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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. CFO: no impact - CFF: increased by amount rcvd at issuance and decreased by payment made at redemption - CFO is lower (b/c no impact) and CFF is higher
IASB - Goals
Asset Revaluation: IFRS
Impact on the Cash Flow of a Zero Coupon Bond...
Taxation: Income Tax Expense
2. 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
Common Size Statement
Net Reporting of Revenue
FASB
Effects of Lease Classification on Ratios - Finance Lease
3. Replacement cost subject to: Upper limit = NRV - Loewr limit = NRV - normal profit margin
Taxation: Income Tax Expense
Form DEF-14A...
Market Value (GAAP)...
B/S - Long-term Liabilities
4. 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
IASB - Goals
Tax Loss Carryforward...
Effects of Lease Classification on Ratios - Finance Lease
Intangible Assets
5. Off B/S asset or liability = Footnotes disclosure - Lease payments are expensed when due via I/S - Payments are CFO outflows
Cash flow ratios
Convergence IFRS/US GAAP...
Cash Flow From Operations (CFO) - FASB
Operating Lease
6. 1) Change in accounting principle; 2) Change in accounting estimate; 3) Prior period adjustments
Types of accounting changes...
SEC guidance for Revenue Recognition
Creative Cash Flows Accounting: Motivation
Inventory Cost Flow Methods...
7. Tax Rate down: DTL down -> Inc. Tax Exp down -> NI up - DTA down -> Inc. Tax Exp up -> NI down
Financial Ratios based on B/S: Solvency (Coverage)
IASB - Goals
DTA/DTL: Effect on Net Income when Tax Rate decreases...
Taxation: Income Tax Expense
8. Employer contributes specific % - No guarantee on future benefits - Employee bears investment risk - Pension expense = employer contribution
Expensed Intangibles...
Defined Contribution Plans
FASB - Harmonization
Forecasting Financial Performance: Application
9. Efficient inventory managment
Fraud Triangle - 1) Incentive/Pressure
Inventory mangement: High T/O (low DOH) and sales growth above industry average
Sarbanes-Oxley Management Report...
Stock options: Use treasury stock method
10. Is required under IFRS but not under GAAP
Fundamental principles for PREPARING f/s under IFRS: (IAS No 10
Footnote disclosure of Reconciliation of opening and closing carrying values...
FIFO is appropriate
Disclosure for each segment...
11. 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
Funded Status US GAAP & IFRS
Lessor Accounting Capital Lease: Sales-Type Lease
Income Statement
Financial Lease Reporting
12. +Cash rcvd from customer - +Cash dividends rcvd - +Cash interest rcvd - +Other cash income ((trading securities) - Payment to suppliers - Cash expenses (wages etc) - Cash interest paid - Cash taxes paid
Add/ Sub changes to related b/s operating accounts
Potentially Dillutive Securities
Cash Flow From Operations (CFO) - FASB
Trade-Offs Qualitative Characteristics of IFRS
13. Working Capital = CA - CL - Working Capital TO = Rev/Avg. Working Capital - Fixed Asset TO = Rev/Avg Net Fixed Assets
Trade-Offs Qualitative Characteristics of IFRS
Activity Ratios
Effects of Lease Classification on Ratios - Operating Lease
Low Quality Earnings is result of...
14. FASB & IASB -LT projects under contract - reliable estimates of revenue - cost and completion time -Rev - exp and profit are recognized in proportion to total cost incurred to date - divided by total expected cost.
Amortization of Bond Discount = (in/out flow) in the indirect method CFO
Market Value (GAAP)...
LIFO results in: (assuming inflationary period)
% of Completion
15. I/S: Income statement account/Sales - B/S: Balance sheet account/ Total Assets
Net Periodic Benefit Costs
Vertical Common Size Statements...
Gain/(loss) on bond early retirement: (derecognition of debt)
Finance (capital) Lease criteria GAAP vs. IFRS
16. Required by IFRS - Permited by US GAAP
Low Quality Earnings is result of...
Component depreciation;
% of Completion
Expensed Intangibles...
