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Test your basic knowledge |
Advanced Financial Reporting And Analysis
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Study First
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
study here
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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. I/S: COGS higher - EBT lower - Taxes: lower - NI: Lower - B/S: INV: lower - W/C: Lower - are/E: lower - CF: CFO: higher
Intercorporate Investment: < 20% votes...
LIFO results in: (assuming inflationary period)
FIFO ending inventory =
Expensed Intangibles...
2. 1) Stretching A/P (increase in # days in payable) = 365/(AP T/O) = 365/(purchases/ Avg. AP)) 2) Financing payables (allows to great AP as CFF) 3) Securitizing A/are: (allows to recognize gains in I/S) 4) Income Tax Benefit from stock options 5) Buyba
Intercorporate Investment: < 20% votes...
Not all CF increase are Sustainable. Example of how Mgmt can Manipulate Cash Flow Statement
Cost recovery method...
IOSCO
3. Interest Expense = Coupon + Amortization = PV of future CF x market yield @ issuance
Lessor Accounting Capital Lease: Sales-Type Lease
CFO Analysis...
Free Cash Flow -CFO
Impact on the B/S of a Discount Bond...
4. 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)
Cash Flow: Logic (A = L + E)
Extended DuPont Equation...
Calculate dividends declared...
From creditor POV: Int. Coverage;
5. Pd after more than 1 year - notes & bonds: at PV of future CF pymets - Capital leases - Provisions - Deferred tax
Form 144...
B/S - Long-term Liabilities
Fundamental principles for PREPARING f/s under IFRS: (IAS No 10
Sarbanes-Oxley Management Report...
6. Unlisted instruments - Held-to-maturity investments - Loans - Receivables
Lessor Accounting Capital Lease: Sales-Type Lease
Market Value (GAAP)...
Impact on the Cash Flow of a Discount Bond...
Financial Assets: US GAAP/Amortized at Cost
7. All other liabilities (e.g. bonds - notes payables - leases)
Balance Sheet
Financial Liability: US GAAP/Amortized at Cost
Convergence IFRS/US GAAP...
FIFO results in: (assuming inflationary period)
8. Securities that would INCREASE EPS if exercised
The objective of f/s is to...
Antidilutive Securities
Free Cash Flow to the Firm - FCFF
B/S - investments
9. 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
Balance Sheet
Form DEF-14A...
Cash Flow From Financing (USA) (Source of Cash)
10. 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
Complex Capital Structure
Depreciation Methods...
Warning Signs of Earnings Manipulation
Characteristics of an effective framework
11. 1) Risk & Reward transferred; 2) No continued control; 3) Reliable measurement; 4) Probable flow of benefits; 5) Cost verifiable
Cash flow ratios
IFRS Revenue Recognition
Asset Capitalization
Fraud Triangle - 1) Incentive/Pressure
12. NI/Avg. Total Assets - NI + Int (1-t) / Avg. Total Assets - Operating ROA: Operating INc/ Avg. Total Assets
Financial Ratios based on B/S: Solvency (Coverage)
Return on Assets ROA...
Barriers to a single framework...
Effects of Lease Classification on F/S - Finance Lease
13. Shares are to take over control - Subsidiary - Consolidate financials
Motivation to Understate Assets/Overstate Liabilities
Intercorporate Investment: > 50% votes...
Footnote Finance Liability Disclosure
Free Cash Flow to Equity - FCFE
14. GAAP: more quantitative rules - IFRS: more qualitative approach based on whether the risks and reward of the asset have tranferred.
Credit Rating Process...
Which of the following characteristics should be of least concerned about management's opportunities to commit fraud?
Finance (capital) Lease criteria GAAP vs. IFRS
Capitalized Intangibles...
15. IFRS: Funded status is NOT on B/S Asset/Liability - Result in a b/s that does NOT represent econ reality - GAAP: Funded status = B/S Asset/Liability -Both disclose components of DBO - plan assets - expenses - and assumptions used to calculate pensio
Funded Status US GAAP & IFRS
Form 144...
Inventory Cost Flow Methods...
Reasons to Lease...
16. Tax liability based on taxable income as per TAX Report/RETURN
Low Quality Earnings is result of...
Taxation: Tax Payable
Financial Liability: US GAAP/Amortized at Cost
Inventory mangement: Low T/O (High DOH)...
17. 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
Impact on the B/S of a Premium Bond...
IOSCO
IFRS: Required F/S
Operating Risk Ratios...
18. Means that at least ONE of the following is true: Company has poor profit margin; Company has poor asset TO; Company is underleveraged
Credit Rating Process...
Unusual OR Infrequent items...
ROE interpretation: if ROE is low...
IFRS: Required F/S
19. 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.
IFRS/US GAAP Frameworks: objective of F/S
SEC guidance for Revenue Recognition
CFO Analysis...
Sources of Differences betweent F/S & T/
20. 1) fair presentation; 2) going concern; 3) accrual basis; 4) consistency; 5) materiality
Net Reporting of Revenue
Motivation to Over-report Earnings
IASB - Goals
Fundamental principles for PREPARING f/s under IFRS: (IAS No 10
21. 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
Potentially Dillutive Securities
Cash Flow: Logic (A = L + E)
4 General Categories for Creditworthiness/Capacity...
IFRS/US GAAP Frameworks: purpose of framework
22. 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
B/S - Long-lived assets
Financial Ration based on B/S: Liquidity Ratios
Financial Ratios based on B/S: Solvency ratio
Fraud Triangle - 3) Attitude/rationalization
23. 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)
Forecasting Financial Performance: Top Down Approach...
Intangible Assets
Which set of accounting standards requires firms to disclose estimated amortization expense for the next five years on intangible assets?
Revaluation below historic cost...
