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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) 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.
2. 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
DTA Issues
Impact on the Cash Flow of a Discount Bond...
Cash Flow From Financing (USA) (Source of Cash)
3. Potentially dilutive securitites [options - warrants - convertible securities]
Balance Sheet - formats
Complex Capital Structure
Credit Analysis: Ratios
Cash Flow From Operations (CFO) - IFRS
4. Assets - liabilities - and equity are presented in a single column.
FIFO results in: (assuming inflationary period)
Vertical Common Size Statements...
Double-decline balance (DDB)
The report format of B/S
5. 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...
Net Periodic Benefit Costs
Return on Assets ROA...
The best indicator of overstating its profits is...
6. 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
Balance Sheet - formats
Installment Method...
Cost included in Inventory on b/s...
Analysis: Market Value of Debt
7. G = (earnings Retention rate) x (ROE) - earnings retention rate = [1-(payout ratio)] - payout ratio = Common dividends/ NI - Pref. Div.
Expensed Intangibles...
Financial Ration based on B/S: Liquidity Ratios
Stock options: Use treasury stock method
Sustainable Growth
8. I/S: Income statement account/Sales - B/S: Balance sheet account/ Total Assets
Market Value (GAAP)...
Vertical Common Size Statements...
IOSCO
DTA Issues
9. 1) Revenue (external & internal) 2) Segment results (operating profit) 3) Carrying amount of segment asset4 4) Segment liabilities (IFRS) 5) Cost of PPE and intangibles acquired 6) Depreciation and Amort expenses 7) Other non-cash expense 8) Share of
Ratios that directly affect choice of Inventory Account...
DTA/DTL: Effect on Net Income when Tax Rate decreases...
Types of accounting changes: accounting estimate
Disclosure for each segment...
10. 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
FASB - Harmonization
Revaluation below historic cost...
Funded status of the pension plan (under US GAAP & IFRS) is reported where?
Fraud Triangle - 2) Opportunity
11. 1) Purpose and context 2) Data Collection 3) Data Processing 4) Analysis/Interpretation of data 5) Develop conclusions and recommendations 6) Follow-up
Steps of F/S Analysis
The objective of f/s is to...
Cash flow ratios
Taxation: Income Tax Expense
12. 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)
Extended DuPont Equation...
FIFO ending inventory =
Operating Risk Ratios...
Financial Assets: US GAAP/Amortized at Cost
13. 1) fair presentation; 2) going concern; 3) accrual basis; 4) consistency; 5) materiality
Effects of Lease Classification on F/S - Operating Lease
Financial Assets: US GAAP/Fair Market Value
Fundamental principles for PREPARING f/s under IFRS: (IAS No 10
The 4 Qualitative Characteristics of IFRS
14. 1) Intention to hold >1 year (e.g. debt or equity) valued @ cost or mkt value 2) Equity accounted investments
Sales Basis Revenue Recognitions
LIFO is appropriate
B/S - investments
Fundamental principles for PREPARING f/s under IFRS: (IAS No 10
15. 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
Straight-line depreciation (SL)
Analyst Treaments of DTL
Financial Liability: US GAAP/Amortized at Cost
Operating Lease
16. 1) Cheaper Financing; 2) Reduce risk of obsolescence; 3) Less restrictive provisions; 4) Off-B/S reporting; 5) Tax Reporting Advantages (treated as ownership for tax ( deduct depreciation and interest expense)
Diluted EPS
Warning Signs of Earnings Manipulation
Reasons to Lease...
Types of accounting changes: accounting estimate
17. 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
FIFO ending inventory =
Footnote Finance Liability Disclosure
Simple capital structure
Capitalization of Interest...
18. 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
LIFO results in: (assuming inflationary period)
Return on Equity (ROE)...
Effects of Lease Classification on Ratios - Finance Lease
Defined Benefit Obligations (DBO)
19. 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
Sources of Differences: Temporary
IFRS/US GAAP Frameworks: objective of F/S
Financial Implications of Capitalizing...
