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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. Depreciation exp = (cost - residual value) x (# units produced / total expected to produce)
B/S - Long-term Liabilities
Cost recovery method...
Units of Production Method
Forecasting Financial Performance: Application
2. 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
MD&A contains...
Cash Flow: Logic (A = L + E)
Which set of accounting standards requires firms to disclose estimated amortization expense for the next five years on intangible assets?
Installment Method...
3. 1) Land @ cost; 2) Plant & building @ historic cost less accu'm depr; 3) Equipment @ historic cost less accu'm depr 4) Intangible assets @ historic cost less accu'm amort
Characteristics of an effective framework
Funded status of the pension plan (under US GAAP & IFRS) is reported where?
Income Tax Paid...
B/S - Long-lived assets PP&E
4. Stock options - Warrants - Convertible debt - Convertible preferred stock
Potentially Dillutive Securities
Fraud Triangle - 1) Incentive/Pressure
BASIC EPS
Inventory mangement: High T/O (low DOH) and sales growth below industry average
5. Decreases DTA -> Decreases Net Income - [Decrease in Valuation Allowance; Increase DTA and Increases Net Income]
An Increase in the Valuation Allowance Account...
Motivation to Over-report Earnings
Taxation: Tax Payable
Double-decline balance (DDB)
6. Trade relief - Contingent consideration - Union concessions
Lessor Accounting Capital Lease: Sales-Type Lease
The 4 Qualitative Characteristics of FASB...
Motivation to Under-report Earnings
Dilutive Securities
7. Return on Total Equity = NI/ Avg. Total Equity - Return on C/E = NI - Pref. Div/ Avg. Common Equity
Net Reporting of Revenue
Credit Analysis: Ratios
Balance Sheet - formats
Return on Equity (ROE)...
8. Net income + non-cash charges - working cap investment
Funded Status US GAAP & IFRS
DTA/DTL: Effect on Net Income when Tax Rate decreases...
Free Cash Flow -CFO
Fraud Triangle - 1) Incentive/Pressure
9. 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
Low Quality Earnings is result of...
Analyst Treaments of DTL
DTA Issues
Effects of Lease Classification on Ratios - Operating Lease
10. 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
Taxation Analyst Adjustments...
Effects of Lease Classification on F/S - Operating Lease
Free Cash Flow to the Firm - FCFF
Finance (capital) Lease criteria (under US GAAP)
11. 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
Free Cash Flow -CFO
Double-decline balance (DDB)
Form 144...
Impairments recognition (GAAP)
12. 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
CFO Analysis...
Warning Signs of Earnings Manipulation
Revaluation below historic cost...
Financial Implications of Capitalizing...
13. Assets - liabilities - and equity are presented in a single column.
Diluted EPS
Gain/(loss) on bond early retirement: (derecognition of debt)
Intangibles under IFRS...
The report format of B/S
14. I/S: COGS higher - EBT lower - Taxes: lower - NI: Lower - B/S: INV: lower - W/C: Lower - are/E: lower - CF: CFO: higher
Motivation to Overstate Assets/Understate Liabilities
Extraordinary Items: Unusual AND Infrequent items...
LIFO results in: (assuming inflationary period)
Fundamental principles for PREPARING f/s under IFRS: (IAS No 10
15. 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 mangement: High T/O (low DOH) and sales growth below industry average
Financial Ratios based on B/S: Solvency ratio
Capitalization of Interest...
FIFO is appropriate
16. 1) SL; 2) Double Decline balance (accelerated); 3) Units of production; 4) Tax code perscribed Modified Accelerated Cost Recovery System (MACRS)
Depreciation Methods...
Creative Cash Flows Accounting: Motivation
Trade-Offs Qualitative Characteristics of IFRS
Taxation: Tax Payable
17. Inventory TO = COGS / Avg. Inventory - LIFO = Higher - FIFO = Lower - DOH = 365/(Inv. T/O) = 365/( COGS/ Avg. Inv.) - LIFO = lower days - FIFO = higher days - Gross Profit margin = Gross profit/ revenues - LIFO = lower - FIFO = higher
Taxation Analyst Adjustments...
