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Test your basic knowledge |
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.
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. 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.
Not all CF increase are Sustainable. Example of how Mgmt can Manipulate Cash Flow Statement
Stock options: Use treasury stock method
CFO Analysis...
Forecasting Financial Performance: Application
2. 1) Calculate cash raised on exercise 2) Repurchase shares at avg. price 3) New Shares = exercised - repurchased
Sources of Differences betweent F/S & T/
Inventory mangement: High T/O (low DOH) and sales growth below industry average
Funded Status US GAAP & IFRS
Stock options: Use treasury stock method
3. 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)
Inv. Valuation reporting Inventory ABOVE costs...
Sales Basis Revenue Recognitions
Disclosure for each segment...
Free Cash Flow -CFO
4. '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
Operating vs. Non-operating Income
Deferred Tax Liability: (DTL)
Cash Flow From Financing (USA) (Source of Cash)
Horizontal Common Size Statements...
5. Divdends and share repurchases - Production and investment - M&A - New debt issuance - Payoff pattern and liquidation priority - Maintenance of assets used as collateral
Impact on the B/S of a Premium Bond...
Activity Based Restrictions
Convergence IFRS/US GAAP...
The objective of f/s is to...
6. Outflow - (bringing bond DOWN to par)
Sources of Differences: Temporary
Which of the following characteristics should be of least concerned about management's opportunities to commit fraud?
Amortization of Bond Premium = (in/out flow) in the indirect method CFO
Net Realizable Value (NRV) (IFRS)
7. You.S. GAAP
Which set of accounting standards requires firms to disclose estimated amortization expense for the next five years on intangible assets?
B/S - Long-lived assets
Free Cash Flow -CFO
Activity Ratios
8. 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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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
FIFO results in: (assuming inflationary period)
Analysis: Market Value of Debt
days of sales o/s =
B/S - short-term investments
10. 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
Form 8-K...
Effects of Lease Classification on Ratios - Operating Lease
Extraordinary Items: Unusual AND Infrequent items...
Credit Rating Process...
11. Net income + non-cash charges - working cap investment
Free Cash Flow -CFO
Common Size Statement
IASB - Goals
DBO Funded Status =
12. Reported BELOW the line. Operations mgmt has decided to dispose of but: 1) has not yet done so or 2) did so in CY after it generated profit/(loss) Must be physicallly and operationally distinct from firm. Analyst must determine effects on future inco
Discontinued Operations...
IOSCO
Complex Capital Structure
B/S - Long-term Liabilities
13. Carrying amount of the liability minus the amount that will be deductible in the future.
Tax base on a liability
DTA Issues
Financial Liability: US GAAP/Fair Market Value
Simple capital structure
14. Efficient inventory managment
IFRS: Presentation Requirements
Inventory mangement: High T/O (low DOH) and sales growth above industry average
Financial Adj to Facilitate Comparison...
Fraud Triangle - 2) Opportunity
15. 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...
Creative Cash Flows Accounting: Motivation
B/S - Long-lived assets PP&E
Cash Flow From Financing (USA) (Source of Cash)
16. Potentially dilutive securitites [options - warrants - convertible securities]
Types of accounting changes...
Forecasting Financial Performance: Top Down Approach...
Complex Capital Structure
Financial Ratio based on I/S...
17. [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
Not all CF increase are Sustainable. Example of how Mgmt can Manipulate Cash Flow Statement
Financial Adj to Facilitate Comparison...
Diluted EPS
Intercorporate Investment: 20% - 50% votes...
18. IAS 39 Marketable securities - IAS 2 Inventories (LIFO prohibited) - IAS 16 PP&E - JV (IFRS: proportional consolidation) - IAS 38 Intangibles - IAS 18 & 11 Contruction Contracts - Extraordinary Items: Prohibited in IFRS - Cash Flow Statement
Types of accounting changes: prior period adjustments
Sales Basis Revenue Recognitions
Convergence IFRS/US GAAP...
Intercorporate Investment: < 20% votes...
19. Means that at least ONE of the following is true: Company has poor profit margin; Company has poor asset TO; Company is underleveraged
ROE interpretation: if ROE is low...
Analyzing Effective Tax Rate Reconciliation
Units of Production Method
FIFO after-tax profit =
20. Return on Total Equity = NI/ Avg. Total Equity - Return on C/E = NI - Pref. Div/ Avg. Common Equity
Inventory Valuatoin (LCM)
FIFO ending inventory =
Creative Cash Flows Accounting: Technique
Return on Equity (ROE)...
21. 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
Effects of Lease Classification on Ratios - Operating Lease
Financial Liability: US GAAP/Amortized at Cost
Inventory mangement: High T/O (low DOH) and sales growth below industry average
Comprehensive income...
22. 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)
Extended DuPont Equation...
Inventory mangement: High T/O (low DOH) and sales growth above industry average
Return on Assets ROA...
Impact on the B/S of a Par Bond...
23. 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
Expensed Intangibles...
Defined Benefit Obligations (DBO)
Revaluation above historic cost...
24. 1) if 50% of its revenue is earned externally 2) if a business area has at least 10% of a firm's: Revenue; or Operating profit; or Use of asset 3) Business and geographical segments
Segment Reporting
Impact on the Cash Flow of a Zero Coupon Bond...
Intercorporate Investment: 20% - 50% votes...
Antidilutive Securities
25. LIFO after-tax profit + (change in LIFO reserve)(1 - t)
One major difference between the presentation of deferred tax assets and liabilities under IFRS and under U.S. GAAP is that...