17. 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
Analysis: Market Value of Debt
Analyst Treaments of DTL
Cash Flow From Operations (CFO) - FASB
Comprehensive income...
18. 1) B/S asset increased to FMV 2) Increase above original cost to equity via revaluation surplus account (comprehensive Income)
Revaluation above historic cost...
Impact on the B/S of a Zero Coupon Bond...
Which set of accounting standards requires firms to disclose estimated amortization expense for the next five years on intangible assets?
Analyzing Effective Tax Rate Reconciliation
19. Interest Expense = Coupon - Amortization = PV of future CF x market yield @ issuance
Tax base on a liability
Cash Flow: Logic (A = L + E)
Impact on the B/S of a Premium Bond...
What is the economic substance of financial (capital) lease?
20. 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
Fraud Triangle - 3) Attitude/rationalization
Double-decline balance (DDB)
Intercorporate Investment: < 20% votes...
Cost included in Inventory on b/s...
21. Nonreversal DTL - therefore it is permanent = Equity. therefore decrease in DTL = Increase in Equity - Reversal DTL - therefore it is temp = Liability
IFRS: Presentation Requirements
CFO - Direct/Indirect method
LIFO results in: (assuming inflationary period)
Taxation Analyst Adjustments...
22. US Gaap: Balance Sheet - IFRS:Disclosed in Footnotes - May be mentioned in MD&A if mgnt considers it significant
Net Reporting of Revenue
Amortization of Bond Discount = (in/out flow) in the indirect method CFO
Taxation: Income Tax Expense
Funded status of the pension plan (under US GAAP & IFRS) is reported where?
23. Same as other ratios using NI in this case substitut NI for CFO.
Cash flow ratios
Sources of Differences betweent F/S & T/
Revaluation below historic cost...
Amortization of Bond Discount = (in/out flow) in the indirect method CFO
24. 1st: Net Income - dividends declared = chg in are/E - Then: Dividends declared +/- chg dividends payable = cash dividends paid.
Finance (capital) Lease criteria (under US GAAP)
Implication for Analysts: Be aware of differences in tax reconcilation between periods
Creative Cash Flows Accounting: Motivation
Calculate dividends declared...
25. Outflow - (bringing bond DOWN to par)
Amortization of Bond Premium = (in/out flow) in the indirect method CFO
Vertical Common Size Statements...
Valuation allowance
Cash Flow From Financing (USA) (Source of Cash)
26. Includes: cash flow from interst Rec'd and Paid - and Dividend received. Includes all income taxes paid.
The 4 Qualitative Characteristics of IFRS
Types of accounting changes: prior period adjustments
Cash Flow From Operations (CFO) - FASB
Intercorporate Investment: > 50% votes...
27. CFO: cash interest expense - CFF: increased by amount rcvd at issuance and decreased by payment made at redemption - CFO is lower CFF is higher
Traditional DuPont Equation...
Footnote Finance Liability Disclosure
% of Completion
Impact on the Cash Flow of a Premium Bond...
28. Days of sales o/s + days of inv. on hand - # of days payable (shorter the better)
Cash flow ratios
Cash Conversion Cycle =
Operating Lease
Footnote Finance Liability Disclosure
29. 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.
Which set of accounting standards requires firms to disclose estimated amortization expense for the next five years on intangible assets?
Tax base of an asset
Form DEF-14A...
Cash Flow From Operations (CFO) - FASB
30. Means that at least ONE of the following is true: Company has poor profit margin; Company has poor asset TO; Company is underleveraged
Gain/(loss) on bond early retirement: (derecognition of debt)
Sarbanes-Oxley Management Report...
Financial Liability: US GAAP/Amortized at Cost
ROE interpretation: if ROE is low...
31. 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
Taxation: Tax Payable
Financial Lease Reporting
Taxation: Income Tax Expense
Double-decline balance (DDB)
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
Financial Implications of Capitalizing...
Free Cash Flow to Equity - FCFE
Debt covenants
Taxation Disclosure Requirements
33. 1) understandability; 2) relevance; 3) reliability; and 4)comparability - No hierarchy
LIFO is appropriate
CFI Analysis...
