data 5) Develop conclusions and recommendations 6) Follow-up
Inventory Cost Flow Methods...
Steps of F/S Analysis
Comprehensive income...
IFRS Revenue Recognition For Service
22. Interest Expense = Coupon + Amortization = PV of future CF x market yield @ issuance
B/S - Long-lived assets
Motivation to Under-report Earnings
Income Tax Paid...
Impact on the B/S of a Discount Bond...
23. Assets: higher - Liabilities: Higher - NI (Early yrs): Lower - CFO: Higher (b/c only interest portion is classed as CFO) - CFF: Lower (b/c principal repayment portion) - Total CF: Same - Since Int. exp + depre > lease pymt in the early years. This de
Financial Ratio based on I/S...
Complex Capital Structure
Effects of Lease Classification on F/S - Finance Lease
B/S - Long-lived assets PP&E
24. Assets - liabilities - and equity are presented in a single column.
Amortization of Bond Premium = (in/out flow) in the indirect method CFO
The report format of B/S
Warning Signs of Earnings Manipulation
The 4 Qualitative Characteristics of IFRS
25. 1) Lack physical form (patent - copyrights etc; 2) Good will is an ex. of an unidentifiable intangible asset - not amortized but subject to annual impairment reviews; 3) Identifiable intangibles are amortized.(eliminate goodwill from ratio analysis)
Steps of F/S Analysis
Intangible Assets
Free Cash Flow to Equity - FCFE
Effective Tax Rate
26. 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
Finance (capital) Lease criteria (under US GAAP)
Financial Liability: US GAAP/Fair Market Value
B/S - Stockholders' Equity
CFO Disclosure requirement...
27. Tax Rate down: DTL down -> Inc. Tax Exp down -> NI up - DTA down -> Inc. Tax Exp up -> NI down
CFO - Direct method
MD&A contains...
Tax Loss Carryforward...
DTA/DTL: Effect on Net Income when Tax Rate decreases...
28. 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
Ratios that directly affect choice of Inventory Account...
Income Tax Paid...
Effects of Lease Classification on F/S - Operating Lease
Lessor Accounting Capital Lease: Sales: Direct Financing Lease
29. Interest expense = Coupon rate
Impact on the B/S of a Par Bond...
Inv. Valuation reporting Inventory ABOVE costs...
Inventory mangement: High T/O (low DOH) and sales growth above industry average
B/S - Long-term Liabilities
30. 1) held-to-maturity: @ amortized cost (i.e Bonds) 2) trading: @ fair value through P&L @ fair mkt value - unrealized g/(l) are recognized on the I/S. 3) available-for-sale: @ fair mkt value - unrealized g/(l) are NOT recognized on the I/S - instead r
Income Tax Paid...
B/S - short-term investments
Sources of Differences betweent F/S & T/
Revaluation below historic cost...
31. Interest Expense = Coupon - Amortization = PV of future CF x market yield @ issuance
MD&A contains...
Barter (IASB & FASB)
Impact on the B/S of a Premium Bond...
Finance (capital) Lease criteria (under US GAAP)
32. 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.]
Cash flow ratios
Free Cash Flow to the Firm - FCFF
Financial Implications of Capitalizing...
Disclosure for each segment...
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
Motivation to Overstate Assets/Understate Liabilities
Common Size Statement
Sustainable Growth
Effective Tax Rate
34. Aggressive Revenue Recognition - Diff. growth rates of operating cash flow and earnings - Abnormal comparative sales growth - Abnormal inventory growth as compared to sales - Moving nonoperating income and nonrecurring gains up to I/S to boost revenu
Warning Signs of Earnings Manipulation
Not all CF increase are Sustainable. Example of how Mgmt can Manipulate Cash Flow Statement
Financial Liability: US GAAP/Fair Market Value
Types of accounting changes: accounting estimate
35. Total assets TO = Revenue/Avg. total asset - Fixed asset TO = Revenue/ Avg. net fixed assets - Working Cap TO = Revenue/Avg. working captial
Expensed Intangibles...
