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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. 1) Diff tax rate in diff. tax jurisdictions (countries) (continuous)2) Permanent tax differences: tax credit - tax-exempt income - nondeductible expenses - & tax diff between capital gains and operating income. (continuous) 3)in tax rates and legisl
Analyzing Effective Tax Rate Reconciliation
BASIC EPS
DTA Issues
FIFO is appropriate
2. 1) Balance Sheet; 2) Comprehensive Income; 3) Change in Equity; 4) Cash Flow Statement; 5) Accounting policies and notes.
Revaluation below historic cost...
IFRS: Required F/S
Fraud Triangle - 1) Incentive/Pressure
Impact on the Cash Flow of a Zero Coupon Bond...
3. Outflow - (bringing bond DOWN to par)
Financial Assets: US GAAP/Fair Market Value
Amortization of Bond Premium = (in/out flow) in the indirect method CFO
B/S - investments
Measurement of A & L disclosure in footnotes
4. 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
Creative Cash Flows Accounting: Motivation
IASB - Goals
CFO - Direct/Indirect method
The 4 Qualitative Characteristics of FASB...
5. 365/(AR T/O) = 365/(Rev/Avg. AR)
CFO - Indirect method steps...
Financial Implications of Capitalizing...
days of sales o/s =
Return on total capital (ROTC)...
6. 1) understandability; 2) relevance; 3) reliability; and 4)comparability - No hierarchy
The 4 Qualitative Characteristics of IFRS
Comprehensive income...
Credit Analysis: Ratios
FIFO after-tax profit =
7. 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)
Analysis: Market Value of Debt
Footnote disclosure of Reconciliation of opening and closing carrying values...
Diluted EPS
Intangible Assets
8. Same as other ratios using NI in this case substitut NI for CFO.
Cash flow ratios
Valuation allowance
Financial Adj to Facilitate Comparison...
Cash Flow From Operations (CFO) - IFRS
9. 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
FASB
B/S - short-term investments
What is the economic substance of financial (capital) lease?
Footnote disclosure of Reconciliation of opening and closing carrying values...
10. BV - cash paid = gain/(loss) + any unamortized issue costs (US only) = Gain/Loss on repurchase [I/S as continuing operations)
Gain/(loss) on bond early retirement: (derecognition of debt)
Impact on the B/S of a Zero Coupon Bond...
Activity Based Restrictions
Fraud Triangle - 2) Opportunity
11. 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.
Capitalization of Interest...
Form 144...
Income Tax Paid...
Sources of Differences: Temporary
12. 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
Intercorporate Investment: 20% - 50% votes...
Financial Ratio based on I/S...
Activity Ratios
Effects of Lease Classification on Ratios - Finance Lease
13. Pd after more than 1 year - notes & bonds: at PV of future CF pymets - Capital leases - Provisions - Deferred tax
B/S - Long-term Liabilities
Taxation: Tax Payable
Valuation Allowance...
Complex Capital Structure
14. Loss that could not be deducted on the tax return in current period but may be used to reduce taxable income and taxes payable in future (i.e. warranty)
Convergence IFRS/US GAAP...
Units of Production Method
B/S - Long-term Liabilities
Tax Loss Carryforward...
15. Is more relevant than book value: Recent changes allow more liability to be recorded at FMV (IFRS & GAAP require disclosure of FMV) - Downward adj. in liability will Increase equity and decrease leverage ratio - Upward adj in liability will decrease
Financial Ratios based on B/S: Solvency (Coverage)
Auditor/Audit Opinion
Analysis: Market Value of Debt
Financial Implications of Capitalizing...
16. Capital structure that contains NO potentially dillutive securities - (contains only c/s - nonconvertible debt - and nonconvertible pref. stock)
Component depreciation;
Bond Issuance Cost under GAAP/IFRS
Complex Capital Structure
Simple capital structure
17. 1) Evidence of an arrangement; 2) Completion of earnings process; 3) Price is determined or determinable; 4) Assurance of payment
Which of the following characteristics should be of least concerned about management's opportunities to commit fraud?
