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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. Income Tax Expense/Pretax Income (EBIT) Income Tax Exp. = Taxes payable + chg in deferred ta
Effective Tax Rate
Comprehensive income...
Add/ Sub changes to related b/s operating accounts
Fraud Triangle - 2) Opportunity
2. Outflow - (bringing bond DOWN to par)
Capitalization of Interest...
Free Cash Flow -CFO
Amortization of Bond Premium = (in/out flow) in the indirect method CFO
Cost recovery method...
3. Assets - liabilities - and equity are presented in a single column.
Tax base of an asset
Taxation Disclosure Requirements
The report format of B/S
Net Realizable Value (NRV) (IFRS)
4. Both: Recognize going concern & accrual assumptions - IASB: Going concern & accruals given more prominence in framework - FASB: Going concern assumption not well developed in framework.
Motivation to Over-report Earnings
IFRS/US GAAP Frameworks: underlying assumptions...
Operating Lease
Statement of Cash Flow - relevance...
5. 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)
IOSCO
CFO - Direct/Indirect method
Discontinued Operations...
Analyzing Effective Tax Rate Reconciliation
6. 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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7. Required by IFRS - Permited by US GAAP
Inventory Cost Flow Methods...
Taxable Income
Effects of Lease Classification on F/S - Finance Lease
Component depreciation;
8. 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)
Sales Basis Revenue Recognitions
Balance Sheet - formats
Double-decline balance (DDB)
Which set of accounting standards requires firms to disclose estimated amortization expense for the next five years on intangible assets?
9. 'Equity' -Chg in debt - Cash raised from equity and debt - -Chg in c/s - Cash spent on repurchasing equity or redeeming debt -Dividends paid - Calculate dividend declared: NI -*Div.Declared = chg in are/E - Div. Declared +(-) chg in div. payable = c
# of days payable =
Amortization of Bond Discount = (in/out flow) in the indirect method CFO
Barriers to a single framework...
Cash Flow From Financing (USA) (Source of Cash)
10. Assess liquidity - solvency and financial flexibiliy
Income Statement
Statement of Cash Flow - relevance...
Disclosure for each segment...
FIFO results in: (assuming inflationary period)
11. NRV = Est. selling cost - Est. cost of complition - selling costs
Extended DuPont Equation...
Forecasting Financial Performance: Application
Types of accounting changes: prior period adjustments
Net Realizable Value (NRV) (IFRS)
12. BV - cash paid = gain/(loss) + any unamortized issue costs (US only) = Gain/Loss on repurchase [I/S as continuing operations)
DTA Issues
Credit Rating Process...
Free Cash Flow to the Firm - FCFF
Gain/(loss) on bond early retirement: (derecognition of debt)
13. 1) SL; 2) Double Decline balance (accelerated); 3) Units of production; 4) Tax code perscribed Modified Accelerated Cost Recovery System (MACRS)
IFRS/US GAAP Frameworks: Recognition of Elements...
B/S - Long-term Liabilities
Depreciation Methods...
% of Completion
14. Shows only the difference between sales and cost of goods sold Users are usually: 1) internet-based merchandising companies; 2) Sell prodict but never hold inventory; 3) Arrangement for supplier to ship directly to end customer. Discolsure policies
Motivation to Under-report Earnings
Net Reporting of Revenue
Vertical Common Size Statements...
Creative Cash Flows Accounting: Motivation
15. Tax Rate down: DTL down -> Inc. Tax Exp down -> NI up - DTA down -> Inc. Tax Exp up -> NI down
Screening for Potential Equity Investment: Criteria
Which of the following characteristics should be of least concerned about management's opportunities to commit fraud?
DTA/DTL: Effect on Net Income when Tax Rate decreases...
Valuation allowance
16. 1) 3rd party pressure: 1) analyst/institutional expectations; 2) need to obtain finance; 3) listing requirements; 4) Debt covenants; 5) Transactions 2) Directors' Financial Position: 1) Equity interest; 2) Stock options; 3) Personal debt guarantees.