24. Management turnover.
Trade-Offs Qualitative Characteristics of IFRS
To investigate the stability of that structure - Kilgore would be best served by looking at...
Which set of accounting standards requires firms to disclose estimated amortization expense for the next five years on intangible assets?
Credit Rating Process...
25. 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.
Types of accounting changes: accounting principle
Lessor Accounting Capital Lease: Sales: Direct Financing Lease
Potentially Dillutive Securities
Add/ Sub changes to related b/s operating accounts
26. Trading securities - Available-for-sale - Derivatives (standalone or embedded in non-derivative intrument) - Assets with fair value exposure hedged by derivatives
Types of accounting changes: accounting principle
Forecasting Financial Performance: Application
Income Statement
Financial Assets: US GAAP/Fair Market Value
27. 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.
ROE interpretation: if ROE is low...
Form 8-K...
Bond Issuance Cost under GAAP/IFRS
Cash Flow From Investing (USA) (Assets)
28. 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;
Bond Issuance Cost under GAAP/IFRS
Comprehensive income...
% of Completion
29. 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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30. 1) Unqualified opinion (good); 2) Qualified opinion (followed GAAP except for...); 3) Adverse opinion (bad)
Effects of Lease Classification on F/S - Finance Lease
Low Quality Earnings is result of...
Auditor/Audit Opinion
Types of accounting changes...
31. 1) Balance Sheet; 2) Comprehensive Income; 3) Change in Equity; 4) Cash Flow Statement; 5) Accounting policies and notes.
DTA/DTL: Effect on Net Income when Tax Rate decreases...
IFRS: Required F/S
Fraud Triangle - 1) Incentive/Pressure
The account format of B/S
32. Timing differences (depreciations) - Permanent differences
Fraud Triangle
Sources of Differences betweent F/S & T/
Add/ Sub changes to related b/s operating accounts
B/S - investments
33. 1) Valuation; 2) Standard setting; 3) Measurement
Sales Basis Revenue Recognitions
Barriers to a single framework...
Intercorporate Investment: < 20% votes...
FIFO results in: (assuming inflationary period)
34. Depreciation exp = (cost-residual value)/ useful life
Horizontal Common Size Statements...
Straight-line depreciation (SL)
Component depreciation;
CFO - Direct/Indirect method
35. 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
Forecasting Financial Performance: Application
Financial Ration based on B/S: Liquidity Ratios
Capitalization of Interest...
Sources of Differences: Permanent
36. 1) Revenue (external & internal) 2) Segment results (operating profit) 3) Carrying amount of segment asset4 4) Segment liabilities (IFRS) 5) Cost of PPE and intangibles acquired 6) Depreciation and Amort expenses 7) Other non-cash expense 8) Share of
Disclosure for each segment...
IFRS/US GAAP Frameworks: Measurement of Elements...
Defined Benefit Obligations (DBO)
Financial Ratio based on I/S...
37. 1) Timing Differences: Accrual vs. modified cash accounting - Differences in reporting methods estimates
Traditional DuPont Equation...
Net Reporting of Revenue
Sources of Differences: Temporary
days of sales o/s =
38. Interest expense = Coupon rate
Balance Sheet - formats
Creative Cash Flows Accounting: Motivation
Inventory mangement: High T/O (low DOH) and sales growth above industry average
Impact on the B/S of a Par Bond...
39. Cash collections less direct cash inputs less other cash outfllows
Impact on the B/S of a Premium Bond...
CFO - Direct method
IASB
Asset Capitalization
40. Return on Total Equity = NI/ Avg. Total Equity - Return on C/E = NI - Pref. Div/ Avg. Common Equity
Cost included in Inventory on b/s...
Impact on the B/S of a Discount Bond...
Form 144...
Return on Equity (ROE)...
41. Interest Expense = Amortization
Impact on the B/S of a Zero Coupon Bond...
Tax base of an asset
Finance (capital) Lease criteria GAAP vs. IFRS
Free Cash Flow to the Firm - FCFF
42. BV - cash paid = gain/(loss) + any unamortized issue costs (US only) = Gain/Loss on repurchase [I/S as continuing operations)
Fundamental principles for PREPARING f/s under IFRS: (IAS No 10
CFO - Direct method
Stock options: Use treasury stock method
Gain/(loss) on bond early retirement: (derecognition of debt)
43. 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
Return on Assets ROA...
Cash flow ratios
Ratios that directly affect choice of Inventory Account...
Unusual OR Infrequent items...
44. 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
Motivation to Over-report Earnings
ROE interpretation: if ROE is low...
Return on Equity (ROE)...
CFO Disclosure requirement...
45. 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
B/S - Long-lived assets
Operating Risk Ratios...
Types of accounting changes: accounting principle
Effects of Lease Classification on F/S - Finance Lease
46. Income Tax Expense/Pretax Income (EBIT) Income Tax Exp. = Taxes payable + chg in deferred ta
Effective Tax Rate
Intangible Assets
Sources of Differences: Permanent
CFO Analysis...
47. 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
Asset Revaluation: IFRS
Fraud Triangle - 2) Opportunity
Financial Ratio based on I/S...
IFRS: Presentation Requirements
48. Net income + non-cash charges - working cap investment
Market Value (GAAP)...
Free Cash Flow -CFO
CFO - Direct method
IFRS/US GAAP Frameworks: underlying assumptions...
49. When Statutory tax rate does NOT equal Effective tax rate - Tax expense does note equal pretax income x statutory rate
Sources of Differences: Permanent
Extended DuPont Equation...
Intercorporate Investment: < 20% votes...
Return on Assets ROA...
50. 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
Installment Method...
Dilutive Securities
Financial Liability: US GAAP/Fair Market Value