Simple capital structure
Return on Assets ROA...
SEC guidance for Revenue Recognition
18. 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 Revenue Recognition For Service
Sales Basis Revenue Recognitions
Calculate dividends declared...
Gain/(loss) on bond early retirement: (derecognition of debt)
19. It is the purchase of an asset using debt finance.
What is the economic substance of financial (capital) lease?
Steps of F/S Analysis
Capitalized Intangibles...
Impact on the Cash Flow of a Premium Bond...
20. EU 1) Int'l Accounting Standards Board; 2) Unified int'l frameworks of accounting standards (IFRS); 3) Addopted by EU in 2005
IASB
Unusual OR Infrequent items...
Not all CF increase are Sustainable. Example of how Mgmt can Manipulate Cash Flow Statement
Operating Risk Ratios...
21. 1) Forecast GDP 2) Regress industry sales against GDP 3) Forecast industry sales 4) Cosider changes to firm's mkt share 5) Forecast firms sales 6) Use hisoric margins for stable firms or forecast individual expense items 7) Remove non-recurring items
Forecasting Financial Performance: Top Down Approach...
IFRS/US GAAP Frameworks: underlying assumptions...
FIFO ending inventory =
Income Tax Paid...
22. Income Tax Expense/Pretax Income (EBIT) Income Tax Exp. = Taxes payable + chg in deferred ta
CFO - Direct method
To investigate the stability of that structure - Kilgore would be best served by looking at...
Effective Tax Rate
CFO - Indirect method steps...
23. 1st: Net Income - dividends declared = chg in are/E - Then: Dividends declared +/- chg dividends payable = cash dividends paid.
Calculate dividends declared...
Net Realizable Value (NRV) (IFRS)
Potentially Dillutive Securities
Steps of F/S Analysis
24. Interest expense = Coupon rate
DTA/DTL: Effect on Net Income when Tax Rate decreases...
IFRS/US GAAP Frameworks: F/S elements...
Impact on the B/S of a Par Bond...
Installment Method...
25. CFO = NI - means high quality of earnings but may be affect by the stage of business cycle and firm's life cycle - CFO > NI - means premature recognition of revenue or delayed recognition of expenses.
Intangibles under IFRS...
Funded status of the pension plan (under US GAAP & IFRS) is reported where?
CFO Analysis...
Which of the following characteristics should be of least concerned about management's opportunities to commit fraud?
26. NRV = Est. selling cost - Est. cost of complition - selling costs
Cash Conversion Cycle =
FASB
Net Realizable Value (NRV) (IFRS)
Steps of F/S Analysis
27. 1) Change in accounting principle; 2) Change in accounting estimate; 3) Prior period adjustments
Warning Signs of Earnings Manipulation
Trade-Offs Qualitative Characteristics of IFRS
Analysis: Market Value of Debt
Types of accounting changes...
28. 1) fair presentation; 2) going concern; 3) accrual basis; 4) consistency; 5) materiality
Creative Cash Flows Accounting: Motivation
Potentially Dillutive Securities
Fundamental principles for PREPARING f/s under IFRS: (IAS No 10
Financial Ratios based on B/S: Solvency (Coverage)
29. 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
Calculate dividends declared...
Fraud Triangle - 3) Attitude/rationalization
Form DEF-14A...
B/S - Stockholders' Equity
30. 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
Fraud Triangle - 2) Opportunity
Tax base on a liability
Double-decline balance (DDB)
Not all CF increase are Sustainable. Example of how Mgmt can Manipulate Cash Flow Statement
31. Higher share price - Lower borrowing cost - Higher incentive compensation
Creative Cash Flows Accounting: Motivation
CFO Disclosure requirement...
Common Size Statement
Taxation: Tax Payable
32. 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
IOSCO
Convergence IFRS/US GAAP...
Analysis: Market Value of Debt
Expensed Intangibles...
