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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. 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:
FIFO after-tax profit =
CFO - Indirect method steps...
Operating Risk Ratios...
Impact on the Cash Flow of a Discount Bond...
2. 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
Double-decline balance (DDB)
FASB
The account format of B/S
Auditor/Audit Opinion
3. Working Capital = CA - CL - Working Capital TO = Rev/Avg. Working Capital - Fixed Asset TO = Rev/Avg Net Fixed Assets
Activity Ratios
CFI Analysis...
ROE interpretation: if ROE is low...
Trade-Offs Qualitative Characteristics of IFRS
4. Both: Recognize going concern & accrual assumptions - IASB: Going concern & accruals given more prominence in framework - FASB: Going concern assumption not well developed in framework.
Financial Ratio based on I/S...
IFRS/US GAAP Frameworks: underlying assumptions...
Fraud Triangle - 1) Incentive/Pressure
DTA Issues
5. 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
Extraordinary Items: Unusual AND Infrequent items...
IFRS: Required F/S
Financial Ratio based on I/S...
Analysis: Market Value of Debt
6. 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
Analyzing Effective Tax Rate Reconciliation
Financial Assets: US GAAP/Fair Market Value
ROE interpretation: if ROE is low...
DTA Issues
7. Ensure that information in f/s is useful to a wide range of users.
The objective of f/s is to...
FIFO ending inventory =
Return on total capital (ROTC)...
Footnote disclosure of Reconciliation of opening and closing carrying values...
8. 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.
CFI Analysis...
FASB - Harmonization
Types of accounting changes: prior period adjustments
Cost recovery method...
9. 1) Calculate cash raised on exercise 2) Repurchase shares at avg. price 3) New Shares = exercised - repurchased
Cash flow ratios
Stock options: Use treasury stock method
The account format of B/S
Defined Benefit Obligations (DBO)
10. 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
Creative Cash Flows Accounting: Technique
Effects of Lease Classification on F/S - Operating Lease
Steps of F/S Analysis
IFRS: Required F/S
11. US 1) Financial Accounting Standards Board; 2) Standards form GAAP; 3) Aims - useful - relevant - reliable - consistent and comparable; 4) SEC deems FASB standard authoritative
Taxable Income
Impact on the Cash Flow of a Premium Bond...
Market Value (GAAP)...
FASB
12. Diff. in depreciation methods/assumptions; Diff. in inventory methods/assumptions; Diff. in treatment of the effect of exchg rate chgs; Diff. in classifications of investment securities - Goodwill: Internally Generated DON'T capitalize - Purchased =
Measures of Operating Performance - Efficiency Ratios...
Creative Cash Flows Accounting: Technique
Financial Adj to Facilitate Comparison...
Effects of Lease Classification on Ratios - Finance Lease
13. 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.
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14. 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...
Motivation to Under-report Earnings
Inventory mangement: Low T/O (High DOH)...
IFRS: Presentation Requirements
15. Income Tax Expense > Taxes Payable - F/S > Tax Return - Pay less tax now but more on reversal
Sarbanes-Oxley Management Report...
Deferred Tax Liability: (DTL)
Financial Ratios based on B/S: Solvency ratio
Net Reporting of Revenue
16. Off B/S asset or liability = Footnotes disclosure - Lease payments are expensed when due via I/S - Payments are CFO outflows
Operating Lease
Intangible Assets
Return on total capital (ROTC)...
Financial Ratios based on B/S: Solvency (Coverage)
17. Taxes payable + chg deferred Tax as per Financial Report
Deferred Tax Liability: (DTL)
IFRS/US GAAP Frameworks: purpose of framework
Taxation: Income Tax Expense
IASB
18. GAAP: more quantitative rules - IFRS: more qualitative approach based on whether the risks and reward of the asset have tranferred.
The best indicator of overstating its profits is...
Finance (capital) Lease criteria GAAP vs. IFRS
Deferred Tax Liability: (DTL)
Vertical Common Size Statements...
19. Actual cash outflow for taxes paid during current period
Valuation allowance
The objective of f/s is to...
Cash flow ratios
Income Tax Paid...
20. EU 1) Int'l Accounting Standards Board; 2) Unified int'l frameworks of accounting standards (IFRS); 3) Addopted by EU in 2005
Operating Risk Ratios...
Antidilutive Securities
IASB
Debt covenants
21. All other liabilities (e.g. bonds - notes payables - leases)
Finance (capital) Lease criteria (under US GAAP)
Income Statement
Financial Liability: US GAAP/Amortized at Cost
Measurement of A & L disclosure in footnotes
22. Income Tax Expense/Pretax Income (EBIT) Income Tax Exp. = Taxes payable + chg in deferred ta
Extraordinary Items: Unusual AND Infrequent items...
Effective Tax Rate
Impact on the B/S of a Zero Coupon Bond...
Impact on the Cash Flow of a Discount Bond...
23. 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
Form DEF-14A...
Financial Ration based on B/S: Liquidity Ratios
Impairments recognition (IFRS)
Inventory Cost Flow Methods...
24. Income Tax Expense < Taxes Payable - F/S < Tax Return - Pay more tax now but more on reversal
Sales Basis Revenue Recognitions
Steps of F/S Analysis
Deferred Tax Asset: (DTA)
DTA Issues
25. 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
Installment Method...
Auditor/Audit Opinion
B/S - Long-lived assets PP&E
Sustainable Growth
26. 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
Cash Flow From Operations (CFO) - FASB
days of inv. on hand =
IFRS/US GAAP Frameworks: Measurement of Elements...
