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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.
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. 1) Valuation; 2) Standard setting; 3) Measurement
Horizontal Common Size Statements...
Complex Capital Structure
Cash Flow From Operations (CFO) - FASB
Barriers to a single framework...
2. Efficient inventory managment
BASIC EPS
Common Size Statement
Inventory mangement: High T/O (low DOH) and sales growth above industry average
Impact on the B/S of a Zero Coupon Bond...
3. '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
Cash Flow From Investing (USA) (Assets)
Measures of Operating Performance - Efficiency Ratios...
Taxation: Tax Payable
Disclosure for each segment...
4. 365/(AP T/O) = 365/(purchases/ Avg. AP)
Financial Liability: US GAAP/Amortized at Cost
# of days payable =
Taxation: Income Tax Expense
Financial Ratios based on B/S: Solvency ratio
5. 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)
Types of accounting changes: prior period adjustments
The 4 Qualitative Characteristics of FASB...
Intangible Assets
Sources of Differences: Temporary
6. Small investment for div/capital gains purpose - If Secondary market: Held-to-maturity: Debt securities co intend to hold to maturity; Carried at Amortized cost. Available-for-sale: Sold to satisfy Debt/Equity Needs; Currrent or non-current; B/S @ MV
B/S - short-term investments
Balance Sheet - formats
Fraud Triangle
Intercorporate Investment: < 20% votes...
7. Assess liquidity - solvency and financial flexibiliy
Roles of financial reporting & analysis include...
Fraud Triangle - 2) Opportunity
Cash Flow From Operations (CFO) - FASB
Statement of Cash Flow - relevance...
8. LIFO after-tax profit + (change in LIFO reserve)(1 - t)
FIFO after-tax profit =
One major difference between the presentation of deferred tax assets and liabilities under IFRS and under U.S. GAAP is that...
Unusual OR Infrequent items...
Types of accounting changes: prior period adjustments
9. Replacement cost subject to: Upper limit = NRV - Loewr limit = NRV - normal profit margin
IFRS/US GAAP Frameworks: objective of F/S
Fraud Triangle - 3) Attitude/rationalization
Operating Risk Ratios...
Market Value (GAAP)...
10. 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
CFO - Direct method
B/S - Long-term Liabilities
The best indicator of overstating its profits is...
Analyst Treaments of DTL
11. Stock options - Warrants - Convertible debt - Convertible preferred stock
Potentially Dillutive Securities
FIFO after-tax profit =
Forecasting Financial Performance: Application
Financial Ratios based on B/S: Solvency ratio
12. FIFO: EI = newest purchases - LIFO: EI = oldest purchases - Avg. Costs: EI = Available for sale/Units - Specific ID: high value items (cars - diamonds etc)
Finance (capital) Lease criteria (under US GAAP)
Inventory Cost Flow Methods...
Motivation to Understate Assets/Overstate Liabilities
Fundamental principles for PREPARING f/s under IFRS: (IAS No 10
13. 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...
Defined Benefit Obligations (DBO)
Inv. Valuation reporting Inventory ABOVE costs...
Valuation allowance
14. 1) Change in accounting principle; 2) Change in accounting estimate; 3) Prior period adjustments
Types of accounting changes...
ROE interpretation: if ROE is low...
Effects of Lease Classification on Ratios - Operating Lease
Sustainable Growth
15. 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
Effects of Lease Classification on F/S - Finance Lease
Intangibles under IFRS...
Impact on the B/S of a Premium Bond...
IFRS: Required F/S
16. I/S and B/S - Each line is relative to base year
Horizontal Common Size Statements...
Impact on the Cash Flow of a Premium Bond...
B/S - Stockholders' Equity
Financial Liability: US GAAP/Amortized at Cost
17. Shows only the difference between sales and cost of goods sold Users are usually: 1) internet-based merchandising companies; 2) Sell prodict but never hold inventory; 3) Arrangement for supplier to ship directly to end customer. Discolsure policies
Financial Adj to Facilitate Comparison...
Form DEF-14A...
Intercorporate Investment: > 50% votes...
