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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.
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. Tax Rate down: DTL down -> Inc. Tax Exp down -> NI up - DTA down -> Inc. Tax Exp up -> NI down
IASB - Goals
DTA/DTL: Effect on Net Income when Tax Rate decreases...
Analyzing Effective Tax Rate Reconciliation
Financial Implications of Capitalizing...
2. Securities that would DECREASE EPS if exercised - If X< Avg. stock price then could be exercised - If X> Avg. stock price then will not be exercised
B/S - Long-term Liabilities
From creditor POV: Int. Coverage;
Disclosure for each segment...
Dilutive Securities
3. + Service Costs (recurring costs (actual)) - + Interest Costs (recurring costs (actual)) - - Expected return on plan assets (smoothed event) - +/- Amort of (gains) and losses (smoothed event) - +/- Amort of prior service costs* (smoothed event) - +/-
Net Periodic Benefit Costs
Which of the following characteristics should be of least concerned about management's opportunities to commit fraud?
Defined Benefit Plans
Steps of F/S Analysis
4. Assets: lower - Liabilities: lower - NI (Early yrs): higher - CFO: lower (b/c entire pymt is classed as CFO) - CFF: higher - Total CF: Same
Funded Status US GAAP & IFRS
Fraud Triangle - 2) Opportunity
Finance (capital) Lease criteria GAAP vs. IFRS
Effects of Lease Classification on F/S - Operating Lease
5. Ensure that information in f/s is useful to a wide range of users.
The objective of f/s is to...
Intangibles under IFRS...
Taxation Analyst Adjustments...
Gain/(loss) on bond early retirement: (derecognition of debt)
6. US 1) Financial Accounting Standards Board; 2) Standards form GAAP; 3) Aims - useful - relevant - reliable - consistent and comparable; 4) SEC deems FASB standard authoritative
Funded status of the pension plan (under US GAAP & IFRS) is reported where?
FASB
Dilutive Securities
Types of accounting changes: accounting principle
7. G = (earnings Retention rate) x (ROE) - earnings retention rate = [1-(payout ratio)] - payout ratio = Common dividends/ NI - Pref. Div.
Sustainable Growth
Return on Assets ROA...
Debt covenants
Stock options: Use treasury stock method
8. 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
Impact on the Cash Flow of a Premium Bond...
CFO Disclosure requirement...
Cash Flow From Operations (CFO) - IFRS
Finance (capital) Lease criteria (under US GAAP)
9. 365/(AR T/O) = 365/(Rev/Avg. AR)
Form DEF-14A...
days of sales o/s =
Return on total capital (ROTC)...
Net Periodic Benefit Costs
10. Profit is recognized only when it exceeds estimated total cost.
Cash flow ratios
Sources of Differences: Permanent
Cost recovery method...
Credit Rating Process...
11. 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
Intercorporate Investment: 20% - 50% votes...
FIFO ending inventory =
Valuation Allowance...
Net Reporting of Revenue
12. 1) Timing Differences: Accrual vs. modified cash accounting - Differences in reporting methods estimates
Inventory mangement: Low T/O (High DOH)...
Cash Flow From Investing (USA) (Assets)
Sources of Differences: Temporary
Sustainable Growth
13. 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: Measurement of Elements...
IFRS/US GAAP Frameworks: purpose of framework
FIFO after-tax profit =
Impairments recognition (GAAP)
14. LT D-to-E = Total LT Debt / Total Equity - D-to-E = Total Debt / Total Equity - Financial leverage ratio = Total Assets/Total Equity - Total Debt Ratio = Total Debt / Total Asset - Debt-to-Capital = Total Debt/ Total Debt + SOE - All Solvency are ove
Financial Ratios based on B/S: Solvency ratio
The report format of B/S
FIFO after-tax profit =
LIFO results in: (assuming inflationary period)
15. '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
Funded Status US GAAP & IFRS
CFO Analysis...
Taxation Disclosure Requirements
Cash Flow From Financing (USA) (Source of Cash)
16. 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
Impact on the Cash Flow of a Zero Coupon Bond...
Inventory Valuatoin (LCM)
IASB
The 4 Qualitative Characteristics of FASB...
