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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.
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. 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
Types of accounting changes: accounting principle
IFRS/US GAAP Frameworks: objective of F/S
Operating vs. Non-operating Income
Footnote Finance Liability Disclosure
2. FIFO: EI = newest purchases - LIFO: EI = oldest purchases - Avg. Costs: EI = Available for sale/Units - Specific ID: high value items (cars - diamonds etc)
Form 144...
An Increase in the Valuation Allowance Account...
IFRS/US GAAP Frameworks: Recognition of Elements...
Inventory Cost Flow Methods...
3. CFO: cash interest expense - CFF: increased by amount rcvd at issuance and decreased by payment made at redemption - CFO is lower CFF is higher
Auditor/Audit Opinion
Extended DuPont Equation...
Cost included in Inventory on b/s...
Impact on the Cash Flow of a Premium Bond...
4. 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
Sarbanes-Oxley Management Report...
Cash Flow From Financing (USA) (Source of Cash)
Inventory mangement: Low T/O (High DOH)...
Effects of Lease Classification on F/S - Finance Lease
5. Inflow - (bringing bond UP to par)
DTA Issues
Implication for Analysts: Be aware of differences in tax reconcilation between periods
Amortization of Bond Discount = (in/out flow) in the indirect method CFO
Common Size Statement
6. Income Tax Expense < Taxes Payable - F/S < Tax Return - Pay more tax now but more on reversal
Deferred Tax Asset: (DTA)
DTA Issues
IFRS/US GAAP Frameworks: purpose of framework
ROE interpretation: if ROE is low...
7. G = (earnings Retention rate) x (ROE) - earnings retention rate = [1-(payout ratio)] - payout ratio = Common dividends/ NI - Pref. Div.
Taxation: Income Tax Expense
Sources of Differences: Temporary
Sustainable Growth
Horizontal Common Size Statements...
8. Income subject to tax as per Tax Return
days of inv. on hand =
Taxable Income
Types of accounting changes...
Taxation: Tax Payable
9. FASB: Asset is a future economic benefit - IASB: Asset is a RESOURCE from which future economic benefit is expected to flow.
IFRS/US GAAP Frameworks: Recognition of Elements...
Sustainable Growth
Implication for Analysts: Be aware of differences in tax reconcilation between periods
IFRS/US GAAP Frameworks: F/S elements...
10. Current Ratio (CA/CL): lower - Work. Cap (CA -CL): Lower - Asset TO: (Sales/TA): Lower - ROA (EAT/TA): Lower - ROE (EAT/E): Lower - Debt/Equity: Higher - Since Int. exp + depre > lease pymt in the early years. This decreases NI - and Profitability ra
Effects of Lease Classification on Ratios - Finance Lease
DTA Issues
Fraud Triangle - 2) Opportunity
Steps of F/S Analysis
11. 1) Outcome reliable: rev recognized by stage of completion 2) Outcome unreliable: revenue recognized but no profit (
Financial Assets: US GAAP/Amortized at Cost
Intercorporate Investment: > 50% votes...
Motivation to Over-report Earnings
IFRS Revenue Recognition For Service
12. [net income - preferred dividends] + [convertible prf.dividends] + [convertible debt int.] (1-t) / (weighted avg. of c/s o/s) + (shares from conversion of conv. pfd. shares) + (shares from conversion of conv. debt) + (shares issuable from stock optio
FIFO after-tax profit =
Diluted EPS
Deferred Tax Asset: (DTA)
Barter (IASB & FASB)
13. +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
Trade-Offs Qualitative Characteristics of IFRS
Taxable Income
Cash Flow From Operations (CFO) - FASB
Market Value (GAAP)...
14. 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
Amortization of Bond Premium = (in/out flow) in the indirect method CFO
Comprehensive income...
IFRS/US GAAP Frameworks: purpose of framework
Finance (capital) Lease criteria (under US GAAP)
15. 365/(AR T/O) = 365/(Rev/Avg. AR)
Extraordinary Items: Unusual AND Infrequent items...
