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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. 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
Measurement of A & L disclosure in footnotes
Sources of Differences: Permanent
Revaluation below historic cost...
Effects of Lease Classification on F/S - Finance Lease
2. 365/(AP T/O) = 365/(purchases/ Avg. AP)
Simple capital structure
Cash flow ratios
# of days payable =
Inventory Valuatoin (LCM)
3. = LIFO ending inventory + LIFO reserve FIFO after-tax profit
FIFO ending inventory =
Financial Liability: US GAAP/Fair Market Value
Double-decline balance (DDB)
BASIC EPS
4. Includes: cash flow from interst Rec'd and Paid - and Dividend received. Includes all income taxes paid.
Extraordinary Items: Unusual AND Infrequent items...
Cash Flow From Operations (CFO) - IFRS
Cash Flow From Operations (CFO) - FASB
Sources of Differences: Temporary
5. 1) Intention to hold >1 year (e.g. debt or equity) valued @ cost or mkt value 2) Equity accounted investments
Horizontal Common Size Statements...
Tax Loss Carryforward...
B/S - investments
Financial Ratios based on B/S: Solvency (Coverage)
6. 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
Gain/(loss) on bond early retirement: (derecognition of debt)
CFO - Indirect method steps...
Cost included in Inventory on b/s...
B/S - Long-lived assets
7. 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)
B/S - Stockholders' Equity
Discontinued Operations...
Balance Sheet - formats
Unusual OR Infrequent items...
8. 1) Calculate cash raised on exercise 2) Repurchase shares at avg. price 3) New Shares = exercised - repurchased
The account format of B/S
Fraud Triangle - 2) Opportunity
Footnote Finance Liability Disclosure
Stock options: Use treasury stock method
9. I/S: COGS higher - EBT lower - Taxes: lower - NI: Lower - B/S: INV: lower - W/C: Lower - are/E: lower - CF: CFO: higher
LIFO results in: (assuming inflationary period)
Form 144...
Motivation to Under-report Earnings
Cost included in Inventory on b/s...
10. 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
Intangible Assets
Impairments recognition (IFRS)
FIFO after-tax profit =
Operating Risk Ratios...
11. Return on Total Equity = NI/ Avg. Total Equity - Return on C/E = NI - Pref. Div/ Avg. Common Equity
IASB - Goals
Return on Equity (ROE)...
Sources of Differences betweent F/S & T/
IFRS Revenue Recognition For Service
12. Financial Services Companies: Operating activities: Interest - Dividends - G/(L) on disposal Non-Financial Services Companies: Non-operating activities: Interest - Dividends - G/(L) on disposal
Funded status of the pension plan (under US GAAP & IFRS) is reported where?
Operating vs. Non-operating Income
Fraud Triangle - 3) Attitude/rationalization
Tax Loss Carryforward...
13. 1) Relevance vs. reliability; 2) Benefit > cost; 3) Excludes intangibles and non-quantifiable info.
Trade-Offs Qualitative Characteristics of IFRS
IFRS/US GAAP Frameworks: underlying assumptions...
B/S - investments
4 General Categories for Creditworthiness/Capacity...
14. It is the purchase of an asset using debt finance.
3 C's for Credit Analysis...
Fraud Triangle
What is the economic substance of financial (capital) lease?
IFRS/US GAAP Frameworks: F/S elements...
15. 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
Creative Cash Flows Accounting: Technique
B/S - Long-lived assets PP&E
Implication for Analysts: Be aware of differences in tax reconcilation between periods
Calculate dividends declared...
16. Interest Expense = Coupon - Amortization = PV of future CF x market yield @ issuance
Impact on the B/S of a Premium Bond...
Comprehensive income...
Taxation: Income Tax Expense
Financial Assets: US GAAP/Amortized at Cost
17. 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
Unusual OR Infrequent items...
Complex Capital Structure
Motivation to Under-report Earnings
Cost included in Inventory on b/s...
18. 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
Effects of Lease Classification on Ratios - Finance Lease
Dilutive Securities
Free Cash Flow to the Firm - FCFF
Intercorporate Investment: < 20% votes...
19. 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
Comprehensive income...
Tax base of an asset
Funded Status US GAAP & IFRS
Return on Equity (ROE)...
20. EU 1) Int'l Accounting Standards Board; 2) Unified int'l frameworks of accounting standards (IFRS); 3) Addopted by EU in 2005
Ending Inventory =
IASB
Intangibles under IFRS...
Lessor Accounting Capital Lease: Sales-Type Lease
21. Interest expense = Coupon rate
Financial Liability: US GAAP/Fair Market Value
Impact on the B/S of a Par Bond...
Valuation allowance
Credit Analysis: Ratios
22. 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
Sources of Differences: Temporary
Footnote Finance Liability Disclosure
Low Quality Earnings is result of...
Impact on the Cash Flow of a Discount Bond...
23. Outflow - (bringing bond DOWN to par)
Amortization of Bond Premium = (in/out flow) in the indirect method CFO
The account format of B/S
Revaluation below historic cost...
Comprehensive income...
24. Shares are to take over control - Subsidiary - Consolidate financials
Cash Flow From Operations (CFO) - FASB
Financial Ratios based on B/S: Solvency (Coverage)
Expensed Intangibles...
Intercorporate Investment: > 50% votes...
25. Unlisted instruments - Held-to-maturity investments - Loans - Receivables
Financial Ratios based on B/S: Solvency ratio
Sources of Differences betweent F/S & T/
Financial Assets: US GAAP/Amortized at Cost
Measures of Operating Performance - Efficiency Ratios...
