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Test your basic knowledge |
Advanced Financial Reporting And Analysis
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Study First
Subject
:
business-skills
Instructions:
Answer 50 questions in 15 minutes.
If you are not ready to take this test, you can
study here
.
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. Higher share price - Lower borrowing cost - Higher incentive compensation
DTA Issues
Net Reporting of Revenue
Creative Cash Flows Accounting: Motivation
Defined Contribution Plans
2. Decreases DTA -> Decreases Net Income - [Decrease in Valuation Allowance; Increase DTA and Increases Net Income]
Financial Assets: US GAAP/Fair Market Value
An Increase in the Valuation Allowance Account...
Diluted EPS
Not all CF increase are Sustainable. Example of how Mgmt can Manipulate Cash Flow Statement
3. 1) Lack physical form (patent - copyrights etc; 2) Good will is an ex. of an unidentifiable intangible asset - not amortized but subject to annual impairment reviews; 3) Identifiable intangibles are amortized.(eliminate goodwill from ratio analysis)
The report format of B/S
Intangible Assets
FIFO after-tax profit =
Lessor Accounting Capital Lease: Sales-Type Lease
4. 1) Change in accounting principle; 2) Change in accounting estimate; 3) Prior period adjustments
DBO Funded Status =
B/S - investments
Types of accounting changes...
B/S - short-term investments
5. Refers to changes from one GAAP method or IFRS method to another IFRS & US GAAP require prior year data shown in f/s to be adjusted.
Ratios that directly affect choice of Inventory Account...
Income Tax Paid...
Types of accounting changes: accounting principle
CFO - Direct method
6. 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
Effective Tax Rate
Discontinued Operations...
FIFO results in: (assuming inflationary period)
CFO Analysis...
7. 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)
Straight-line depreciation (SL)
Fraud Triangle - 1) Incentive/Pressure
Add/ Sub changes to related b/s operating accounts
Impairments recognition (IFRS)
8. 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
Component depreciation;
Financial Implications of Capitalizing...
Defined Benefit Plans
Return on Equity (ROE)...
9. 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
Taxation Disclosure Requirements
The 4 Qualitative Characteristics of IFRS
Extraordinary Items: Unusual AND Infrequent items...
Types of accounting changes: accounting principle
10. Refers to change in mgmt judgement Does NOT require restatement of prior pd earnings; Disclose in footnotes
Types of accounting changes: accounting estimate
Convergence IFRS/US GAAP...
Inventory mangement: High T/O (low DOH) and sales growth above industry average
Analyzing Effective Tax Rate Reconciliation
11. 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
Comprehensive income...
DTA Issues
IFRS/US GAAP Frameworks: F/S elements...
Valuation Allowance...
12. 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
Barter (IASB & FASB)
Operating vs. Non-operating Income
Lessor Accounting Capital Lease: Sales-Type Lease
Effects of Lease Classification on F/S - Finance Lease
13. Tax Rate down: DTL down -> Inc. Tax Exp down -> NI up - DTA down -> Inc. Tax Exp up -> NI down
Screening for Potential Equity Investment: Criteria
DTA/DTL: Effect on Net Income when Tax Rate decreases...
Effects of Lease Classification on F/S - Operating Lease
The objective of f/s is to...
14. For inventory that does not deteriorate with age.
LIFO is appropriate
Financial Ratios based on B/S: Solvency ratio
FIFO is appropriate
Inventory Systems...
15. Ensure that information in f/s is useful to a wide range of users.
The objective of f/s is to...
Cost recovery method...
Implication for Analysts: Be aware of differences in tax reconcilation between periods
Disclosure for each segment...
16. Research = Expensed Development may be capitalized when the following critera is met: (ie if in the Development stage and NOT research stage) 1) process is clearly identified 2) Cost can be clearly idenfified 3) Technical feasibility established 4) M
Footnote Finance Liability Disclosure
DTA/DTL: Effect on Net Income when Tax Rate decreases...
Intangibles under IFRS...
Sarbanes-Oxley Management Report...
17. 1) Capitalize interst during construction period when building its own operating facility; 2) Interest must actually be paid by the firm; 3) Specific and general debt interest is capitalized
Capitalization of Interest...
The objective of f/s is to...