B/S - Stockholders' Equity
Inventory mangement: High T/O (low DOH) and sales growth above industry average
days of sales o/s =
16. 1) Incentive/Pressure (the motive to commit fraud) 2) Opportunity (exists with weak internal controls) 3) Attitude/rationalization (mindset that fraud is justified)
Balance Sheet - formats
IFRS/US GAAP Frameworks: underlying assumptions...
Fraud Triangle
Return on Assets ROA...
17. A: Increase = use cash (-) - Decrease = source cash (+) - L: Increase = source cash (+) - Decrease = use of cash (-) - E: Increase = source cash (+) - Decrease = use of cash (-)
Measurement of A & L disclosure in footnotes
Cash Flow: Logic (A = L + E)
Financial Assets: US GAAP/Amortized at Cost
Debt covenants
18. 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
Deferred Tax Asset: (DTA)
Form DEF-14A...
Discontinued Operations...
Effective Tax Rate
19. FASB: No discussion of 'probables' - IASB: Asset - liabilities - are probable flows
IFRS Revenue Recognition For Service
Financial Ratios based on B/S: Solvency (Coverage)
Calculate dividends declared...
IFRS/US GAAP Frameworks: Recognition of Elements...
20. 'Equity' -Chg in debt - Cash raised from equity and debt - -Chg in c/s - Cash spent on repurchasing equity or redeeming debt -Dividends paid - Calculate dividend declared: NI -*Div.Declared = chg in are/E - Div. Declared +(-) chg in div. payable = c
Capitalization of Interest...
Unusual OR Infrequent items...
Cash Flow From Financing (USA) (Source of Cash)
IFRS/US GAAP Frameworks: Measurement of Elements...
21. 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.
Form DEF-14A...
Return on total capital (ROTC)...
Balance Sheet - formats
days of inv. on hand =
22. 1) Timing Differences: Accrual vs. modified cash accounting - Differences in reporting methods estimates
Sources of Differences: Temporary
Impact on the B/S of a Discount Bond...
Motivation to Overstate Assets/Understate Liabilities
Implication for Analysts: Be aware of differences in tax reconcilation between periods
23. (GAAP) Internally created intangibles 1) (R&D) are expensed 2) Advertising 3) Software (developed to establish feasibility)
Expensed Intangibles...
B/S - investments
Stock options: Use treasury stock method
Cash Flow: Logic (A = L + E)
24. When Statutory tax rate does NOT equal Effective tax rate - Tax expense does note equal pretax income x statutory rate
Roles of financial reporting & analysis include...
Sources of Differences: Permanent
Trade-Offs Qualitative Characteristics of IFRS
Taxable Income
25. Trading securities - Available-for-sale - Derivatives (standalone or embedded in non-derivative intrument) - Assets with fair value exposure hedged by derivatives
Segment Reporting
Financial Assets: US GAAP/Fair Market Value
IFRS Revenue Recognition
Units of Production Method
26. Decreases DTA -> Decreases Net Income - [Decrease in Valuation Allowance; Increase DTA and Increases Net Income]
Fundamental principles for PREPARING f/s under IFRS: (IAS No 10
Types of accounting changes: prior period adjustments
An Increase in the Valuation Allowance Account...
Analysis: Market Value of Debt
27. 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.
IASB - Goals
Taxation: Income Tax Expense
Intercorporate Investment: > 50% votes...
IFRS: Presentation Requirements
28. 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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29. 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
Inventory Systems...
Screening for Potential Equity Investment: Criteria
FIFO is appropriate
Effects of Lease Classification on Ratios - Finance Lease
30. 1) SL; 2) Double Decline balance (accelerated); 3) Units of production; 4) Tax code perscribed Modified Accelerated Cost Recovery System (MACRS)
Calculate dividends declared...
Depreciation Methods...
Component depreciation;
Sarbanes-Oxley Management Report...
31. Amount deductible in future tax return
Traditional DuPont Equation...
What is the economic substance of financial (capital) lease?
Tax base of an asset
Sarbanes-Oxley Management Report...
32. 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.
IFRS: Presentation Requirements
Form 144...