Fraud Triangle - 2) Opportunity
Market Value (GAAP)...
Fraud Triangle - 1) Incentive/Pressure
Unusual OR Infrequent items...
17. Carrying amount of the liability minus the amount that will be deductible in the future.
Impact on the B/S of a Premium Bond...
CFO Disclosure requirement...
Tax base on a liability
Trade-Offs Qualitative Characteristics of IFRS
18. 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
FIFO is appropriate
Impact on the B/S of a Discount Bond...
DTA Issues
Comprehensive income...
19. 1) held-to-maturity: @ amortized cost (i.e Bonds) 2) trading: @ fair value through P&L @ fair mkt value - unrealized g/(l) are recognized on the I/S. 3) available-for-sale: @ fair mkt value - unrealized g/(l) are NOT recognized on the I/S - instead r
Revaluation above historic cost...
B/S - short-term investments
Under Completed Contract Method...
Complex Capital Structure
20. 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
Activity Ratios
Revaluation below historic cost...
Expensed Intangibles...
21. 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
Ratios that directly affect choice of Inventory Account...
Capitalized Intangibles...
IFRS Revenue Recognition
Financial Liability: US GAAP/Amortized at Cost
22. 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
Valuation Allowance...
Roles of financial reporting & analysis include...
Free Cash Flow to Equity - FCFE
IOSCO
23. It is the purchase of an asset using debt finance.
The best indicator of overstating its profits is...
Intercorporate Investment: > 50% votes...
Effects of Lease Classification on Ratios - Finance Lease
What is the economic substance of financial (capital) lease?
24. 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
Impact on the Cash Flow of a Discount Bond...
Ending Inventory =
Trade-Offs Qualitative Characteristics of IFRS
Free Cash Flow to the Firm - FCFF
25. 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
The 4 Qualitative Characteristics of FASB...
Credit Rating Process...
DTA Issues
Motivation to Overstate Assets/Understate Liabilities
26. More than a third of Maxwell's total sales go to its own consolidated subsidiaries High levels of related-party transactions are worrisome - particularly when those parties are not audited. But transactions within the company between subsidiaries con
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27. 1) Transparency; 2) Comprehensiveness; 3) Consistency
Depreciation Methods...
Inventory mangement: High T/O (low DOH) and sales growth above industry average
Characteristics of an effective framework
Potentially Dillutive Securities
28. Amount deductible in future tax return
IFRS/US GAAP Frameworks: underlying assumptions...
Tax base of an asset
Funded Status US GAAP & IFRS
Amortization of Bond Discount = (in/out flow) in the indirect method CFO
29. 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)
Footnote Finance Liability Disclosure
Sustainable Growth
Reasons to Lease...
CFO - Direct method
30. Assets: higher - Liabilities: Higher - NI (Early yrs): Lower - CFO: Higher (b/c only interest portion is classed as CFO) - CFF: Lower (b/c principal repayment portion) - Total CF: Same - Since Int. exp + depre > lease pymt in the early years. This de
Effects of Lease Classification on F/S - Finance Lease
CFO Analysis...
CFO Disclosure requirement...
Types of accounting changes: accounting estimate
31. Depreciation exp = (cost-residual value)/ useful life
Straight-line depreciation (SL)
CFI Analysis...
To investigate the stability of that structure - Kilgore would be best served by looking at...
Amortization of Bond Premium = (in/out flow) in the indirect method CFO
32. 365/(AP T/O) = 365/(purchases/ Avg. AP)
# of days payable =
Types of accounting changes...
Deferred Tax Liability: (DTL)
Financial Lease Reporting
33. Trade relief - Contingent consideration - Union concessions
Complex Capital Structure
Ending Inventory =
Motivation to Under-report Earnings
To investigate the stability of that structure - Kilgore would be best served by looking at...
34. 1) Calculate cash raised on exercise 2) Repurchase shares at avg. price 3) New Shares = exercised - repurchased
Stock options: Use treasury stock method
Extended DuPont Equation...
