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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. Financial Services Companies: Operating activities: Interest - Dividends - G/(L) on disposal Non-Financial Services Companies: Non-operating activities: Interest - Dividends - G/(L) on disposal
Income Tax Paid...
IFRS/US GAAP Frameworks: purpose of framework
Operating vs. Non-operating Income
Cost recovery method...
2. Carrying amount of the liability minus the amount that will be deductible in the future.
B/S - short-term investments
Inventory mangement: Low T/O (High DOH)...
DTA Issues
Tax base on a liability
3. 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
Activity Ratios
SEC guidance for Revenue Recognition
FIFO is appropriate
4. 1) Valuation; 2) Standard setting; 3) Measurement
Amortization of Bond Premium = (in/out flow) in the indirect method CFO
Operating Risk Ratios...
Barriers to a single framework...
Effects of Lease Classification on Ratios - Operating Lease
5. NRV = Est. selling cost - Est. cost of complition - selling costs
Intangibles under IFRS...
Net Realizable Value (NRV) (IFRS)
The 4 Qualitative Characteristics of IFRS
Expensed Intangibles...
6. 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.
Effective Tax Rate
IFRS/US GAAP Frameworks: objective of F/S
IFRS/US GAAP Frameworks: Measurement of Elements...
Balance Sheet - formats
7. Improve ROA and Asset TO Ratios - Report higher aquisition goodwill
Impact on the Cash Flow of a Discount Bond...
Motivation to Understate Assets/Overstate Liabilities
Financial Ratios based on B/S: Solvency ratio
Net Reporting of Revenue
8. I/S and B/S - Each line is relative to base year
Intercorporate Investment: < 20% votes...
Discontinued Operations...
Horizontal Common Size Statements...
Financial Assets: US GAAP/Fair Market Value
9. 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 Overstate Assets/Understate Liabilities
CFO Disclosure requirement...
Taxable Income
LIFO is appropriate
10. Part of indenture that place restrictions on the firm that protect bondholderns and increase value of the firm's bond - Breach is technical default
DBO Funded Status =
The account format of B/S
Debt covenants
Reasons to Lease...
11. 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
Segment Reporting
Impact on the B/S of a Par Bond...
Disclosure for each segment...
Defined Benefit Obligations (DBO)
12. FASB & IASB -LT projects under contract - reliable estimates of revenue - cost and completion time -Rev - exp and profit are recognized in proportion to total cost incurred to date - divided by total expected cost.
BASIC EPS
IFRS: Required F/S
% of Completion
Impairments recognition (IFRS)
13. 1) B/S asset increased to FMV 2) Increase above original cost to equity via revaluation surplus account (comprehensive Income)
Roles of financial reporting & analysis include...
Financial Assets: US GAAP/Fair Market Value
IFRS: Required F/S
Revaluation above historic cost...
14. 1) SL; 2) Double Decline balance (accelerated); 3) Units of production; 4) Tax code perscribed Modified Accelerated Cost Recovery System (MACRS)
CFO Disclosure requirement...
Depreciation Methods...
Creative Cash Flows Accounting: Motivation
Impact on the Cash Flow of a Par Bond...
15. When a company prepares a proxy statement for its shareholders prior to the annual meeting or other shareholder vote - it also files the statement with the SEC as Form DEF-14A.
Form DEF-14A...
Inventory mangement: High T/O (low DOH) and sales growth above industry average
Impact on the Cash Flow of a Discount Bond...
ROE interpretation: if ROE is low...
16. 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.
Discontinued Operations...
Screening for Potential Equity Investment: Criteria
Balance Sheet
IFRS: Presentation Requirements
17. Shows the performance of the company over a reporting period.
Credit Rating Process...
CFO - Direct method
Income Statement
Intercorporate Investment: 20% - 50% votes...
18. 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
Reasons to Lease...
Footnote Finance Liability Disclosure
CFI Analysis...
Inventory Cost Flow Methods...
19. 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.
