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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.
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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) Balance Sheet; 2) Comprehensive Income; 3) Change in Equity; 4) Cash Flow Statement; 5) Accounting policies and notes.
Analyst Treaments of DTL
IASB - Goals
IFRS: Required F/S
Inventory mangement: High T/O (low DOH) and sales growth below industry average
2. Int. Coverage = EBIT/Interest Expense - Fixed Charged Coverage = (EBIT+Lease Pymts) / Int. exp + Lease payments
Financial Ratios based on B/S: Solvency (Coverage)
Financial Assets: US GAAP/Fair Market Value
Barriers to a single framework...
Financial Ratio based on I/S...
3. 1) Account format (A on left and L & E on right) 2) Report format ( A - L - E presented in one column) 3) Classified B/S (ordered)
Steps of F/S Analysis
Balance Sheet - formats
Fraud Triangle - 3) Attitude/rationalization
Cash Flow From Investing (USA) (Assets)
4. 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
Creative Cash Flows Accounting: Technique
Reasons to Lease...
Discontinued Operations...
Net Reporting of Revenue
5. 1) Basis for measurement; 2) carrying value of inventory by category; 3) Amount of inventory carried at FV less cost to sell 4) Write-downs & reversals (discussion of circumstance that led to reversal); 5) Inventories pledged as collateral for liabil
Ending Inventory =
Measurement of A & L disclosure in footnotes
Financial Liability: US GAAP/Amortized at Cost
FASB
6. Interest expense = Coupon rate
Income Statement
Footnote disclosure of Reconciliation of opening and closing carrying values...
Impact on the B/S of a Par Bond...
Sources of Differences: Permanent
7. Actual cash outflow for taxes paid during current period
Installment Method...
Income Tax Paid...
IFRS/US GAAP Frameworks: objective of F/S
LIFO is appropriate
8. CFO: cash interest expense - CFF: increased by amount rcvd at issuance and decreased by payment made at redemption - CFO is higher and CFF is lower
Impact on the Cash Flow of a Discount Bond...
Impact on the B/S of a Par Bond...
Types of accounting changes...
Motivation to Over-report Earnings
9. 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
IASB - Goals
Inventory Systems...
Dilutive Securities
Straight-line depreciation (SL)
10. GAAP: direct method must disclose adj to reconcile NI to CFO. reconciliation is NOT required for IFRS. IFRS: pymts for Int & Taxes MUST be disclosed separately in the CF Stmnt under direct or indirect. Under GAAP - this can be reported in CF stmnt or
Defined Benefit Plans
CFO Disclosure requirement...
Sources of Differences: Permanent
FIFO ending inventory =
11. Unlisted instruments - Held-to-maturity investments - Loans - Receivables
Financial Assets: US GAAP/Amortized at Cost
Financial Adj to Facilitate Comparison...
Impact on the Cash Flow of a Discount Bond...
IASB - Goals
12. 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
Sarbanes-Oxley Management Report...
Return on Equity (ROE)...
FASB
13. Divdends and share repurchases - Production and investment - M&A - New debt issuance - Payoff pattern and liquidation priority - Maintenance of assets used as collateral
Activity Based Restrictions
Segment Reporting
Creative Cash Flows Accounting: Technique
IASB - Goals
14. 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
IFRS/US GAAP Frameworks: objective of F/S
Activity Ratios
Warning Signs of Earnings Manipulation
Impairments recognition (GAAP)
15. G = (earnings Retention rate) x (ROE) - earnings retention rate = [1-(payout ratio)] - payout ratio = Common dividends/ NI - Pref. Div.
Sustainable Growth
DTA Issues
Footnote Finance Liability Disclosure
Revaluation above historic cost...
16. 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
Activity Based Restrictions
Effects of Lease Classification on F/S - Operating Lease
Analyst Treaments of DTL
Intercorporate Investment: < 20% votes...
17. 1) 3rd party pressure: 1) analyst/institutional expectations; 2) need to obtain finance; 3) listing requirements; 4) Debt covenants; 5) Transactions 2) Directors' Financial Position: 1) Equity interest; 2) Stock options; 3) Personal debt guarantees.
