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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. 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
Impact on the B/S of a Zero Coupon Bond...
Fraud Triangle - 3) Attitude/rationalization
Financial Ratios based on B/S: Solvency (Coverage)
Fraud Triangle - 1) Incentive/Pressure
2. Return on Total Equity = NI/ Avg. Total Equity - Return on C/E = NI - Pref. Div/ Avg. Common Equity
Segment Reporting
Return on Equity (ROE)...
Activity Ratios
Form 144...
3. 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.
CFO - Direct/Indirect method
Inventory Valuatoin (LCM)
Form DEF-14A...
Component depreciation;
4. 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
Double-decline balance (DDB)
Impact on the B/S of a Zero Coupon Bond...
Fraud Triangle - 1) Incentive/Pressure
Inventory Systems...
5. Outflow - (bringing bond DOWN to par)
Amortization of Bond Premium = (in/out flow) in the indirect method CFO
Operating Lease
Types of accounting changes: prior period adjustments
Traditional DuPont Equation...
6. 1) Unqualified opinion (good); 2) Qualified opinion (followed GAAP except for...); 3) Adverse opinion (bad)
IFRS Revenue Recognition
Complex Capital Structure
Extended DuPont Equation...
Auditor/Audit Opinion
7. GAAP: more quantitative rules - IFRS: more qualitative approach based on whether the risks and reward of the asset have tranferred.
Financial Lease Reporting
Credit Rating Process...
Tax Loss Carryforward...
Finance (capital) Lease criteria GAAP vs. IFRS
8. Efficient inventory managment
Inventory mangement: High T/O (low DOH) and sales growth above industry average
CFO - Direct/Indirect method
Asset Revaluation: IFRS
Discontinued Operations...
9. NRV = Est. selling cost - Est. cost of complition - selling costs
Cash Flow From Operations (CFO) - IFRS
Return on Assets ROA...
B/S - investments
Net Realizable Value (NRV) (IFRS)
10. Income Tax Expense < Taxes Payable - F/S < Tax Return - Pay more tax now but more on reversal
Cash Flow From Financing (USA) (Source of Cash)
Taxable Income
Deferred Tax Asset: (DTA)
Footnote disclosure of Reconciliation of opening and closing carrying values...
11. 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
Diluted EPS
DTA Issues
FIFO is appropriate
Free Cash Flow to the Firm - FCFF
12. EU 1) Int'l Accounting Standards Board; 2) Unified int'l frameworks of accounting standards (IFRS); 3) Addopted by EU in 2005
IASB
Stock options: Use treasury stock method
Balance Sheet
Double-decline balance (DDB)
13. Stock options - Warrants - Convertible debt - Convertible preferred stock
Extended DuPont Equation...
Potentially Dillutive Securities
IFRS/US GAAP Frameworks: objective of F/S
Unusual OR Infrequent items...
14. 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.
Impact on the Cash Flow of a Zero Coupon Bond...
From creditor POV: Int. Coverage;
Financial Lease Reporting
Impairments recognition (IFRS)
15. Tax liability based on taxable income as per TAX Report/RETURN
Taxation: Tax Payable
Cash Flow: Logic (A = L + E)
FIFO results in: (assuming inflationary period)
The 4 Qualitative Characteristics of IFRS
16. CV of Op. Inc = std dev. EBIT/ Mean EBIT - CV of Revenue: std. dev Rev/ mean Rev. - Operating Leverage = %chg in EBIT/ %chg in Sales
Operating Risk Ratios...
Impairments recognition (IFRS)
FASB
Cash flow ratios
17. G = (earnings Retention rate) x (ROE) - earnings retention rate = [1-(payout ratio)] - payout ratio = Common dividends/ NI - Pref. Div.
Net Periodic Benefit Costs
Intangible Assets
Sustainable Growth
Cost included in Inventory on b/s...
18. NI/Avg. Total Assets - NI + Int (1-t) / Avg. Total Assets - Operating ROA: Operating INc/ Avg. Total Assets
Return on Assets ROA...
