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Test your basic knowledge |
Advanced Financial Reporting And Analysis
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Study First
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. 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...
Impairments recognition (GAAP)
IFRS/US GAAP Frameworks: F/S elements...
CFO Disclosure requirement...
2. Shows the financial position of a firm AT A SINGLE POINT in time A = L + E.
CFO Analysis...
B/S - Long-lived assets
Deferred Tax Liability: (DTL)
Balance Sheet
3. Financial Services Companies: Operating activities: Interest - Dividends - G/(L) on disposal Non-Financial Services Companies: Non-operating activities: Interest - Dividends - G/(L) on disposal
4 General Categories for Creditworthiness/Capacity...
Operating vs. Non-operating Income
Under Completed Contract Method...
Fraud Triangle
4. Cash collections less direct cash inputs less other cash outfllows
The best indicator of overstating its profits is...
Intercorporate Investment: 20% - 50% votes...
CFO - Direct method
Intangibles under IFRS...
5. (GAAP) Internally created intangibles 1) (R&D) are expensed 2) Advertising 3) Software (developed to establish feasibility)
Expensed Intangibles...
Dilutive Securities
Return on Equity (ROE)...
Taxation Disclosure Requirements
6. Off B/S asset or liability = Footnotes disclosure - Lease payments are expensed when due via I/S - Payments are CFO outflows
Operating Lease
Extraordinary Items: Unusual AND Infrequent items...
Valuation allowance
Fundamental principles for PREPARING f/s under IFRS: (IAS No 10
7. 1) Start with NI 2) Sub Gains or add losses from financing or investing CFs 3) Add non-cash charges (depr't & amort'z) & sub all non cash revenue 4) Add/ Sub changes to related b/s operating accounts:
Analyzing Effective Tax Rate Reconciliation
CFO - Indirect method steps...
Segment Reporting
Low Quality Earnings is result of...
8. 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...
Trade-Offs Qualitative Characteristics of IFRS
Debt covenants
Financial Liability: US GAAP/Fair Market Value
9. Lost sales from stock outs
Inventory mangement: High T/O (low DOH) and sales growth below industry average
Segment Reporting
The account format of B/S
Inventory Valuatoin (LCM)
10. You.S. GAAP
Tax base on a liability
Which set of accounting standards requires firms to disclose estimated amortization expense for the next five years on intangible assets?
IFRS/US GAAP Frameworks: Measurement of Elements...
Gross Reporting of Revenue
11. 1) 3rd party pressure: 1) analyst/institutional expectations; 2) need to obtain finance; 3) listing requirements; 4) Debt covenants; 5) Transactions 2) Directors' Financial Position: 1) Equity interest; 2) Stock options; 3) Personal debt guarantees.
Not all CF increase are Sustainable. Example of how Mgmt can Manipulate Cash Flow Statement
Convergence IFRS/US GAAP...
Which set of accounting standards requires firms to disclose estimated amortization expense for the next five years on intangible assets?
Fraud Triangle - 1) Incentive/Pressure
12. 1) Basis for measurement; 2) carrying value of inventory by category; 3) Amount of inventory carried at FV less cost to sell 4) Write-downs & reversals (discussion of circumstance that led to reversal); 5) Inventories pledged as collateral for liabil
Measurement of A & L disclosure in footnotes
Financial Ratio based on I/S...
Operating vs. Non-operating Income
Fraud Triangle - 2) Opportunity
13. 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
FIFO ending inventory =
Warning Signs of Earnings Manipulation
Intercorporate Investment: > 50% votes...
14. I/S: Income statement account/Sales - B/S: Balance sheet account/ Total Assets
IFRS/US GAAP Frameworks: purpose of framework
Inventory mangement: High T/O (low DOH) and sales growth above industry average
Vertical Common Size Statements...
Expensed Intangibles...
15. 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.
Return on total capital (ROTC)...
Creative Cash Flows Accounting: Technique
CFO Analysis...
3 C's for Credit Analysis...
16. 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...
B/S - Long-lived assets
Valuation allowance
Operating vs. Non-operating Income
17. 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.
B/S - Long-lived assets
IFRS/US GAAP Frameworks: objective of F/S
Taxation Analyst Adjustments...
