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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
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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) Results of operations and discussions of trend; 2) Capital resources - liquidity - and cash flow trends; 3) General business overview based on known trends; 4) Effects of trends - events - and uncertainties; 5) Discontinued operations - extraordin
FIFO ending inventory =
MD&A contains...
Under Completed Contract Method...
Defined Benefit Plans
2. 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
Forecasting Financial Performance: Top Down Approach...
Funded status of the pension plan (under US GAAP & IFRS) is reported where?
Operating vs. Non-operating Income
B/S - investments
3. Tax Rate down: DTL down -> Inc. Tax Exp down -> NI up - DTA down -> Inc. Tax Exp up -> NI down
DTA/DTL: Effect on Net Income when Tax Rate decreases...
Cost included in Inventory on b/s...
days of inv. on hand =
Financial Lease Reporting
4. Is required under IFRS but not under GAAP
Motivation to Over-report Earnings
Footnote disclosure of Reconciliation of opening and closing carrying values...
Types of accounting changes: prior period adjustments
Motivation to Understate Assets/Overstate Liabilities
5. Research = Expensed Development may be capitalized when the following critera is met: (ie if in the Development stage and NOT research stage) 1) process is clearly identified 2) Cost can be clearly idenfified 3) Technical feasibility established 4) M
Intangibles under IFRS...
days of inv. on hand =
FIFO results in: (assuming inflationary period)
Which of the following characteristics should be of least concerned about management's opportunities to commit fraud?
6. For inventory that has a limited shelf life ex) Because the movies have a very limited shelf life and will greatly deteriorate in value with age - especially after the first year - FIFO is the most appropriate method of accounting for the movies for
FIFO is appropriate
Cash Flow From Operations (CFO) - FASB
IFRS: Presentation Requirements
IFRS/US GAAP Frameworks: Measurement of Elements...
7. 1) Incentive/Pressure (the motive to commit fraud) 2) Opportunity (exists with weak internal controls) 3) Attitude/rationalization (mindset that fraud is justified)
The report format of B/S
Impact on the B/S of a Premium Bond...
Fraud Triangle
Sustainable Growth
8. 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
Impairments recognition (IFRS)
Low Quality Earnings is result of...
Calculate dividends declared...
Impact on the B/S of a Discount Bond...
9. Improve ROA and Asset TO Ratios - Report higher aquisition goodwill
Cash Flow: Logic (A = L + E)
Lessor Accounting Capital Lease: Sales-Type Lease
Motivation to Understate Assets/Overstate Liabilities
Footnote Finance Liability Disclosure
10. Assets held for continuing usage in the business NOT for resale ( Invoice price - Sales Tax - Freight & Insurance - and Installation costs) 1) capitalize costs that result in higher future earnings 2) expense costs that have uncertain/NO impact on fu
Debt covenants
Gain/(loss) on bond early retirement: (derecognition of debt)
Barter (IASB & FASB)
Asset Capitalization
11. Days of sales o/s + days of inv. on hand - # of days payable (shorter the better)
Cash Conversion Cycle =
Fundamental principles for PREPARING f/s under IFRS: (IAS No 10
Depreciation Methods...
The report format of B/S
12. 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
Amortization of Bond Premium = (in/out flow) in the indirect method CFO
Valuation Allowance...
Analysis: Market Value of Debt
Effective Tax Rate
13. 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.
Financial Liability: US GAAP/Amortized at Cost
Cash Flow: Logic (A = L + E)
DTA/DTL: Effect on Net Income when Tax Rate decreases...
Fraud Triangle - 2) Opportunity
14. 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...
Cash Flow From Operations (CFO) - FASB
Reasons to Lease...
Not all CF increase are Sustainable. Example of how Mgmt can Manipulate Cash Flow Statement
15. CFO: cash interest expense - CFF: increased by amount rcvd at issuance and decreased by payment made at redemption - CFO is lower CFF is higher
Impact on the Cash Flow of a Premium Bond...
Straight-line depreciation (SL)
Fraud Triangle - 3) Attitude/rationalization
Operating vs. Non-operating Income
16. 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
BASIC EPS
Analysis: Market Value of Debt
Disclosure for each segment...