Types of accounting changes: accounting estimate
Auditor/Audit Opinion
CFO Analysis...
19. 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
Forecasting Financial Performance: Application
Analysis: Market Value of Debt
Auditor/Audit Opinion
Financial Implications of Capitalizing...
20. Share are to ensure significant influence over the company - Affiliate/Associate - Equity Method
Funded status of the pension plan (under US GAAP & IFRS) is reported where?
Intercorporate Investment: 20% - 50% votes...
Statement of Cash Flow - relevance...
Expensed Intangibles...
21. 1) Meet CFO (strategy; industry overview - accounting policy) 2) Tour major facilities 3) Vote on analyst recommendations (bus.& fin. risk) 4) Monitor publicly distributed ratings
LIFO results in: (assuming inflationary period)
Not all CF increase are Sustainable. Example of how Mgmt can Manipulate Cash Flow Statement
Credit Rating Process...
Creative Cash Flows Accounting: Motivation
22. 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
Taxation Disclosure Requirements
B/S - Stockholders' Equity
Gross Reporting of Revenue
Impact on the B/S of a Zero Coupon Bond...
23. Follows the traditional ledger account - assets on the left hand side and liabilities and equity on the right hand side.
The account format of B/S
B/S - short-term investments
Valuation allowance
ROE interpretation: if ROE is low...
24. Capital structure that contains NO potentially dillutive securities - (contains only c/s - nonconvertible debt - and nonconvertible pref. stock)
Financial Liability: US GAAP/Amortized at Cost
Simple capital structure
Tax Loss Carryforward...
Horizontal Common Size Statements...
25. 1st: Net Income - dividends declared = chg in are/E - Then: Dividends declared +/- chg dividends payable = cash dividends paid.
Calculate dividends declared...
Footnote disclosure of Reconciliation of opening and closing carrying values...
DBO Funded Status =
Statement of Cash Flow - relevance...
26. Higher share price - Lower borrowing cost - Higher incentive compensation
days of inv. on hand =
Creative Cash Flows Accounting: Motivation
FASB - Harmonization
days of sales o/s =
27. Profit is recognized only when it exceeds estimated total cost.
Cost recovery method...
Impact on the B/S of a Zero Coupon Bond...
Component depreciation;
Expensed Intangibles...
28. US 1) Financial Accounting Standards Board; 2) Standards form GAAP; 3) Aims - useful - relevant - reliable - consistent and comparable; 4) SEC deems FASB standard authoritative
FASB
# of days payable =
Measurement of A & L disclosure in footnotes
Intercorporate Investment: < 20% votes...
29. 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
Extraordinary Items: Unusual AND Infrequent items...
Inventory Cost Flow Methods...
Financial Ratio based on I/S...
Effects of Lease Classification on Ratios - Finance Lease
30. 1) installment sales (If collection is certain - rev is recognized at time of sale) 2) installment method: (if collection cannot be estimated) 3) cost recovery (if collectability is highly uncertain)
IFRS/US GAAP Frameworks: Recognition of Elements...
Cash Flow: Logic (A = L + E)
Sales Basis Revenue Recognitions
Extraordinary Items: Unusual AND Infrequent items...
31. Int. Coverage = EBIT/Interest Expense - Fixed Charged Coverage = (EBIT+Lease Pymts) / Int. exp + Lease payments
Inventory Valuatoin (LCM)
Financial Ratios based on B/S: Solvency (Coverage)
Tax Loss Carryforward...
Balance Sheet
32. 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.
Defined Benefit Obligations (DBO)
Footnote disclosure of Reconciliation of opening and closing carrying values...
Effects of Lease Classification on F/S - Finance Lease
Dilutive Securities
33. 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)
CFO - Direct/Indirect method
Taxable Income
IFRS/US GAAP Frameworks: objective of F/S
The best indicator of overstating its profits is...
34. Exchange of goods or services between two parties (no cash) IASB: Revenue = FMV of similar non-barter transaction with unrelated parties FASB: Revenue = FMV only if the company has received cash payments for such services in the past
Intercorporate Investment: < 20% votes...