Ratios that directly affect choice of Inventory Account...
Cash Flow From Investing (USA) (Assets)
Complex Capital Structure
18. Impairment is recorded on a Contra asset account - revalued below original cost means contra asset account is 0 1) B/S asset reduced to FMV 2) Loss take to I/S 3) Reversal of org. loss allowed I/S 4) Increase above org. cost to equity (comprehenive
Low Quality Earnings is result of...
Effects of Lease Classification on Ratios - Operating Lease
Return on Equity (ROE)...
Revaluation below historic cost...
19. Higher share price - Lower borrowing cost - Higher incentive compensation
Tax Loss Carryforward...
Creative Cash Flows Accounting: Motivation
One major difference between the presentation of deferred tax assets and liabilities under IFRS and under U.S. GAAP is that...
SEC guidance for Revenue Recognition
20. Diff. in depreciation methods/assumptions; Diff. in inventory methods/assumptions; Diff. in treatment of the effect of exchg rate chgs; Diff. in classifications of investment securities - Goodwill: Internally Generated DON'T capitalize - Purchased =
Funded Status US GAAP & IFRS
Complex Capital Structure
Financial Adj to Facilitate Comparison...
Fundamental principles for PREPARING f/s under IFRS: (IAS No 10
21. (net income - preferred dividends)/weighted average of common shares outstanding - only income from continuing operations is considered
BASIC EPS
Measures of Operating Performance - Efficiency Ratios...
LIFO is appropriate
Extraordinary Items: Unusual AND Infrequent items...
22. Shows the financial position of a firm AT A SINGLE POINT in time A = L + E.
Activity Ratios
Bond Issuance Cost under GAAP/IFRS
Funded Status US GAAP & IFRS
Balance Sheet
23. 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)
Extended DuPont Equation...
Fraud Triangle - 1) Incentive/Pressure
Lessor Accounting Capital Lease: Sales-Type Lease
Cash flow ratios
24. 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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25. Securities that would INCREASE EPS if exercised
Impact on the B/S of a Discount Bond...
Cash Flow From Financing (USA) (Source of Cash)
CFO - Indirect method steps...
Antidilutive Securities
26. 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
Free Cash Flow to the Firm - FCFF
Impairments recognition (IFRS)
Free Cash Flow -CFO
27. 365/(AP T/O) = 365/(purchases/ Avg. AP)
# of days payable =
Cost included in Inventory on b/s...
CFI Analysis...
Inventory mangement: High T/O (low DOH) and sales growth below industry average
28. 1) Calculate cash raised on exercise 2) Repurchase shares at avg. price 3) New Shares = exercised - repurchased
Financial Assets: US GAAP/Fair Market Value
Analyst Treaments of DTL
Impact on the Cash Flow of a Zero Coupon Bond...
Stock options: Use treasury stock method
29. Any I/S subtotal is expressed a margin ratio (to revenues) - Gross profit margin = gross profit/ revenue - Net profit margin = Net Inc/revenue - Operating profit margin = EBIT/ revenue - Pre-tax margin = EBT/ revenue
Income Tax Paid...
Taxation: Tax Payable
Financial Ratio based on I/S...
Under Completed Contract Method...
30. 1) Show each item as a % of Net Revenue 2) Show each inflow as a % of total inflows 3) Show each outflow as a % of total outflow
Common Size Statement
B/S - Long-lived assets
Horizontal Common Size Statements...
BASIC EPS
31. 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)
Sarbanes-Oxley Management Report...
IFRS/US GAAP Frameworks: objective of F/S
B/S - Long-lived assets PP&E
Forecasting Financial Performance: Top Down Approach...
32. Same as other ratios using NI in this case substitut NI for CFO.
Cash flow ratios
Impact on the B/S of a Discount Bond...
Amortization of Bond Premium = (in/out flow) in the indirect method CFO
CFI Analysis...
33. For inventory that does not deteriorate with age.
Creative Cash Flows Accounting: Technique
Extraordinary Items: Unusual AND Infrequent items...
