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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. 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
Impact on the Cash Flow of a Par Bond...
Financial Ratio based on I/S...
Financial Ration based on B/S: Liquidity Ratios
From creditor POV: Int. Coverage;
2. Both: Recognize going concern & accrual assumptions - IASB: Going concern & accruals given more prominence in framework - FASB: Going concern assumption not well developed in framework.
Impact on the Cash Flow of a Discount Bond...
Intangibles under IFRS...
Double-decline balance (DDB)
IFRS/US GAAP Frameworks: underlying assumptions...
3. 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
Comprehensive income...
Discontinued Operations...
Financial Lease Reporting
Impairments recognition (GAAP)
4. 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.
Intangible Assets
Complex Capital Structure
Defined Benefit Obligations (DBO)
Activity Based Restrictions
5. Interest expense = Coupon rate
Tax base of an asset
Impact on the B/S of a Par Bond...
Which of the following characteristics should be of least concerned about management's opportunities to commit fraud?
Comprehensive income...
6. 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
Inventory mangement: High T/O (low DOH) and sales growth above industry average
Effective Tax Rate
B/S - Long-term Liabilities
7. 1) Basis for measurement; 2) carrying value of inventory by category; 3) Amount of inventory carried at FV less cost to sell 4) Write-downs & reversals (discussion of circumstance that led to reversal); 5) Inventories pledged as collateral for liabil
Financial Assets: US GAAP/Amortized at Cost
Measurement of A & L disclosure in footnotes
Double-decline balance (DDB)
Balance Sheet - formats
8. 1) Balance Sheet; 2) Comprehensive Income; 3) Change in Equity; 4) Cash Flow Statement; 5) Accounting policies and notes.
Intangibles under IFRS...
IFRS: Required F/S
Barter (IASB & FASB)
Common Size Statement
9. +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
Unusual OR Infrequent items...
CFO - Direct/Indirect method
days of sales o/s =
Cash Flow From Operations (CFO) - FASB
10. 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
Tax base on a liability
Diluted EPS
FIFO is appropriate
Impact on the Cash Flow of a Discount Bond...
11. 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)
Tax base on a liability
Financial Ratio based on I/S...
IFRS/US GAAP Frameworks: objective of F/S
Intangible Assets
12. Used when estimates of revenue or cost are unreliable or short-term contracts - (US GAAP only) Revenue - expense - and profit is recognized at completion (IFRS) Revenue is recognized to the extent of contract cost - cost are expensed when incureed
Under Completed Contract Method...
Form 144...
IOSCO
CFO Analysis...
13. IFRS Allows firm to report PP&E at FMV less Accm' Depr' - Must disclose carrying vlaue using historic cost model.
Steps of F/S Analysis
Asset Revaluation: IFRS
LIFO is appropriate
# of days payable =
14. = LIFO ending inventory + LIFO reserve FIFO after-tax profit
The report format of B/S
Vertical Common Size Statements...
Capitalized Intangibles...
FIFO ending inventory =
15. 1) Evidence of an arrangement; 2) Completion of earnings process; 3) Price is determined or determinable; 4) Assurance of payment
Sources of Differences betweent F/S & T/
Auditor/Audit Opinion
SEC guidance for Revenue Recognition
Cash Flow From Investing (USA) (Assets)
16. 1) Purpose and context 2) Data Collection 3) Data Processing 4) Analysis/Interpretation of data 5) Develop conclusions and recommendations 6) Follow-up
Steps of F/S Analysis
B/S - Long-lived assets PP&E
Funded status of the pension plan (under US GAAP & IFRS) is reported where?
Cash Flow From Operations (CFO) - IFRS
17. Net income + non-cash charges - working cap investment
Fraud Triangle
Free Cash Flow -CFO
Capitalization of Interest...
Gross Reporting of Revenue
18. Interest Expense = Coupon + Amortization = PV of future CF x market yield @ issuance
Statement of Cash Flow - relevance...