B/S - Long-lived assets PP&E
Barter (IASB & FASB)
IASB
35. BV - cash paid = gain/(loss) + any unamortized issue costs (US only) = Gain/Loss on repurchase [I/S as continuing operations)
The report format of B/S
Impact on the Cash Flow of a Par Bond...
Taxation: Tax Payable
Gain/(loss) on bond early retirement: (derecognition of debt)
36. Change in equity from transactions from nonownership sources. Include: NI - chg in foreign currency translation adj. - chg in pension adj to funded status - chg unrealized gains/losses on derivatives contracts accounted for as hedges - chng in unrea
4 General Categories for Creditworthiness/Capacity...
Comprehensive income...
days of sales o/s =
Cost included in Inventory on b/s...
37. Contra asset account used to reduce DTA for probability that it will NOT be realized - Increase in valuation = decrease in DTA and NI - Decrease in valuation = increase in DTA and NI
IFRS Revenue Recognition
Valuation Allowance...
Forecasting Financial Performance: Top Down Approach...
Cost included in Inventory on b/s...
38. 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
IFRS/US GAAP Frameworks: Recognition of Elements...
Screening for Potential Equity Investment: Criteria
Common Size Statement
Fraud Triangle - 2) Opportunity
39. 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
CFO Disclosure requirement...
Characteristics of an effective framework
Amortization of Bond Discount = (in/out flow) in the indirect method CFO
Trade-Offs Qualitative Characteristics of IFRS
40. 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
Horizontal Common Size Statements...
CFO - Direct method
Unusual OR Infrequent items...
Analyst Treaments of DTL
41. Is required under IFRS but not under GAAP
DTA/DTL: Effect on Net Income when Tax Rate decreases...
# of days payable =
Footnote disclosure of Reconciliation of opening and closing carrying values...
DTA Issues
42. 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
FIFO ending inventory =
Inventory mangement: High T/O (low DOH) and sales growth above industry average
Disclosure for each segment...
Segment Reporting
43. Interest Expense = Coupon + Amortization = PV of future CF x market yield @ issuance
Impact on the B/S of a Discount Bond...
The account format of B/S
Extended DuPont Equation...
Sources of Differences betweent F/S & T/
44. 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 Revenue Recognition For Service
4 General Categories for Creditworthiness/Capacity...
IFRS/US GAAP Frameworks: objective of F/S
Tax base of an asset
45. Ensure that information in f/s is useful to a wide range of users.
Potentially Dillutive Securities
Which set of accounting standards requires firms to disclose estimated amortization expense for the next five years on intangible assets?
FIFO after-tax profit =
The objective of f/s is to...
46. 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
Extraordinary Items: Unusual AND Infrequent items...
Amortization of Bond Discount = (in/out flow) in the indirect method CFO
Financial Assets: US GAAP/Fair Market Value
Sales Basis Revenue Recognitions
47. Beginning Inv. (BI) + Purchases (P) = Available for Sale - Available for sale - COGS = Ending Inventory (EI)
Bond Issuance Cost under GAAP/IFRS
Operating vs. Non-operating Income
Double-decline balance (DDB)
Ending Inventory =
48. (GAAP) Internally created intangibles 1) (R&D) are expensed 2) Advertising 3) Software (developed to establish feasibility)
Intangibles under IFRS...
LIFO results in: (assuming inflationary period)
Amortization of Bond Discount = (in/out flow) in the indirect method CFO
Expensed Intangibles...
49. Management turnover.
Measures of Operating Performance - Efficiency Ratios...
Capitalized Intangibles...
Free Cash Flow to Equity - FCFE
To investigate the stability of that structure - Kilgore would be best served by looking at...
50. ROE = (NI/Sales) x (Sales/Assets) x (Assets/Equity) or ROE= Net Profit Margin x Asset TO x Leverage Ratio
Capitalized Intangibles...
Traditional DuPont Equation...
Gross Reporting of Revenue
Warning Signs of Earnings Manipulation
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