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Test your basic knowledge |
Advanced Financial Reporting And Analysis
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Subject
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business-skills
Instructions:
Answer 50 questions in 15 minutes.
If you are not ready to take this test, you can
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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
Reasons to Lease...
Fraud Triangle - 3) Attitude/rationalization
Component depreciation;
Return on Assets ROA...
2. Income Tax Expense > Taxes Payable - F/S > Tax Return - Pay less tax now but more on reversal
Deferred Tax Liability: (DTL)
Stock options: Use treasury stock method
Creative Cash Flows Accounting: Motivation
LIFO is appropriate
3. I/S: COGS lower - EBT higher - Taxes: higher - NI: higher - B/S: INV: higher - W/C: higher - are/E: higher - CF: CFO: lower
Valuation allowance
What is the economic substance of financial (capital) lease?
Activity Ratios
FIFO results in: (assuming inflationary period)
4. 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
Financial Adj to Facilitate Comparison...
Creative Cash Flows Accounting: Motivation
Footnote Finance Liability Disclosure
IFRS/US GAAP Frameworks: underlying assumptions...
5. Interest Expense = Amortization
Impact on the B/S of a Zero Coupon Bond...
The report format of B/S
Motivation to Over-report Earnings
CFO Disclosure requirement...
6. 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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7. (net income - preferred dividends)/weighted average of common shares outstanding - only income from continuing operations is considered
FIFO is appropriate
Activity Based Restrictions
BASIC EPS
Diluted EPS
8. US Gaap: lower of cost or market value - (does NOT allow subsequent reverasals) - IFRS: lower of cost or NET realizable value - (allows subsequent reversals)
Types of accounting changes: prior period adjustments
Operating Risk Ratios...
Inventory Valuatoin (LCM)
Antidilutive Securities
9. 1st: Net Income - dividends declared = chg in are/E - Then: Dividends declared +/- chg dividends payable = cash dividends paid.
Sources of Differences betweent F/S & T/
Calculate dividends declared...
Unusual OR Infrequent items...
B/S - Long-lived assets
10. 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
Measures of Operating Performance - Efficiency Ratios...
FASB - Harmonization
Impairments recognition (IFRS)
11. Follows the traditional ledger account - assets on the left hand side and liabilities and equity on the right hand side.
An Increase in the Valuation Allowance Account...
CFO Analysis...
Footnote Finance Liability Disclosure
The account format of B/S
12. Amount deductible in future tax return
Tax base of an asset
Traditional DuPont Equation...
Vertical Common Size Statements...
SEC guidance for Revenue Recognition
13. 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...
Convergence IFRS/US GAAP...
Inventory Cost Flow Methods...
The best indicator of overstating its profits is...
14. Shows the financial position of a firm AT A SINGLE POINT in time A = L + E.
Balance Sheet
Steps of F/S Analysis
Financial Implications of Capitalizing...
Revaluation below historic cost...
15. 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
CFI Analysis...
Fraud Triangle - 3) Attitude/rationalization
Inventory mangement: Low T/O (High DOH)...
Footnote disclosure of Reconciliation of opening and closing carrying values...
16. 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...
Segment Reporting
Intercorporate Investment: > 50% votes...
Financial Lease Reporting
17. [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
IFRS: Required F/S
B/S - Stockholders' Equity
Diluted EPS
The objective of f/s is to...
18. 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
Impact on the B/S of a Zero Coupon Bond...
Dilutive Securities
CFO Disclosure requirement...
Convergence IFRS/US GAAP...
19. Exchange of goods or services between two parties (no cash) IASB: Revenue = FMV of similar non-barter transaction with unrelated parties FASB: Revenue = FMV only if the company has received cash payments for such services in the past
Finance (capital) Lease criteria GAAP vs. IFRS
Statement of Cash Flow - relevance...
Asset Revaluation: IFRS
Barter (IASB & FASB)
20. Tax Rate down: DTL down -> Inc. Tax Exp down -> NI up - DTA down -> Inc. Tax Exp up -> NI down
Financial Ration based on B/S: Liquidity Ratios
DTA/DTL: Effect on Net Income when Tax Rate decreases...
Impairments recognition (GAAP)
Analysis: Market Value of Debt
21. Required by IFRS - Permited by US GAAP
IFRS/US GAAP Frameworks: purpose of framework
Component depreciation;
Defined Benefit Obligations (DBO)
Deferred Tax Liability: (DTL)
22. Actual cash outflow for taxes paid during current period
Types of accounting changes...
Income Tax Paid...
IFRS Revenue Recognition
Common Size Statement
23. 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
Discontinued Operations...
Balance Sheet
Income Tax Paid...
B/S - short-term investments
24. 1) is a contra asset account used to reduce the value of a DTA - 2) it is used to reduce the asset when future taxable income is deemed to be insefficient to fully use the DTA.
Ratios that directly affect choice of Inventory Account...
ROE interpretation: if ROE is low...
Types of accounting changes: accounting estimate
Valuation allowance
25. 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
Warning Signs of Earnings Manipulation
Tax Loss Carryforward...
FIFO is appropriate
Activity Ratios
26. 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)
Add/ Sub changes to related b/s operating accounts
Not all CF increase are Sustainable. Example of how Mgmt can Manipulate Cash Flow Statement
Motivation to Understate Assets/Overstate Liabilities
One major difference between the presentation of deferred tax assets and liabilities under IFRS and under U.S. GAAP is that...
27. Ensure that information in f/s is useful to a wide range of users.
The objective of f/s is to...
B/S - Stockholders' Equity
Deferred Tax Liability: (DTL)
Funded status of the pension plan (under US GAAP & IFRS) is reported where?