Financial Ratios based on B/S: Solvency ratio
18. 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
Impact on the B/S of a Zero Coupon Bond...
IFRS/US GAAP Frameworks: underlying assumptions...
FASB - Harmonization
Impact on the Cash Flow of a Discount Bond...
19. ROE = (NI/EBT)x(EBT/EBIT)x(EBIT/Rev)x(Rev/Asset)x(Asset/Eqty) or (tax burden)x(int. burden)x(EBITmargin)x(Aset TO)x(Fin Lvg)
Simple capital structure
CFI Analysis...
Forecasting Financial Performance: Top Down Approach...
Extended DuPont Equation...
20. Income Tax Expense < Taxes Payable - F/S < Tax Return - Pay more tax now but more on reversal
Income Tax Paid...
Deferred Tax Asset: (DTA)
Form 144...
IFRS/US GAAP Frameworks: F/S elements...
21. 1) Balance Sheet; 2) Comprehensive Income; 3) Change in Equity; 4) Cash Flow Statement; 5) Accounting policies and notes.
IFRS: Required F/S
Lessor Accounting Capital Lease: Sales-Type Lease
Cash Flow From Investing (USA) (Assets)
Financial Adj to Facilitate Comparison...
22. A company can issue securities to certain qualified buyers without registering the securities with the SEC - but must notify the SEC that it intends to do so.
IFRS/US GAAP Frameworks: Measurement of Elements...
Depreciation Methods...
Form 144...
To investigate the stability of that structure - Kilgore would be best served by looking at...
23. Includes: cash flow from interst Rec'd and Paid - and Dividend received. Includes all income taxes paid.
Impact on the B/S of a Discount Bond...
IFRS/US GAAP Frameworks: purpose of framework
Cash Flow From Operations (CFO) - FASB
Sources of Differences: Temporary
24. 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
Screening for Potential Equity Investment: Criteria
Reasons to Lease...
Creative Cash Flows Accounting: Technique
Debt covenants
25. Management turnover.
Sources of Differences: Permanent
To investigate the stability of that structure - Kilgore would be best served by looking at...
Intangibles under IFRS...
Impact on the B/S of a Discount Bond...
26. Primary) Relevance & Reliability - Secondary) Comparability - Lastly) Understandability - user specific
Defined Benefit Obligations (DBO)
The 4 Qualitative Characteristics of FASB...
IFRS/US GAAP Frameworks: F/S elements...
Form 144...
27. 1) will only benefit on reversal if there is sufficient taxable earnings 2) can only utilize loss carryforwards if we have future profits 3) If asset cannot be utilized in full it is reduced by a contra 'valuation allowance'. REDUCE DTA - REDUCE NI
Financial Lease Reporting
Motivation to Under-report Earnings
DTA Issues
Unusual OR Infrequent items...
28. GAAP: shown as a separate prepaid asset and amortized - IFRS: Deducted from proceeds and liability therefore effective interest rate is HIGHER under IFRS than GAAP.
Bond Issuance Cost under GAAP/IFRS
Antidilutive Securities
Inventory mangement: High T/O (low DOH) and sales growth above industry average
Analyzing Effective Tax Rate Reconciliation
29. 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
Statement of Cash Flow - relevance...
From creditor POV: Int. Coverage;
Footnote disclosure of Reconciliation of opening and closing carrying values...
FASB
30. 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...
Revaluation below historic cost...
Discontinued Operations...
Defined Benefit Plans
31. Interest Expense = Coupon + Amortization = PV of future CF x market yield @ issuance
Revaluation below historic cost...
Forecasting Financial Performance: Application
Income Tax Paid...
Impact on the B/S of a Discount Bond...
32. I/S: COGS higher - EBT lower - Taxes: lower - NI: Lower - B/S: INV: lower - W/C: Lower - are/E: lower - CF: CFO: higher
Form 144...
Add/ Sub changes to related b/s operating accounts
LIFO results in: (assuming inflationary period)
The objective of f/s is to...
