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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. 1) Scale & Diversification - 2) Operational Efficiency - 3) Margin Stability - 4) Leverage
4 General Categories for Creditworthiness/Capacity...
IASB - Goals
days of inv. on hand =
FASB - Harmonization
2. 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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3. 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.
Cost recovery method...
Gross Reporting of Revenue
To investigate the stability of that structure - Kilgore would be best served by looking at...
Ending Inventory =
4. 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
Free Cash Flow -CFO
Impact on the Cash Flow of a Zero Coupon Bond...
FASB - Harmonization
DTA Issues
5. Companies should not recognize revenue from barter transactions. The additional revenue is likely to improperly boost profits. While an unusually high sales-growth rate may indicate fraud - it could also indicate good management. It's a yellow flag -
Traditional DuPont Equation...
Lessor Accounting Capital Lease: Sales-Type Lease
Impairments recognition (IFRS)
The best indicator of overstating its profits is...
6. 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
Asset Capitalization
Ending Inventory =
Net Periodic Benefit Costs
Inventory Valuatoin (LCM)
7. Amount deductible in future tax return
Bond Issuance Cost under GAAP/IFRS
Tax base of an asset
ROE interpretation: if ROE is low...
Balance Sheet
8. Contributed capital = c/s @ par plus add'l paid-in capital - Treasury stock (reaquired by frim but not yet retired) - are/E = Accum' NI less dividends - Minority (non-controlling) interest - Comprehensive income items: all chg in SOE not in I/S or fr
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9. Interest Rec'd - CFO/CFI Divs Rec'd - CFO/CFI Interst Paid - CFO/CFF Divs Paid - CFF/CFO Overdraft = cash - not CFF
Cash Flow From Operations (CFO) - IFRS
Income Statement
Balance Sheet - formats
Trade-Offs Qualitative Characteristics of IFRS
10. FIFO: EI = newest purchases - LIFO: EI = oldest purchases - Avg. Costs: EI = Available for sale/Units - Specific ID: high value items (cars - diamonds etc)
From creditor POV: Int. Coverage;
Not all CF increase are Sustainable. Example of how Mgmt can Manipulate Cash Flow Statement
Sales Basis Revenue Recognitions
Inventory Cost Flow Methods...
11. Depreciation exp = (cost - residual value) x (# units produced / total expected to produce)
Impairments recognition (IFRS)
Effects of Lease Classification on F/S - Finance Lease
Operating Risk Ratios...
Units of Production Method
12. 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
FIFO ending inventory =
Footnote disclosure of Reconciliation of opening and closing carrying values...
Finance (capital) Lease criteria GAAP vs. IFRS
13. 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.
DTA/DTL: Effect on Net Income when Tax Rate decreases...
Intercorporate Investment: > 50% votes...
Defined Benefit Obligations (DBO)
ROE interpretation: if ROE is low...
14. Shares are to take over control - Subsidiary - Consolidate financials
Intercorporate Investment: > 50% votes...
IFRS/US GAAP Frameworks: underlying assumptions...
Sarbanes-Oxley Management Report...
Ratios that directly affect choice of Inventory Account...
15. 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
Free Cash Flow -CFO
Inv. Valuation reporting Inventory ABOVE costs...
Low Quality Earnings is result of...
Financial Ration based on B/S: Liquidity Ratios
16. 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
Sustainable Growth
Free Cash Flow -CFO
DTA Issues
% of Completion
17. Both: Recognize going concern & accrual assumptions - IASB: Going concern & accruals given more prominence in framework - FASB: Going concern assumption not well developed in framework.
Measurement of A & L disclosure in footnotes
IFRS/US GAAP Frameworks: underlying assumptions...
Sources of Differences: Permanent
FASB - Harmonization
18. 1) Firms adds a lease asset and a lease liability to b/s = amounts - 2) Recognize int. expense on liability and depreciation exp on asset - Since Int. exp + depre > lease pymt in the early years. This decreases NI - and Profitability ratios.
Footnote disclosure of Reconciliation of opening and closing carrying values...
Valuation Allowance...
Financial Lease Reporting
IASB
19. Shows the financial position of a firm AT A SINGLE POINT in time A = L + E.
Balance Sheet
Calculate dividends declared...
Cash Flow From Operations (CFO) - FASB
Impact on the Cash Flow of a Par Bond...
20. 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:
Financial Lease Reporting
CFO - Indirect method steps...
Form DEF-14A...
Intangibles under IFRS...
21. 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
Taxation: Tax Payable
Funded status of the pension plan (under US GAAP & IFRS) is reported where?
FIFO ending inventory =
Not all CF increase are Sustainable. Example of how Mgmt can Manipulate Cash Flow Statement
22. 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
To investigate the stability of that structure - Kilgore would be best served by looking at...
Units of Production Method
Discontinued Operations...
DTA/DTL: Effect on Net Income when Tax Rate decreases...
23. 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
Cash Conversion Cycle =
Lessor Accounting Capital Lease: Sales: Direct Financing Lease
Taxable Income
Cost included in Inventory on b/s...
24. Net income + non-cash charges - working cap investment
Free Cash Flow -CFO
IFRS/US GAAP Frameworks: Measurement of Elements...
Cost recovery method...
Financial Ratios based on B/S: Solvency (Coverage)
25. 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
CFO Disclosure requirement...
Finance (capital) Lease criteria (under US GAAP)
B/S - Long-lived assets PP&E
IASB
26. 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.
Effects of Lease Classification on F/S - Finance Lease
Taxation Disclosure Requirements
Ending Inventory =
Form DEF-14A...
