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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. Income Tax Expense/Pretax Income (EBIT) Income Tax Exp. = Taxes payable + chg in deferred ta
Net Reporting of Revenue
Fraud Triangle
Effective Tax Rate
Financial Implications of Capitalizing...
2. To improve liquidity and leverage ratios
Motivation to Overstate Assets/Understate Liabilities
Return on Assets ROA...
Financial Ratio based on I/S...
Effects of Lease Classification on Ratios - Finance Lease
3. 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.
Inventory Valuatoin (LCM)
Intercorporate Investment: > 50% votes...
Financial Lease Reporting
Intercorporate Investment: 20% - 50% votes...
4. Unlisted instruments - Held-to-maturity investments - Loans - Receivables
Financial Assets: US GAAP/Amortized at Cost
FIFO ending inventory =
Deferred Tax Asset: (DTA)
Form 144...
5. 1) Evidence of an arrangement; 2) Completion of earnings process; 3) Price is determined or determinable; 4) Assurance of payment
Return on Equity (ROE)...
SEC guidance for Revenue Recognition
Fundamental principles for PREPARING f/s under IFRS: (IAS No 10
ROE interpretation: if ROE is low...
6. Interest expense = Coupon rate
Simple capital structure
Impact on the B/S of a Par Bond...
Asset Revaluation: IFRS
IASB
7. Tax Rate down: DTL down -> Inc. Tax Exp down -> NI up - DTA down -> Inc. Tax Exp up -> NI down
DTA/DTL: Effect on Net Income when Tax Rate decreases...
Revaluation above historic cost...
An Increase in the Valuation Allowance Account...
Impairments recognition (GAAP)
8. Higher share price - Lower borrowing cost - Higher incentive compensation
CFO - Direct method
Creative Cash Flows Accounting: Motivation
Financial Ratios based on B/S: Solvency ratio
days of sales o/s =
9. 1) SL; 2) Double Decline balance (accelerated); 3) Units of production; 4) Tax code perscribed Modified Accelerated Cost Recovery System (MACRS)
An Increase in the Valuation Allowance Account...
Financial Ratios based on B/S: Solvency (Coverage)
Depreciation Methods...
Vertical Common Size Statements...
10. Part of indenture that place restrictions on the firm that protect bondholderns and increase value of the firm's bond - Breach is technical default
Expensed Intangibles...
Debt covenants
Motivation to Over-report Earnings
What is the economic substance of financial (capital) lease?
11. Inflow - (bringing bond UP to par)
DTA Issues
Amortization of Bond Discount = (in/out flow) in the indirect method CFO
Financial Adj to Facilitate Comparison...
Financial Ratios based on B/S: Solvency (Coverage)
12. US Gaap: lower of cost or market value - (does NOT allow subsequent reverasals) - IFRS: lower of cost or NET realizable value - (allows subsequent reversals)
Inventory Valuatoin (LCM)
Potentially Dillutive Securities
FIFO results in: (assuming inflationary period)
3 C's for Credit Analysis...
13. Management turnover.
Inventory mangement: High T/O (low DOH) and sales growth above industry average
Diluted EPS
To investigate the stability of that structure - Kilgore would be best served by looking at...
IASB - Goals
14. 1) Change in accounting principle; 2) Change in accounting estimate; 3) Prior period adjustments
Creative Cash Flows Accounting: Motivation
Types of accounting changes...
Impact on the Cash Flow of a Zero Coupon Bond...
IASB - Goals
15. Both: Broadly consistent - lack fully developed concepts - FASB: Assets revaluations prohibited (except some financial instruments)
CFO Analysis...
Unusual OR Infrequent items...
IFRS/US GAAP Frameworks: Measurement of Elements...
Cash Flow From Financing (USA) (Source of Cash)
16. Nature of liability; Maturity dates; Stated and effective int. rates; Call and conversion features; covenants; security pledged as collateral; Amount of Debt maturity in each of the next 5 years; Fair value of o/s instrutments
Sustainable Growth
Footnote Finance Liability Disclosure
IFRS: Required F/S
B/S - Stockholders' Equity
17. ROE = (NI/Sales) x (Sales/Assets) x (Assets/Equity) or ROE= Net Profit Margin x Asset TO x Leverage Ratio
Straight-line depreciation (SL)
Traditional DuPont Equation...
CFO - Direct/Indirect method
Extended DuPont Equation...
