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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. Outflow - (bringing bond DOWN to par)
Not all CF increase are Sustainable. Example of how Mgmt can Manipulate Cash Flow Statement
SEC guidance for Revenue Recognition
Extended DuPont Equation...
Amortization of Bond Premium = (in/out flow) in the indirect method CFO
2. 1) SL; 2) Double Decline balance (accelerated); 3) Units of production; 4) Tax code perscribed Modified Accelerated Cost Recovery System (MACRS)
Barriers to a single framework...
Lessor Accounting Capital Lease: Sales: Direct Financing Lease
Depreciation Methods...
Activity Ratios
3. Both: purpose is to assist development & revision of accting stds - IASB: Firms must consider framework if no std exists - FASB: No express requirement to consider framework
Debt covenants
The best indicator of overstating its profits is...
Financial Ratios based on B/S: Solvency ratio
IFRS/US GAAP Frameworks: purpose of framework
4. Divdends and share repurchases - Production and investment - M&A - New debt issuance - Payoff pattern and liquidation priority - Maintenance of assets used as collateral
CFO - Indirect method steps...
Cash Conversion Cycle =
Defined Benefit Obligations (DBO)
Activity Based Restrictions
5. Aggressive Revenue Recognition - Diff. growth rates of operating cash flow and earnings - Abnormal comparative sales growth - Abnormal inventory growth as compared to sales - Moving nonoperating income and nonrecurring gains up to I/S to boost revenu
Taxation: Income Tax Expense
Gross Reporting of Revenue
B/S - Long-lived assets
Warning Signs of Earnings Manipulation
6. Timing differences (depreciations) - Permanent differences
Ratios that directly affect choice of Inventory Account...
Unusual OR Infrequent items...
The report format of B/S
Sources of Differences betweent F/S & T/
7. (net income - preferred dividends)/weighted average of common shares outstanding - only income from continuing operations is considered
CFO - Direct/Indirect method
BASIC EPS
% of Completion
Funded Status US GAAP & IFRS
8. Profit is recognized only when it exceeds estimated total cost.
Cost recovery method...
Revaluation above historic cost...
Motivation to Overstate Assets/Understate Liabilities
Debt covenants
9. Used when estimates of revenue or cost are unreliable or short-term contracts - (US GAAP only) Revenue - expense - and profit is recognized at completion (IFRS) Revenue is recognized to the extent of contract cost - cost are expensed when incureed
Fraud Triangle - 3) Attitude/rationalization
DBO Funded Status =
Under Completed Contract Method...
Which of the following characteristics should be of least concerned about management's opportunities to commit fraud?
10. 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
Financial Implications of Capitalizing...
Types of accounting changes: accounting principle
Antidilutive Securities
Valuation Allowance...
11. A: Increase = use cash (-) - Decrease = source cash (+) - L: Increase = source cash (+) - Decrease = use of cash (-) - E: Increase = source cash (+) - Decrease = use of cash (-)
Effects of Lease Classification on Ratios - Finance Lease
Cash Flow: Logic (A = L + E)
Effects of Lease Classification on F/S - Finance Lease
Cash flow ratios
12. 1) Purpose and context 2) Data Collection 3) Data Processing 4) Analysis/Interpretation of data 5) Develop conclusions and recommendations 6) Follow-up
Financial Ration based on B/S: Liquidity Ratios
Steps of F/S Analysis
ROE interpretation: if ROE is low...
Comprehensive income...
13. Required by IFRS - Permited by US GAAP
Unusual OR Infrequent items...
IFRS/US GAAP Frameworks: purpose of framework
Component depreciation;
Dilutive Securities
14. 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 =
IOSCO
Cash Flow: Logic (A = L + E)
Analysis: Market Value of Debt
Credit Analysis: Ratios
15. NRV = Est. selling cost - Est. cost of complition - selling costs
Financial Ratios based on B/S: Solvency (Coverage)
Motivation to Over-report Earnings
Types of accounting changes: accounting estimate
Net Realizable Value (NRV) (IFRS)
16. Companies must file this form to disclose material events including significant asset acquisitions and disposals - changes in management or corporate governance - or matters related to its accountants - financial statements - or the markets on which
Forecasting Financial Performance: Top Down Approach...
