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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. 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
days of sales o/s =
CFO Analysis...
Debt covenants
2. 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
Unusual OR Infrequent items...
Sarbanes-Oxley Management Report...
MD&A contains...
Stock options: Use treasury stock method
3. 1st: Net Income - dividends declared = chg in are/E - Then: Dividends declared +/- chg dividends payable = cash dividends paid.
The 4 Qualitative Characteristics of FASB...
Convergence IFRS/US GAAP...
Ending Inventory =
Calculate dividends declared...
4. Held for continuing use within the business (not for resale) 1) investment property; 2) Assets held for sale; 3) Natural resources; 4) PP&E
Impact on the Cash Flow of a Par Bond...
BASIC EPS
Intangible Assets
B/S - Long-lived assets
5. 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
Free Cash Flow to Equity - FCFE
Fraud Triangle
Finance (capital) Lease criteria (under US GAAP)
LIFO results in: (assuming inflationary period)
6. Taxes payable + chg deferred Tax as per Financial Report
Antidilutive Securities
Taxation: Income Tax Expense
Inv. Valuation reporting Inventory ABOVE costs...
Valuation Allowance...
7. 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.]
Screening for Potential Equity Investment: Criteria
Intercorporate Investment: > 50% votes...
Form 8-K...
Free Cash Flow to the Firm - FCFF
8. Is required under IFRS but not under GAAP
Fraud Triangle - 3) Attitude/rationalization
LIFO is appropriate
CFO - Indirect method steps...
Footnote disclosure of Reconciliation of opening and closing carrying values...
9. 1) Responsibility to establish and maintain adequate internal controls 2) Mgmt's framework for evaluating internal controls 3) Assessment of the effectiveness of internal controls over the last operating period 4) Statement of auditor's attestment 5)
Forecasting Financial Performance: Top Down Approach...
Deferred Tax Asset: (DTA)
Cost included in Inventory on b/s...
Sarbanes-Oxley Management Report...
10. +Cash rcvd from customer - +Cash dividends rcvd - +Cash interest rcvd - +Other cash income ((trading securities) - Payment to suppliers - Cash expenses (wages etc) - Cash interest paid - Cash taxes paid
Analyst Treaments of DTL
Types of accounting changes: accounting estimate
Cash Flow From Operations (CFO) - FASB
Intercorporate Investment: > 50% votes...
11. 1) Incentive/Pressure (the motive to commit fraud) 2) Opportunity (exists with weak internal controls) 3) Attitude/rationalization (mindset that fraud is justified)
Which set of accounting standards requires firms to disclose estimated amortization expense for the next five years on intangible assets?
Fraud Triangle
Units of Production Method
Impairments recognition (GAAP)
12. 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
SEC guidance for Revenue Recognition
From creditor POV: Int. Coverage;
Add/ Sub changes to related b/s operating accounts
IOSCO
13. Shows sales and cost of goods sold.Under GAAP: 1) must be primary obligor under the contract; 2) bear inventory and credit risk; 3) have the ability to choose its supplier; 4) have reasonable latitude to set the price.
Gross Reporting of Revenue
Defined Benefit Obligations (DBO)
Capitalized Intangibles...
Screening for Potential Equity Investment: Criteria
14. Working Capital = CA - CL - Working Capital TO = Rev/Avg. Working Capital - Fixed Asset TO = Rev/Avg Net Fixed Assets
Financial Ratio based on I/S...
Activity Ratios
Financial Liability: US GAAP/Fair Market Value
Add/ Sub changes to related b/s operating accounts
15. '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
The account format of B/S
Cash Flow From Investing (USA) (Assets)
Convergence IFRS/US GAAP...
Credit Rating Process...
16. 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.
Impact on the Cash Flow of a Zero Coupon Bond...
DTA Issues
Analysis: Market Value of Debt
Bond Issuance Cost under GAAP/IFRS
17. 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...
BASIC EPS
Operating Lease
Capitalized Intangibles...
