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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. 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
Taxation Analyst Adjustments...
Implication for Analysts: Be aware of differences in tax reconcilation between periods
Disclosure for each segment...
FASB
2. Follows the traditional ledger account - assets on the left hand side and liabilities and equity on the right hand side.
Complex Capital Structure
The account format of B/S
Operating vs. Non-operating Income
Implication for Analysts: Be aware of differences in tax reconcilation between periods
3. 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
Gross Reporting of Revenue
CFO Disclosure requirement...
Types of accounting changes: prior period adjustments
Characteristics of an effective framework
4. (net income - preferred dividends)/weighted average of common shares outstanding - only income from continuing operations is considered
Extended DuPont Equation...
Deferred Tax Liability: (DTL)
Convergence IFRS/US GAAP...
BASIC EPS
5. Capital structure that contains NO potentially dillutive securities - (contains only c/s - nonconvertible debt - and nonconvertible pref. stock)
Simple capital structure
Financial Assets: US GAAP/Amortized at Cost
Statement of Cash Flow - relevance...
Fraud Triangle - 2) Opportunity
6. 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
DBO Funded Status =
Unusual OR Infrequent items...
Sources of Differences betweent F/S & T/
Impairments recognition (GAAP)
7. 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
Financial Lease Reporting
CFO Analysis...
Potentially Dillutive Securities
Forecasting Financial Performance: Top Down Approach...
8. Shares are to take over control - Subsidiary - Consolidate financials
Analyst Treaments of DTL
Vertical Common Size Statements...
Inventory Cost Flow Methods...
Intercorporate Investment: > 50% votes...
9. 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
Disclosure for each segment...
Activity Ratios
B/S - Stockholders' Equity
Financial Ratio based on I/S...
10. 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)
FIFO results in: (assuming inflationary period)
Dilutive Securities
# of days payable =
11. GAAP: more quantitative rules - IFRS: more qualitative approach based on whether the risks and reward of the asset have tranferred.
B/S - short-term investments
Depreciation Methods...
Finance (capital) Lease criteria GAAP vs. IFRS
Gross Reporting of Revenue
12. Divdends and share repurchases - Production and investment - M&A - New debt issuance - Payoff pattern and liquidation priority - Maintenance of assets used as collateral
Intercorporate Investment: < 20% votes...
Income Statement
Activity Based Restrictions
Return on Equity (ROE)...
13. 'Assets' - Cash spent on long-term assets - Proceeds from the sale of long-term assets - Cash flow from investments in JVs - affiliates - and long-term investments in securities (trading securities are CFO) - [CFI = Cash additions - cash rcvd on disp
DBO Funded Status =
Screening for Potential Equity Investment: Criteria
Cash Flow From Investing (USA) (Assets)
Barter (IASB & FASB)
14. Depreciation exp = (cost - residual value) x (# units produced / total expected to produce)
Units of Production Method
Convergence IFRS/US GAAP...
The report format of B/S
Lessor Accounting Capital Lease: Sales: Direct Financing Lease
15. FASB: Asset is a future economic benefit - IASB: Asset is a RESOURCE from which future economic benefit is expected to flow.
Measures of Operating Performance - Efficiency Ratios...
An Increase in the Valuation Allowance Account...
IFRS/US GAAP Frameworks: F/S elements...
DTA Issues
16. 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...
IFRS/US GAAP Frameworks: objective of F/S
Financial Liability: US GAAP/Amortized at Cost
Simple capital structure
17. Used when estimates of revenue or cost are unreliable or short-term contracts - (US GAAP only) Revenue - expense - and profit is recognized at completion (IFRS) Revenue is recognized to the extent of contract cost - cost are expensed when incureed
IFRS: Presentation Requirements
DTA Issues
Under Completed Contract Method...
Analyzing Effective Tax Rate Reconciliation
18. Tax liability based on taxable income as per TAX Report/RETURN
Measurement of A & L disclosure in footnotes
Intangibles under IFRS...
Taxation: Tax Payable
Effects of Lease Classification on F/S - Operating Lease
19. Profit is recognized only when it exceeds estimated total cost.
IFRS/US GAAP Frameworks: Recognition of Elements...
