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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
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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) Timing Differences: Accrual vs. modified cash accounting - Differences in reporting methods estimates
Cash Flow From Operations (CFO) - FASB
Low Quality Earnings is result of...
Sources of Differences: Temporary
Roles of financial reporting & analysis include...
2. It is Rare - but permitted for commodity producer/dealers B/S = NRV - I/S = unrealized gains/losses
Cash flow ratios
Inv. Valuation reporting Inventory ABOVE costs...
Forecasting Financial Performance: Application
Component depreciation;
3. NI/Avg. Total Assets - NI + Int (1-t) / Avg. Total Assets - Operating ROA: Operating INc/ Avg. Total Assets
Return on Assets ROA...
DTA Issues
Inventory mangement: High T/O (low DOH) and sales growth above industry average
Which of the following characteristics should be of least concerned about management's opportunities to commit fraud?
4. 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
IFRS/US GAAP Frameworks: purpose of framework
Segment Reporting
Financial Ration based on B/S: Liquidity Ratios
Creative Cash Flows Accounting: Technique
5. Lost sales from stock outs
Types of accounting changes: accounting estimate
MD&A contains...
B/S - short-term investments
Inventory mangement: High T/O (low DOH) and sales growth below industry average
6. 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
Installment Method...
Form DEF-14A...
Impact on the B/S of a Discount Bond...
Valuation Allowance...
7. 1) fair presentation; 2) going concern; 3) accrual basis; 4) consistency; 5) materiality
Fundamental principles for PREPARING f/s under IFRS: (IAS No 10
Sarbanes-Oxley Management Report...
Cash flow ratios
Operating Risk Ratios...
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)
Inventory Valuatoin (LCM)
Impairments recognition (GAAP)
Inv. Valuation reporting Inventory ABOVE costs...
IASB
9. Contributed capital = c/s @ par plus add'l paid-in capital - Treasury stock (reaquired by frim but not yet retired) - are/E = Accum' NI less dividends - Minority (non-controlling) interest - Comprehensive income items: all chg in SOE not in I/S or fr
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10. FIFO: EI = newest purchases - LIFO: EI = oldest purchases - Avg. Costs: EI = Available for sale/Units - Specific ID: high value items (cars - diamonds etc)
Footnote Finance Liability Disclosure
Diluted EPS
Impact on the Cash Flow of a Par Bond...
Inventory Cost Flow Methods...
11. US 1) Financial Accounting Standards Board; 2) Standards form GAAP; 3) Aims - useful - relevant - reliable - consistent and comparable; 4) SEC deems FASB standard authoritative
Effects of Lease Classification on Ratios - Operating Lease
Dilutive Securities
Cash Flow From Operations (CFO) - FASB
FASB
12. 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
IOSCO
Impact on the B/S of a Zero Coupon Bond...
Impairments recognition (IFRS)
IFRS: Presentation Requirements
13. 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
Sources of Differences betweent F/S & T/
Cash Flow From Operations (CFO) - FASB
Installment Method...
Financial Ratio based on I/S...
14. Interest Expense = Amortization
CFO - Direct/Indirect method
Footnote disclosure of Reconciliation of opening and closing carrying values...
B/S - Stockholders' Equity
Impact on the B/S of a Zero Coupon Bond...
15. 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
Barter (IASB & FASB)
Convergence IFRS/US GAAP...
LIFO is appropriate
Intangible Assets
16. 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
From creditor POV: Int. Coverage;
Lessor Accounting Capital Lease: Sales: Direct Financing Lease
Financial Lease Reporting
Ratios that directly affect choice of Inventory Account...
17. Selecting accounting principles to distort results - Structuring transactions to achieve a desired outcome - Using aggressive or unrealistic estimates and assumptions - Exploiting the intent of the accounting principle
Asset Revaluation: IFRS
Finance (capital) Lease criteria GAAP vs. IFRS
Low Quality Earnings is result of...
Fraud Triangle - 3) Attitude/rationalization
18. 365/(AR T/O) = 365/(Rev/Avg. AR)
Types of accounting changes...
Discontinued Operations...
Inventory mangement: Low T/O (High DOH)...
days of sales o/s =
19. Inflow - (bringing bond UP to par)
The 4 Qualitative Characteristics of IFRS
Amortization of Bond Discount = (in/out flow) in the indirect method CFO
Cash Conversion Cycle =
Revaluation above historic cost...
20. 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
Operating Lease
Defined Benefit Obligations (DBO)
Common Size Statement
Intangible Assets
21. To improve liquidity and leverage ratios
Reasons to Lease...
Motivation to Overstate Assets/Understate Liabilities
Amortization of Bond Premium = (in/out flow) in the indirect method CFO
Simple capital structure
22. EBIT/ Avg. total capital - Total capital includes: debt capital - so int. is aded back to NI
Financial Ration based on B/S: Liquidity Ratios
Return on total capital (ROTC)...
Taxation: Tax Payable
Balance Sheet
23. 1)DTL - DTA - valuation allowance - Net ? in valutaion allowance over the period 2) unrecognized DTL or undistributed earning from subsidiaries & JVs 3) Current yr tax effect of each type of temp difference 4)Components of Inc Tax Expense 5)Tax loss
Comprehensive income...
ROE interpretation: if ROE is low...
Financial Implications of Capitalizing...
Taxation Disclosure Requirements
24. 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
Effective Tax Rate
Impact on the Cash Flow of a Zero Coupon Bond...
Financial Assets: US GAAP/Amortized at Cost
FASB - Harmonization
25. '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
Impact on the B/S of a Par Bond...