18. Inventory TO = COGS / Avg. Inventory - LIFO = Higher - FIFO = Lower - DOH = 365/(Inv. T/O) = 365/( COGS/ Avg. Inv.) - LIFO = lower days - FIFO = higher days - Gross Profit margin = Gross profit/ revenues - LIFO = lower - FIFO = higher
Sustainable Growth
The best indicator of overstating its profits is...
Ratios that directly affect choice of Inventory Account...
Financial Ration based on B/S: Liquidity Ratios
19. Income Tax Expense < Taxes Payable - F/S < Tax Return - Pay more tax now but more on reversal
Deferred Tax Asset: (DTA)
Inventory mangement: High T/O (low DOH) and sales growth below industry average
An Increase in the Valuation Allowance Account...
Valuation Allowance...
20. 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
Extended DuPont Equation...
FIFO after-tax profit =
Inventory mangement: High T/O (low DOH) and sales growth below industry average
Dilutive Securities
21. LT D-to-E = Total LT Debt / Total Equity - D-to-E = Total Debt / Total Equity - Financial leverage ratio = Total Assets/Total Equity - Total Debt Ratio = Total Debt / Total Asset - Debt-to-Capital = Total Debt/ Total Debt + SOE - All Solvency are ove
Sources of Differences: Permanent
Financial Ratios based on B/S: Solvency ratio
Intangible Assets
B/S - Long-term Liabilities
22. A: Increase = use cash (-) - Decrease = source cash (+) - L: Increase = source cash (+) - Decrease = use of cash (-) - E: Increase = source cash (+) - Decrease = use of cash (-)
Motivation to Overstate Assets/Understate Liabilities
BASIC EPS
days of sales o/s =
Cash Flow: Logic (A = L + E)
23. 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
Amortization of Bond Discount = (in/out flow) in the indirect method CFO
Capitalization of Interest...
Credit Rating Process...
Complex Capital Structure
24. 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.
DBO Funded Status =
Reasons to Lease...
Antidilutive Securities
Types of accounting changes: accounting principle
25. Improve ROA and Asset TO Ratios - Report higher aquisition goodwill
Impact on the Cash Flow of a Premium Bond...
Effective Tax Rate
Motivation to Understate Assets/Overstate Liabilities
The 4 Qualitative Characteristics of FASB...
26. 1) Timing Differences: Accrual vs. modified cash accounting - Differences in reporting methods estimates
Intercorporate Investment: > 50% votes...
Fraud Triangle
Sources of Differences: Temporary
Measurement of A & L disclosure in footnotes
27. Fair Value of Plan Assets - Defined Benefit Obligation (DBO) - Fair Value > DBO: overfunded (asset on B/S - GAAP) - Fair Value < DBO: underfunded (liability on B/S - GAAP) - (Funded Status = Economic Position of Plan)
Financial Implications of Capitalizing...
DBO Funded Status =
Reasons to Lease...
Under Completed Contract Method...
28. 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...
The 4 Qualitative Characteristics of IFRS
Depreciation Methods...
Motivation to Under-report Earnings
29. All other liabilities (e.g. bonds - notes payables - leases)
Financial Liability: US GAAP/Amortized at Cost
LIFO results in: (assuming inflationary period)
Gross Reporting of Revenue
Cash Flow From Operations (CFO) - FASB
30. Carrying amount of the liability minus the amount that will be deductible in the future.
Footnote disclosure of Reconciliation of opening and closing carrying values...
IFRS Revenue Recognition
Intercorporate Investment: > 50% votes...
Tax base on a liability
31. 1) Outcome reliable: rev recognized by stage of completion 2) Outcome unreliable: revenue recognized but no profit (
Sustainable Growth
IFRS Revenue Recognition For Service
Operating Risk Ratios...
Segment Reporting
32. Reported BELOW the line. Operations mgmt has decided to dispose of but: 1) has not yet done so or 2) did so in CY after it generated profit/(loss) Must be physicallly and operationally distinct from firm. Analyst must determine effects on future inco
Lessor Accounting Capital Lease: Sales-Type Lease
Financial Assets: US GAAP/Amortized at Cost
Capitalized Intangibles...
Discontinued Operations...
33. Profit is recognized only when it exceeds estimated total cost.
Deferred Tax Asset: (DTA)
Cost recovery method...