Impairments recognition (GAAP)
Taxable Income
Valuation Allowance...
Fraud Triangle - 1) Incentive/Pressure
18. FASB & IASB -LT projects under contract - reliable estimates of revenue - cost and completion time -Rev - exp and profit are recognized in proportion to total cost incurred to date - divided by total expected cost.
B/S - short-term investments
% of Completion
Debt covenants
Fraud Triangle
19. 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
Fundamental principles for PREPARING f/s under IFRS: (IAS No 10
Footnote Finance Liability Disclosure
Inventory mangement: High T/O (low DOH) and sales growth above industry average
Units of Production Method
20. Shows the financial position of a firm AT A SINGLE POINT in time A = L + E.
Sustainable Growth
Impact on the Cash Flow of a Par Bond...
Balance Sheet
Simple capital structure
21. Trade relief - Contingent consideration - Union concessions
Capitalization of Interest...
Motivation to Under-report Earnings
Finance (capital) Lease criteria GAAP vs. IFRS
FASB - Harmonization
22. Shares are to take over control - Subsidiary - Consolidate financials
Defined Benefit Obligations (DBO)
Taxation: Tax Payable
Intercorporate Investment: > 50% votes...
Types of accounting changes: accounting principle
23. It is the purchase of an asset using debt finance.
CFO - Direct/Indirect method
Measurement of A & L disclosure in footnotes
What is the economic substance of financial (capital) lease?
FIFO ending inventory =
24. 1) held-to-maturity: @ amortized cost (i.e Bonds) 2) trading: @ fair value through P&L @ fair mkt value - unrealized g/(l) are recognized on the I/S. 3) available-for-sale: @ fair mkt value - unrealized g/(l) are NOT recognized on the I/S - instead r
Under Completed Contract Method...
Income Tax Paid...
Expensed Intangibles...
B/S - short-term investments
25. Interest Rec'd - CFO/CFI Divs Rec'd - CFO/CFI Interst Paid - CFO/CFF Divs Paid - CFF/CFO Overdraft = cash - not CFF
Capitalization of Interest...
Cash Flow From Operations (CFO) - IFRS
Credit Analysis: Ratios
Under Completed Contract Method...
26. 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
Intercorporate Investment: < 20% votes...
B/S - Stockholders' Equity
IASB - Goals
Valuation allowance
27. Tax liability based on taxable income as per TAX Report/RETURN
Taxation: Tax Payable
Funded Status US GAAP & IFRS
Not all CF increase are Sustainable. Example of how Mgmt can Manipulate Cash Flow Statement
Convergence IFRS/US GAAP...
28. (GAAP) Internally created intangibles 1) (R&D) are expensed 2) Advertising 3) Software (developed to establish feasibility)
Financial Ration based on B/S: Liquidity Ratios
Fraud Triangle - 1) Incentive/Pressure
Free Cash Flow -CFO
Expensed Intangibles...
29. 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
IFRS/US GAAP Frameworks: purpose of framework
Cost recovery method...
Implication for Analysts: Be aware of differences in tax reconcilation between periods
Discontinued Operations...
30. Periodic: Inventory and COGS determined at p/e - Perpetual: Inv. & COGS updated for each sale (no purchase account need) - Cost flow method impact: FIFO = same for both - LIFO = different - Avg. cost = different - FIFO & LIFO relationship remain
Activity Based Restrictions
Measures of Operating Performance - Efficiency Ratios...
Inventory mangement: Low T/O (High DOH)...
Inventory Systems...
31. 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
days of sales o/s =
Effects of Lease Classification on F/S - Finance Lease
FIFO is appropriate
Impairments recognition (IFRS)
32. 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
Low Quality Earnings is result of...
Inventory Cost Flow Methods...
Potentially Dillutive Securities
Disclosure for each segment...