Operating Lease
Cash Flow From Investing (USA) (Assets)
Motivation to Under-report Earnings
26. Stock options - Warrants - Convertible debt - Convertible preferred stock
Complex Capital Structure
Potentially Dillutive Securities
Sources of Differences: Permanent
Lessor Accounting Capital Lease: Sales-Type Lease
27. Depreciation exp = (cost-residual value)/ useful life
Straight-line depreciation (SL)
Revaluation above historic cost...
days of inv. on hand =
Effective Tax Rate
28. '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
Free Cash Flow to the Firm - FCFF
Cash Flow: Logic (A = L + E)
CFO Disclosure requirement...
Cash Flow From Financing (USA) (Source of Cash)
29. 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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30. Includes: cash flow from interst Rec'd and Paid - and Dividend received. Includes all income taxes paid.
The 4 Qualitative Characteristics of FASB...
Cash Flow From Operations (CFO) - FASB
FASB
Extraordinary Items: Unusual AND Infrequent items...
31. Ensure that information in f/s is useful to a wide range of users.
Financial Liability: US GAAP/Amortized at Cost
Balance Sheet
The objective of f/s is to...
CFO - Indirect method steps...
32. 1) Outcome reliable: rev recognized by stage of completion 2) Outcome unreliable: revenue recognized but no profit (
Steps of F/S Analysis
IASB
Deferred Tax Asset: (DTA)
IFRS Revenue Recognition For Service
33. 1) Unqualified opinion (good); 2) Qualified opinion (followed GAAP except for...); 3) Adverse opinion (bad)
Ratios that directly affect choice of Inventory Account...
One major difference between the presentation of deferred tax assets and liabilities under IFRS and under U.S. GAAP is that...
An Increase in the Valuation Allowance Account...
Auditor/Audit Opinion
34. Potentially dilutive securitites [options - warrants - convertible securities]
Low Quality Earnings is result of...
Valuation allowance
Convergence IFRS/US GAAP...
Complex Capital Structure
35. Taxes payable + chg deferred Tax as per Financial Report
Creative Cash Flows Accounting: Technique
Taxation: Income Tax Expense
Financial Ratios based on B/S: Solvency (Coverage)
Antidilutive Securities
36. 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
Installment Method...
Simple capital structure
Activity Ratios
Dilutive Securities
37. 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.
Defined Benefit Obligations (DBO)
Valuation allowance
CFI Analysis...
Amortization of Bond Discount = (in/out flow) in the indirect method CFO
38. Follows the traditional ledger account - assets on the left hand side and liabilities and equity on the right hand side.
Sources of Differences: Permanent
Debt covenants
Cost recovery method...
The account format of B/S
39. 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
Operating Risk Ratios...
Extended DuPont Equation...
Cash Flow From Operations (CFO) - FASB
Financial Liability: US GAAP/Amortized at Cost
40. 1) Development of high quality - transparent and enforceable global standards; 2) Promote application of standards; 3) Take into account special needs (small & med entities & emerging markets); 4) Convergence of nat'l and int'l standards
B/S - short-term investments
IASB - Goals
Comprehensive income...
Inventory mangement: High T/O (low DOH) and sales growth below industry average
41. 1) Purpose and context 2) Data Collection 3) Data Processing 4) Analysis/Interpretation of data 5) Develop conclusions and recommendations 6) Follow-up
Steps of F/S Analysis
Measures of Operating Performance - Efficiency Ratios...
IFRS/US GAAP Frameworks: Measurement of Elements...
Units of Production Method
42. Increasing CFI - may indicate growth OR Decreasing CFI or sell capital assets to conserve or generate cash.May result in higher outflows in the future as older assets are replaced or growth conts.
Operating Lease
CFI Analysis...
Low Quality Earnings is result of...
Inventory Systems...
43. Assets: lower - Liabilities: lower - NI (Early yrs): higher - CFO: lower (b/c entire pymt is classed as CFO) - CFF: higher - Total CF: Same
IFRS/US GAAP Frameworks: Recognition of Elements...
Effects of Lease Classification on F/S - Operating Lease
Cash flow ratios
Which set of accounting standards requires firms to disclose estimated amortization expense for the next five years on intangible assets?
44. 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
DBO Funded Status =
Return on total capital (ROTC)...
Discontinued Operations...
Intercorporate Investment: < 20% votes...
45. All other liabilities (e.g. bonds - notes payables - leases)
Balance Sheet - formats
Impact on the B/S of a Discount Bond...
Financial Liability: US GAAP/Amortized at Cost
Taxation Disclosure Requirements
46. Low: P/E - P/CF - or P/S - High: ROE - ROA - growth rates of sales and earnings - Low: leverage
Motivation to Under-report Earnings
Intangible Assets
Capitalization of Interest...
Screening for Potential Equity Investment: Criteria
47. 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
Fraud Triangle - 3) Attitude/rationalization
Implication for Analysts: Be aware of differences in tax reconcilation between periods
Statement of Cash Flow - relevance...
Inventory Systems...
48. 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
Deferred Tax Liability: (DTL)
Financial Liability: US GAAP/Amortized at Cost
Credit Rating Process...
Market Value (GAAP)...
49. 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
Intangibles under IFRS...
CFI Analysis...
Financial Ration based on B/S: Liquidity Ratios
Inventory Cost Flow Methods...
50. Income Tax Expense/Pretax Income (EBIT) Income Tax Exp. = Taxes payable + chg in deferred ta
IFRS Revenue Recognition
B/S - Long-lived assets
Effective Tax Rate
Not all CF increase are Sustainable. Example of how Mgmt can Manipulate Cash Flow Statement