Cost recovery method...
days of sales o/s =
Types of accounting changes: accounting estimate
20. ROE = (NI/Sales) x (Sales/Assets) x (Assets/Equity) or ROE= Net Profit Margin x Asset TO x Leverage Ratio
IASB
One major difference between the presentation of deferred tax assets and liabilities under IFRS and under U.S. GAAP is that...
Traditional DuPont Equation...
Potentially Dillutive Securities
21. G = (earnings Retention rate) x (ROE) - earnings retention rate = [1-(payout ratio)] - payout ratio = Common dividends/ NI - Pref. Div.
Balance Sheet - formats
ROE interpretation: if ROE is low...
Defined Contribution Plans
Sustainable Growth
22. 1) Account format (A on left and L & E on right) 2) Report format ( A - L - E presented in one column) 3) Classified B/S (ordered)
Sarbanes-Oxley Management Report...
Balance Sheet - formats
Market Value (GAAP)...
Installment Method...
23. 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
Financial Assets: US GAAP/Amortized at Cost
FASB
Analysis: Market Value of Debt
SEC guidance for Revenue Recognition
24. Beginning Inv. (BI) + Purchases (P) = Available for Sale - Available for sale - COGS = Ending Inventory (EI)
Impact on the Cash Flow of a Par Bond...
IASB
Ending Inventory =
Cash Flow From Investing (USA) (Assets)
25. BV - cash paid = gain/(loss) + any unamortized issue costs (US only) = Gain/Loss on repurchase [I/S as continuing operations)
Asset Revaluation: IFRS
Double-decline balance (DDB)
Income Tax Paid...
Gain/(loss) on bond early retirement: (derecognition of debt)
26. 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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27. You.S. GAAP
Which set of accounting standards requires firms to disclose estimated amortization expense for the next five years on intangible assets?
Form 144...
Fraud Triangle - 2) Opportunity
Extended DuPont Equation...
28. 1) Calculate cash raised on exercise 2) Repurchase shares at avg. price 3) New Shares = exercised - repurchased
Statement of Cash Flow - relevance...
Antidilutive Securities
Inventory mangement: High T/O (low DOH) and sales growth below industry average
Stock options: Use treasury stock method
29. Actual cash outflow for taxes paid during current period
Which set of accounting standards requires firms to disclose estimated amortization expense for the next five years on intangible assets?
DTA/DTL: Effect on Net Income when Tax Rate decreases...
Component depreciation;
Income Tax Paid...
30. 1) Nature of industry/entity operations: 3rd party transactions; Power of customer/supplier; Acct est subjective; Unusual transactions; International operations; International operations; Operations in tax havens. 2) Opportunity complex/unstable org.
Fraud Triangle - 2) Opportunity
Impact on the B/S of a Premium Bond...
FASB - Harmonization
Inventory mangement: High T/O (low DOH) and sales growth above industry average
31. Employer promises specific payment stream at retirement - Payments are based on yrs of service - retirement age - and final salary - Employers bears investment risk - Funded by pool of assets - Complicated accounting
IFRS/US GAAP Frameworks: F/S elements...
Tax base of an asset
Cash Flow From Operations (CFO) - IFRS
Defined Benefit Plans
32. 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
The account format of B/S
Effects of Lease Classification on Ratios - Operating Lease
Discontinued Operations...
Effects of Lease Classification on F/S - Operating Lease
33. 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
DBO Funded Status =
Revaluation below historic cost...
IOSCO
Motivation to Understate Assets/Overstate Liabilities
34. 1) Relevance vs. reliability; 2) Benefit > cost; 3) Excludes intangibles and non-quantifiable info.
Trade-Offs Qualitative Characteristics of IFRS
IFRS/US GAAP Frameworks: F/S elements...
Types of accounting changes: accounting estimate
Financial Ratios based on B/S: Solvency (Coverage)
35. Companies must file this form to disclose material events including significant asset acquisitions and disposals - changes in management or corporate governance - or matters related to its accountants - financial statements - or the markets on which
Which set of accounting standards requires firms to disclose estimated amortization expense for the next five years on intangible assets?