26. 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.
IFRS Revenue Recognition
CFO Analysis...
Balance Sheet
IFRS/US GAAP Frameworks: objective of F/S
27. FASB: No discussion of 'probables' - IASB: Asset - liabilities - are probable flows
Cash Flow From Financing (USA) (Source of Cash)
Calculate dividends declared...
Extraordinary Items: Unusual AND Infrequent items...
IFRS/US GAAP Frameworks: Recognition of Elements...
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
Cash Flow From Financing (USA) (Source of Cash)
Statement of Cash Flow - relevance...
Fraud Triangle - 2) Opportunity
B/S - Long-lived assets PP&E
29. Int. Coverage = EBIT/Interest Expense - Fixed Charged Coverage = (EBIT+Lease Pymts) / Int. exp + Lease payments
B/S - investments
Gross Reporting of Revenue
Tax base on a liability
Financial Ratios based on B/S: Solvency (Coverage)
30. G = (earnings Retention rate) x (ROE) - earnings retention rate = [1-(payout ratio)] - payout ratio = Common dividends/ NI - Pref. Div.
Intercorporate Investment: > 50% votes...
Sustainable Growth
Installment Method...
LIFO is appropriate
31. 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
Extraordinary Items: Unusual AND Infrequent items...
Fraud Triangle - 3) Attitude/rationalization
FASB - Harmonization
Barter (IASB & FASB)
32. 1) Outcome reliable: rev recognized by stage of completion 2) Outcome unreliable: revenue recognized but no profit (
IFRS Revenue Recognition For Service
Inv. Valuation reporting Inventory ABOVE costs...
Types of accounting changes: accounting estimate
Financial Implications of Capitalizing...
33. 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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34. 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
Financial Assets: US GAAP/Amortized at Cost
Funded Status US GAAP & IFRS
Convergence IFRS/US GAAP...
LIFO is appropriate
35. Potentially dilutive securitites [options - warrants - convertible securities]
IFRS Revenue Recognition For Service
Barter (IASB & FASB)
Complex Capital Structure
Cost included in Inventory on b/s...
36. US Gaap: lower of cost or market value - (does NOT allow subsequent reverasals) - IFRS: lower of cost or NET realizable value - (allows subsequent reversals)
Funded Status US GAAP & IFRS
3 C's for Credit Analysis...
Inventory Valuatoin (LCM)
Antidilutive Securities
37. '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
Revaluation above historic cost...
Tax base on a liability
Forecasting Financial Performance: Top Down Approach...
Cash Flow From Investing (USA) (Assets)
38. 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
Segment Reporting
Convergence IFRS/US GAAP...
Ending Inventory =
39. Slow moving or obsolete inventory
Fraud Triangle
IFRS/US GAAP Frameworks: Measurement of Elements...
Inventory mangement: Low T/O (High DOH)...
Free Cash Flow to the Firm - FCFF
40. 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
Not all CF increase are Sustainable. Example of how Mgmt can Manipulate Cash Flow Statement
Effects of Lease Classification on F/S - Finance Lease
Inventory mangement: Low T/O (High DOH)...
Deferred Tax Liability: (DTL)
41. Beginning Inv. (BI) + Purchases (P) = Available for Sale - Available for sale - COGS = Ending Inventory (EI)
Form DEF-14A...
Ending Inventory =
Footnote disclosure of Reconciliation of opening and closing carrying values...
Impact on the Cash Flow of a Zero Coupon Bond...
42. EBIT/ *Gross Interest EBITDA/ *Gross Interest *(inc'd capitalized interest) - How many times is EBIT or EBITDA bigger than gross interest? Higher ratio is desired. Shows ability to cover int. payment
Steps of F/S Analysis
Motivation to Over-report Earnings
Credit Rating Process...
From creditor POV: Int. Coverage;
43. 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.
Component depreciation;
CFI Analysis...
IFRS/US GAAP Frameworks: underlying assumptions...
Intercorporate Investment: 20% - 50% votes...
44. 1) Unqualified opinion (good); 2) Qualified opinion (followed GAAP except for...); 3) Adverse opinion (bad)
Auditor/Audit Opinion
Financial Ratios based on B/S: Solvency (Coverage)
Defined Benefit Plans
Simple capital structure
45. 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
# of days payable =
Forecasting Financial Performance: Application
Steps of F/S Analysis
Credit Rating Process...
46. 1st: Net Income - dividends declared = chg in are/E - Then: Dividends declared +/- chg dividends payable = cash dividends paid.
Calculate dividends declared...
Defined Contribution Plans
B/S - Long-lived assets PP&E
B/S - Long-lived assets
47. Cash collections less direct cash inputs less other cash outfllows
Antidilutive Securities
Screening for Potential Equity Investment: Criteria
CFO - Direct method
Impairments recognition (GAAP)
48. 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
Form 8-K...
Forecasting Financial Performance: Top Down Approach...
Discontinued Operations...
Double-decline balance (DDB)
49. 1) held-to-maturity: @ amortized cost (i.e Bonds) 2) trading: @ fair value through P&L @ fair mkt value - unrealized g/(l) are recognized on the I/S. 3) available-for-sale: @ fair mkt value - unrealized g/(l) are NOT recognized on the I/S - instead r
Net Realizable Value (NRV) (IFRS)
B/S - short-term investments
Depreciation Methods...
Defined Benefit Obligations (DBO)
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
Types of accounting changes: prior period adjustments
B/S - Long-term Liabilities
% of Completion