Form 8-K...
Taxation Analyst Adjustments...
The account format of B/S
17. Improve ROA and Asset TO Ratios - Report higher aquisition goodwill
Financial Assets: US GAAP/Fair Market Value
Cash Flow From Investing (USA) (Assets)
Asset Revaluation: IFRS
Motivation to Understate Assets/Overstate Liabilities
18. 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
CFI Analysis...
Barter (IASB & FASB)
Form 8-K...
Implication for Analysts: Be aware of differences in tax reconcilation between periods
19. 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
Intangibles under IFRS...
Ratios that directly affect choice of Inventory Account...
Valuation allowance
Cash Flow From Operations (CFO) - FASB
20. 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...
IFRS/US GAAP Frameworks: F/S elements...
Net Reporting of Revenue
Impairments recognition (IFRS)
21. 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.
Steps of F/S Analysis
Valuation allowance
Lessor Accounting Capital Lease: Sales: Direct Financing Lease
Market Value (GAAP)...
22. EBIT/ Avg. total capital - Total capital includes: debt capital - so int. is aded back to NI
Cash Flow From Investing (USA) (Assets)
Lessor Accounting Capital Lease: Sales: Direct Financing Lease
Complex Capital Structure
Return on total capital (ROTC)...
23. 1) Increase comparability; 2) Reduce expense of overseas capital; 3) Reduce the expense of producing consolidated accounts
Cash Conversion Cycle =
IFRS/US GAAP Frameworks: F/S elements...
FASB - Harmonization
Asset Capitalization
24. It is Rare - but permitted for commodity producer/dealers B/S = NRV - I/S = unrealized gains/losses
Measurement of A & L disclosure in footnotes
Component depreciation;
Inv. Valuation reporting Inventory ABOVE costs...
Asset Revaluation: IFRS
25. 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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26. Tax liability based on taxable income as per TAX Report/RETURN
One major difference between the presentation of deferred tax assets and liabilities under IFRS and under U.S. GAAP is that...
Traditional DuPont Equation...
Taxation: Tax Payable
Which of the following characteristics should be of least concerned about management's opportunities to commit fraud?
27. I/S: COGS lower - EBT higher - Taxes: higher - NI: higher - B/S: INV: higher - W/C: higher - are/E: higher - CF: CFO: lower
Fraud Triangle
FIFO results in: (assuming inflationary period)
The 4 Qualitative Characteristics of FASB...
Cash Flow From Operations (CFO) - IFRS
28. Interest Rec'd - CFO/CFI Divs Rec'd - CFO/CFI Interst Paid - CFO/CFF Divs Paid - CFF/CFO Overdraft = cash - not CFF
Cost included in Inventory on b/s...
Cash Flow From Operations (CFO) - IFRS
Low Quality Earnings is result of...
B/S - Long-lived assets PP&E
29. LIFO after-tax profit + (change in LIFO reserve)(1 - t)
DBO Funded Status =
FIFO after-tax profit =
Financial Ratio based on I/S...
To investigate the stability of that structure - Kilgore would be best served by looking at...
30. 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
Market Value (GAAP)...
Impairments recognition (IFRS)
Characteristics of an effective framework
Which of the following characteristics should be of least concerned about management's opportunities to commit fraud?
31. Beginning Inv. (BI) + Purchases (P) = Available for Sale - Available for sale - COGS = Ending Inventory (EI)
Cash Flow From Operations (CFO) - FASB
Simple capital structure
The report format of B/S
Ending Inventory =
32. '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
What is the economic substance of financial (capital) lease?
