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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.
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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. 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
Net Reporting of Revenue
Financial Lease Reporting
Discontinued Operations...
ROE interpretation: if ROE is low...
2. Working Capital = CA - CL - Working Capital TO = Rev/Avg. Working Capital - Fixed Asset TO = Rev/Avg Net Fixed Assets
Impact on the Cash Flow of a Zero Coupon Bond...
Activity Ratios
Return on total capital (ROTC)...
Implication for Analysts: Be aware of differences in tax reconcilation between periods
3. 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.
Lessor Accounting Capital Lease: Sales-Type Lease
Intangible Assets
Form DEF-14A...
Diluted EPS
4. Delay Supplier pymt: boost CFO; review days' sales in AP; Financing of payables: use N/P to pay off AP; manipulate timing of CFO; Securitization of A/are: accelerates appearance of collection - boosts CFO; Tax benefit of stock options: lower tax paid
Calculate dividends declared...
Creative Cash Flows Accounting: Technique
Taxable Income
Amortization of Bond Premium = (in/out flow) in the indirect method CFO
5. Lost sales from stock outs
% of Completion
Inventory mangement: High T/O (low DOH) and sales growth below industry average
Motivation to Understate Assets/Overstate Liabilities
IFRS Revenue Recognition For Service
6. Management turnover.
Motivation to Overstate Assets/Understate Liabilities
Taxation: Tax Payable
Measures of Operating Performance - Efficiency Ratios...
To investigate the stability of that structure - Kilgore would be best served by looking at...
7. (net income - preferred dividends)/weighted average of common shares outstanding - only income from continuing operations is considered
An Increase in the Valuation Allowance Account...
BASIC EPS
DTA/DTL: Effect on Net Income when Tax Rate decreases...
CFO Disclosure requirement...
8. Interest Expense = Coupon + Amortization = PV of future CF x market yield @ issuance
Impact on the B/S of a Discount Bond...
FIFO ending inventory =
Discontinued Operations...
CFI Analysis...
9. 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
From creditor POV: Int. Coverage;
Screening for Potential Equity Investment: Criteria
Inventory Cost Flow Methods...
Barriers to a single framework...
10. 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)
Income Tax Paid...
Statement of Cash Flow - relevance...
Inventory Valuatoin (LCM)
11. Stock options - Warrants - Convertible debt - Convertible preferred stock
Potentially Dillutive Securities
IFRS: Required F/S
Financial Ratios based on B/S: Solvency (Coverage)
IFRS/US GAAP Frameworks: underlying assumptions...
12. Decreases DTA -> Decreases Net Income - [Decrease in Valuation Allowance; Increase DTA and Increases Net Income]
The best indicator of overstating its profits is...
An Increase in the Valuation Allowance Account...
Lessor Accounting Capital Lease: Sales: Direct Financing Lease
Motivation to Over-report Earnings
13. 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
Inventory Valuatoin (LCM)
Analyzing Effective Tax Rate Reconciliation
Barter (IASB & FASB)
Taxation: Tax Payable
14. Refers to changes from one GAAP method or IFRS method to another IFRS & US GAAP require prior year data shown in f/s to be adjusted.
Financial Ration based on B/S: Liquidity Ratios
Inventory mangement: Low T/O (High DOH)...
Types of accounting changes: accounting principle
DTA/DTL: Effect on Net Income when Tax Rate decreases...
15. 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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16. Unlisted instruments - Held-to-maturity investments - Loans - Receivables
Straight-line depreciation (SL)
Financial Assets: US GAAP/Amortized at Cost
Potentially Dillutive Securities
Funded status of the pension plan (under US GAAP & IFRS) is reported where?
17. Assets: lower - Liabilities: lower - NI (Early yrs): higher - CFO: lower (b/c entire pymt is classed as CFO) - CFF: higher - Total CF: Same
Analyzing Effective Tax Rate Reconciliation
Financial Adj to Facilitate Comparison...
Financial Lease Reporting
Effects of Lease Classification on F/S - Operating Lease
18. Interest expense = Coupon rate
Tax Loss Carryforward...
Impact on the B/S of a Par Bond...