Financial Ratios based on B/S: Solvency (Coverage)
Installment Method...
34. Depreciation exp = (cost-residual value)/ useful life
IFRS/US GAAP Frameworks: underlying assumptions...
Sources of Differences: Temporary
Straight-line depreciation (SL)
Depreciation Methods...
35. Shares are to take over control - Subsidiary - Consolidate financials
Intercorporate Investment: > 50% votes...
Inventory Valuatoin (LCM)
Financial Liability: US GAAP/Fair Market Value
Impairments recognition (IFRS)
36. 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
Types of accounting changes: accounting principle
Asset Revaluation: IFRS
Effective Tax Rate
37. 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 Operations (CFO) - FASB
Impact on the Cash Flow of a Discount Bond...
Financial Adj to Facilitate Comparison...
Effects of Lease Classification on Ratios - Operating Lease
38. 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
days of inv. on hand =
Free Cash Flow to the Firm - FCFF
Finance (capital) Lease criteria GAAP vs. IFRS
Capitalization of Interest...
39. Pd after more than 1 year - notes & bonds: at PV of future CF pymets - Capital leases - Provisions - Deferred tax
Implication for Analysts: Be aware of differences in tax reconcilation between periods
Financial Liability: US GAAP/Amortized at Cost
Effects of Lease Classification on F/S - Finance Lease
B/S - Long-term Liabilities
40. Any I/S subtotal is expressed a margin ratio (to revenues) - Gross profit margin = gross profit/ revenue - Net profit margin = Net Inc/revenue - Operating profit margin = EBIT/ revenue - Pre-tax margin = EBT/ revenue
days of inv. on hand =
Sales Basis Revenue Recognitions
Sources of Differences betweent F/S & T/
Financial Ratio based on I/S...
41. 1) Balance Sheet; 2) Comprehensive Income; 3) Change in Equity; 4) Cash Flow Statement; 5) Accounting policies and notes.
IFRS Revenue Recognition For Service
The 4 Qualitative Characteristics of FASB...
IFRS: Required F/S
Screening for Potential Equity Investment: Criteria
42. 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)
Cost included in Inventory on b/s...
Inventory mangement: Low T/O (High DOH)...
CFO - Direct/Indirect method
Screening for Potential Equity Investment: Criteria
43. 1) Relevance vs. reliability; 2) Benefit > cost; 3) Excludes intangibles and non-quantifiable info.
Impact on the Cash Flow of a Zero Coupon Bond...
Analyzing Effective Tax Rate Reconciliation
Intangible Assets
Trade-Offs Qualitative Characteristics of IFRS
44. Trade relief - Contingent consideration - Union concessions
Tax base on a liability
Motivation to Under-report Earnings
Impact on the B/S of a Zero Coupon Bond...
Income Tax Paid...
45. 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
Segment Reporting
Motivation to Understate Assets/Overstate Liabilities
IASB - Goals
Unusual OR Infrequent items...
46. Income Tax Expense > Taxes Payable - F/S > Tax Return - Pay less tax now but more on reversal
Gross Reporting of Revenue
Diluted EPS
Measures of Operating Performance - Efficiency Ratios...
Deferred Tax Liability: (DTL)
47. Net income + non-cash charges - working cap investment
Cash Flow From Operations (CFO) - FASB
B/S - short-term investments
Free Cash Flow -CFO
Antidilutive Securities
48. 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)
Add/ Sub changes to related b/s operating accounts
Common Size Statement
Taxation Disclosure Requirements
The 4 Qualitative Characteristics of FASB...
49. Part of indenture that place restrictions on the firm that protect bondholderns and increase value of the firm's bond - Breach is technical default
Taxation: Income Tax Expense
Financial Assets: US GAAP/Amortized at Cost
Debt covenants
IFRS/US GAAP Frameworks: objective of F/S
50. Trading securities - Available-for-sale - Derivatives (standalone or embedded in non-derivative intrument) - Assets with fair value exposure hedged by derivatives
Free Cash Flow to the Firm - FCFF
Financial Assets: US GAAP/Fair Market Value
Trade-Offs Qualitative Characteristics of IFRS
Income Tax Paid...