17. I/S: Income statement account/Sales - B/S: Balance sheet account/ Total Assets
Income Tax Paid...
Fraud Triangle - 2) Opportunity
Vertical Common Size Statements...
What is the economic substance of financial (capital) lease?
18. I/S: COGS higher - EBT lower - Taxes: lower - NI: Lower - B/S: INV: lower - W/C: Lower - are/E: lower - CF: CFO: higher
Taxation Analyst Adjustments...
Lessor Accounting Capital Lease: Sales: Direct Financing Lease
3 C's for Credit Analysis...
LIFO results in: (assuming inflationary period)
19. 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
FIFO ending inventory =
Effects of Lease Classification on F/S - Finance Lease
Defined Benefit Plans
Potentially Dillutive Securities
20. 1) Revenue (external & internal) 2) Segment results (operating profit) 3) Carrying amount of segment asset4 4) Segment liabilities (IFRS) 5) Cost of PPE and intangibles acquired 6) Depreciation and Amort expenses 7) Other non-cash expense 8) Share of
Disclosure for each segment...
The 4 Qualitative Characteristics of FASB...
Financial Lease Reporting
Asset Revaluation: IFRS
21. Refers to change in mgmt judgement Does NOT require restatement of prior pd earnings; Disclose in footnotes
Inventory mangement: High T/O (low DOH) and sales growth above industry average
Types of accounting changes: accounting estimate
Operating vs. Non-operating Income
LIFO is appropriate
22. Management turnover.
IOSCO
IFRS/US GAAP Frameworks: F/S elements...
Add/ Sub changes to related b/s operating accounts
To investigate the stability of that structure - Kilgore would be best served by looking at...
23. 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)
Fraud Triangle - 2) Opportunity
B/S - Long-lived assets
Extended DuPont Equation...
Effects of Lease Classification on Ratios - Operating Lease
24. 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
Implication for Analysts: Be aware of differences in tax reconcilation between periods
Intangibles under IFRS...
Financial Lease Reporting
Defined Benefit Obligations (DBO)
25. 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.
Funded Status US GAAP & IFRS
Fraud Triangle - 1) Incentive/Pressure
CFO Disclosure requirement...
Effects of Lease Classification on F/S - Operating Lease
26. GAAP: shown as a separate prepaid asset and amortized - IFRS: Deducted from proceeds and liability therefore effective interest rate is HIGHER under IFRS than GAAP.
Bond Issuance Cost under GAAP/IFRS
Defined Benefit Obligations (DBO)
MD&A contains...
Tax base on a liability
27. It is Rare - but permitted for commodity producer/dealers B/S = NRV - I/S = unrealized gains/losses
Financial Liability: US GAAP/Fair Market Value
ROE interpretation: if ROE is low...
Inv. Valuation reporting Inventory ABOVE costs...
Ending Inventory =
28. 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
IASB - Goals
Taxation: Tax Payable
Characteristics of an effective framework
IASB
29. Assets - liabilities - and equity are presented in a single column.
Defined Benefit Plans
The report format of B/S
Financial Ratios based on B/S: Solvency ratio
B/S - Long-term Liabilities
30. Research = Expensed Development may be capitalized when the following critera is met: (ie if in the Development stage and NOT research stage) 1) process is clearly identified 2) Cost can be clearly idenfified 3) Technical feasibility established 4) M
Capitalized Intangibles...
B/S - investments
Impairments recognition (GAAP)
Intangibles under IFRS...
31. 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
DTA/DTL: Effect on Net Income when Tax Rate decreases...
Types of accounting changes: prior period adjustments
Inventory Valuatoin (LCM)
32. 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
Cash Flow From Operations (CFO) - FASB
LIFO is appropriate
Taxation Analyst Adjustments...
From creditor POV: Int. Coverage;
33. 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
Financial Ratios based on B/S: Solvency ratio
Net Periodic Benefit Costs
FIFO is appropriate
Impact on the B/S of a Zero Coupon Bond...
34. Diff. in depreciation methods/assumptions; Diff. in inventory methods/assumptions; Diff. in treatment of the effect of exchg rate chgs; Diff. in classifications of investment securities - Goodwill: Internally Generated DON'T capitalize - Purchased =
Financial Adj to Facilitate Comparison...