Steps of F/S Analysis
Types of accounting changes: accounting principle
19. Reported BELOW the line.Prohibited under IAS1 1) Losses from expropriation of assets. 2) Uninsured losses from natural disasters - Analyst must determine if it is really THAT extraordinary and if should be included in forecasting
IFRS: Required F/S
Extraordinary Items: Unusual AND Infrequent items...
Ending Inventory =
Motivation to Understate Assets/Overstate Liabilities
20. Share are to ensure significant influence over the company - Affiliate/Associate - Equity Method
Intercorporate Investment: 20% - 50% votes...
Roles of financial reporting & analysis include...
Form DEF-14A...
Taxation: Income Tax Expense
21. 365/(AR T/O) = 365/(Rev/Avg. AR)
Market Value (GAAP)...
Low Quality Earnings is result of...
Free Cash Flow to the Firm - FCFF
days of sales o/s =
22. Interest Expense = Coupon - Amortization = PV of future CF x market yield @ issuance
Intercorporate Investment: > 50% votes...
Impact on the B/S of a Premium Bond...
Defined Benefit Plans
CFO Analysis...
23. Low: P/E - P/CF - or P/S - High: ROE - ROA - growth rates of sales and earnings - Low: leverage
Valuation allowance
Impairments recognition (IFRS)
Screening for Potential Equity Investment: Criteria
Cash Flow From Financing (USA) (Source of Cash)
24. 1) Purchase cost; 2) conversion costs; 3) Allocation of fixed production OH based on normal capacity levels; 4) Other costs necessary to bring the inventory to its present location and condition (freight costs & installation) - Exclude: Admin OH - S
Debt covenants
Asset Revaluation: IFRS
Cost included in Inventory on b/s...
IFRS/US GAAP Frameworks: Measurement of Elements...
25. 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...
Effects of Lease Classification on Ratios - Finance Lease
% of Completion
Finance (capital) Lease criteria (under US GAAP)
26. All other liabilities (e.g. bonds - notes payables - leases)
Depreciation Methods...
Operating vs. Non-operating Income
Financial Ratio based on I/S...
Financial Liability: US GAAP/Amortized at Cost
27. 1) Timing Differences: Accrual vs. modified cash accounting - Differences in reporting methods estimates
Intangibles under IFRS...
Sources of Differences: Temporary
Effects of Lease Classification on F/S - Finance Lease
Antidilutive Securities
28. 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
Vertical Common Size Statements...
Defined Benefit Obligations (DBO)
Free Cash Flow to Equity - FCFE
Operating Risk Ratios...
29. 1) Relevance vs. reliability; 2) Benefit > cost; 3) Excludes intangibles and non-quantifiable info.
Trade-Offs Qualitative Characteristics of IFRS
Fraud Triangle
days of sales o/s =
Ending Inventory =
30. Return on Total Equity = NI/ Avg. Total Equity - Return on C/E = NI - Pref. Div/ Avg. Common Equity
Return on Equity (ROE)...
Fundamental principles for PREPARING f/s under IFRS: (IAS No 10
Simple capital structure
4 General Categories for Creditworthiness/Capacity...
31. 1) Balance Sheet; 2) Comprehensive Income; 3) Change in Equity; 4) Cash Flow Statement; 5) Accounting policies and notes.
days of inv. on hand =
Cash Flow From Operations (CFO) - IFRS
IFRS: Required F/S
Income Tax Paid...
32. 1) Consider the growth rate and capital spending levels when determining whether temp diff due to accelerated depre will reverse 2) Look for cumulative differences due to asset impairments and post-retirement benefits 3) Restructuring charges can c
Warning Signs of Earnings Manipulation
Implication for Analysts: Be aware of differences in tax reconcilation between periods
Lessor Accounting Capital Lease: Sales-Type Lease
IFRS/US GAAP Frameworks: objective of F/S
33. GAAP: shown as a separate prepaid asset and amortized - IFRS: Deducted from proceeds and liability therefore effective interest rate is HIGHER under IFRS than GAAP.
FIFO is appropriate
Bond Issuance Cost under GAAP/IFRS
Inventory Valuatoin (LCM)
B/S - Stockholders' Equity
34. I/S and B/S - Each line is relative to base year
Impact on the B/S of a Premium Bond...
Financial Ratios based on B/S: Solvency ratio
Horizontal Common Size Statements...
