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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
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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. Amount deductible in future tax return
Tax base of an asset
Effects of Lease Classification on F/S - Finance Lease
Fundamental principles for PREPARING f/s under IFRS: (IAS No 10
Inventory Valuatoin (LCM)
2. Outflow - (bringing bond DOWN to par)
IFRS/US GAAP Frameworks: objective of F/S
BASIC EPS
Amortization of Bond Premium = (in/out flow) in the indirect method CFO
Intercorporate Investment: > 50% votes...
3. It is Rare - but permitted for commodity producer/dealers B/S = NRV - I/S = unrealized gains/losses
Motivation to Over-report Earnings
Inv. Valuation reporting Inventory ABOVE costs...
Return on Equity (ROE)...
Extraordinary Items: Unusual AND Infrequent items...
4. 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
Free Cash Flow to Equity - FCFE
FIFO results in: (assuming inflationary period)
Valuation Allowance...
Free Cash Flow -CFO
5. 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.
6. Beginning Inv. (BI) + Purchases (P) = Available for Sale - Available for sale - COGS = Ending Inventory (EI)
IFRS Revenue Recognition
The 4 Qualitative Characteristics of IFRS
Ending Inventory =
Effects of Lease Classification on F/S - Finance Lease
7. ROE = (NI/Sales) x (Sales/Assets) x (Assets/Equity) or ROE= Net Profit Margin x Asset TO x Leverage Ratio
Traditional DuPont Equation...
Complex Capital Structure
Asset Revaluation: IFRS
Motivation to Over-report Earnings
8. 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
IFRS: Required F/S
Impact on the Cash Flow of a Par Bond...
Under Completed Contract Method...
Footnote Finance Liability Disclosure
9. Shows the financial position of a firm AT A SINGLE POINT in time A = L + E.
Analyst Treaments of DTL
Balance Sheet
Simple capital structure
Barriers to a single framework...
10. Working Capital = CA - CL - Working Capital TO = Rev/Avg. Working Capital - Fixed Asset TO = Rev/Avg Net Fixed Assets
Activity Ratios
Motivation to Over-report Earnings
Return on total capital (ROTC)...
Free Cash Flow to Equity - FCFE
11. 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.
IFRS: Presentation Requirements
% of Completion
Financial Liability: US GAAP/Fair Market Value
Gross Reporting of Revenue
12. Stock options - Warrants - Convertible debt - Convertible preferred stock
Net Realizable Value (NRV) (IFRS)
Potentially Dillutive Securities
Measurement of A & L disclosure in footnotes
Depreciation Methods...
13. 1) Calculate cash raised on exercise 2) Repurchase shares at avg. price 3) New Shares = exercised - repurchased
Stock options: Use treasury stock method
Straight-line depreciation (SL)
FIFO results in: (assuming inflationary period)
Antidilutive Securities
14. 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
Straight-line depreciation (SL)
Funded Status US GAAP & IFRS
CFO Disclosure requirement...
Market Value (GAAP)...
15. 1) Change in accounting principle; 2) Change in accounting estimate; 3) Prior period adjustments
Types of accounting changes...
Taxation: Income Tax Expense
Fraud Triangle - 1) Incentive/Pressure
Defined Contribution Plans
16. 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
Net Reporting of Revenue
Common Size Statement
Statement of Cash Flow - relevance...
Effects of Lease Classification on Ratios - Finance Lease
17. 1) Increase comparability; 2) Reduce expense of overseas capital; 3) Reduce the expense of producing consolidated accounts
FIFO results in: (assuming inflationary period)
Asset Capitalization
Credit Rating Process...
FASB - Harmonization
18. Int. Coverage = EBIT/Interest Expense - Fixed Charged Coverage = (EBIT+Lease Pymts) / Int. exp + Lease payments
Free Cash Flow to Equity - FCFE
Implication for Analysts: Be aware of differences in tax reconcilation between periods
B/S - Long-term Liabilities
Financial Ratios based on B/S: Solvency (Coverage)
19. 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
Form 8-K...