18. 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
Vertical Common Size Statements...
Which set of accounting standards requires firms to disclose estimated amortization expense for the next five years on intangible assets?
Unusual OR Infrequent items...
Forecasting Financial Performance: Top Down Approach...
19. 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
IASB
Creative Cash Flows Accounting: Technique
Motivation to Understate Assets/Overstate Liabilities
CFO - Direct/Indirect method
20. Shows only the difference between sales and cost of goods sold Users are usually: 1) internet-based merchandising companies; 2) Sell prodict but never hold inventory; 3) Arrangement for supplier to ship directly to end customer. Discolsure policies
Debt covenants
LIFO results in: (assuming inflationary period)
Net Reporting of Revenue
Component depreciation;
21. 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 =
Impact on the Cash Flow of a Discount Bond...
B/S - Long-term Liabilities
Credit Analysis: Ratios
Lessor Accounting Capital Lease: Sales: Direct Financing Lease
22. 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
Which set of accounting standards requires firms to disclose estimated amortization expense for the next five years on intangible assets?
Financial Ratios based on B/S: Solvency ratio
B/S - short-term investments
Types of accounting changes: accounting principle
23. 1) Unqualified opinion (good); 2) Qualified opinion (followed GAAP except for...); 3) Adverse opinion (bad)
Sales Basis Revenue Recognitions
Trade-Offs Qualitative Characteristics of IFRS
Capitalized Intangibles...
Auditor/Audit Opinion
24. Employer promises specific payment stream at retirement - Payments are based on yrs of service - retirement age - and final salary - Employers bears investment risk - Funded by pool of assets - Complicated accounting
Antidilutive Securities
Defined Benefit Plans
The objective of f/s is to...
Motivation to Understate Assets/Overstate Liabilities
25. Decreases DTA -> Decreases Net Income - [Decrease in Valuation Allowance; Increase DTA and Increases Net Income]
FASB - Harmonization
What is the economic substance of financial (capital) lease?
CFO Disclosure requirement...
An Increase in the Valuation Allowance Account...
26. Exchange of goods or services between two parties (no cash) IASB: Revenue = FMV of similar non-barter transaction with unrelated parties FASB: Revenue = FMV only if the company has received cash payments for such services in the past
LIFO is appropriate
Installment Method...
Barter (IASB & FASB)
Footnote disclosure of Reconciliation of opening and closing carrying values...
27. 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
IFRS/US GAAP Frameworks: Recognition of Elements...
Finance (capital) Lease criteria (under US GAAP)
B/S - Stockholders' Equity
Valuation allowance
28. Shows the financial position of a firm AT A SINGLE POINT in time A = L + E.
B/S - Long-lived assets PP&E
DTA Issues
Sources of Differences: Temporary
Balance Sheet
29. Both: General agreement on objectives; focus on wide range of users - IASB: One objective for all users - FASB: Separate objectives for business entities and non-business entities.
Effects of Lease Classification on Ratios - Operating Lease
Capitalized Intangibles...
Intercorporate Investment: < 20% votes...
IFRS/US GAAP Frameworks: objective of F/S
30. Small investment for div/capital gains purpose - If Secondary market: Held-to-maturity: Debt securities co intend to hold to maturity; Carried at Amortized cost. Available-for-sale: Sold to satisfy Debt/Equity Needs; Currrent or non-current; B/S @ MV
LIFO is appropriate
Intercorporate Investment: > 50% votes...
Intercorporate Investment: < 20% votes...
Impact on the Cash Flow of a Zero Coupon Bond...
31. 1) Nature of industry/entity operations: 3rd party transactions; Power of customer/supplier; Acct est subjective; Unusual transactions; International operations; International operations; Operations in tax havens. 2) Opportunity complex/unstable org.
Effects of Lease Classification on Ratios - Operating Lease
Measurement of A & L disclosure in footnotes
Fraud Triangle - 2) Opportunity
Impact on the B/S of a Discount Bond...
32. Depreciation exp = (cost - residual value) x (# units produced / total expected to produce)
Units of Production Method
Deferred Tax Liability: (DTL)
Finance (capital) Lease criteria GAAP vs. IFRS
Form 144...
33. 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
Gain/(loss) on bond early retirement: (derecognition of debt)
B/S - Long-lived assets PP&E
Impairments recognition (GAAP)
Impact on the Cash Flow of a Zero Coupon Bond...