Free Cash Flow to Equity - FCFE
Inventory mangement: High T/O (low DOH) and sales growth below industry average
33. 2 step-process 1) Recoverability: carrying value > undiscounted CF from asset's use and disposal 2) Loss measurement: Loss is the excess of carrying value over the asset's fair market value or PV of cash flows - Loss reversal for held-for-use assets
Activity Based Restrictions
Cash Flow: Logic (A = L + E)
Impairments recognition (GAAP)
Operating Risk Ratios...
34. 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.
Amortization of Bond Discount = (in/out flow) in the indirect method CFO
Valuation allowance
Impairments recognition (GAAP)
Inventory Systems...
35. Profit is recognized only when it exceeds estimated total cost.
Cash Flow From Operations (CFO) - IFRS
Cost recovery method...
Balance Sheet
What is the economic substance of financial (capital) lease?
36. 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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37. 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
Barriers to a single framework...
Intangible Assets
The account format of B/S
Capitalized Intangibles...
38. Profit recognized is the proportion of cash collected x total expected profit Revenue = (COG provided to date/total COG to be provided) x total expected revenue
Taxation Disclosure Requirements
Amortization of Bond Premium = (in/out flow) in the indirect method CFO
Free Cash Flow -CFO
Installment Method...
39. 1) Purpose and context 2) Data Collection 3) Data Processing 4) Analysis/Interpretation of data 5) Develop conclusions and recommendations 6) Follow-up
ROE interpretation: if ROE is low...
Effects of Lease Classification on F/S - Operating Lease
Form 144...
Steps of F/S Analysis
40. Low: P/E - P/CF - or P/S - High: ROE - ROA - growth rates of sales and earnings - Low: leverage
Screening for Potential Equity Investment: Criteria
Cost recovery method...
Capitalized Intangibles...
FIFO is appropriate
41. 1) Evaluating equity investments for a portfolio; 2) Evaluating potential M&A; 3) Evaluating a subsidiary of a parent company; 4) Deciding on private equity/ venture cap investment 5) Determine creditworthiness - borrowing; 6) Extending credit to
Antidilutive Securities
Lessor Accounting Capital Lease: Sales: Direct Financing Lease
Operating Risk Ratios...
Roles of financial reporting & analysis include...
42. 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
B/S - short-term investments
Steps of F/S Analysis
SEC guidance for Revenue Recognition
Activity Ratios
43. 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.]
Free Cash Flow to the Firm - FCFF
Sources of Differences: Permanent
FASB
One major difference between the presentation of deferred tax assets and liabilities under IFRS and under U.S. GAAP is that...
44. 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
Segment Reporting
Analysis: Market Value of Debt
Asset Capitalization
B/S - short-term investments
45. Unlisted instruments - Held-to-maturity investments - Loans - Receivables
Net Realizable Value (NRV) (IFRS)
Creative Cash Flows Accounting: Motivation
Financial Assets: US GAAP/Amortized at Cost
Impairments recognition (IFRS)
46. Slow moving or obsolete inventory
Stock options: Use treasury stock method
Inventory mangement: Low T/O (High DOH)...
Reasons to Lease...
Types of accounting changes: accounting principle
47. 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.
IFRS/US GAAP Frameworks: purpose of framework
Not all CF increase are Sustainable. Example of how Mgmt can Manipulate Cash Flow Statement
Financial Adj to Facilitate Comparison...
IFRS/US GAAP Frameworks: objective of F/S
48. 1) Change in accounting principle; 2) Change in accounting estimate; 3) Prior period adjustments
From creditor POV: Int. Coverage;
Sustainable Growth
Types of accounting changes...
Analyst Treaments of DTL
49. 1) understandability; 2) relevance; 3) reliability; and 4)comparability - No hierarchy
Valuation allowance
Ratios that directly affect choice of Inventory Account...
Measures of Operating Performance - Efficiency Ratios...
The 4 Qualitative Characteristics of IFRS
50. GAAP: more quantitative rules - IFRS: more qualitative approach based on whether the risks and reward of the asset have tranferred.
Component depreciation;
Finance (capital) Lease criteria GAAP vs. IFRS
IFRS Revenue Recognition
Valuation Allowance...