Net Reporting of Revenue
18. It is Rare - but permitted for commodity producer/dealers B/S = NRV - I/S = unrealized gains/losses
Financial Ratios based on B/S: Solvency ratio
Characteristics of an effective framework
Inv. Valuation reporting Inventory ABOVE costs...
Add/ Sub changes to related b/s operating accounts
19. 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
Return on Assets ROA...
Asset Revaluation: IFRS
Revaluation above historic cost...
Analysis: Market Value of Debt
20. 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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21. Assets - liabilities - and equity are presented in a single column.
Intercorporate Investment: < 20% votes...
Taxation: Income Tax Expense
The report format of B/S
Analysis: Market Value of Debt
22. 1) if 50% of its revenue is earned externally 2) if a business area has at least 10% of a firm's: Revenue; or Operating profit; or Use of asset 3) Business and geographical segments
Vertical Common Size Statements...
IASB
SEC guidance for Revenue Recognition
Segment Reporting
23. 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
Convergence IFRS/US GAAP...
Operating vs. Non-operating Income
Cash Flow From Financing (USA) (Source of Cash)
Comprehensive income...
24. I/S: COGS higher - EBT lower - Taxes: lower - NI: Lower - B/S: INV: lower - W/C: Lower - are/E: lower - CF: CFO: higher
Trade-Offs Qualitative Characteristics of IFRS
days of sales o/s =
LIFO results in: (assuming inflationary period)
Impact on the B/S of a Par Bond...
25. US 1) Financial Accounting Standards Board; 2) Standards form GAAP; 3) Aims - useful - relevant - reliable - consistent and comparable; 4) SEC deems FASB standard authoritative
Gain/(loss) on bond early retirement: (derecognition of debt)
Defined Benefit Plans
FASB
Free Cash Flow -CFO
26. Income Tax Expense < Taxes Payable - F/S < Tax Return - Pay more tax now but more on reversal
Net Periodic Benefit Costs
Balance Sheet
Deferred Tax Asset: (DTA)
Fundamental principles for PREPARING f/s under IFRS: (IAS No 10
27. 1) Aggregation where appropriate; 2) No offsetting assets against liabilities or income against exp.; 3) Classifed B/S; 4) Minimum Info on face; 5) Minimum disclosure; 6) Comparative info.
CFO - Direct/Indirect method
Operating vs. Non-operating Income
Form 144...
IFRS: Presentation Requirements
28. 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.
Trade-Offs Qualitative Characteristics of IFRS
IFRS: Presentation Requirements
B/S - Stockholders' Equity
CFI Analysis...
29. Trade relief - Contingent consideration - Union concessions
Impact on the Cash Flow of a Premium Bond...
Footnote disclosure of Reconciliation of opening and closing carrying values...
Motivation to Under-report Earnings
Taxable Income
30. +Cash rcvd from customer - +Cash dividends rcvd - +Cash interest rcvd - +Other cash income ((trading securities) - Payment to suppliers - Cash expenses (wages etc) - Cash interest paid - Cash taxes paid
Inventory mangement: High T/O (low DOH) and sales growth above industry average
Financial Assets: US GAAP/Fair Market Value
Horizontal Common Size Statements...
Cash Flow From Operations (CFO) - FASB
31. Working Capital = CA - CL - Working Capital TO = Rev/Avg. Working Capital - Fixed Asset TO = Rev/Avg Net Fixed Assets
Revaluation below historic cost...
Intangibles under IFRS...
Activity Ratios
The account format of B/S
32. Companies should not recognize revenue from barter transactions. The additional revenue is likely to improperly boost profits. While an unusually high sales-growth rate may indicate fraud - it could also indicate good management. It's a yellow flag -
Gain/(loss) on bond early retirement: (derecognition of debt)
The best indicator of overstating its profits is...
Trade-Offs Qualitative Characteristics of IFRS
Screening for Potential Equity Investment: Criteria
33. 1) Balance Sheet; 2) Comprehensive Income; 3) Change in Equity; 4) Cash Flow Statement; 5) Accounting policies and notes.