28. 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
Dilutive Securities
Finance (capital) Lease criteria GAAP vs. IFRS
Measurement of A & L disclosure in footnotes
Low Quality Earnings is result of...
29. 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
Under Completed Contract Method...
Balance Sheet - formats
Financial Ration based on B/S: Liquidity Ratios
Sales Basis Revenue Recognitions
30. Companies should not recognize revenue from barter transactions. The additional revenue is likely to improperly boost profits. While an unusually high sales-growth rate may indicate fraud - it could also indicate good management. It's a yellow flag -
Valuation Allowance...
4 General Categories for Creditworthiness/Capacity...
Characteristics of an effective framework
The best indicator of overstating its profits is...
31. 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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32. Interest Expense = Coupon - Amortization = PV of future CF x market yield @ issuance
Creative Cash Flows Accounting: Technique
Asset Capitalization
Vertical Common Size Statements...
Impact on the B/S of a Premium Bond...
33. Depreciation exp = (cost - accum depre)/useful life x 2 - Does NOT use residual value but depreciation stops when residual value has been reached - reduce EBIT - NI - Assets - Equity and decrease ROA & ROE
Form DEF-14A...
Balance Sheet - formats
DTA Issues
Double-decline balance (DDB)
34. EU 1) Int'l Accounting Standards Board; 2) Unified int'l frameworks of accounting standards (IFRS); 3) Addopted by EU in 2005
Cost included in Inventory on b/s...
Motivation to Understate Assets/Overstate Liabilities
IASB
Types of accounting changes: accounting principle
35. Outflow - (bringing bond DOWN to par)
Amortization of Bond Premium = (in/out flow) in the indirect method CFO
Financial Assets: US GAAP/Fair Market Value
Activity Based Restrictions
Simple capital structure
36. (GAAP) Internally created intangibles 1) (R&D) are expensed 2) Advertising 3) Software (developed to establish feasibility)
Vertical Common Size Statements...
Finance (capital) Lease criteria (under US GAAP)
Expensed Intangibles...
FIFO ending inventory =
37. Derivatives - Non-derivative investments with fair value exposure hedged by derivatives
Financial Liability: US GAAP/Fair Market Value
Impairments recognition (IFRS)
3 C's for Credit Analysis...
Low Quality Earnings is result of...
38. If any ONE out of the FOUR are met must be classifed as Financial Lease: 1) Title transfered to lessee at the end of lease; 2) Bargain purchase option at the end of the lease; 3) Lease period is at least 75% of asset's useful life; 4) The PV of least
ROE interpretation: if ROE is low...
Double-decline balance (DDB)
Finance (capital) Lease criteria (under US GAAP)
Intercorporate Investment: < 20% votes...
39. 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)
Inventory mangement: High T/O (low DOH) and sales growth above industry average
Financial Ratio based on I/S...
Deferred Tax Asset: (DTA)
Sales Basis Revenue Recognitions
40. Shows the performance of the company over a reporting period.
Discontinued Operations...
Financial Lease Reporting
Income Statement
DBO Funded Status =
41. Current Ratio (CA/CL): Higher - Work. Cap (CA -CL): Higher - Asset TO: (Sales/TA): Higher - ROA (EAT/TA): Higher - ROE (EAT/E): Higher - Debt/Equity: Lower - Understates Leverage ratios (b/c not recognized as a liability) - Overstates Coverage ratios
Effects of Lease Classification on Ratios - Operating Lease
Types of accounting changes: accounting principle
BASIC EPS
Effective Tax Rate
42. 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
Impact on the B/S of a Discount Bond...
Ratios that directly affect choice of Inventory Account...
Cash flow ratios
Measurement of A & L disclosure in footnotes
43. 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
Measurement of A & L disclosure in footnotes
The objective of f/s is to...
Types of accounting changes: accounting estimate
Lessor Accounting Capital Lease: Sales-Type Lease
44. 1) Credit Scoring (CF Forecast) 2) Equity Investment screening (cutoff values)
Forecasting Financial Performance: Application
Impact on the Cash Flow of a Par Bond...
Income Statement
Impairments recognition (GAAP)
45. 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.
Types of accounting changes: accounting estimate
Cash Flow From Operations (CFO) - FASB
Financial Lease Reporting
Tax Loss Carryforward...
46. 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
Motivation to Understate Assets/Overstate Liabilities
Types of accounting changes: accounting principle
Barriers to a single framework...
IFRS/US GAAP Frameworks: purpose of framework
47. 1) Relevance vs. reliability; 2) Benefit > cost; 3) Excludes intangibles and non-quantifiable info.
Implication for Analysts: Be aware of differences in tax reconcilation between periods
Lessor Accounting Capital Lease: Sales-Type Lease
SEC guidance for Revenue Recognition
Trade-Offs Qualitative Characteristics of IFRS
48. For inventory that does not deteriorate with age.
LIFO is appropriate
Vertical Common Size Statements...
Asset Revaluation: IFRS
Under Completed Contract Method...
49. 'Equity' -Chg in debt - Cash raised from equity and debt - -Chg in c/s - Cash spent on repurchasing equity or redeeming debt -Dividends paid - Calculate dividend declared: NI -*Div.Declared = chg in are/E - Div. Declared +(-) chg in div. payable = c
Disclosure for each segment...
Measures of Operating Performance - Efficiency Ratios...
Implication for Analysts: Be aware of differences in tax reconcilation between periods
Cash Flow From Financing (USA) (Source of Cash)
50. 1) Evidence of an arrangement; 2) Completion of earnings process; 3) Price is determined or determinable; 4) Assurance of payment
Which of the following characteristics should be of least concerned about management's opportunities to commit fraud?
SEC guidance for Revenue Recognition
Antidilutive Securities
B/S - Long-term Liabilities