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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. Depreciation exp = (cost - accum depre)/useful life x 2 - Does NOT use residual value but depreciation stops when residual value has been reached - reduce EBIT - NI - Assets - Equity and decrease ROA & ROE
Defined Benefit Obligations (DBO)
Implication for Analysts: Be aware of differences in tax reconcilation between periods
Double-decline balance (DDB)
Credit Rating Process...
2. 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
4 General Categories for Creditworthiness/Capacity...
Creative Cash Flows Accounting: Motivation
IFRS/US GAAP Frameworks: underlying assumptions...
Impact on the Cash Flow of a Discount Bond...
3. [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
Intercorporate Investment: 20% - 50% votes...
Potentially Dillutive Securities
Cash Flow From Operations (CFO) - FASB
Diluted EPS
4. EU & US 1) Int'l Org. of Securities Commission; 2) Goal: uniform regulation; 3) Core objectives: Protecting investor - Fair - transparent - efficient markets - Reduction of systematic risk
What is the economic substance of financial (capital) lease?
CFO Analysis...
Asset Revaluation: IFRS
IOSCO
5. Nonreversal DTL - therefore it is permanent = Equity. therefore decrease in DTL = Increase in Equity - Reversal DTL - therefore it is temp = Liability
IFRS/US GAAP Frameworks: objective of F/S
Income Statement
Taxation Analyst Adjustments...
Revaluation below historic cost...
6. NI/Avg. Total Assets - NI + Int (1-t) / Avg. Total Assets - Operating ROA: Operating INc/ Avg. Total Assets
Barriers to a single framework...
Return on Assets ROA...
Depreciation Methods...
Trade-Offs Qualitative Characteristics of IFRS
7. When Statutory tax rate does NOT equal Effective tax rate - Tax expense does note equal pretax income x statutory rate
Sources of Differences: Permanent
Fraud Triangle - 2) Opportunity
Forecasting Financial Performance: Top Down Approach...
Intercorporate Investment: < 20% votes...
8. Assess liquidity - solvency and financial flexibiliy
Statement of Cash Flow - relevance...
Segment Reporting
Traditional DuPont Equation...
Intercorporate Investment: > 50% votes...
9. 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 =
Cash Conversion Cycle =
Dilutive Securities
Potentially Dillutive Securities
Financial Adj to Facilitate Comparison...
10. Derivatives - Non-derivative investments with fair value exposure hedged by derivatives
Defined Contribution Plans
Financial Liability: US GAAP/Fair Market Value
Lessor Accounting Capital Lease: Sales: Direct Financing Lease
Activity Based Restrictions
11. Ineffective corp. ethical values; non-financial managers invovled in selection of accounting principles/estimates; History of violation; Focus on stock price and earning trends; Commitment to unrealistic/aggressive forecasts; Failure to correct known
Fraud Triangle - 3) Attitude/rationalization
Effects of Lease Classification on F/S - Operating Lease
Financial Ratios based on B/S: Solvency (Coverage)
Complex Capital Structure
12. 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
Impairments recognition (IFRS)
Inv. Valuation reporting Inventory ABOVE costs...
Return on Assets ROA...
Revaluation below historic cost...
13. Timing differences (depreciations) - Permanent differences
Sources of Differences betweent F/S & T/
Auditor/Audit Opinion
Impact on the Cash Flow of a Discount Bond...
Amortization of Bond Discount = (in/out flow) in the indirect method CFO
14. 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.
Types of accounting changes...
IASB - Goals
Gross Reporting of Revenue
MD&A contains...
15. Inflow - (bringing bond UP to par)
Defined Benefit Obligations (DBO)
MD&A contains...
Cost recovery method...
Amortization of Bond Discount = (in/out flow) in the indirect method CFO
16. 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
Extended DuPont Equation...
