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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.
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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. 1st: Net Income - dividends declared = chg in are/E - Then: Dividends declared +/- chg dividends payable = cash dividends paid.
B/S - Long-lived assets
The report format of B/S
Fraud Triangle - 1) Incentive/Pressure
Calculate dividends declared...
2. Days of sales o/s + days of inv. on hand - # of days payable (shorter the better)
Cash Conversion Cycle =
Stock options: Use treasury stock method
Ending Inventory =
Net Periodic Benefit Costs
3. 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
Activity Based Restrictions
Cash Flow: Logic (A = L + E)
Barter (IASB & FASB)
CFO - Indirect method steps...
4. Return on Total Equity = NI/ Avg. Total Equity - Return on C/E = NI - Pref. Div/ Avg. Common Equity
Sarbanes-Oxley Management Report...
Creative Cash Flows Accounting: Technique
Return on Equity (ROE)...
Taxable Income
5. Profit is recognized only when it exceeds estimated total cost.
Cost recovery method...
IOSCO
Cash Flow From Operations (CFO) - FASB
Sarbanes-Oxley Management Report...
6. I/S: Income statement account/Sales - B/S: Balance sheet account/ Total Assets
Complex Capital Structure
Vertical Common Size Statements...
IASB
Sustainable Growth
7. US 1) Financial Accounting Standards Board; 2) Standards form GAAP; 3) Aims - useful - relevant - reliable - consistent and comparable; 4) SEC deems FASB standard authoritative
The account format of B/S
FASB
Deferred Tax Liability: (DTL)
LIFO is appropriate
8. Securities that would INCREASE EPS if exercised
days of inv. on hand =
Asset Revaluation: IFRS
Antidilutive Securities
Forecasting Financial Performance: Application
9. 1) Capitalize interst during construction period when building its own operating facility; 2) Interest must actually be paid by the firm; 3) Specific and general debt interest is capitalized
SEC guidance for Revenue Recognition
Capitalization of Interest...
Vertical Common Size Statements...
The report format of B/S
10. If any ONE out of the FOUR are met must be classifed as Financial Lease: 1) Title transfered to lessee at the end of lease; 2) Bargain purchase option at the end of the lease; 3) Lease period is at least 75% of asset's useful life; 4) The PV of least
Antidilutive Securities
Measures of Operating Performance - Efficiency Ratios...
Effects of Lease Classification on F/S - Operating Lease
Finance (capital) Lease criteria (under US GAAP)
11. 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
Financial Ration based on B/S: Liquidity Ratios
Calculate dividends declared...
Creative Cash Flows Accounting: Technique
Funded Status US GAAP & IFRS
12. Low: P/E - P/CF - or P/S - High: ROE - ROA - growth rates of sales and earnings - Low: leverage
LIFO results in: (assuming inflationary period)
Inventory mangement: High T/O (low DOH) and sales growth above industry average
Free Cash Flow to the Firm - FCFF
Screening for Potential Equity Investment: Criteria
13. 1) Change in accounting principle; 2) Change in accounting estimate; 3) Prior period adjustments
Asset Revaluation: IFRS
Extraordinary Items: Unusual AND Infrequent items...
IOSCO
Types of accounting changes...
14. 1) Evidence of an arrangement; 2) Completion of earnings process; 3) Price is determined or determinable; 4) Assurance of payment
SEC guidance for Revenue Recognition
Sources of Differences betweent F/S & T/
Valuation allowance
% of Completion
15. Slow moving or obsolete inventory
Amortization of Bond Discount = (in/out flow) in the indirect method CFO
Barriers to a single framework...
Inventory mangement: Low T/O (High DOH)...
Traditional DuPont Equation...
16. 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
FIFO after-tax profit =
Deferred Tax Asset: (DTA)
Taxation Disclosure Requirements
Financial Ratio based on I/S...