Stock options: Use treasury stock method
IFRS: Presentation Requirements
FIFO after-tax profit =
26. ROE = (NI/Sales) x (Sales/Assets) x (Assets/Equity) or ROE= Net Profit Margin x Asset TO x Leverage Ratio
Impact on the Cash Flow of a Discount Bond...
CFO - Indirect method steps...
Balance Sheet - formats
Traditional DuPont Equation...
27. Share are to ensure significant influence over the company - Affiliate/Associate - Equity Method
Taxation: Income Tax Expense
Intercorporate Investment: 20% - 50% votes...
LIFO results in: (assuming inflationary period)
Funded Status US GAAP & IFRS
28. GAAP: more quantitative rules - IFRS: more qualitative approach based on whether the risks and reward of the asset have tranferred.
Cash Flow From Operations (CFO) - FASB
Warning Signs of Earnings Manipulation
Finance (capital) Lease criteria GAAP vs. IFRS
Cash Flow: Logic (A = L + E)
29. FIFO: EI = newest purchases - LIFO: EI = oldest purchases - Avg. Costs: EI = Available for sale/Units - Specific ID: high value items (cars - diamonds etc)
Disclosure for each segment...
Measures of Operating Performance - Efficiency Ratios...
Which set of accounting standards requires firms to disclose estimated amortization expense for the next five years on intangible assets?
Inventory Cost Flow Methods...
30. Depreciation exp = (cost - residual value) x (# units produced / total expected to produce)
Units of Production Method
Amortization of Bond Discount = (in/out flow) in the indirect method CFO
Unusual OR Infrequent items...
Balance Sheet
31. 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
Warning Signs of Earnings Manipulation
Tax Loss Carryforward...
Measurement of A & L disclosure in footnotes
Impact on the B/S of a Par Bond...
32. 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
Valuation allowance
Expensed Intangibles...
B/S - Long-lived assets PP&E
Cash Flow: Logic (A = L + E)
33. 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
Revaluation above historic cost...
Forecasting Financial Performance: Application
Impairments recognition (GAAP)
Statement of Cash Flow - relevance...
34. G = (earnings Retention rate) x (ROE) - earnings retention rate = [1-(payout ratio)] - payout ratio = Common dividends/ NI - Pref. Div.
Sustainable Growth
Impact on the B/S of a Premium Bond...
Motivation to Overstate Assets/Understate Liabilities
IFRS/US GAAP Frameworks: Recognition of Elements...
35. 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:
Taxation: Tax Payable
Horizontal Common Size Statements...
CFO - Indirect method steps...
Impact on the B/S of a Par Bond...
36. 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)
Balance Sheet - formats
Capitalization of Interest...
Credit Rating Process...
Capitalized Intangibles...
37. 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
Cash Conversion Cycle =
An Increase in the Valuation Allowance Account...
The 4 Qualitative Characteristics of IFRS
Double-decline balance (DDB)
38. 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
Auditor/Audit Opinion
CFO Analysis...
Roles of financial reporting & analysis include...
IOSCO
39. Ensure that information in f/s is useful to a wide range of users.
The objective of f/s is to...
Operating Lease
Impact on the B/S of a Par Bond...
Defined Benefit Plans
40. Amount deductible in future tax return
Types of accounting changes...
IASB
Tax base of an asset
Finance (capital) Lease criteria (under US GAAP)
41. Follows the traditional ledger account - assets on the left hand side and liabilities and equity on the right hand side.
What is the economic substance of financial (capital) lease?
Disclosure for each segment...
Free Cash Flow to the Firm - FCFF
The account format of B/S
42. 1) is a contra asset account used to reduce the value of a DTA - 2) it is used to reduce the asset when future taxable income is deemed to be insefficient to fully use the DTA.
An Increase in the Valuation Allowance Account...
Valuation allowance
Creative Cash Flows Accounting: Motivation
Sources of Differences: Temporary
43. 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)
Operating Risk Ratios...
Net Periodic Benefit Costs
Add/ Sub changes to related b/s operating accounts
Sources of Differences betweent F/S & T/
44. Companies must file this form to disclose material events including significant asset acquisitions and disposals - changes in management or corporate governance - or matters related to its accountants - financial statements - or the markets on which
Cash flow ratios
IFRS: Presentation Requirements
IASB
Form 8-K...
45. Same as other ratios using NI in this case substitut NI for CFO.
Cash flow ratios
IFRS: Presentation Requirements
Sources of Differences: Permanent
FIFO results in: (assuming inflationary period)
46. Actual cash outflow for taxes paid during current period
Income Tax Paid...
Inventory Valuatoin (LCM)
Debt covenants
Effects of Lease Classification on Ratios - Operating Lease
47. 1) understandability; 2) relevance; 3) reliability; and 4)comparability - No hierarchy
The 4 Qualitative Characteristics of IFRS
LIFO results in: (assuming inflationary period)
Taxable Income
Sources of Differences betweent F/S & T/
48. EBIT/ Avg. total capital - Total capital includes: debt capital - so int. is aded back to NI
IFRS/US GAAP Frameworks: objective of F/S
Financial Adj to Facilitate Comparison...
Funded status of the pension plan (under US GAAP & IFRS) is reported where?
Return on total capital (ROTC)...
49. 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)
FIFO results in: (assuming inflationary period)
B/S - Long-lived assets PP&E
Installment Method...
CFO - Direct/Indirect method
50. CV of Op. Inc = std dev. EBIT/ Mean EBIT - CV of Revenue: std. dev Rev/ mean Rev. - Operating Leverage = %chg in EBIT/ %chg in Sales
IASB
Operating Risk Ratios...
Characteristics of an effective framework
To investigate the stability of that structure - Kilgore would be best served by looking at...