4 General Categories for Creditworthiness/Capacity...
35. Income subject to tax as per Tax Return
IASB
Taxable Income
B/S - Long-term Liabilities
Defined Benefit Plans
36. + 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) - +/-
Funded Status US GAAP & IFRS
IASB - Goals
Cash Conversion Cycle =
Net Periodic Benefit Costs
37. Potentially dilutive securitites [options - warrants - convertible securities]
Units of Production Method
Impact on the B/S of a Par Bond...
Sources of Differences: Permanent
Complex Capital Structure
38. Total assets TO = Revenue/Avg. total asset - Fixed asset TO = Revenue/ Avg. net fixed assets - Working Cap TO = Revenue/Avg. working captial
Barter (IASB & FASB)
Taxation: Tax Payable
Discontinued Operations...
Measures of Operating Performance - Efficiency Ratios...
39. Both: Recognize going concern & accrual assumptions - IASB: Going concern & accruals given more prominence in framework - FASB: Going concern assumption not well developed in framework.
IFRS/US GAAP Frameworks: underlying assumptions...
Screening for Potential Equity Investment: Criteria
Impairments recognition (GAAP)
Impact on the Cash Flow of a Par Bond...
40. Nonreversal DTL - therefore it is permanent = Equity. therefore decrease in DTL = Increase in Equity - Reversal DTL - therefore it is temp = Liability
One major difference between the presentation of deferred tax assets and liabilities under IFRS and under U.S. GAAP is that...
days of sales o/s =
Taxation Analyst Adjustments...
Free Cash Flow -CFO
41. (GAAP) Internally created intangibles 1) (R&D) are expensed 2) Advertising 3) Software (developed to establish feasibility)
Defined Benefit Obligations (DBO)
IFRS: Required F/S
Expensed Intangibles...
Inventory mangement: High T/O (low DOH) and sales growth below industry average
42. I/S: Income statement account/Sales - B/S: Balance sheet account/ Total Assets
Vertical Common Size Statements...
Add/ Sub changes to related b/s operating accounts
Effects of Lease Classification on Ratios - Finance Lease
Forecasting Financial Performance: Top Down Approach...
43. 1) Transparency; 2) Comprehensiveness; 3) Consistency
Sources of Differences: Temporary
Intangible Assets
Characteristics of an effective framework
The report format of B/S
44. 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
Income Tax Paid...
Balance Sheet
Return on total capital (ROTC)...
45. Any I/S subtotal is expressed a margin ratio (to revenues) - Gross profit margin = gross profit/ revenue - Net profit margin = Net Inc/revenue - Operating profit margin = EBIT/ revenue - Pre-tax margin = EBT/ revenue
Valuation Allowance...
IFRS/US GAAP Frameworks: Measurement of Elements...
Financial Ratio based on I/S...
IFRS/US GAAP Frameworks: Recognition of Elements...
46. Current Ratio (CA/CL): lower - Work. Cap (CA -CL): Lower - Asset TO: (Sales/TA): Lower - ROA (EAT/TA): Lower - ROE (EAT/E): Lower - Debt/Equity: Higher - Since Int. exp + depre > lease pymt in the early years. This decreases NI - and Profitability ra
Effects of Lease Classification on Ratios - Finance Lease
Financial Assets: US GAAP/Fair Market Value
Taxation: Tax Payable
Impact on the Cash Flow of a Premium Bond...
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.
Types of accounting changes: accounting principle
DBO Funded Status =
Gross Reporting of Revenue
IFRS/US GAAP Frameworks: F/S elements...
48. 1) SL; 2) Double Decline balance (accelerated); 3) Units of production; 4) Tax code perscribed Modified Accelerated Cost Recovery System (MACRS)
Effects of Lease Classification on F/S - Operating Lease
Diluted EPS
Depreciation Methods...
CFO Analysis...
49. 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
Double-decline balance (DDB)
Financial Liability: US GAAP/Fair Market Value
CFO - Indirect method steps...
Balance Sheet
50. ROE = (NI/Sales) x (Sales/Assets) x (Assets/Equity) or ROE= Net Profit Margin x Asset TO x Leverage Ratio
Financial Adj to Facilitate Comparison...
Financial Assets: US GAAP/Fair Market Value
Analysis: Market Value of Debt
Traditional DuPont Equation...