17. GAAP: more quantitative rules - IFRS: more qualitative approach based on whether the risks and reward of the asset have tranferred.
Analyzing Effective Tax Rate Reconciliation
Income Tax Paid...
Barter (IASB & FASB)
Finance (capital) Lease criteria GAAP vs. IFRS
18. 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.
Financial Lease Reporting
Which set of accounting standards requires firms to disclose estimated amortization expense for the next five years on intangible assets?
Net Realizable Value (NRV) (IFRS)
Types of accounting changes: accounting principle
19. 1) Evaluating equity investments for a portfolio; 2) Evaluating potential M&A; 3) Evaluating a subsidiary of a parent company; 4) Deciding on private equity/ venture cap investment 5) Determine creditworthiness - borrowing; 6) Extending credit to
Not all CF increase are Sustainable. Example of how Mgmt can Manipulate Cash Flow Statement
Convergence IFRS/US GAAP...
Impairments recognition (GAAP)
Roles of financial reporting & analysis include...
20. 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...
The account format of B/S
IFRS/US GAAP Frameworks: Measurement of Elements...
Impairments recognition (GAAP)
21. 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
Financial Ratio based on I/S...
Convergence IFRS/US GAAP...
Activity Ratios
Antidilutive Securities
22. 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)
Credit Analysis: Ratios
Ratios that directly affect choice of Inventory Account...
Balance Sheet - formats
Cash Flow From Operations (CFO) - FASB
23. 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.
Form DEF-14A...
Auditor/Audit Opinion
Trade-Offs Qualitative Characteristics of IFRS
Return on Assets ROA...
24. Trade relief - Contingent consideration - Union concessions
Financial Liability: US GAAP/Amortized at Cost
Financial Ratios based on B/S: Solvency ratio
Motivation to Under-report Earnings
To investigate the stability of that structure - Kilgore would be best served by looking at...
25. BV - cash paid = gain/(loss) + any unamortized issue costs (US only) = Gain/Loss on repurchase [I/S as continuing operations)
Effects of Lease Classification on Ratios - Operating Lease
Antidilutive Securities
Inv. Valuation reporting Inventory ABOVE costs...
Gain/(loss) on bond early retirement: (derecognition of debt)
26. 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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27. Share are to ensure significant influence over the company - Affiliate/Associate - Equity Method
IFRS Revenue Recognition
Return on total capital (ROTC)...
B/S - Long-term Liabilities
Intercorporate Investment: 20% - 50% votes...
28. 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
Simple capital structure
Complex Capital Structure
Defined Benefit Obligations (DBO)
29. Trading securities - Available-for-sale - Derivatives (standalone or embedded in non-derivative intrument) - Assets with fair value exposure hedged by derivatives
Credit Analysis: Ratios
days of inv. on hand =
Financial Assets: US GAAP/Fair Market Value
Net Reporting of Revenue
30. 1) Start with NI 2) Sub Gains or add losses from financing or investing CFs 3) Add non-cash charges (depr't & amort'z) & sub all non cash revenue 4) Add/ Sub changes to related b/s operating accounts:
Calculate dividends declared...
Lessor Accounting Capital Lease: Sales: Direct Financing Lease
CFO - Indirect method steps...
Finance (capital) Lease criteria GAAP vs. IFRS
31. (net income - preferred dividends)/weighted average of common shares outstanding - only income from continuing operations is considered
Cash Flow From Investing (USA) (Assets)
% of Completion
BASIC EPS
Free Cash Flow -CFO
32. 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)
Sales Basis Revenue Recognitions
Motivation to Over-report Earnings
Debt covenants
Trade-Offs Qualitative Characteristics of IFRS
33. 1) Balance Sheet; 2) Comprehensive Income; 3) Change in Equity; 4) Cash Flow Statement; 5) Accounting policies and notes.
Sarbanes-Oxley Management Report...
ROE interpretation: if ROE is low...