Comprehensive income...
Form 8-K...
Fundamental principles for PREPARING f/s under IFRS: (IAS No 10
36. If PV of min lease pymt = cost of asset 1) lessor is not a dealer of leased equipment (fin. co.)2) no gross profit is recognized at time of lease inception 3) all profit is int. revenue recognized over period of lease. CFO = Int. Income inflow - CFI
Creative Cash Flows Accounting: Motivation
Lessor Accounting Capital Lease: Sales: Direct Financing Lease
Warning Signs of Earnings Manipulation
Ending Inventory =
37. 1) when differences are expected to REVERSE and reslut in future tax payment - treate DTL as a LIABILITY in calculating leverage ratios 2) when differences are NOT expected to REVERSE and result in future tax payment - treat DTL as EQUITY in calculat
Antidilutive Securities
Free Cash Flow to the Firm - FCFF
Auditor/Audit Opinion
Analyst Treaments of DTL
38. 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
Simple capital structure
ROE interpretation: if ROE is low...
Revaluation below historic cost...
Capitalization of Interest...
39. Interest Rec'd - CFO/CFI Divs Rec'd - CFO/CFI Interst Paid - CFO/CFF Divs Paid - CFF/CFO Overdraft = cash - not CFF
B/S - Long-lived assets
Units of Production Method
Inventory Systems...
Cash Flow From Operations (CFO) - IFRS
40. I/S: COGS lower - EBT higher - Taxes: higher - NI: higher - B/S: INV: higher - W/C: higher - are/E: higher - CF: CFO: lower
Inventory Cost Flow Methods...
FIFO results in: (assuming inflationary period)
B/S - Long-lived assets
ROE interpretation: if ROE is low...
41. 1) Valuation; 2) Standard setting; 3) Measurement
Barriers to a single framework...
Motivation to Under-report Earnings
Valuation allowance
B/S - Stockholders' Equity
42. 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
Discontinued Operations...
Revaluation above historic cost...
# of days payable =
B/S - Long-lived assets PP&E
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
BASIC EPS
Taxation Analyst Adjustments...
Measurement of A & L disclosure in footnotes
To investigate the stability of that structure - Kilgore would be best served by looking at...
44. Ensure that information in f/s is useful to a wide range of users.
Defined Benefit Plans
The objective of f/s is to...
Not all CF increase are Sustainable. Example of how Mgmt can Manipulate Cash Flow Statement
Sources of Differences: Permanent
45. CFO: cash interest expense - CFF: increased by amount rcvd at issuance and decreased by payment made at redemption - CFO is higher and CFF is lower
Analyst Treaments of DTL
The best indicator of overstating its profits is...
Reasons to Lease...
Impact on the Cash Flow of a Discount Bond...
46. EU 1) Int'l Accounting Standards Board; 2) Unified int'l frameworks of accounting standards (IFRS); 3) Addopted by EU in 2005
IASB
Creative Cash Flows Accounting: Motivation
Impact on the Cash Flow of a Discount Bond...
B/S - Long-term Liabilities
47. Potentially dilutive securitites [options - warrants - convertible securities]
Lessor Accounting Capital Lease: Sales: Direct Financing Lease
Analyst Treaments of DTL
Complex Capital Structure
3 C's for Credit Analysis...
48. US Gaap: Balance Sheet - IFRS:Disclosed in Footnotes - May be mentioned in MD&A if mgnt considers it significant
Funded status of the pension plan (under US GAAP & IFRS) is reported where?
IFRS Revenue Recognition
DBO Funded Status =
Cash Flow From Operations (CFO) - FASB
49. 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
Warning Signs of Earnings Manipulation
Convergence IFRS/US GAAP...
Deferred Tax Liability: (DTL)
Financial Adj to Facilitate Comparison...
50. 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)
Income Statement
CFO - Direct/Indirect method
Analysis: Market Value of Debt
Financial Assets: US GAAP/Fair Market Value