33. 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
Steps of F/S Analysis
Creative Cash Flows Accounting: Technique
Financial Ration based on B/S: Liquidity Ratios
Inventory Cost Flow Methods...
34. 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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35. Cash collections less direct cash inputs less other cash outfllows
Valuation Allowance...
Creative Cash Flows Accounting: Motivation
Bond Issuance Cost under GAAP/IFRS
CFO - Direct method
36. Potentially dilutive securitites [options - warrants - convertible securities]
Characteristics of an effective framework
Gain/(loss) on bond early retirement: (derecognition of debt)
Complex Capital Structure
Capitalization of Interest...
37. 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
FIFO is appropriate
Return on Equity (ROE)...
MD&A contains...
Effects of Lease Classification on Ratios - Operating Lease
38. I/S: COGS lower - EBT higher - Taxes: higher - NI: higher - B/S: INV: higher - W/C: higher - are/E: higher - CF: CFO: lower
CFO - Indirect method steps...
Sustainable Growth
Sales Basis Revenue Recognitions
FIFO results in: (assuming inflationary period)
39. ROE = (NI/EBT)x(EBT/EBIT)x(EBIT/Rev)x(Rev/Asset)x(Asset/Eqty) or (tax burden)x(int. burden)x(EBITmargin)x(Aset TO)x(Fin Lvg)
Types of accounting changes...
DTA/DTL: Effect on Net Income when Tax Rate decreases...
Inv. Valuation reporting Inventory ABOVE costs...
Extended DuPont Equation...
40. Management turnover.
To investigate the stability of that structure - Kilgore would be best served by looking at...
IFRS: Presentation Requirements
Not all CF increase are Sustainable. Example of how Mgmt can Manipulate Cash Flow Statement
B/S - Long-lived assets
41. 1) Intention to hold >1 year (e.g. debt or equity) valued @ cost or mkt value 2) Equity accounted investments
Operating Risk Ratios...
Diluted EPS
Trade-Offs Qualitative Characteristics of IFRS
B/S - investments
42. Decreases DTA -> Decreases Net Income - [Decrease in Valuation Allowance; Increase DTA and Increases Net Income]
3 C's for Credit Analysis...
FIFO after-tax profit =
IFRS/US GAAP Frameworks: F/S elements...
An Increase in the Valuation Allowance Account...
43. 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.
Simple capital structure
Footnote Finance Liability Disclosure
Fraud Triangle - 2) Opportunity
Intercorporate Investment: < 20% votes...
44. Tax liability based on taxable income as per TAX Report/RETURN
Diluted EPS
Valuation Allowance...
Taxation: Tax Payable
Free Cash Flow to the Firm - FCFF
45. Income subject to tax as per Tax Return
Taxable Income
Valuation allowance
Form DEF-14A...
Financial Ratios based on B/S: Solvency (Coverage)
46. 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.
Straight-line depreciation (SL)
IFRS/US GAAP Frameworks: objective of F/S
Auditor/Audit Opinion
Expensed Intangibles...
47. 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
IOSCO
B/S - Long-lived assets PP&E
Cash flow ratios
CFI Analysis...
48. 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
Impact on the Cash Flow of a Premium Bond...
Common Size Statement
From creditor POV: Int. Coverage;
Convergence IFRS/US GAAP...
49. Tax Rate down: DTL down -> Inc. Tax Exp down -> NI up - DTA down -> Inc. Tax Exp up -> NI down
Fundamental principles for PREPARING f/s under IFRS: (IAS No 10
Funded status of the pension plan (under US GAAP & IFRS) is reported where?
Financial Lease Reporting
DTA/DTL: Effect on Net Income when Tax Rate decreases...
50. US 1) Financial Accounting Standards Board; 2) Standards form GAAP; 3) Aims - useful - relevant - reliable - consistent and comparable; 4) SEC deems FASB standard authoritative
days of sales o/s =
B/S - Stockholders' Equity
Intercorporate Investment: 20% - 50% votes...
FASB