Net Reporting of Revenue
IFRS: Required F/S
34. [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
Sources of Differences betweent F/S & T/
Diluted EPS
Intercorporate Investment: 20% - 50% votes...
Cash Flow: Logic (A = L + E)
35. I/S: COGS higher - EBT lower - Taxes: lower - NI: Lower - B/S: INV: lower - W/C: Lower - are/E: lower - CF: CFO: higher
LIFO results in: (assuming inflationary period)
Impact on the B/S of a Premium Bond...
days of inv. on hand =
Motivation to Understate Assets/Overstate Liabilities
36. 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
Operating vs. Non-operating Income
Taxation: Tax Payable
Credit Rating Process...
Extraordinary Items: Unusual AND Infrequent items...
37. Actual cash outflow for taxes paid during current period
Straight-line depreciation (SL)
Income Tax Paid...
Sustainable Growth
IFRS/US GAAP Frameworks: underlying assumptions...
38. = LIFO ending inventory + LIFO reserve FIFO after-tax profit
Finance (capital) Lease criteria GAAP vs. IFRS
Forecasting Financial Performance: Top Down Approach...
Auditor/Audit Opinion
FIFO ending inventory =
39. 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)
Add/ Sub changes to related b/s operating accounts
Tax Loss Carryforward...
Financial Ratios based on B/S: Solvency (Coverage)
Antidilutive Securities
40. 1) Increase comparability; 2) Reduce expense of overseas capital; 3) Reduce the expense of producing consolidated accounts
Deferred Tax Liability: (DTL)
CFO - Indirect method steps...
Impairments recognition (GAAP)
FASB - Harmonization
41. 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.
Inventory Systems...
Types of accounting changes: accounting principle
4 General Categories for Creditworthiness/Capacity...
Impact on the B/S of a Discount Bond...
42. Derivatives - Non-derivative investments with fair value exposure hedged by derivatives
Warning Signs of Earnings Manipulation
Debt covenants
Financial Liability: US GAAP/Fair Market Value
IOSCO
43. 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.
Operating Risk Ratios...
Low Quality Earnings is result of...
Defined Benefit Obligations (DBO)
The best indicator of overstating its profits is...
44. 1) B/S asset increased to FMV 2) Increase above original cost to equity via revaluation surplus account (comprehensive Income)
Cash Flow From Operations (CFO) - FASB
Revaluation above historic cost...
Deferred Tax Asset: (DTA)
IFRS/US GAAP Frameworks: Recognition of Elements...
45. FASB: Asset is a future economic benefit - IASB: Asset is a RESOURCE from which future economic benefit is expected to flow.
CFO - Direct method
IFRS/US GAAP Frameworks: F/S elements...
Analyzing Effective Tax Rate Reconciliation
Expensed Intangibles...
46. 1) Purchase cost; 2) conversion costs; 3) Allocation of fixed production OH based on normal capacity levels; 4) Other costs necessary to bring the inventory to its present location and condition (freight costs & installation) - Exclude: Admin OH - S
Common Size Statement
The 4 Qualitative Characteristics of FASB...
Cost included in Inventory on b/s...
Income Tax Paid...
47. IFRS Allows firm to report PP&E at FMV less Accm' Depr' - Must disclose carrying vlaue using historic cost model.
Types of accounting changes: accounting estimate
Tax Loss Carryforward...
Asset Revaluation: IFRS
Revaluation above historic cost...
48. Income subject to tax as per Tax Return
Return on total capital (ROTC)...
Taxable Income
Not all CF increase are Sustainable. Example of how Mgmt can Manipulate Cash Flow Statement
Funded Status US GAAP & IFRS
49. Shows the performance of the company over a reporting period.
Balance Sheet - formats
SEC guidance for Revenue Recognition
Income Statement
FASB
50. 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
Warning Signs of Earnings Manipulation
Form 144...
Comprehensive income...
Financial Liability: US GAAP/Fair Market Value
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