Types of accounting changes: prior period adjustments
Cash Flow From Investing (USA) (Assets)
Tax base of an asset
33. If PV of min lease pymt = cost of asset 1) lessor is not a dealer of leased equipment (fin. co.)2) no gross profit is recognized at time of lease inception 3) all profit is int. revenue recognized over period of lease. CFO = Int. Income inflow - CFI
Comprehensive income...
Return on total capital (ROTC)...
Depreciation Methods...
Lessor Accounting Capital Lease: Sales: Direct Financing Lease
34. 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
Valuation Allowance...
Asset Revaluation: IFRS
Inventory Cost Flow Methods...
Net Periodic Benefit Costs
35. 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
Defined Benefit Plans
The best indicator of overstating its profits is...
Potentially Dillutive Securities
FIFO is appropriate
36. 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)
The 4 Qualitative Characteristics of FASB...
3 C's for Credit Analysis...
Motivation to Under-report Earnings
Add/ Sub changes to related b/s operating accounts
37. FASB: No discussion of 'probables' - IASB: Asset - liabilities - are probable flows
The objective of f/s is to...
IFRS/US GAAP Frameworks: Recognition of Elements...
Taxation Disclosure Requirements
Installment Method...
38. 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.
% of Completion
Effects of Lease Classification on Ratios - Operating Lease
Cash Flow From Investing (USA) (Assets)
Gross Reporting of Revenue
39. Income subject to tax as per Tax Return
Dilutive Securities
Taxable Income
Financial Liability: US GAAP/Fair Market Value
Return on Assets ROA...
40. Assets - liabilities - and equity are presented in a single column.
Types of accounting changes: prior period adjustments
Balance Sheet
IFRS: Presentation Requirements
The report format of B/S
41. Selecting accounting principles to distort results - Structuring transactions to achieve a desired outcome - Using aggressive or unrealistic estimates and assumptions - Exploiting the intent of the accounting principle
Impact on the B/S of a Discount Bond...
Low Quality Earnings is result of...
Trade-Offs Qualitative Characteristics of IFRS
Financial Implications of Capitalizing...
42. 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
CFI Analysis...
Disclosure for each segment...
SEC guidance for Revenue Recognition
Activity Based Restrictions
43. 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
Footnote Finance Liability Disclosure
Inventory Systems...
Unusual OR Infrequent items...
Lessor Accounting Capital Lease: Sales: Direct Financing Lease
44. 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.
MD&A contains...
Sources of Differences: Permanent
Impact on the B/S of a Par Bond...
IFRS: Presentation Requirements
45. FASB: Asset is a future economic benefit - IASB: Asset is a RESOURCE from which future economic benefit is expected to flow.
One major difference between the presentation of deferred tax assets and liabilities under IFRS and under U.S. GAAP is that...
Finance (capital) Lease criteria GAAP vs. IFRS
Under Completed Contract Method...
IFRS/US GAAP Frameworks: F/S elements...
46. 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
Revaluation above historic cost...
Asset Capitalization
Inventory mangement: High T/O (low DOH) and sales growth above industry average
days of sales o/s =
47. 1) Credit Scoring (CF Forecast) 2) Equity Investment screening (cutoff values)
Motivation to Over-report Earnings
Forecasting Financial Performance: Application
Common Size Statement
Operating vs. Non-operating Income
48. EU & US 1) Int'l Org. of Securities Commission; 2) Goal: uniform regulation; 3) Core objectives: Protecting investor - Fair - transparent - efficient markets - Reduction of systematic risk
One major difference between the presentation of deferred tax assets and liabilities under IFRS and under U.S. GAAP is that...
Analysis: Market Value of Debt
Financial Ratios based on B/S: Solvency ratio
IOSCO
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
Units of Production Method
Debt covenants
Cash flow ratios
Cash Flow From Operations (CFO) - FASB
50. 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
Sustainable Growth
The 4 Qualitative Characteristics of IFRS
Valuation Allowance...
Credit Rating Process...