Impact on the Cash Flow of a Zero Coupon Bond...
LIFO is appropriate
B/S - Long-lived assets PP&E
20. 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.
IFRS: Presentation Requirements
Return on Assets ROA...
4 General Categories for Creditworthiness/Capacity...
Sources of Differences: Temporary
21. 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.
IFRS/US GAAP Frameworks: Recognition of Elements...
Simple capital structure
Fraud Triangle - 2) Opportunity
Impact on the Cash Flow of a Par Bond...
22. 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 -
IFRS/US GAAP Frameworks: underlying assumptions...
The best indicator of overstating its profits is...
Revaluation below historic cost...
Intangible Assets
23. 1) B/S asset increased to FMV 2) Increase above original cost to equity via revaluation surplus account (comprehensive Income)
IFRS Revenue Recognition
Revaluation above historic cost...
From creditor POV: Int. Coverage;
Characteristics of an effective framework
24. Unlisted instruments - Held-to-maturity investments - Loans - Receivables
The report format of B/S
Financial Assets: US GAAP/Amortized at Cost
Extended DuPont Equation...
Straight-line depreciation (SL)
25. Interest expense = Coupon rate
Intercorporate Investment: > 50% votes...
Simple capital structure
Motivation to Under-report Earnings
Impact on the B/S of a Par Bond...
26. I/S: COGS lower - EBT higher - Taxes: higher - NI: higher - B/S: INV: higher - W/C: higher - are/E: higher - CF: CFO: lower
Implication for Analysts: Be aware of differences in tax reconcilation between periods
One major difference between the presentation of deferred tax assets and liabilities under IFRS and under U.S. GAAP is that...
FIFO results in: (assuming inflationary period)
Inventory mangement: High T/O (low DOH) and sales growth above industry average
27. 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
Trade-Offs Qualitative Characteristics of IFRS
BASIC EPS
Revaluation below historic cost...
Balance Sheet - formats
28. I/S and B/S - Each line is relative to base year
Motivation to Over-report Earnings
Horizontal Common Size Statements...
Cash Flow From Investing (USA) (Assets)
An Increase in the Valuation Allowance Account...
29. BV - cash paid = gain/(loss) + any unamortized issue costs (US only) = Gain/Loss on repurchase [I/S as continuing operations)
Valuation allowance
Defined Benefit Obligations (DBO)
Gain/(loss) on bond early retirement: (derecognition of debt)
Impact on the Cash Flow of a Zero Coupon Bond...
30. If PV of min lease pymt < cost of asset 1) lessor is a dealer or seller of the leased equipment 2) at the time of lease inception - lessor recognized a gross profit on sale. (NI - are/E - and Assests are higher) 3) Interest rev recognized over period
Impact on the Cash Flow of a Zero Coupon Bond...
Add/ Sub changes to related b/s operating accounts
Lessor Accounting Capital Lease: Sales-Type Lease
Measures of Operating Performance - Efficiency Ratios...
31. Income Tax Expense > Taxes Payable - F/S > Tax Return - Pay less tax now but more on reversal
Inventory mangement: High T/O (low DOH) and sales growth below industry average
Impact on the B/S of a Discount Bond...
Financial Assets: US GAAP/Amortized at Cost
Deferred Tax Liability: (DTL)
32. Part of indenture that place restrictions on the firm that protect bondholderns and increase value of the firm's bond - Breach is technical default
Amortization of Bond Discount = (in/out flow) in the indirect method CFO
Debt covenants
Return on Equity (ROE)...
ROE interpretation: if ROE is low...
33. EBIT/ *Gross Interest EBITDA/ *Gross Interest *(inc'd capitalized interest) - How many times is EBIT or EBITDA bigger than gross interest? Higher ratio is desired. Shows ability to cover int. payment
Financial Assets: US GAAP/Amortized at Cost
From creditor POV: Int. Coverage;
Gross Reporting of Revenue
Inventory Systems...