Impact on the B/S of a Discount Bond...
Financial Liability: US GAAP/Amortized at Cost
The best indicator of overstating its profits is...
19. Interest Expense = Amortization
CFO - Direct/Indirect method
Forecasting Financial Performance: Application
Impact on the B/S of a Zero Coupon Bond...
Revaluation above historic cost...
20. Meet Analyst Expectations - Meet debt covenants - Incentive compensation
Discontinued Operations...
Motivation to Over-report Earnings
Net Reporting of Revenue
Antidilutive Securities
21. GAAP: shown as a separate prepaid asset and amortized - IFRS: Deducted from proceeds and liability therefore effective interest rate is HIGHER under IFRS than GAAP.
Effects of Lease Classification on F/S - Finance Lease
Intangibles under IFRS...
Bond Issuance Cost under GAAP/IFRS
Implication for Analysts: Be aware of differences in tax reconcilation between periods
22. IFRS: Funded status is NOT on B/S Asset/Liability - Result in a b/s that does NOT represent econ reality - GAAP: Funded status = B/S Asset/Liability -Both disclose components of DBO - plan assets - expenses - and assumptions used to calculate pensio
IFRS/US GAAP Frameworks: objective of F/S
Funded Status US GAAP & IFRS
CFO - Indirect method steps...
Activity Ratios
23. 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 =
Financial Adj to Facilitate Comparison...
Convergence IFRS/US GAAP...
Balance Sheet - formats
Intangible Assets
24. Outflow - (bringing bond DOWN to par)
Antidilutive Securities
B/S - Stockholders' Equity
Motivation to Over-report Earnings
Amortization of Bond Premium = (in/out flow) in the indirect method CFO
25. Potentially dilutive securitites [options - warrants - convertible securities]
Complex Capital Structure
Motivation to Over-report Earnings
ROE interpretation: if ROE is low...
CFO - Indirect method steps...
26. CFO: cash interest expense - CFF: increased by amount rcvd at issuance and decreased by payment made at redemption - CFO is lower CFF is higher
Sales Basis Revenue Recognitions
Cash Flow From Operations (CFO) - FASB
Impact on the Cash Flow of a Premium Bond...
Income Statement
27. 1) Change in accounting principle; 2) Change in accounting estimate; 3) Prior period adjustments
Common Size Statement
Fraud Triangle - 1) Incentive/Pressure
Intercorporate Investment: 20% - 50% votes...
Types of accounting changes...
28. Cash collections less direct cash inputs less other cash outfllows
Impairments recognition (IFRS)
CFO - Direct method
Types of accounting changes...
FIFO is appropriate
29. NRV = Est. selling cost - Est. cost of complition - selling costs
Expensed Intangibles...
Net Realizable Value (NRV) (IFRS)
Financial Ratios based on B/S: Solvency (Coverage)
Cost included in Inventory on b/s...
30. 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)
Footnote Finance Liability Disclosure
Gain/(loss) on bond early retirement: (derecognition of debt)
ROE interpretation: if ROE is low...
Add/ Sub changes to related b/s operating accounts
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...
Low Quality Earnings is result of...
Taxation Analyst Adjustments...
Potentially Dillutive Securities
32. 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
DTA Issues
CFO - Direct/Indirect method
Sources of Differences betweent F/S & T/
Tax Loss Carryforward...
33. Trading securities - Available-for-sale - Derivatives (standalone or embedded in non-derivative intrument) - Assets with fair value exposure hedged by derivatives
Impact on the Cash Flow of a Premium Bond...
Deferred Tax Liability: (DTL)
Cash Flow From Investing (USA) (Assets)
Financial Assets: US GAAP/Fair Market Value
34. Income Tax Expense < Taxes Payable - F/S < Tax Return - Pay more tax now but more on reversal
IFRS/US GAAP Frameworks: F/S elements...
To investigate the stability of that structure - Kilgore would be best served by looking at...