Effects of Lease Classification on F/S - Operating Lease
Types of accounting changes: accounting principle
Bond Issuance Cost under GAAP/IFRS
Fundamental principles for PREPARING f/s under IFRS: (IAS No 10
20. 1) Consider the growth rate and capital spending levels when determining whether temp diff due to accelerated depre will reverse 2) Look for cumulative differences due to asset impairments and post-retirement benefits 3) Restructuring charges can c
Analysis: Market Value of Debt
4 General Categories for Creditworthiness/Capacity...
Taxation: Tax Payable
Implication for Analysts: Be aware of differences in tax reconcilation between periods
21. 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
Complex Capital Structure
BASIC EPS
Impact on the Cash Flow of a Zero Coupon Bond...
The 4 Qualitative Characteristics of IFRS
22. 1) is a contra asset account used to reduce the value of a DTA - 2) it is used to reduce the asset when future taxable income is deemed to be insefficient to fully use the DTA.
Measures of Operating Performance - Efficiency Ratios...
Inv. Valuation reporting Inventory ABOVE costs...
Valuation allowance
DBO Funded Status =
23. 1) Evaluating equity investments for a portfolio; 2) Evaluating potential M&A; 3) Evaluating a subsidiary of a parent company; 4) Deciding on private equity/ venture cap investment 5) Determine creditworthiness - borrowing; 6) Extending credit to
Roles of financial reporting & analysis include...
B/S - short-term investments
Cost recovery method...
Effects of Lease Classification on F/S - Operating Lease
24. 1) Calculate cash raised on exercise 2) Repurchase shares at avg. price 3) New Shares = exercised - repurchased
The best indicator of overstating its profits is...
Inventory Valuatoin (LCM)
Operating Risk Ratios...
Stock options: Use treasury stock method
25. Income Tax Expense < Taxes Payable - F/S < Tax Return - Pay more tax now but more on reversal
Inv. Valuation reporting Inventory ABOVE costs...
Deferred Tax Asset: (DTA)
IOSCO
Gross Reporting of Revenue
26. Efficient inventory managment
Defined Benefit Plans
Cash Flow From Operations (CFO) - IFRS
Inventory mangement: High T/O (low DOH) and sales growth above industry average
IOSCO
27. 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
Common Size Statement
Tax Loss Carryforward...
CFO Disclosure requirement...
Not all CF increase are Sustainable. Example of how Mgmt can Manipulate Cash Flow Statement
28. Is required under IFRS but not under GAAP
Creative Cash Flows Accounting: Motivation
Inventory Valuatoin (LCM)
Tax base of an asset
Footnote disclosure of Reconciliation of opening and closing carrying values...
29. Adjustments Involves erros or new accounting standards - Resate prior period - Disclose nature and effect on NI - Errors may indicate weakness in internal controls
Valuation Allowance...
# of days payable =
Types of accounting changes: prior period adjustments
Vertical Common Size Statements...
30. FIFO: EI = newest purchases - LIFO: EI = oldest purchases - Avg. Costs: EI = Available for sale/Units - Specific ID: high value items (cars - diamonds etc)
Types of accounting changes: accounting estimate
Inventory Cost Flow Methods...
Characteristics of an effective framework
Return on Assets ROA...
31. It is Rare - but permitted for commodity producer/dealers B/S = NRV - I/S = unrealized gains/losses
days of sales o/s =
Inv. Valuation reporting Inventory ABOVE costs...
IFRS/US GAAP Frameworks: F/S elements...
Financial Assets: US GAAP/Amortized at Cost
32. Interest Expense = Coupon - Amortization = PV of future CF x market yield @ issuance
LIFO is appropriate
days of inv. on hand =
Impact on the B/S of a Premium Bond...
Diluted EPS
33. Decreases DTA -> Decreases Net Income - [Decrease in Valuation Allowance; Increase DTA and Increases Net Income]
An Increase in the Valuation Allowance Account...
Roles of financial reporting & analysis include...