Free Cash Flow to the Firm - FCFF
Potentially Dillutive Securities
Financial Ratios based on B/S: Solvency ratio
IFRS: Required F/S
34. Shows the financial position of a firm AT A SINGLE POINT in time A = L + E.
What is the economic substance of financial (capital) lease?
B/S - short-term investments
Balance Sheet
Unusual OR Infrequent items...
35. 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
Cash Flow From Financing (USA) (Source of Cash)
Asset Capitalization
B/S - short-term investments
Cost included in Inventory on b/s...
36. Int. Coverage = EBIT/Interest Expense - Fixed Charged Coverage = (EBIT+Lease Pymts) / Int. exp + Lease payments
Intangible Assets
Operating vs. Non-operating Income
Financial Ratios based on B/S: Solvency (Coverage)
Revaluation below historic cost...
37. Includes: cash flow from interst Rec'd and Paid - and Dividend received. Includes all income taxes paid.
Cash Flow From Operations (CFO) - FASB
IFRS Revenue Recognition
Financial Liability: US GAAP/Amortized at Cost
Taxation: Income Tax Expense
38. 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)
Cost recovery method...
CFO - Direct/Indirect method
Types of accounting changes: accounting principle
Defined Benefit Obligations (DBO)
39. 1) understandability; 2) relevance; 3) reliability; and 4)comparability - No hierarchy
4 General Categories for Creditworthiness/Capacity...
Form 144...
Creative Cash Flows Accounting: Motivation
The 4 Qualitative Characteristics of IFRS
40. 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
Financial Implications of Capitalizing...
Common Size Statement
Types of accounting changes: accounting principle
Intangibles under IFRS...
41. Timing differences (depreciations) - Permanent differences
Sources of Differences betweent F/S & T/
FIFO ending inventory =
Form 8-K...
Asset Revaluation: IFRS
42. G = (earnings Retention rate) x (ROE) - earnings retention rate = [1-(payout ratio)] - payout ratio = Common dividends/ NI - Pref. Div.
Sustainable Growth
The 4 Qualitative Characteristics of IFRS
Intangible Assets
Impact on the Cash Flow of a Premium Bond...
43. Reported ABOVE the line 1) G/(L) from disposal of a business segment 2) G/(L) from sale of investment in subsidiary 3) Provisions for environmental remediation - impairments - write-offs - write-downs - restructuring.4) Integration expense for recent
DTA/DTL: Effect on Net Income when Tax Rate decreases...
Motivation to Understate Assets/Overstate Liabilities
Depreciation Methods...
Unusual OR Infrequent items...
44. 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
Not all CF increase are Sustainable. Example of how Mgmt can Manipulate Cash Flow Statement
Income Statement
Cash Flow From Operations (CFO) - IFRS
Lessor Accounting Capital Lease: Sales: Direct Financing Lease
45. 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.]
Free Cash Flow to the Firm - FCFF
Analysis: Market Value of Debt
Simple capital structure
Deferred Tax Asset: (DTA)
46. Income Tax Expense/Pretax Income (EBIT) Income Tax Exp. = Taxes payable + chg in deferred ta
Funded status of the pension plan (under US GAAP & IFRS) is reported where?
Effective Tax Rate
Gain/(loss) on bond early retirement: (derecognition of debt)
Fraud Triangle
47. 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...
BASIC EPS
Valuation Allowance...
Taxation Disclosure Requirements
48. 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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49. Fair Value of Plan Assets - Defined Benefit Obligation (DBO) - Fair Value > DBO: overfunded (asset on B/S - GAAP) - Fair Value < DBO: underfunded (liability on B/S - GAAP) - (Funded Status = Economic Position of Plan)
CFI Analysis...
Amortization of Bond Discount = (in/out flow) in the indirect method CFO
Inventory Valuatoin (LCM)
DBO Funded Status =
50. Contra asset account used to reduce DTA for probability that it will NOT be realized - Increase in valuation = decrease in DTA and NI - Decrease in valuation = increase in DTA and NI
Income Tax Paid...
Valuation Allowance...
Financial Liability: US GAAP/Fair Market Value
The report format of B/S