Measures of Operating Performance - Efficiency Ratios...
Activity Ratios
CFO Disclosure requirement...
36. 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
The objective of f/s is to...
Analyzing Effective Tax Rate Reconciliation
Cost recovery method...
Inventory mangement: High T/O (low DOH) and sales growth below industry average
37. Asset is impaired if carrying value > recoverable amount - One-step process 1) Compare carrying value to: recoverable amount = the greater of the two. a) Fair value - selling costs b) Value in use = (PV of future cash flow from cont. use) - Loss reve
Complex Capital Structure
Component depreciation;
From creditor POV: Int. Coverage;
Impairments recognition (IFRS)
38. Income Tax Expense/Pretax Income (EBIT) Income Tax Exp. = Taxes payable + chg in deferred ta
Return on total capital (ROTC)...
Impairments recognition (GAAP)
Effective Tax Rate
Straight-line depreciation (SL)
39. 1) Relevance vs. reliability; 2) Benefit > cost; 3) Excludes intangibles and non-quantifiable info.
Trade-Offs Qualitative Characteristics of IFRS
Forecasting Financial Performance: Top Down Approach...
Tax base on a liability
Motivation to Overstate Assets/Understate Liabilities
40. 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.
Fraud Triangle - 3) Attitude/rationalization
Types of accounting changes: accounting estimate
Stock options: Use treasury stock method
CFO Analysis...
41. For inventory that has a limited shelf life ex) Because the movies have a very limited shelf life and will greatly deteriorate in value with age - especially after the first year - FIFO is the most appropriate method of accounting for the movies for
Impact on the B/S of a Premium Bond...
Gain/(loss) on bond early retirement: (derecognition of debt)
Form 144...
FIFO is appropriate
42. Actual cash outflow for taxes paid during current period
Form 8-K...
Valuation allowance
Income Tax Paid...
Impact on the B/S of a Zero Coupon Bond...
43. 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.
Sarbanes-Oxley Management Report...
Finance (capital) Lease criteria (under US GAAP)
Barriers to a single framework...
Financial Lease Reporting
44. G = (earnings Retention rate) x (ROE) - earnings retention rate = [1-(payout ratio)] - payout ratio = Common dividends/ NI - Pref. Div.
Analysis: Market Value of Debt
Sustainable Growth
Characteristics of an effective framework
Dilutive Securities
45. Depreciation exp = (cost - residual value) x (# units produced / total expected to produce)
Units of Production Method
IFRS/US GAAP Frameworks: objective of F/S
days of sales o/s =
FASB
46. Decreases DTA -> Decreases Net Income - [Decrease in Valuation Allowance; Increase DTA and Increases Net Income]
DTA/DTL: Effect on Net Income when Tax Rate decreases...
Cash Flow: Logic (A = L + E)
An Increase in the Valuation Allowance Account...
To investigate the stability of that structure - Kilgore would be best served by looking at...
47. Net income + non-cash charges - working cap investment
Which of the following characteristics should be of least concerned about management's opportunities to commit fraud?
Free Cash Flow -CFO
Cash Flow From Operations (CFO) - FASB
LIFO is appropriate
48. Both: Recognize going concern & accrual assumptions - IASB: Going concern & accruals given more prominence in framework - FASB: Going concern assumption not well developed in framework.
Revaluation below historic cost...
Types of accounting changes: prior period adjustments
IFRS/US GAAP Frameworks: underlying assumptions...
Form 8-K...
49. Inflow - (bringing bond UP to par)
Barter (IASB & FASB)
Straight-line depreciation (SL)
Which of the following characteristics should be of least concerned about management's opportunities to commit fraud?
Amortization of Bond Discount = (in/out flow) in the indirect method CFO
50. PV of future obligation or the PV of the amount owed to employees for future pension benefits earned to date - Payments are determined based on expected final salary.
IFRS/US GAAP Frameworks: Measurement of Elements...
Effects of Lease Classification on F/S - Finance Lease
Cash Flow From Financing (USA) (Source of Cash)
Defined Benefit Obligations (DBO)