From creditor POV: Int. Coverage;
Taxable Income
Operating vs. Non-operating Income
35. Follows the traditional ledger account - assets on the left hand side and liabilities and equity on the right hand side.
Straight-line depreciation (SL)
4 General Categories for Creditworthiness/Capacity...
The account format of B/S
IFRS/US GAAP Frameworks: Measurement of Elements...
36. 1) Valuation; 2) Standard setting; 3) Measurement
IFRS/US GAAP Frameworks: Recognition of Elements...
Barriers to a single framework...
Operating Risk Ratios...
Effects of Lease Classification on Ratios - Finance Lease
37. Small investment for div/capital gains purpose - If Secondary market: Held-to-maturity: Debt securities co intend to hold to maturity; Carried at Amortized cost. Available-for-sale: Sold to satisfy Debt/Equity Needs; Currrent or non-current; B/S @ MV
Discontinued Operations...
Intercorporate Investment: < 20% votes...
The best indicator of overstating its profits is...
FIFO results in: (assuming inflationary period)
38. 1) Intention to hold >1 year (e.g. debt or equity) valued @ cost or mkt value 2) Equity accounted investments
Sources of Differences: Permanent
Sustainable Growth
B/S - investments
Simple capital structure
39. 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
IFRS: Required F/S
Inv. Valuation reporting Inventory ABOVE costs...
CFI Analysis...
Impairments recognition (GAAP)
40. 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
Activity Based Restrictions
FASB - Harmonization
Steps of F/S Analysis
Capitalized Intangibles...
41. EU 1) Int'l Accounting Standards Board; 2) Unified int'l frameworks of accounting standards (IFRS); 3) Addopted by EU in 2005
Financial Ratios based on B/S: Solvency (Coverage)
IASB
Gross Reporting of Revenue
Auditor/Audit Opinion
42. 1) Credit Scoring (CF Forecast) 2) Equity Investment screening (cutoff values)
CFO - Direct/Indirect method
Credit Rating Process...
Fraud Triangle - 3) Attitude/rationalization
Forecasting Financial Performance: Application
43. Return on Total Equity = NI/ Avg. Total Equity - Return on C/E = NI - Pref. Div/ Avg. Common Equity
IFRS: Required F/S
Return on Equity (ROE)...
Financial Ratios based on B/S: Solvency (Coverage)
Form DEF-14A...
44. 1) Calculate cash raised on exercise 2) Repurchase shares at avg. price 3) New Shares = exercised - repurchased
Implication for Analysts: Be aware of differences in tax reconcilation between periods
Impact on the B/S of a Discount Bond...
Stock options: Use treasury stock method
Inventory mangement: High T/O (low DOH) and sales growth above industry average
45. NRV = Est. selling cost - Est. cost of complition - selling costs
FIFO results in: (assuming inflationary period)
Component depreciation;
Net Realizable Value (NRV) (IFRS)
Financial Ration based on B/S: Liquidity Ratios
46. 1) Change in accounting principle; 2) Change in accounting estimate; 3) Prior period adjustments
IFRS/US GAAP Frameworks: Recognition of Elements...
Sarbanes-Oxley Management Report...
FIFO is appropriate
Types of accounting changes...
47. 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
Segment Reporting
Free Cash Flow to Equity - FCFE
3 C's for Credit Analysis...
B/S - Long-lived assets
48. +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
Cash Flow From Operations (CFO) - FASB
Which set of accounting standards requires firms to disclose estimated amortization expense for the next five years on intangible assets?
Inventory Cost Flow Methods...
Intercorporate Investment: < 20% votes...
49. CFO: cash interest expense - CFF: increased by amount rcvd at issuance and decreased by payment made at redemption
IFRS Revenue Recognition
CFO - Direct/Indirect method
Warning Signs of Earnings Manipulation
Impact on the Cash Flow of a Par Bond...
50. 1) Outcome reliable: rev recognized by stage of completion 2) Outcome unreliable: revenue recognized but no profit (
IFRS Revenue Recognition For Service
Form DEF-14A...
Creative Cash Flows Accounting: Motivation
The 4 Qualitative Characteristics of IFRS