34. 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
Impact on the B/S of a Zero Coupon Bond...
Form 8-K...
B/S - Stockholders' Equity
35. 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)
Financial Lease Reporting
Add/ Sub changes to related b/s operating accounts
IFRS Revenue Recognition
FIFO results in: (assuming inflationary period)
36. Derivatives - Non-derivative investments with fair value exposure hedged by derivatives
Which of the following characteristics should be of least concerned about management's opportunities to commit fraud?
Straight-line depreciation (SL)
Financial Liability: US GAAP/Fair Market Value
Motivation to Understate Assets/Overstate Liabilities
37. 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
Financial Ratio based on I/S...
Form DEF-14A...
Impact on the B/S of a Premium Bond...
38. Inflow - (bringing bond UP to par)
Impact on the B/S of a Par Bond...
Income Statement
IFRS/US GAAP Frameworks: underlying assumptions...
Amortization of Bond Discount = (in/out flow) in the indirect method CFO
39. Decreases DTA -> Decreases Net Income - [Decrease in Valuation Allowance; Increase DTA and Increases Net Income]
Bond Issuance Cost under GAAP/IFRS
IFRS/US GAAP Frameworks: purpose of framework
An Increase in the Valuation Allowance Account...
Forecasting Financial Performance: Application
40. 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.
Units of Production Method
Form DEF-14A...
Financial Ratios based on B/S: Solvency ratio
Low Quality Earnings is result of...
41. 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
Form 8-K...
Under Completed Contract Method...
Discontinued Operations...
Impact on the Cash Flow of a Discount Bond...
42. 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
Free Cash Flow to Equity - FCFE
Financial Liability: US GAAP/Amortized at Cost
Income Statement
Implication for Analysts: Be aware of differences in tax reconcilation between periods
43. Both: purpose is to assist development & revision of accting stds - IASB: Firms must consider framework if no std exists - FASB: No express requirement to consider framework
IFRS/US GAAP Frameworks: purpose of framework
Traditional DuPont Equation...
B/S - investments
Net Realizable Value (NRV) (IFRS)
44. 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
Installment Method...
Capitalized Intangibles...
What is the economic substance of financial (capital) lease?
45. CFO: cash interest expense - CFF: increased by amount rcvd at issuance and decreased by payment made at redemption - CFO is lower CFF is higher
Market Value (GAAP)...
Impact on the Cash Flow of a Premium Bond...
Cash Flow: Logic (A = L + E)
Fraud Triangle - 3) Attitude/rationalization
46. To improve liquidity and leverage ratios
Extraordinary Items: Unusual AND Infrequent items...
Motivation to Overstate Assets/Understate Liabilities
Lessor Accounting Capital Lease: Sales-Type Lease
Taxation Analyst Adjustments...
47. 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.
Funded Status US GAAP & IFRS
Bond Issuance Cost under GAAP/IFRS
Financial Liability: US GAAP/Amortized at Cost
The objective of f/s is to...
48. NI/Avg. Total Assets - NI + Int (1-t) / Avg. Total Assets - Operating ROA: Operating INc/ Avg. Total Assets
Fundamental principles for PREPARING f/s under IFRS: (IAS No 10
Motivation to Understate Assets/Overstate Liabilities
Return on Assets ROA...
FIFO ending inventory =
49. + Service Costs (recurring costs (actual)) - + Interest Costs (recurring costs (actual)) - - Expected return on plan assets (smoothed event) - +/- Amort of (gains) and losses (smoothed event) - +/- Amort of prior service costs* (smoothed event) - +/-
FIFO is appropriate
Net Periodic Benefit Costs
Barriers to a single framework...
Sources of Differences: Permanent
50. Net income + non-cash charges - working cap investment
Warning Signs of Earnings Manipulation
Which of the following characteristics should be of least concerned about management's opportunities to commit fraud?
Free Cash Flow -CFO
Traditional DuPont Equation...