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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. Off B/S asset or liability = Footnotes disclosure - Lease payments are expensed when due via I/S - Payments are CFO outflows
Intercorporate Investment: 20% - 50% votes...
Intangible Assets
Operating Lease
Defined Benefit Obligations (DBO)
2. 1) B/S asset increased to FMV 2) Increase above original cost to equity via revaluation surplus account (comprehensive Income)
Revaluation above historic cost...
FIFO results in: (assuming inflationary period)
Discontinued Operations...
Implication for Analysts: Be aware of differences in tax reconcilation between periods
3. 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...
Financial Ratio based on I/S...
Analyst Treaments of DTL
Taxation Disclosure Requirements
4. Taxes payable + chg deferred Tax as per Financial Report
Reasons to Lease...
Taxation: Income Tax Expense
DBO Funded Status =
Free Cash Flow to Equity - FCFE
5. Means that at least ONE of the following is true: Company has poor profit margin; Company has poor asset TO; Company is underleveraged
IFRS Revenue Recognition
ROE interpretation: if ROE is low...
Financial Ratios based on B/S: Solvency (Coverage)
IFRS/US GAAP Frameworks: underlying assumptions...
6. 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...
Sarbanes-Oxley Management Report...
Depreciation Methods...
Analyst Treaments of DTL
7. Carrying amount of the liability minus the amount that will be deductible in the future.
Tax base on a liability
Amortization of Bond Discount = (in/out flow) in the indirect method CFO
An Increase in the Valuation Allowance Account...
CFO - Direct/Indirect method
8. Income variability lower - Profitability early years (ROE - ROA & NI) is Higher - Profitability later years: lower - Total Cash Flows: Same - CFO: higher - CFI: Lower - Leverage ratios: D/E & D/A: lower - Opposite fore Expensing
Intangibles under IFRS...
Financial Implications of Capitalizing...
Capitalized Intangibles...
Sources of Differences betweent F/S & T/
9. 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
Measurement of A & L disclosure in footnotes
3 C's for Credit Analysis...
Implication for Analysts: Be aware of differences in tax reconcilation between periods
10. Improve ROA and Asset TO Ratios - Report higher aquisition goodwill
Expensed Intangibles...
IFRS/US GAAP Frameworks: underlying assumptions...
Motivation to Understate Assets/Overstate Liabilities
Installment Method...
11. 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
Installment Method...
Form DEF-14A...
Impact on the B/S of a Discount Bond...
12. 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
Operating vs. Non-operating Income
Funded Status US GAAP & IFRS
Impact on the Cash Flow of a Discount Bond...
Defined Contribution Plans
13. 1) Intention to hold >1 year (e.g. debt or equity) valued @ cost or mkt value 2) Equity accounted investments
Calculate dividends declared...
B/S - investments
Finance (capital) Lease criteria GAAP vs. IFRS
LIFO results in: (assuming inflationary period)
14. 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.
CFO Analysis...
Fraud Triangle
Deferred Tax Liability: (DTL)
ROE interpretation: if ROE is low...
15. Divdends and share repurchases - Production and investment - M&A - New debt issuance - Payoff pattern and liquidation priority - Maintenance of assets used as collateral
Capitalization of Interest...
Analysis: Market Value of Debt
Activity Based Restrictions
Financial Implications of Capitalizing...
16. 1) Increase comparability; 2) Reduce expense of overseas capital; 3) Reduce the expense of producing consolidated accounts
Balance Sheet - formats
Sales Basis Revenue Recognitions
FASB - Harmonization
DTA Issues
17. 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
Revaluation below historic cost...
Gain/(loss) on bond early retirement: (derecognition of debt)
Units of Production Method
18. Cash Flow available for distribution to the c/s; after all obligations have been paid. CFO - fixed capital investment + net debt increase or CFO - net cap expenditure + net borrowings
Segment Reporting
Free Cash Flow to Equity - FCFE
Tax base of an asset
Barter (IASB & FASB)
19. Interest expense = Coupon rate
Impact on the B/S of a Discount Bond...