20. US 1) Financial Accounting Standards Board; 2) Standards form GAAP; 3) Aims - useful - relevant - reliable - consistent and comparable; 4) SEC deems FASB standard authoritative
Fraud Triangle - 3) Attitude/rationalization
Intercorporate Investment: > 50% votes...
FASB
Motivation to Under-report Earnings
21. 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
Extraordinary Items: Unusual AND Infrequent items...
Funded Status US GAAP & IFRS
Fraud Triangle - 3) Attitude/rationalization
Creative Cash Flows Accounting: Technique
22. 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
Low Quality Earnings is result of...
Sources of Differences: Temporary
IASB - Goals
Auditor/Audit Opinion
23. It is Rare - but permitted for commodity producer/dealers B/S = NRV - I/S = unrealized gains/losses
Free Cash Flow to Equity - FCFE
Inv. Valuation reporting Inventory ABOVE costs...
Financial Implications of Capitalizing...
FIFO after-tax profit =
24. 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.
Form 144...
FIFO ending inventory =
Types of accounting changes...
Taxation: Tax Payable
25. 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
Types of accounting changes: prior period adjustments
FIFO results in: (assuming inflationary period)
Comprehensive income...
Financial Implications of Capitalizing...
26. 1st: Net Income - dividends declared = chg in are/E - Then: Dividends declared +/- chg dividends payable = cash dividends paid.
Form 8-K...
Return on Equity (ROE)...
IFRS: Required F/S
Calculate dividends declared...
27. 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
Deferred Tax Asset: (DTA)
Barriers to a single framework...
Analyzing Effective Tax Rate Reconciliation
Financial Liability: US GAAP/Amortized at Cost
28. 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
Impairments recognition (GAAP)
Fraud Triangle - 1) Incentive/Pressure
Ending Inventory =
Dilutive Securities
29. 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
Balance Sheet - formats
Gain/(loss) on bond early retirement: (derecognition of debt)
Activity Based Restrictions
Unusual OR Infrequent items...
30. 1) understandability; 2) relevance; 3) reliability; and 4)comparability - No hierarchy
The 4 Qualitative Characteristics of IFRS
Finance (capital) Lease criteria (under US GAAP)
Cost included in Inventory on b/s...
Deferred Tax Liability: (DTL)
31. Refers to change in mgmt judgement Does NOT require restatement of prior pd earnings; Disclose in footnotes
Revaluation above historic cost...
Sources of Differences: Temporary
Measures of Operating Performance - Efficiency Ratios...
Types of accounting changes: accounting estimate
32. Stock options - Warrants - Convertible debt - Convertible preferred stock
Warning Signs of Earnings Manipulation
Roles of financial reporting & analysis include...
Potentially Dillutive Securities
Intercorporate Investment: 20% - 50% votes...
33. 1) Change in accounting principle; 2) Change in accounting estimate; 3) Prior period adjustments
Types of accounting changes...
Under Completed Contract Method...
FASB
Effective Tax Rate
34. Held for continuing use within the business (not for resale) 1) investment property; 2) Assets held for sale; 3) Natural resources; 4) PP&E
Revaluation below historic cost...
The 4 Qualitative Characteristics of FASB...
B/S - Long-lived assets
CFO Analysis...
35. 1) Increase comparability; 2) Reduce expense of overseas capital; 3) Reduce the expense of producing consolidated accounts
Motivation to Over-report Earnings
FASB - Harmonization
Cash Flow From Operations (CFO) - FASB
Net Periodic Benefit Costs
36. Reported BELOW the line.Prohibited under IAS1 1) Losses from expropriation of assets. 2) Uninsured losses from natural disasters - Analyst must determine if it is really THAT extraordinary and if should be included in forecasting
Extraordinary Items: Unusual AND Infrequent items...
DTA/DTL: Effect on Net Income when Tax Rate decreases...
Installment Method...
Fraud Triangle - 2) Opportunity
37. Interest Expense = Coupon - Amortization = PV of future CF x market yield @ issuance
Impact on the B/S of a Premium Bond...