The 4 Qualitative Characteristics of IFRS
Market Value (GAAP)...
34. It is Rare - but permitted for commodity producer/dealers B/S = NRV - I/S = unrealized gains/losses
Depreciation Methods...
Which of the following characteristics should be of least concerned about management's opportunities to commit fraud?
Inv. Valuation reporting Inventory ABOVE costs...
Impairments recognition (IFRS)
35. 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
Types of accounting changes...
Measures of Operating Performance - Efficiency Ratios...
Sarbanes-Oxley Management Report...
From creditor POV: Int. Coverage;
36. 1) Relevance vs. reliability; 2) Benefit > cost; 3) Excludes intangibles and non-quantifiable info.
Expensed Intangibles...
Trade-Offs Qualitative Characteristics of IFRS
4 General Categories for Creditworthiness/Capacity...
Net Reporting of Revenue
37. GAAP: direct method must disclose adj to reconcile NI to CFO. reconciliation is NOT required for IFRS. IFRS: pymts for Int & Taxes MUST be disclosed separately in the CF Stmnt under direct or indirect. Under GAAP - this can be reported in CF stmnt or
Credit Analysis: Ratios
Taxable Income
CFO Disclosure requirement...
Intangibles under IFRS...
38. Lost sales from stock outs
Valuation allowance
Inventory mangement: High T/O (low DOH) and sales growth below industry average
days of sales o/s =
IFRS Revenue Recognition For Service
39. 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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40. 1) Scale & Diversification - 2) Operational Efficiency - 3) Margin Stability - 4) Leverage
4 General Categories for Creditworthiness/Capacity...
B/S - Long-term Liabilities
Tax base of an asset
Analyst Treaments of DTL
41. Cash Flow available for distribution to the c/s; after all obligations have been paid. CFO - fixed capital investment + net debt increase or CFO - net cap expenditure + net borrowings
Free Cash Flow to Equity - FCFE
Cash Flow From Operations (CFO) - FASB
Double-decline balance (DDB)
B/S - investments
42. 1) Timing Differences: Accrual vs. modified cash accounting - Differences in reporting methods estimates
Sources of Differences: Temporary
Taxation Disclosure Requirements
Financial Ration based on B/S: Liquidity Ratios
Comprehensive income...
43. 'Assets' - Cash spent on long-term assets - Proceeds from the sale of long-term assets - Cash flow from investments in JVs - affiliates - and long-term investments in securities (trading securities are CFO) - [CFI = Cash additions - cash rcvd on disp
Footnote disclosure of Reconciliation of opening and closing carrying values...
Net Realizable Value (NRV) (IFRS)
Cash Flow From Investing (USA) (Assets)
Return on total capital (ROTC)...
44. 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.
Income Statement
IFRS: Presentation Requirements
Reasons to Lease...
Motivation to Under-report Earnings
45. 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
Financial Assets: US GAAP/Amortized at Cost
Motivation to Understate Assets/Overstate Liabilities
Implication for Analysts: Be aware of differences in tax reconcilation between periods
FIFO results in: (assuming inflationary period)
46. 365/(Inv. T/O) = 365/( COGS/ Avg. Inv.)
Sustainable Growth
Activity Based Restrictions
days of inv. on hand =
Stock options: Use treasury stock method
47. 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.
Which set of accounting standards requires firms to disclose estimated amortization expense for the next five years on intangible assets?
Fraud Triangle - 1) Incentive/Pressure
IFRS Revenue Recognition
Types of accounting changes...
48. = LIFO ending inventory + LIFO reserve FIFO after-tax profit
FIFO ending inventory =
Analyzing Effective Tax Rate Reconciliation
B/S - Stockholders' Equity
Revaluation below historic cost...
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)
CFO - Direct/Indirect method
Asset Revaluation: IFRS
An Increase in the Valuation Allowance Account...
Motivation to Understate Assets/Overstate Liabilities
50. 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:
Which of the following characteristics should be of least concerned about management's opportunities to commit fraud?
Return on total capital (ROTC)...
CFO - Indirect method steps...
SEC guidance for Revenue Recognition