34. I/S: Income statement account/Sales - B/S: Balance sheet account/ Total Assets
Impairments recognition (GAAP)
Impact on the Cash Flow of a Premium Bond...
Footnote Finance Liability Disclosure
Vertical Common Size Statements...
35. Derivatives - Non-derivative investments with fair value exposure hedged by derivatives
B/S - Long-term Liabilities
Financial Adj to Facilitate Comparison...
Common Size Statement
Financial Liability: US GAAP/Fair Market Value
36. When Statutory tax rate does NOT equal Effective tax rate - Tax expense does note equal pretax income x statutory rate
Warning Signs of Earnings Manipulation
Defined Benefit Plans
Units of Production Method
Sources of Differences: Permanent
37. 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.
Units of Production Method
Measures of Operating Performance - Efficiency Ratios...
The best indicator of overstating its profits is...
Form 144...
38. I/S: COGS lower - EBT higher - Taxes: higher - NI: higher - B/S: INV: higher - W/C: higher - are/E: higher - CF: CFO: lower
FIFO results in: (assuming inflationary period)
Trade-Offs Qualitative Characteristics of IFRS
Convergence IFRS/US GAAP...
Screening for Potential Equity Investment: Criteria
39. Profit is recognized only when it exceeds estimated total cost.
Funded Status US GAAP & IFRS
Net Realizable Value (NRV) (IFRS)
LIFO results in: (assuming inflationary period)
Cost recovery method...
40. 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
Analyst Treaments of DTL
Impact on the Cash Flow of a Par Bond...
Activity Ratios
One major difference between the presentation of deferred tax assets and liabilities under IFRS and under U.S. GAAP is that...
41. 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
Measurement of A & L disclosure in footnotes
Measures of Operating Performance - Efficiency Ratios...
Potentially Dillutive Securities
42. Under GAAP 1) Purchased patentes - copyrights - franchises - licenses - brands - and trademarks 2) Direct response advertising 3) Goodwill arising from transactions - (Proceeds - FMV net assets required = goodwill) 4) Software development costs once
Effects of Lease Classification on F/S - Operating Lease
Cost recovery method...
Credit Rating Process...
Capitalized Intangibles...
43. FASB: No discussion of 'probables' - IASB: Asset - liabilities - are probable flows
From creditor POV: Int. Coverage;
Cash Flow From Financing (USA) (Source of Cash)
Financial Lease Reporting
IFRS/US GAAP Frameworks: Recognition of Elements...
44. EBIT/ Avg. total capital - Total capital includes: debt capital - so int. is aded back to NI
Straight-line depreciation (SL)
Fraud Triangle - 1) Incentive/Pressure
Inventory Cost Flow Methods...
Return on total capital (ROTC)...
45. 1) B/S asset increased to FMV 2) Increase above original cost to equity via revaluation surplus account (comprehensive Income)
Revaluation above historic cost...
Extraordinary Items: Unusual AND Infrequent items...
Taxation: Income Tax Expense
3 C's for Credit Analysis...
46. Share are to ensure significant influence over the company - Affiliate/Associate - Equity Method
Form 8-K...
Financial Assets: US GAAP/Amortized at Cost
Intercorporate Investment: 20% - 50% votes...
Return on total capital (ROTC)...
47. Timing differences (depreciations) - Permanent differences
Under Completed Contract Method...
Inventory Valuatoin (LCM)
Form 8-K...
Sources of Differences betweent F/S & T/
48. BV - cash paid = gain/(loss) + any unamortized issue costs (US only) = Gain/Loss on repurchase [I/S as continuing operations)
What is the economic substance of financial (capital) lease?
Impact on the Cash Flow of a Par Bond...
Trade-Offs Qualitative Characteristics of IFRS
Gain/(loss) on bond early retirement: (derecognition of debt)
49. 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
Common Size Statement
Impairments recognition (IFRS)
Bond Issuance Cost under GAAP/IFRS
Statement of Cash Flow - relevance...
50. Int. Coverage = EBIT/Interest Expense - Fixed Charged Coverage = (EBIT+Lease Pymts) / Int. exp + Lease payments
Antidilutive Securities
Forecasting Financial Performance: Top Down Approach...
Types of accounting changes: accounting principle
Financial Ratios based on B/S: Solvency (Coverage)