CFO - Indirect method steps...
Low Quality Earnings is result of...
35. 1) Unqualified opinion (good); 2) Qualified opinion (followed GAAP except for...); 3) Adverse opinion (bad)
IFRS/US GAAP Frameworks: Measurement of Elements...
Steps of F/S Analysis
Impairments recognition (GAAP)
Auditor/Audit Opinion
36. 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
Comprehensive income...
Free Cash Flow to Equity - FCFE
Financial Implications of Capitalizing...
Free Cash Flow -CFO
37. Cash collections less direct cash inputs less other cash outfllows
CFO - Direct method
Cost recovery method...
Impact on the Cash Flow of a Par Bond...
days of inv. on hand =
38. For inventory that does not deteriorate with age.
Capitalized Intangibles...
Impact on the B/S of a Premium Bond...
SEC guidance for Revenue Recognition
LIFO is appropriate
39. 1) understandability; 2) relevance; 3) reliability; and 4)comparability - No hierarchy
Operating Risk Ratios...
Analyst Treaments of DTL
The 4 Qualitative Characteristics of IFRS
Balance Sheet
40. 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
Free Cash Flow to Equity - FCFE
IASB - Goals
IFRS/US GAAP Frameworks: Recognition of Elements...
41. ROE = (NI/Sales) x (Sales/Assets) x (Assets/Equity) or ROE= Net Profit Margin x Asset TO x Leverage Ratio
Traditional DuPont Equation...
Double-decline balance (DDB)
Sarbanes-Oxley Management Report...
Cash Flow From Financing (USA) (Source of Cash)
42. 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)
Forecasting Financial Performance: Application
Segment Reporting
Add/ Sub changes to related b/s operating accounts
BASIC EPS
43. To improve liquidity and leverage ratios
Effects of Lease Classification on F/S - Finance Lease
An Increase in the Valuation Allowance Account...
Motivation to Overstate Assets/Understate Liabilities
Inventory mangement: High T/O (low DOH) and sales growth above industry average
44. US Gaap: Balance Sheet - IFRS:Disclosed in Footnotes - May be mentioned in MD&A if mgnt considers it significant
Funded status of the pension plan (under US GAAP & IFRS) is reported where?
What is the economic substance of financial (capital) lease?
Inventory mangement: High T/O (low DOH) and sales growth above industry average
The objective of f/s is to...
45. EBIT/ Avg. total capital - Total capital includes: debt capital - so int. is aded back to NI
Return on total capital (ROTC)...
Return on Assets ROA...
Inventory Cost Flow Methods...
Impairments recognition (IFRS)
46. Days of sales o/s + days of inv. on hand - # of days payable (shorter the better)
Ending Inventory =
Financial Liability: US GAAP/Fair Market Value
Income Tax Paid...
Cash Conversion Cycle =
47. [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
Diluted EPS
Cost recovery method...
Intercorporate Investment: 20% - 50% votes...
Add/ Sub changes to related b/s operating accounts
48. Under GAAP 1) Purchased patentes - copyrights - franchises - licenses - brands - and trademarks 2) Direct response advertising 3) Goodwill arising from transactions - (Proceeds - FMV net assets required = goodwill) 4) Software development costs once
Units of Production Method
Capitalized Intangibles...
Free Cash Flow to Equity - FCFE
Defined Contribution Plans
49. Shows the performance of the company over a reporting period.
Impact on the B/S of a Par Bond...
Effective Tax Rate
Cash Conversion Cycle =
Income Statement
50. Current Ratio (CA/CL): Higher - Work. Cap (CA -CL): Higher - Asset TO: (Sales/TA): Higher - ROA (EAT/TA): Higher - ROE (EAT/E): Higher - Debt/Equity: Lower - Understates Leverage ratios (b/c not recognized as a liability) - Overstates Coverage ratios
Impact on the B/S of a Par Bond...
Screening for Potential Equity Investment: Criteria
Effects of Lease Classification on Ratios - Operating Lease
Financial Ration based on B/S: Liquidity Ratios