33. 1) Credit Scoring (CF Forecast) 2) Equity Investment screening (cutoff values)
Fraud Triangle - 2) Opportunity
Forecasting Financial Performance: Application
Financial Ratios based on B/S: Solvency ratio
IFRS/US GAAP Frameworks: F/S elements...
34. 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)
B/S - investments
Impact on the B/S of a Par Bond...
Extended DuPont Equation...
Impact on the B/S of a Zero Coupon Bond...
35. 1) understandability; 2) relevance; 3) reliability; and 4)comparability - No hierarchy
DTA/DTL: Effect on Net Income when Tax Rate decreases...
Operating Lease
The 4 Qualitative Characteristics of IFRS
Straight-line depreciation (SL)
36. 1) Intention to hold >1 year (e.g. debt or equity) valued @ cost or mkt value 2) Equity accounted investments
Add/ Sub changes to related b/s operating accounts
B/S - investments
Financial Ratio based on I/S...
days of sales o/s =
37. Refers to change in mgmt judgement Does NOT require restatement of prior pd earnings; Disclose in footnotes
Cash Flow From Operations (CFO) - FASB
IFRS/US GAAP Frameworks: Recognition of Elements...
FIFO ending inventory =
Types of accounting changes: accounting estimate
38. 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
Impact on the B/S of a Zero Coupon Bond...
Effects of Lease Classification on F/S - Finance Lease
Intercorporate Investment: < 20% votes...
Motivation to Overstate Assets/Understate Liabilities
39. Meet Analyst Expectations - Meet debt covenants - Incentive compensation
Sources of Differences betweent F/S & T/
Cash Flow From Financing (USA) (Source of Cash)
Motivation to Over-report Earnings
Impact on the B/S of a Zero Coupon Bond...
40. GAAP: more quantitative rules - IFRS: more qualitative approach based on whether the risks and reward of the asset have tranferred.
Finance (capital) Lease criteria GAAP vs. IFRS
Capitalized Intangibles...
Debt covenants
Barter (IASB & FASB)
41. 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
Taxation: Tax Payable
Comprehensive income...
The account format of B/S
MD&A contains...
42. Efficient inventory managment
The 4 Qualitative Characteristics of IFRS
Reasons to Lease...
Inventory mangement: High T/O (low DOH) and sales growth above industry average
Analysis: Market Value of Debt
43. 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)
Defined Benefit Plans
Revaluation above historic cost...
Sarbanes-Oxley Management Report...
Return on Equity (ROE)...
44. Income Tax Expense/Pretax Income (EBIT) Income Tax Exp. = Taxes payable + chg in deferred ta
IFRS/US GAAP Frameworks: purpose of framework
Effective Tax Rate
Form 8-K...
Tax Loss Carryforward...
45. 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 =
Form DEF-14A...
Impact on the B/S of a Premium Bond...
Credit Analysis: Ratios
Revaluation below historic cost...
46. Lost sales from stock outs
Return on Equity (ROE)...
Warning Signs of Earnings Manipulation
Unusual OR Infrequent items...
Inventory mangement: High T/O (low DOH) and sales growth below industry average
47. I/S and B/S - Each line is relative to base year
Defined Contribution Plans
Horizontal Common Size Statements...
The report format of B/S
Debt covenants
48. Is more relevant than book value: Recent changes allow more liability to be recorded at FMV (IFRS & GAAP require disclosure of FMV) - Downward adj. in liability will Increase equity and decrease leverage ratio - Upward adj in liability will decrease
FASB
Income Statement
Disclosure for each segment...
Analysis: Market Value of Debt
49. 1) Outcome reliable: rev recognized by stage of completion 2) Outcome unreliable: revenue recognized but no profit (
Which set of accounting standards requires firms to disclose estimated amortization expense for the next five years on intangible assets?
Ratios that directly affect choice of Inventory Account...
IFRS Revenue Recognition For Service
LIFO results in: (assuming inflationary period)
50. 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
Forecasting Financial Performance: Application
Financial Ration based on B/S: Liquidity Ratios
Discontinued Operations...
Motivation to Under-report Earnings
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