Discontinued Operations...
27. Net income + non-cash charges - working cap investment
Which set of accounting standards requires firms to disclose estimated amortization expense for the next five years on intangible assets?
Impact on the B/S of a Par Bond...
Motivation to Under-report Earnings
Free Cash Flow -CFO
28. Both: Broadly consistent - lack fully developed concepts - FASB: Assets revaluations prohibited (except some financial instruments)
Impact on the Cash Flow of a Discount Bond...
Fraud Triangle - 2) Opportunity
# of days payable =
IFRS/US GAAP Frameworks: Measurement of Elements...
29. LIFO after-tax profit + (change in LIFO reserve)(1 - t)
CFO - Direct/Indirect method
FIFO after-tax profit =
Disclosure for each segment...
Inventory mangement: Low T/O (High DOH)...
30. 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.
IFRS: Presentation Requirements
Form 8-K...
Amortization of Bond Premium = (in/out flow) in the indirect method CFO
days of sales o/s =
31. Depreciation exp = (cost - residual value) x (# units produced / total expected to produce)
Units of Production Method
ROE interpretation: if ROE is low...
FIFO results in: (assuming inflationary period)
Free Cash Flow to the Firm - FCFF
32. 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
Credit Rating Process...
Fraud Triangle - 1) Incentive/Pressure
FIFO is appropriate
ROE interpretation: if ROE is low...
33. 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
Implication for Analysts: Be aware of differences in tax reconcilation between periods
Extraordinary Items: Unusual AND Infrequent items...
IFRS/US GAAP Frameworks: underlying assumptions...
The 4 Qualitative Characteristics of FASB...
34. 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 =
Convergence IFRS/US GAAP...
Credit Analysis: Ratios
Units of Production Method
Form 144...
35. Same as other ratios using NI in this case substitut NI for CFO.
IFRS: Presentation Requirements
Cash flow ratios
Deferred Tax Liability: (DTL)
Forecasting Financial Performance: Top Down Approach...
36. 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.
LIFO results in: (assuming inflationary period)
Capitalized Intangibles...
Defined Benefit Obligations (DBO)
Ratios that directly affect choice of Inventory Account...
37. Derivatives - Non-derivative investments with fair value exposure hedged by derivatives
Fundamental principles for PREPARING f/s under IFRS: (IAS No 10
Horizontal Common Size Statements...
Net Periodic Benefit Costs
Financial Liability: US GAAP/Fair Market Value
38. 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)
FIFO is appropriate
Sarbanes-Oxley Management Report...
Ending Inventory =
Funded Status US GAAP & IFRS
39. Shows the performance of the company over a reporting period.
Bond Issuance Cost under GAAP/IFRS
Fundamental principles for PREPARING f/s under IFRS: (IAS No 10
Income Statement
FIFO after-tax profit =
40. 1) SL; 2) Double Decline balance (accelerated); 3) Units of production; 4) Tax code perscribed Modified Accelerated Cost Recovery System (MACRS)
3 C's for Credit Analysis...
Defined Benefit Obligations (DBO)
Depreciation Methods...
B/S - Long-lived assets
41. 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...
3 C's for Credit Analysis...
IFRS/US GAAP Frameworks: F/S elements...
Measures of Operating Performance - Efficiency Ratios...
42. 1) Change in accounting principle; 2) Change in accounting estimate; 3) Prior period adjustments
Financial Assets: US GAAP/Amortized at Cost
Capitalization of Interest...
Types of accounting changes...
Cost included in Inventory on b/s...
43. 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
Cash Flow From Operations (CFO) - FASB
Impact on the Cash Flow of a Premium Bond...
Operating Risk Ratios...
Return on Assets ROA...
44. 1) Transparency; 2) Comprehensiveness; 3) Consistency
Low Quality Earnings is result of...
Characteristics of an effective framework
Cash Flow: Logic (A = L + E)
Component depreciation;
45. [net income - preferred dividends] + [convertible prf.dividends] + [convertible debt int.] (1-t) / (weighted avg. of c/s o/s) + (shares from conversion of conv. pfd. shares) + (shares from conversion of conv. debt) + (shares issuable from stock optio
Finance (capital) Lease criteria GAAP vs. IFRS
Operating vs. Non-operating Income
Operating Risk Ratios...
Diluted EPS
46. 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
Funded Status US GAAP & IFRS
Installment Method...
CFO Disclosure requirement...
Financial Ratios based on B/S: Solvency ratio
47. (GAAP) Internally created intangibles 1) (R&D) are expensed 2) Advertising 3) Software (developed to establish feasibility)
DTA Issues
IFRS/US GAAP Frameworks: objective of F/S
Taxation Analyst Adjustments...
Expensed Intangibles...
48. 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.
FIFO after-tax profit =
Impact on the Cash Flow of a Zero Coupon Bond...
Form DEF-14A...
Trade-Offs Qualitative Characteristics of IFRS
49. Shows the financial position of a firm AT A SINGLE POINT in time A = L + E.
Stock options: Use treasury stock method
Balance Sheet
Return on total capital (ROTC)...
Bond Issuance Cost under GAAP/IFRS
50. 1) Unqualified opinion (good); 2) Qualified opinion (followed GAAP except for...); 3) Adverse opinion (bad)
Operating vs. Non-operating Income
Forecasting Financial Performance: Top Down Approach...
Auditor/Audit Opinion
Convergence IFRS/US GAAP...