Form DEF-14A...
Sales Basis Revenue Recognitions
18. 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)
Traditional DuPont Equation...
# of days payable =
Balance Sheet - formats
B/S - Long-term Liabilities
19. Replacement cost subject to: Upper limit = NRV - Loewr limit = NRV - normal profit margin
Market Value (GAAP)...
Impairments recognition (IFRS)
Extended DuPont Equation...
FIFO results in: (assuming inflationary period)
20. Interest Expense = Coupon - Amortization = PV of future CF x market yield @ issuance
B/S - Long-term Liabilities
Impact on the B/S of a Premium Bond...
Impact on the B/S of a Par Bond...
Common Size Statement
21. Assets - liabilities - and equity are presented in a single column.
Analysis: Market Value of Debt
Not all CF increase are Sustainable. Example of how Mgmt can Manipulate Cash Flow Statement
The report format of B/S
Form 144...
22. Cash Flow available for distribution to all investors (stockholders & debt holders) CFO + int(1-t) - fixed capital investment or [FCFF calculated from NI = NI + noncash charged + (Int exp(1-tax rate) - net cap investment - working capital invt.]
% of Completion
Operating vs. Non-operating Income
Auditor/Audit Opinion
Free Cash Flow to the Firm - FCFF
23. 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.
% of Completion
Add/ Sub changes to related b/s operating accounts
Intercorporate Investment: > 50% votes...
B/S - investments
24. Share are to ensure significant influence over the company - Affiliate/Associate - Equity Method
Double-decline balance (DDB)
Intercorporate Investment: 20% - 50% votes...
ROE interpretation: if ROE is low...
Tax base on a liability
25. Same as other ratios using NI in this case substitut NI for CFO.
Lessor Accounting Capital Lease: Sales: Direct Financing Lease
Tax base on a liability
Straight-line depreciation (SL)
Cash flow ratios
26. If PV of min lease pymt < cost of asset 1) lessor is a dealer or seller of the leased equipment 2) at the time of lease inception - lessor recognized a gross profit on sale. (NI - are/E - and Assests are higher) 3) Interest rev recognized over period
Fraud Triangle - 2) Opportunity
Taxation Analyst Adjustments...
Lessor Accounting Capital Lease: Sales-Type Lease
Sales Basis Revenue Recognitions
27. 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
Trade-Offs Qualitative Characteristics of IFRS
Implication for Analysts: Be aware of differences in tax reconcilation between periods
DTA/DTL: Effect on Net Income when Tax Rate decreases...
Income Statement
28. When Statutory tax rate does NOT equal Effective tax rate - Tax expense does note equal pretax income x statutory rate
Gain/(loss) on bond early retirement: (derecognition of debt)
Impairments recognition (IFRS)
Sources of Differences: Permanent
Market Value (GAAP)...
29. +Cash rcvd from customer - +Cash dividends rcvd - +Cash interest rcvd - +Other cash income ((trading securities) - Payment to suppliers - Cash expenses (wages etc) - Cash interest paid - Cash taxes paid
Sources of Differences: Temporary
Reasons to Lease...
Cash Flow From Operations (CFO) - FASB
The 4 Qualitative Characteristics of FASB...
30. Depreciation exp = (cost-residual value)/ useful life
CFO Disclosure requirement...
Dilutive Securities
Straight-line depreciation (SL)
Horizontal Common Size Statements...
31. 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
Segment Reporting
Cash Flow From Operations (CFO) - FASB
DBO Funded Status =
Financial Ration based on B/S: Liquidity Ratios
32. Inflow - (bringing bond UP to par)
Intangibles under IFRS...
Defined Contribution Plans
Valuation Allowance...
Amortization of Bond Discount = (in/out flow) in the indirect method CFO
33. Primary) Relevance & Reliability - Secondary) Comparability - Lastly) Understandability - user specific
Cash Flow From Operations (CFO) - FASB
Double-decline balance (DDB)
The 4 Qualitative Characteristics of FASB...
Tax base on a liability
34. Low: P/E - P/CF - or P/S - High: ROE - ROA - growth rates of sales and earnings - Low: leverage
Free Cash Flow to Equity - FCFE
Return on total capital (ROTC)...