From creditor POV: Int. Coverage;
SEC guidance for Revenue Recognition
34. (GAAP) Internally created intangibles 1) (R&D) are expensed 2) Advertising 3) Software (developed to establish feasibility)
Lessor Accounting Capital Lease: Sales: Direct Financing Lease
IASB
Convergence IFRS/US GAAP...
Expensed Intangibles...
35. 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
IFRS/US GAAP Frameworks: F/S elements...
Inventory mangement: Low T/O (High DOH)...
Installment Method...
CFO Disclosure requirement...
36. Funds from Operations to debt = NI adj for non cash items/ total debt - Free operating CF to Total Debt = CFO - Capex / total debt - Total Debt to EBITDA = total debt / EBITDA - Return on Capital = EBIT / Capital - Total debt to total debt + equity =
Discontinued Operations...
Credit Analysis: Ratios
Analysis: Market Value of Debt
B/S - Long-lived assets PP&E
37. EU 1) Int'l Accounting Standards Board; 2) Unified int'l frameworks of accounting standards (IFRS); 3) Addopted by EU in 2005
FIFO after-tax profit =
IASB
Financial Liability: US GAAP/Fair Market Value
To investigate the stability of that structure - Kilgore would be best served by looking at...
38. Return on Total Equity = NI/ Avg. Total Equity - Return on C/E = NI - Pref. Div/ Avg. Common Equity
Straight-line depreciation (SL)
IFRS: Presentation Requirements
Return on Equity (ROE)...
Creative Cash Flows Accounting: Technique
39. Same as other ratios using NI in this case substitut NI for CFO.
Cash flow ratios
IFRS Revenue Recognition For Service
Cost included in Inventory on b/s...
CFO Analysis...
40. 1) Outcome reliable: rev recognized by stage of completion 2) Outcome unreliable: revenue recognized but no profit (
Defined Contribution Plans
IFRS Revenue Recognition For Service
What is the economic substance of financial (capital) lease?
Low Quality Earnings is result of...
41. 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
BASIC EPS
Defined Benefit Obligations (DBO)
Financial Ration based on B/S: Liquidity Ratios
Footnote Finance Liability Disclosure
42. 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
Net Realizable Value (NRV) (IFRS)
Free Cash Flow to the Firm - FCFF
IFRS/US GAAP Frameworks: objective of F/S
B/S - Long-lived assets PP&E
43. Required by IFRS - Permited by US GAAP
Add/ Sub changes to related b/s operating accounts
Segment Reporting
Component depreciation;
Barter (IASB & FASB)
44. 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
Credit Rating Process...
Screening for Potential Equity Investment: Criteria
Financial Ratios based on B/S: Solvency (Coverage)
Inventory mangement: Low T/O (High DOH)...
45. US 1) Financial Accounting Standards Board; 2) Standards form GAAP; 3) Aims - useful - relevant - reliable - consistent and comparable; 4) SEC deems FASB standard authoritative
FASB
Return on Equity (ROE)...
Sales Basis Revenue Recognitions
The account format of B/S
46. Share are to ensure significant influence over the company - Affiliate/Associate - Equity Method
Tax Loss Carryforward...
BASIC EPS
Net Reporting of Revenue
Intercorporate Investment: 20% - 50% votes...
47. 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
Warning Signs of Earnings Manipulation
CFO - Indirect method steps...
Creative Cash Flows Accounting: Technique
Impact on the B/S of a Discount Bond...
48. 1) Transparency; 2) Comprehensiveness; 3) Consistency
Credit Analysis: Ratios
Characteristics of an effective framework
Defined Contribution Plans
Inventory Cost Flow Methods...
49. 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
Impact on the B/S of a Par Bond...
Sources of Differences betweent F/S & T/
Funded Status US GAAP & IFRS
Effective Tax Rate
50. Under GAAP 1) Purchased patentes - copyrights - franchises - licenses - brands - and trademarks 2) Direct response advertising 3) Goodwill arising from transactions - (Proceeds - FMV net assets required = goodwill) 4) Software development costs once
Debt covenants
From creditor POV: Int. Coverage;
Capitalized Intangibles...
Return on Equity (ROE)...
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