Types of accounting changes: accounting estimate
Installment Method...
Impact on the B/S of a Par Bond...
20. '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
Forecasting Financial Performance: Top Down Approach...
Vertical Common Size Statements...
Cash Flow From Investing (USA) (Assets)
Valuation allowance
21. CFO: cash interest expense - CFF: increased by amount rcvd at issuance and decreased by payment made at redemption - CFO is lower CFF is higher
Motivation to Understate Assets/Overstate Liabilities
Impact on the Cash Flow of a Premium Bond...
SEC guidance for Revenue Recognition
Not all CF increase are Sustainable. Example of how Mgmt can Manipulate Cash Flow Statement
22. Loss that could not be deducted on the tax return in current period but may be used to reduce taxable income and taxes payable in future (i.e. warranty)
Inventory mangement: Low T/O (High DOH)...
Tax Loss Carryforward...
Impact on the Cash Flow of a Discount Bond...
Form DEF-14A...
23. Outflow - (bringing bond DOWN to par)
3 C's for Credit Analysis...
CFO Disclosure requirement...
Funded Status US GAAP & IFRS
Amortization of Bond Premium = (in/out flow) in the indirect method CFO
24. 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
Footnote Finance Liability Disclosure
Amortization of Bond Discount = (in/out flow) in the indirect method CFO
Which of the following characteristics should be of least concerned about management's opportunities to commit fraud?
Form DEF-14A...
25. Part of indenture that place restrictions on the firm that protect bondholderns and increase value of the firm's bond - Breach is technical default
Debt covenants
Creative Cash Flows Accounting: Motivation
FIFO is appropriate
DTA Issues
26. = LIFO ending inventory + LIFO reserve FIFO after-tax profit
FIFO ending inventory =
Tax base on a liability
Impact on the Cash Flow of a Premium Bond...
Return on Equity (ROE)...
27. Cash collections less direct cash inputs less other cash outfllows
Inventory mangement: High T/O (low DOH) and sales growth above industry average
SEC guidance for Revenue Recognition
Analyzing Effective Tax Rate Reconciliation
CFO - Direct method
28. 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)
Financial Liability: US GAAP/Amortized at Cost
Component depreciation;
Sources of Differences: Permanent
Sales Basis Revenue Recognitions
29. 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
Low Quality Earnings is result of...
Funded status of the pension plan (under US GAAP & IFRS) is reported where?
Comprehensive income...
Cash Flow From Operations (CFO) - IFRS
30. Beginning Inv. (BI) + Purchases (P) = Available for Sale - Available for sale - COGS = Ending Inventory (EI)
B/S - Stockholders' Equity
Measurement of A & L disclosure in footnotes
Ending Inventory =
Intercorporate Investment: > 50% votes...
31. 1) Timing Differences: Accrual vs. modified cash accounting - Differences in reporting methods estimates
Intangibles under IFRS...
Potentially Dillutive Securities
Trade-Offs Qualitative Characteristics of IFRS
Sources of Differences: Temporary
32. Both: Recognize going concern & accrual assumptions - IASB: Going concern & accruals given more prominence in framework - FASB: Going concern assumption not well developed in framework.
Revaluation above historic cost...
Cash Flow: Logic (A = L + E)
FIFO ending inventory =
IFRS/US GAAP Frameworks: underlying assumptions...
33. Cash Flow available for distribution to all investors (stockholders & debt holders) CFO + int(1-t) - fixed capital investment or [FCFF calculated from NI = NI + noncash charged + (Int exp(1-tax rate) - net cap investment - working capital invt.]
IFRS/US GAAP Frameworks: F/S elements...
Free Cash Flow to the Firm - FCFF
FIFO after-tax profit =
Activity Ratios
34. 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
Financial Assets: US GAAP/Amortized at Cost
Sources of Differences betweent F/S & T/
Dilutive Securities
Barter (IASB & FASB)
35. Income Tax Expense/Pretax Income (EBIT) Income Tax Exp. = Taxes payable + chg in deferred ta
Effective Tax Rate
IFRS/US GAAP Frameworks: Measurement of Elements...