Creative Cash Flows Accounting: Technique
Screening for Potential Equity Investment: Criteria
35. Adjustments Involves erros or new accounting standards - Resate prior period - Disclose nature and effect on NI - Errors may indicate weakness in internal controls
Types of accounting changes: prior period adjustments
Finance (capital) Lease criteria (under US GAAP)
Extraordinary Items: Unusual AND Infrequent items...
4 General Categories for Creditworthiness/Capacity...
36. Shows the performance of the company over a reporting period.
Net Periodic Benefit Costs
Income Statement
Impact on the B/S of a Discount Bond...
Operating Risk Ratios...
37. Unlisted instruments - Held-to-maturity investments - Loans - Receivables
Financial Assets: US GAAP/Amortized at Cost
Cost included in Inventory on b/s...
FASB
Calculate dividends declared...
38. Financial Services Companies: Operating activities: Interest - Dividends - G/(L) on disposal Non-Financial Services Companies: Non-operating activities: Interest - Dividends - G/(L) on disposal
Which set of accounting standards requires firms to disclose estimated amortization expense for the next five years on intangible assets?
Operating vs. Non-operating Income
IFRS: Required F/S
Gain/(loss) on bond early retirement: (derecognition of debt)
39. 1) Unqualified opinion (good); 2) Qualified opinion (followed GAAP except for...); 3) Adverse opinion (bad)
Form 8-K...
Component depreciation;
Auditor/Audit Opinion
DTA Issues
40. 1st: Net Income - dividends declared = chg in are/E - Then: Dividends declared +/- chg dividends payable = cash dividends paid.
Revaluation below historic cost...
Calculate dividends declared...
Cash Conversion Cycle =
Financial Ratios based on B/S: Solvency (Coverage)
41. 1)DTL - DTA - valuation allowance - Net ? in valutaion allowance over the period 2) unrecognized DTL or undistributed earning from subsidiaries & JVs 3) Current yr tax effect of each type of temp difference 4)Components of Inc Tax Expense 5)Tax loss
Fraud Triangle
B/S - Long-lived assets PP&E
Taxation Disclosure Requirements
Low Quality Earnings is result of...
42. I/S: COGS lower - EBT higher - Taxes: higher - NI: higher - B/S: INV: higher - W/C: higher - are/E: higher - CF: CFO: lower
Inventory mangement: High T/O (low DOH) and sales growth below industry average
FIFO results in: (assuming inflationary period)
Capitalized Intangibles...
Analysis: Market Value of Debt
43. 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.
Which set of accounting standards requires firms to disclose estimated amortization expense for the next five years on intangible assets?
Tax Loss Carryforward...
Impact on the Cash Flow of a Discount Bond...
Fraud Triangle - 1) Incentive/Pressure
44. Shows the financial position of a firm AT A SINGLE POINT in time A = L + E.
Cost included in Inventory on b/s...
Balance Sheet
Bond Issuance Cost under GAAP/IFRS
Traditional DuPont Equation...
45. 1) understandability; 2) relevance; 3) reliability; and 4)comparability - No hierarchy
The 4 Qualitative Characteristics of IFRS
Component depreciation;
Effects of Lease Classification on F/S - Operating Lease
4 General Categories for Creditworthiness/Capacity...
46. CFO = NI - means high quality of earnings but may be affect by the stage of business cycle and firm's life cycle - CFO > NI - means premature recognition of revenue or delayed recognition of expenses.
Inventory mangement: High T/O (low DOH) and sales growth above industry average
Financial Assets: US GAAP/Amortized at Cost
CFO Analysis...
Inventory mangement: Low T/O (High DOH)...
47. Employer contributes specific % - No guarantee on future benefits - Employee bears investment risk - Pension expense = employer contribution
Double-decline balance (DDB)
Trade-Offs Qualitative Characteristics of IFRS
Defined Contribution Plans
B/S - Long-lived assets
48. 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.
FIFO is appropriate
IFRS: Presentation Requirements
Which of the following characteristics should be of least concerned about management's opportunities to commit fraud?
Inventory Cost Flow Methods...
49. 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...
Common Size Statement
Bond Issuance Cost under GAAP/IFRS
50. 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
B/S - Long-lived assets
Financial Ratios based on B/S: Solvency ratio