Tax base of an asset
Deferred Tax Asset: (DTA)
35. 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
B/S - short-term investments
The best indicator of overstating its profits is...
Free Cash Flow to Equity - FCFE
Traditional DuPont Equation...
36. Int. Coverage = EBIT/Interest Expense - Fixed Charged Coverage = (EBIT+Lease Pymts) / Int. exp + Lease payments
Financial Ratios based on B/S: Solvency (Coverage)
Impact on the B/S of a Premium Bond...
Financial Ration based on B/S: Liquidity Ratios
Impairments recognition (GAAP)
37. Derivatives - Non-derivative investments with fair value exposure hedged by derivatives
Double-decline balance (DDB)
Financial Liability: US GAAP/Fair Market Value
Income Tax Paid...
Reasons to Lease...
38. Beginning Inv. (BI) + Purchases (P) = Available for Sale - Available for sale - COGS = Ending Inventory (EI)
Defined Benefit Plans
Financial Ratios based on B/S: Solvency ratio
Ending Inventory =
To investigate the stability of that structure - Kilgore would be best served by looking at...
39. 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
Screening for Potential Equity Investment: Criteria
Financial Ratio based on I/S...
Gross Reporting of Revenue
Income Statement
40. Profit is recognized only when it exceeds estimated total cost.
Cost recovery method...
Operating Lease
Trade-Offs Qualitative Characteristics of IFRS
Cash Conversion Cycle =
41. 1) Timing Differences: Accrual vs. modified cash accounting - Differences in reporting methods estimates
Types of accounting changes...
Sources of Differences: Temporary
Amortization of Bond Discount = (in/out flow) in the indirect method CFO
What is the economic substance of financial (capital) lease?
42. [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
Valuation Allowance...
CFO - Indirect method steps...
Diluted EPS
IFRS/US GAAP Frameworks: underlying assumptions...
43. 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.
Operating Lease
Calculate dividends declared...
Types of accounting changes: accounting principle
Taxable Income
44. Selecting accounting principles to distort results - Structuring transactions to achieve a desired outcome - Using aggressive or unrealistic estimates and assumptions - Exploiting the intent of the accounting principle
Implication for Analysts: Be aware of differences in tax reconcilation between periods
Low Quality Earnings is result of...
Sarbanes-Oxley Management Report...
Creative Cash Flows Accounting: Technique
45. 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
Asset Capitalization
Defined Benefit Obligations (DBO)
Balance Sheet
Common Size Statement
46. Reported ABOVE the line 1) G/(L) from disposal of a business segment 2) G/(L) from sale of investment in subsidiary 3) Provisions for environmental remediation - impairments - write-offs - write-downs - restructuring.4) Integration expense for recent
Unusual OR Infrequent items...
Convergence IFRS/US GAAP...
Diluted EPS
Financial Liability: US GAAP/Fair Market Value
47. 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
Revaluation below historic cost...
Motivation to Under-report Earnings
Auditor/Audit Opinion
Fraud Triangle
48. 1) Transparency; 2) Comprehensiveness; 3) Consistency
Inv. Valuation reporting Inventory ABOVE costs...
Impact on the B/S of a Par Bond...
Characteristics of an effective framework
Double-decline balance (DDB)
49. 1) Cheaper Financing; 2) Reduce risk of obsolescence; 3) Less restrictive provisions; 4) Off-B/S reporting; 5) Tax Reporting Advantages (treated as ownership for tax ( deduct depreciation and interest expense)
Extended DuPont Equation...
Reasons to Lease...
Depreciation Methods...
Funded Status US GAAP & IFRS
50. 1) Development of high quality - transparent and enforceable global standards; 2) Promote application of standards; 3) Take into account special needs (small & med entities & emerging markets); 4) Convergence of nat'l and int'l standards
IASB - Goals
Measurement of A & L disclosure in footnotes
Add/ Sub changes to related b/s operating accounts
Financial Implications of Capitalizing...