Inventory Valuatoin (LCM)
Common Size Statement
From creditor POV: Int. Coverage;
17. PV of future obligation or the PV of the amount owed to employees for future pension benefits earned to date - Payments are determined based on expected final salary.
Intercorporate Investment: < 20% votes...
Defined Benefit Obligations (DBO)
Dilutive Securities
The report format of B/S
18. Companies should not recognize revenue from barter transactions. The additional revenue is likely to improperly boost profits. While an unusually high sales-growth rate may indicate fraud - it could also indicate good management. It's a yellow flag -
Taxation Analyst Adjustments...
Financial Implications of Capitalizing...
Income Statement
The best indicator of overstating its profits is...
19. 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)
Intangible Assets
Credit Analysis: Ratios
Tax Loss Carryforward...
Finance (capital) Lease criteria (under US GAAP)
20. Adjustments Involves erros or new accounting standards - Resate prior period - Disclose nature and effect on NI - Errors may indicate weakness in internal controls
Creative Cash Flows Accounting: Technique
Capitalized Intangibles...
Extended DuPont Equation...
Types of accounting changes: prior period adjustments
21. = LIFO ending inventory + LIFO reserve FIFO after-tax profit
Cash flow ratios
FIFO ending inventory =
Financial Ratios based on B/S: Solvency (Coverage)
IFRS: Presentation Requirements
22. It is the purchase of an asset using debt finance.
Defined Benefit Obligations (DBO)
Impact on the B/S of a Premium Bond...
Intangibles under IFRS...
What is the economic substance of financial (capital) lease?
23. 1) Relevance vs. reliability; 2) Benefit > cost; 3) Excludes intangibles and non-quantifiable info.
DTA Issues
Trade-Offs Qualitative Characteristics of IFRS
Cash Flow From Operations (CFO) - IFRS
Impact on the B/S of a Premium Bond...
24. 1) SL; 2) Double Decline balance (accelerated); 3) Units of production; 4) Tax code perscribed Modified Accelerated Cost Recovery System (MACRS)
Intercorporate Investment: 20% - 50% votes...
Cash Flow From Operations (CFO) - FASB
Depreciation Methods...
The account format of B/S
25. 1) Intention to hold >1 year (e.g. debt or equity) valued @ cost or mkt value 2) Equity accounted investments
FIFO is appropriate
B/S - investments
Defined Benefit Obligations (DBO)
B/S - Long-lived assets PP&E
26. 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.
Intangible Assets
Inv. Valuation reporting Inventory ABOVE costs...
Form 8-K...
Financial Lease Reporting
27. Depreciation exp = (cost-residual value)/ useful life
Sustainable Growth
IFRS/US GAAP Frameworks: Recognition of Elements...
Ratios that directly affect choice of Inventory Account...
Straight-line depreciation (SL)
28. 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)
Inventory Valuatoin (LCM)
Add/ Sub changes to related b/s operating accounts
Barter (IASB & FASB)
Horizontal Common Size Statements...
29. 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.
Gain/(loss) on bond early retirement: (derecognition of debt)
B/S - short-term investments
IFRS: Presentation Requirements
MD&A contains...
30. All other liabilities (e.g. bonds - notes payables - leases)
Return on Assets ROA...
Financial Liability: US GAAP/Amortized at Cost
Extraordinary Items: Unusual AND Infrequent items...
Intangibles under IFRS...
31. Held for continuing use within the business (not for resale) 1) investment property; 2) Assets held for sale; 3) Natural resources; 4) PP&E
B/S - Stockholders' Equity
IFRS/US GAAP Frameworks: Recognition of Elements...
Inventory mangement: High T/O (low DOH) and sales growth below industry average
B/S - Long-lived assets
32. 1) if 50% of its revenue is earned externally 2) if a business area has at least 10% of a firm's: Revenue; or Operating profit; or Use of asset 3) Business and geographical segments
Segment Reporting
Funded status of the pension plan (under US GAAP & IFRS) is reported where?