33. 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
Implication for Analysts: Be aware of differences in tax reconcilation between periods
Financial Lease Reporting
4 General Categories for Creditworthiness/Capacity...
Free Cash Flow to the Firm - FCFF
34. 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
Effects of Lease Classification on F/S - Operating Lease
Statement of Cash Flow - relevance...
Forecasting Financial Performance: Top Down Approach...
Funded Status US GAAP & IFRS
35. 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
Effects of Lease Classification on F/S - Finance Lease
Financial Implications of Capitalizing...
Creative Cash Flows Accounting: Technique
Forecasting Financial Performance: Top Down Approach...
36. Actual cash outflow for taxes paid during current period
Intercorporate Investment: > 50% votes...
Income Tax Paid...
The 4 Qualitative Characteristics of IFRS
Fraud Triangle - 2) Opportunity
37. 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
Comprehensive income...
Amortization of Bond Premium = (in/out flow) in the indirect method CFO
Taxation Analyst Adjustments...
Intercorporate Investment: < 20% votes...
38. Employer promises specific payment stream at retirement - Payments are based on yrs of service - retirement age - and final salary - Employers bears investment risk - Funded by pool of assets - Complicated accounting
Extraordinary Items: Unusual AND Infrequent items...
Sources of Differences betweent F/S & T/
Defined Benefit Plans
days of inv. on hand =
39. 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
Financial Lease Reporting
Analyst Treaments of DTL
Cash Flow From Operations (CFO) - FASB
Asset Capitalization
40. 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.
days of sales o/s =
Installment Method...
Gain/(loss) on bond early retirement: (derecognition of debt)
Valuation allowance
41. FIFO: EI = newest purchases - LIFO: EI = oldest purchases - Avg. Costs: EI = Available for sale/Units - Specific ID: high value items (cars - diamonds etc)
Taxation: Tax Payable
Inventory Cost Flow Methods...
Trade-Offs Qualitative Characteristics of IFRS
Characteristics of an effective framework
42. Divdends and share repurchases - Production and investment - M&A - New debt issuance - Payoff pattern and liquidation priority - Maintenance of assets used as collateral
IFRS/US GAAP Frameworks: F/S elements...
Activity Based Restrictions
One major difference between the presentation of deferred tax assets and liabilities under IFRS and under U.S. GAAP is that...
Vertical Common Size Statements...
43. Potentially dilutive securitites [options - warrants - convertible securities]
Amortization of Bond Premium = (in/out flow) in the indirect method CFO
Complex Capital Structure
Warning Signs of Earnings Manipulation
B/S - Long-lived assets
44. US Gaap: Balance Sheet - IFRS:Disclosed in Footnotes - May be mentioned in MD&A if mgnt considers it significant
B/S - Long-lived assets PP&E
DTA/DTL: Effect on Net Income when Tax Rate decreases...
Funded status of the pension plan (under US GAAP & IFRS) is reported where?
CFO Disclosure requirement...
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.]
Convergence IFRS/US GAAP...
Statement of Cash Flow - relevance...
Free Cash Flow to the Firm - FCFF
Motivation to Under-report Earnings
46. 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
Creative Cash Flows Accounting: Technique
Valuation Allowance...
B/S - Long-term Liabilities
Vertical Common Size Statements...
47. Same as other ratios using NI in this case substitut NI for CFO.
Lessor Accounting Capital Lease: Sales-Type Lease
Financial Ratios based on B/S: Solvency (Coverage)
Operating Risk Ratios...
Cash flow ratios
48. Interest Expense = Coupon - Amortization = PV of future CF x market yield @ issuance
Sources of Differences betweent F/S & T/
Impact on the B/S of a Premium Bond...
Under Completed Contract Method...
Financial Ratio based on I/S...
49. 1) Evidence of an arrangement; 2) Completion of earnings process; 3) Price is determined or determinable; 4) Assurance of payment
Barter (IASB & FASB)
Financial Liability: US GAAP/Fair Market Value
Return on total capital (ROTC)...
SEC guidance for Revenue Recognition
50. Securities that would INCREASE EPS if exercised
B/S - Long-term Liabilities
Antidilutive Securities
Financial Liability: US GAAP/Amortized at Cost
Intercorporate Investment: > 50% votes...