B/S - investments
% of Completion
Sources of Differences: Temporary
38. 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
Characteristics of an effective framework
Asset Capitalization
Valuation allowance
4 General Categories for Creditworthiness/Capacity...
39. PV of future obligation or the PV of the amount owed to employees for future pension benefits earned to date - Payments are determined based on expected final salary.
IFRS Revenue Recognition For Service
Defined Benefit Obligations (DBO)
IFRS/US GAAP Frameworks: underlying assumptions...
Installment Method...
40. 1)DTL - DTA - valuation allowance - Net ? in valutaion allowance over the period 2) unrecognized DTL or undistributed earning from subsidiaries & JVs 3) Current yr tax effect of each type of temp difference 4)Components of Inc Tax Expense 5)Tax loss
Taxation Analyst Adjustments...
FIFO results in: (assuming inflationary period)
Taxation Disclosure Requirements
Operating vs. Non-operating Income
41. Decreases DTA -> Decreases Net Income - [Decrease in Valuation Allowance; Increase DTA and Increases Net Income]
Taxation Disclosure Requirements
Impairments recognition (GAAP)
An Increase in the Valuation Allowance Account...
FIFO ending inventory =
42. Financial Services Companies: Operating activities: Interest - Dividends - G/(L) on disposal Non-Financial Services Companies: Non-operating activities: Interest - Dividends - G/(L) on disposal
Operating vs. Non-operating Income
Diluted EPS
Return on total capital (ROTC)...
An Increase in the Valuation Allowance Account...
43. Derivatives - Non-derivative investments with fair value exposure hedged by derivatives
Sources of Differences betweent F/S & T/
Market Value (GAAP)...
B/S - Long-lived assets
Financial Liability: US GAAP/Fair Market Value
44. If PV of min lease pymt < cost of asset 1) lessor is a dealer or seller of the leased equipment 2) at the time of lease inception - lessor recognized a gross profit on sale. (NI - are/E - and Assests are higher) 3) Interest rev recognized over period
Lessor Accounting Capital Lease: Sales-Type Lease
To investigate the stability of that structure - Kilgore would be best served by looking at...
Sales Basis Revenue Recognitions
Deferred Tax Asset: (DTA)
45. You.S. GAAP
Ratios that directly affect choice of Inventory Account...
Impact on the B/S of a Par Bond...
Intercorporate Investment: < 20% votes...
Which set of accounting standards requires firms to disclose estimated amortization expense for the next five years on intangible assets?
46. Securities that would INCREASE EPS if exercised
Cash Flow From Operations (CFO) - FASB
Activity Based Restrictions
Antidilutive Securities
Analysis: Market Value of Debt
47. Periodic: Inventory and COGS determined at p/e - Perpetual: Inv. & COGS updated for each sale (no purchase account need) - Cost flow method impact: FIFO = same for both - LIFO = different - Avg. cost = different - FIFO & LIFO relationship remain
ROE interpretation: if ROE is low...
Depreciation Methods...
Inventory Systems...
Effects of Lease Classification on F/S - Operating Lease
48. Depreciation exp = (cost - accum depre)/useful life x 2 - Does NOT use residual value but depreciation stops when residual value has been reached - reduce EBIT - NI - Assets - Equity and decrease ROA & ROE
Operating Lease
Net Periodic Benefit Costs
Gain/(loss) on bond early retirement: (derecognition of debt)
Double-decline balance (DDB)
49. FASB: Asset is a future economic benefit - IASB: Asset is a RESOURCE from which future economic benefit is expected to flow.
Operating Lease
Taxation: Income Tax Expense
IFRS/US GAAP Frameworks: F/S elements...
FIFO results in: (assuming inflationary period)
50. Off B/S asset or liability = Footnotes disclosure - Lease payments are expensed when due via I/S - Payments are CFO outflows
CFO Analysis...
Types of accounting changes: prior period adjustments
Activity Based Restrictions
Operating Lease