Activity Ratios
17. 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 - investments
Steps of F/S Analysis
IASB - Goals
Expensed Intangibles...
18. 1) Capitalize interst during construction period when building its own operating facility; 2) Interest must actually be paid by the firm; 3) Specific and general debt interest is capitalized
Capitalization of Interest...
Financial Implications of Capitalizing...
An Increase in the Valuation Allowance Account...
Intercorporate Investment: < 20% votes...
19. 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
Funded Status US GAAP & IFRS
Warning Signs of Earnings Manipulation
Analyzing Effective Tax Rate Reconciliation
FIFO results in: (assuming inflationary period)
20. All DTA and DTL are classified as noncurrent under IFRS - Under U.S. GAAP - deferred tax assets and liabilities are classified as current or non-current according to the classification of the underlying asset or liability. Under IFRS - deferred tax a
Vertical Common Size Statements...
Footnote disclosure of Reconciliation of opening and closing carrying values...
One major difference between the presentation of deferred tax assets and liabilities under IFRS and under U.S. GAAP is that...
Expensed Intangibles...
21. 1) understandability; 2) relevance; 3) reliability; and 4)comparability - No hierarchy
The 4 Qualitative Characteristics of IFRS
Form 8-K...
CFO Disclosure requirement...
Impact on the B/S of a Discount Bond...
22. Cash collections less direct cash inputs less other cash outfllows
Taxation: Income Tax Expense
Inv. Valuation reporting Inventory ABOVE costs...
Comprehensive income...
CFO - Direct method
23. Interest Rec'd - CFO/CFI Divs Rec'd - CFO/CFI Interst Paid - CFO/CFF Divs Paid - CFF/CFO Overdraft = cash - not CFF
Credit Rating Process...
Inv. Valuation reporting Inventory ABOVE costs...
Intercorporate Investment: < 20% votes...
Cash Flow From Operations (CFO) - IFRS
24. Interest Expense = Coupon + Amortization = PV of future CF x market yield @ issuance
Inventory mangement: High T/O (low DOH) and sales growth below industry average
Depreciation Methods...
Impact on the B/S of a Discount Bond...
Valuation allowance
25. Income Tax Expense < Taxes Payable - F/S < Tax Return - Pay more tax now but more on reversal
Deferred Tax Asset: (DTA)
Income Statement
Types of accounting changes: accounting estimate
Antidilutive Securities
26. 1) Firms adds a lease asset and a lease liability to b/s = amounts - 2) Recognize int. expense on liability and depreciation exp on asset - Since Int. exp + depre > lease pymt in the early years. This decreases NI - and Profitability ratios.
Vertical Common Size Statements...
Dilutive Securities
Financial Lease Reporting
FIFO ending inventory =
27. EBIT/ Avg. total capital - Total capital includes: debt capital - so int. is aded back to NI
Intercorporate Investment: < 20% votes...
Return on total capital (ROTC)...
Gross Reporting of Revenue
Ending Inventory =
28. 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
Statement of Cash Flow - relevance...
Unusual OR Infrequent items...
Impairments recognition (GAAP)
29. 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
Impact on the Cash Flow of a Zero Coupon Bond...
Net Periodic Benefit Costs
Under Completed Contract Method...
Unusual OR Infrequent items...
30. Derivatives - Non-derivative investments with fair value exposure hedged by derivatives
Financial Liability: US GAAP/Fair Market Value
Units of Production Method
Simple capital structure
FIFO is appropriate
31. 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)
Financial Ration based on B/S: Liquidity Ratios
Motivation to Under-report Earnings
IFRS Revenue Recognition For Service
32. 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)
Effects of Lease Classification on F/S - Finance Lease
Taxation Analyst Adjustments...
Add/ Sub changes to related b/s operating accounts
CFO - Direct/Indirect method
33. (net income - preferred dividends)/weighted average of common shares outstanding - only income from continuing operations is considered
Inventory mangement: High T/O (low DOH) and sales growth above industry average
Measures of Operating Performance - Efficiency Ratios...
Vertical Common Size Statements...
BASIC EPS
34. Meet Analyst Expectations - Meet debt covenants - Incentive compensation
Financial Assets: US GAAP/Fair Market Value
days of inv. on hand =
Expensed Intangibles...