27. US 1) Financial Accounting Standards Board; 2) Standards form GAAP; 3) Aims - useful - relevant - reliable - consistent and comparable; 4) SEC deems FASB standard authoritative
What is the economic substance of financial (capital) lease?
FASB
B/S - investments
3 C's for Credit Analysis...
28. 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.
Motivation to Under-report Earnings
CFI Analysis...
Finance (capital) Lease criteria (under US GAAP)
IASB
29. More than a third of Maxwell's total sales go to its own consolidated subsidiaries High levels of related-party transactions are worrisome - particularly when those parties are not audited. But transactions within the company between subsidiaries con
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30. 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
Warning Signs of Earnings Manipulation
Types of accounting changes: accounting principle
Convergence IFRS/US GAAP...
Credit Analysis: Ratios
31. 1) Calculate cash raised on exercise 2) Repurchase shares at avg. price 3) New Shares = exercised - repurchased
Intangibles under IFRS...
Cash Flow From Operations (CFO) - FASB
Stock options: Use treasury stock method
Vertical Common Size Statements...
32. Meet Analyst Expectations - Meet debt covenants - Incentive compensation
Income Statement
Motivation to Over-report Earnings
Balance Sheet
Roles of financial reporting & analysis include...
33. CFO: cash interest expense - CFF: increased by amount rcvd at issuance and decreased by payment made at redemption
Gain/(loss) on bond early retirement: (derecognition of debt)
Inventory Valuatoin (LCM)
Financial Ratios based on B/S: Solvency (Coverage)
Impact on the Cash Flow of a Par Bond...
34. Stock options - Warrants - Convertible debt - Convertible preferred stock
Under Completed Contract Method...
FASB - Harmonization
Potentially Dillutive Securities
Cash Flow From Financing (USA) (Source of Cash)
35. It is the purchase of an asset using debt finance.
Revaluation above historic cost...
Cash Conversion Cycle =
Lessor Accounting Capital Lease: Sales: Direct Financing Lease
What is the economic substance of financial (capital) lease?
36. 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 Assets: US GAAP/Amortized at Cost
Which of the following characteristics should be of least concerned about management's opportunities to commit fraud?
Diluted EPS
Financial Implications of Capitalizing...
37. Days of sales o/s + days of inv. on hand - # of days payable (shorter the better)
Inventory mangement: Low T/O (High DOH)...
Cash Conversion Cycle =
Financial Ratio based on I/S...
DTA/DTL: Effect on Net Income when Tax Rate decreases...
38. Int. Coverage = EBIT/Interest Expense - Fixed Charged Coverage = (EBIT+Lease Pymts) / Int. exp + Lease payments
Financial Ratios based on B/S: Solvency (Coverage)
Potentially Dillutive Securities
Fraud Triangle - 3) Attitude/rationalization
Deferred Tax Liability: (DTL)
39. Trading securities - Available-for-sale - Derivatives (standalone or embedded in non-derivative intrument) - Assets with fair value exposure hedged by derivatives
Inv. Valuation reporting Inventory ABOVE costs...
Financial Assets: US GAAP/Fair Market Value
Motivation to Understate Assets/Overstate Liabilities
IFRS: Required F/S
40. 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
Extended DuPont Equation...
Analyst Treaments of DTL
IFRS/US GAAP Frameworks: purpose of framework
Impairments recognition (IFRS)
41. 1) Timing Differences: Accrual vs. modified cash accounting - Differences in reporting methods estimates
Net Realizable Value (NRV) (IFRS)
Sources of Differences: Temporary
Cash Flow From Investing (USA) (Assets)
% of Completion
42. 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
Screening for Potential Equity Investment: Criteria
Finance (capital) Lease criteria GAAP vs. IFRS
Which set of accounting standards requires firms to disclose estimated amortization expense for the next five years on intangible assets?
43. 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
One major difference between the presentation of deferred tax assets and liabilities under IFRS and under U.S. GAAP is that...
Reasons to Lease...
Effects of Lease Classification on Ratios - Operating Lease
Component depreciation;
44. Tax liability based on taxable income as per TAX Report/RETURN
Barter (IASB & FASB)
Diluted EPS
Warning Signs of Earnings Manipulation
Taxation: Tax Payable
45. 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
Financial Ration based on B/S: Liquidity Ratios
Dilutive Securities
IFRS/US GAAP Frameworks: purpose of framework
46. Improve ROA and Asset TO Ratios - Report higher aquisition goodwill
Motivation to Understate Assets/Overstate Liabilities
Impact on the B/S of a Zero Coupon Bond...
From creditor POV: Int. Coverage;
Gain/(loss) on bond early retirement: (derecognition of debt)
47. 365/(AR T/O) = 365/(Rev/Avg. AR)
B/S - Long-lived assets
What is the economic substance of financial (capital) lease?
days of sales o/s =
Defined Benefit Obligations (DBO)
48. All DTA and DTL are classified as noncurrent under IFRS - Under U.S. GAAP - deferred tax assets and liabilities are classified as current or non-current according to the classification of the underlying asset or liability. Under IFRS - deferred tax a
Straight-line depreciation (SL)
One major difference between the presentation of deferred tax assets and liabilities under IFRS and under U.S. GAAP is that...
Creative Cash Flows Accounting: Motivation
Extended DuPont Equation...
49. 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
Lessor Accounting Capital Lease: Sales: Direct Financing Lease
From creditor POV: Int. Coverage;
What is the economic substance of financial (capital) lease?
Form 144...
50. 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)
DBO Funded Status =
Effective Tax Rate
CFO Analysis...
B/S - Stockholders' Equity