Cash Flow From Investing (USA) (Assets)
Financial Implications of Capitalizing...
36. 1) Calculate cash raised on exercise 2) Repurchase shares at avg. price 3) New Shares = exercised - repurchased
Antidilutive Securities
Stock options: Use treasury stock method
Component depreciation;
To investigate the stability of that structure - Kilgore would be best served by looking at...
37. Total assets TO = Revenue/Avg. total asset - Fixed asset TO = Revenue/ Avg. net fixed assets - Working Cap TO = Revenue/Avg. working captial
Measures of Operating Performance - Efficiency Ratios...
Inventory mangement: High T/O (low DOH) and sales growth below industry average
Defined Benefit Obligations (DBO)
4 General Categories for Creditworthiness/Capacity...
38. 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.
Motivation to Overstate Assets/Understate Liabilities
Characteristics of an effective framework
Gross Reporting of Revenue
Creative Cash Flows Accounting: Technique
39. 1) Purpose and context 2) Data Collection 3) Data Processing 4) Analysis/Interpretation of data 5) Develop conclusions and recommendations 6) Follow-up
Intangibles under IFRS...
SEC guidance for Revenue Recognition
Steps of F/S Analysis
Impact on the Cash Flow of a Premium Bond...
40. 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
Cash Flow: Logic (A = L + E)
Cash flow ratios
Net Reporting of Revenue
Extraordinary Items: Unusual AND Infrequent items...
41. GAAP: more quantitative rules - IFRS: more qualitative approach based on whether the risks and reward of the asset have tranferred.
Component depreciation;
Inventory Systems...
Finance (capital) Lease criteria GAAP vs. IFRS
DTA Issues
42. Stock options - Warrants - Convertible debt - Convertible preferred stock
Footnote Finance Liability Disclosure
LIFO is appropriate
Potentially Dillutive Securities
Intercorporate Investment: < 20% votes...
43. 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
Revaluation above historic cost...
Cost recovery method...
Under Completed Contract Method...
Types of accounting changes: accounting principle
44. 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)
Balance Sheet - formats
IFRS/US GAAP Frameworks: F/S elements...
From creditor POV: Int. Coverage;
Potentially Dillutive Securities
45. Held for continuing use within the business (not for resale) 1) investment property; 2) Assets held for sale; 3) Natural resources; 4) PP&E
FIFO is appropriate
IASB - Goals
B/S - Long-lived assets
The account format of B/S
46. 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
DTA Issues
Net Realizable Value (NRV) (IFRS)
Impairments recognition (IFRS)
Analyzing Effective Tax Rate Reconciliation
47. 1) Responsibility to establish and maintain adequate internal controls 2) Mgmt's framework for evaluating internal controls 3) Assessment of the effectiveness of internal controls over the last operating period 4) Statement of auditor's attestment 5)
Fraud Triangle - 3) Attitude/rationalization
CFO Disclosure requirement...
Capitalization of Interest...
Sarbanes-Oxley Management Report...
48. 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
Dilutive Securities
Expensed Intangibles...
Analyst Treaments of DTL
49. Financial Services Companies: Operating activities: Interest - Dividends - G/(L) on disposal Non-Financial Services Companies: Non-operating activities: Interest - Dividends - G/(L) on disposal
Operating vs. Non-operating Income
Free Cash Flow -CFO
Gain/(loss) on bond early retirement: (derecognition of debt)
FIFO after-tax profit =
50. 1) fair presentation; 2) going concern; 3) accrual basis; 4) consistency; 5) materiality
Fundamental principles for PREPARING f/s under IFRS: (IAS No 10
Forecasting Financial Performance: Application
Cost included in Inventory on b/s...
Effects of Lease Classification on Ratios - Finance Lease