Taxation: Income Tax Expense
Add/ Sub changes to related b/s operating accounts
33. 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
Gain/(loss) on bond early retirement: (derecognition of debt)
Effects of Lease Classification on F/S - Operating Lease
Reasons to Lease...
Roles of financial reporting & analysis include...
34. 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
Inventory Cost Flow Methods...
Diluted EPS
Units of Production Method
35. 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 =
Intangibles under IFRS...
Credit Analysis: Ratios
Gain/(loss) on bond early retirement: (derecognition of debt)
Forecasting Financial Performance: Application
36. Interest expense = Coupon rate
Financial Assets: US GAAP/Amortized at Cost
Types of accounting changes...
Impact on the B/S of a Par Bond...
Auditor/Audit Opinion
37. 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
Sources of Differences: Permanent
Implication for Analysts: Be aware of differences in tax reconcilation between periods
Ending Inventory =
SEC guidance for Revenue Recognition
38. Means that at least ONE of the following is true: Company has poor profit margin; Company has poor asset TO; Company is underleveraged
The objective of f/s is to...
ROE interpretation: if ROE is low...
Cash Flow: Logic (A = L + E)
Measures of Operating Performance - Efficiency Ratios...
39. Decreases DTA -> Decreases Net Income - [Decrease in Valuation Allowance; Increase DTA and Increases Net Income]
An Increase in the Valuation Allowance Account...
B/S - investments
Income Statement
Convergence IFRS/US GAAP...
40. 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
Free Cash Flow to Equity - FCFE
Operating Risk Ratios...
Intangibles under IFRS...
Types of accounting changes: accounting principle
41. For inventory that does not deteriorate with age.
Gain/(loss) on bond early retirement: (derecognition of debt)
LIFO is appropriate
SEC guidance for Revenue Recognition
Cash Conversion Cycle =
42. (GAAP) Internally created intangibles 1) (R&D) are expensed 2) Advertising 3) Software (developed to establish feasibility)
Lessor Accounting Capital Lease: Sales-Type Lease
IFRS/US GAAP Frameworks: F/S elements...
Expensed Intangibles...
CFO - Direct method
43. Cash Flow available for distribution to the c/s; after all obligations have been paid. CFO - fixed capital investment + net debt increase or CFO - net cap expenditure + net borrowings
Straight-line depreciation (SL)
Depreciation Methods...
# of days payable =
Free Cash Flow to Equity - FCFE
44. Income Tax Expense < Taxes Payable - F/S < Tax Return - Pay more tax now but more on reversal
Cash flow ratios
Balance Sheet
Deferred Tax Asset: (DTA)
Financial Assets: US GAAP/Fair Market Value
45. 1) Transparency; 2) Comprehensiveness; 3) Consistency
FIFO is appropriate
Characteristics of an effective framework
B/S - Long-term Liabilities
Deferred Tax Liability: (DTL)
46. Tax liability based on taxable income as per TAX Report/RETURN
Vertical Common Size Statements...
Creative Cash Flows Accounting: Motivation
CFI Analysis...
Taxation: Tax Payable
47. 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.
Balance Sheet
Form 144...
Intercorporate Investment: < 20% votes...
Trade-Offs Qualitative Characteristics of IFRS
48. 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.
Barriers to a single framework...
Types of accounting changes: accounting principle
BASIC EPS
Credit Analysis: Ratios
49. 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
CFO Disclosure requirement...
Impairments recognition (GAAP)
One major difference between the presentation of deferred tax assets and liabilities under IFRS and under U.S. GAAP is that...
DTA/DTL: Effect on Net Income when Tax Rate decreases...
50. Capital structure that contains NO potentially dillutive securities - (contains only c/s - nonconvertible debt - and nonconvertible pref. stock)
Impact on the Cash Flow of a Zero Coupon Bond...
CFI Analysis...
B/S - Long-term Liabilities
Simple capital structure