LIFO is appropriate
The 4 Qualitative Characteristics of FASB...
34. 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)
Cash Flow: Logic (A = L + E)
Balance Sheet - formats
What is the economic substance of financial (capital) lease?
Activity Ratios
35. 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
Sales Basis Revenue Recognitions
Calculate dividends declared...
Impairments recognition (IFRS)
Deferred Tax Asset: (DTA)
36. 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
To investigate the stability of that structure - Kilgore would be best served by looking at...
SEC guidance for Revenue Recognition
Cost recovery method...
Capitalization of Interest...
37. Replacement cost subject to: Upper limit = NRV - Loewr limit = NRV - normal profit margin
Market Value (GAAP)...
Impairments recognition (GAAP)
ROE interpretation: if ROE is low...
Cost recovery method...
38. 1) Risk & Reward transferred; 2) No continued control; 3) Reliable measurement; 4) Probable flow of benefits; 5) Cost verifiable
Financial Ratios based on B/S: Solvency ratio
Vertical Common Size Statements...
IFRS Revenue Recognition
Gain/(loss) on bond early retirement: (derecognition of debt)
39. G = (earnings Retention rate) x (ROE) - earnings retention rate = [1-(payout ratio)] - payout ratio = Common dividends/ NI - Pref. Div.
Sustainable Growth
FIFO is appropriate
The report format of B/S
Fraud Triangle
40. CFO: cash interest expense - CFF: increased by amount rcvd at issuance and decreased by payment made at redemption
Sources of Differences: Temporary
Taxation Analyst Adjustments...
Inventory Valuatoin (LCM)
Impact on the Cash Flow of a Par Bond...
41. Inflow - (bringing bond UP to par)
Impact on the B/S of a Premium Bond...
Intercorporate Investment: > 50% votes...
Discontinued Operations...
Amortization of Bond Discount = (in/out flow) in the indirect method CFO
42. FASB: No discussion of 'probables' - IASB: Asset - liabilities - are probable flows
Bond Issuance Cost under GAAP/IFRS
Add/ Sub changes to related b/s operating accounts
Sources of Differences: Permanent
IFRS/US GAAP Frameworks: Recognition of Elements...
43. 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
Cost recovery method...
Segment Reporting
Warning Signs of Earnings Manipulation
Disclosure for each segment...
44. BV - cash paid = gain/(loss) + any unamortized issue costs (US only) = Gain/Loss on repurchase [I/S as continuing operations)
Reasons to Lease...
Credit Rating Process...
LIFO results in: (assuming inflationary period)
Gain/(loss) on bond early retirement: (derecognition of debt)
45. Income Tax Expense < Taxes Payable - F/S < Tax Return - Pay more tax now but more on reversal
Under Completed Contract Method...
CFO - Indirect method steps...
Not all CF increase are Sustainable. Example of how Mgmt can Manipulate Cash Flow Statement
Deferred Tax Asset: (DTA)
46. 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.
Sarbanes-Oxley Management Report...
To investigate the stability of that structure - Kilgore would be best served by looking at...
Fraud Triangle - 2) Opportunity
Types of accounting changes: accounting estimate
47. Companies must file this form to disclose material events including significant asset acquisitions and disposals - changes in management or corporate governance - or matters related to its accountants - financial statements - or the markets on which
Cash Flow From Operations (CFO) - FASB
Impact on the B/S of a Zero Coupon Bond...
Form 8-K...
Market Value (GAAP)...
48. 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
ROE interpretation: if ROE is low...
Valuation Allowance...
Defined Benefit Plans
IOSCO
49. 1) Relevance vs. reliability; 2) Benefit > cost; 3) Excludes intangibles and non-quantifiable info.
MD&A contains...
Impact on the Cash Flow of a Discount Bond...
Form 8-K...
Trade-Offs Qualitative Characteristics of IFRS
50. Divdends and share repurchases - Production and investment - M&A - New debt issuance - Payoff pattern and liquidation priority - Maintenance of assets used as collateral
Discontinued Operations...
Activity Based Restrictions
Cost recovery method...
Impact on the B/S of a Zero Coupon Bond...
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