Motivation to Over-report Earnings
35. Delay Supplier pymt: boost CFO; review days' sales in AP; Financing of payables: use N/P to pay off AP; manipulate timing of CFO; Securitization of A/are: accelerates appearance of collection - boosts CFO; Tax benefit of stock options: lower tax paid
Creative Cash Flows Accounting: Technique
days of sales o/s =
Analysis: Market Value of Debt
Cash Flow: Logic (A = L + E)
36. Means that at least ONE of the following is true: Company has poor profit margin; Company has poor asset TO; Company is underleveraged
Discontinued Operations...
ROE interpretation: if ROE is low...
Capitalized Intangibles...
IOSCO
37. 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
Analyzing Effective Tax Rate Reconciliation
Motivation to Understate Assets/Overstate Liabilities
Intercorporate Investment: > 50% votes...
B/S - Stockholders' Equity
38. = LIFO ending inventory + LIFO reserve FIFO after-tax profit
CFI Analysis...
Inventory Valuatoin (LCM)
FIFO ending inventory =
Return on total capital (ROTC)...
39. Share are to ensure significant influence over the company - Affiliate/Associate - Equity Method
Impact on the B/S of a Par Bond...
FASB - Harmonization
Intercorporate Investment: 20% - 50% votes...
Straight-line depreciation (SL)
40. 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
Capitalized Intangibles...
CFI Analysis...
Revaluation below historic cost...
Cost included in Inventory on b/s...
41. 1) Balance Sheet; 2) Comprehensive Income; 3) Change in Equity; 4) Cash Flow Statement; 5) Accounting policies and notes.
The objective of f/s is to...
IFRS: Required F/S
Sources of Differences betweent F/S & T/
days of sales o/s =
42. Pd after more than 1 year - notes & bonds: at PV of future CF pymets - Capital leases - Provisions - Deferred tax
Net Periodic Benefit Costs
The 4 Qualitative Characteristics of FASB...
B/S - Long-term Liabilities
DTA/DTL: Effect on Net Income when Tax Rate decreases...
43. IFRS Allows firm to report PP&E at FMV less Accm' Depr' - Must disclose carrying vlaue using historic cost model.
Types of accounting changes: accounting principle
SEC guidance for Revenue Recognition
Asset Revaluation: IFRS
Fraud Triangle
44. 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
Credit Rating Process...
Deferred Tax Asset: (DTA)
Installment Method...
Defined Benefit Plans
45. If any ONE out of the FOUR are met must be classifed as Financial Lease: 1) Title transfered to lessee at the end of lease; 2) Bargain purchase option at the end of the lease; 3) Lease period is at least 75% of asset's useful life; 4) The PV of least
4 General Categories for Creditworthiness/Capacity...
Warning Signs of Earnings Manipulation
Finance (capital) Lease criteria (under US GAAP)
CFO - Direct method
46. 1) Land @ cost; 2) Plant & building @ historic cost less accu'm depr; 3) Equipment @ historic cost less accu'm depr 4) Intangible assets @ historic cost less accu'm amort
B/S - Long-lived assets PP&E
Effects of Lease Classification on F/S - Operating Lease
Cash Flow From Operations (CFO) - FASB
DTA Issues
47. 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
Cash Flow From Financing (USA) (Source of Cash)
Effects of Lease Classification on Ratios - Operating Lease
Form DEF-14A...
Simple capital structure
48. Inflow - (bringing bond UP to par)
Cash flow ratios
Revaluation above historic cost...
Analyst Treaments of DTL
Amortization of Bond Discount = (in/out flow) in the indirect method CFO
49. Both: General agreement on objectives; focus on wide range of users - IASB: One objective for all users - FASB: Separate objectives for business entities and non-business entities.
3 C's for Credit Analysis...
Financial Ratio based on I/S...
Cost included in Inventory on b/s...
IFRS/US GAAP Frameworks: objective of F/S
50. You.S. GAAP
Expensed Intangibles...
Which set of accounting standards requires firms to disclose estimated amortization expense for the next five years on intangible assets?
Inv. Valuation reporting Inventory ABOVE costs...
Taxable Income