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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
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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. You.S. GAAP
Implication for Analysts: Be aware of differences in tax reconcilation between periods
3 C's for Credit Analysis...
Extraordinary Items: Unusual AND Infrequent items...
Which set of accounting standards requires firms to disclose estimated amortization expense for the next five years on intangible assets?
2. 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
Taxation Disclosure Requirements
Component depreciation;
Funded status of the pension plan (under US GAAP & IFRS) is reported where?
Motivation to Under-report Earnings
3. 1) Incentive/Pressure (the motive to commit fraud) 2) Opportunity (exists with weak internal controls) 3) Attitude/rationalization (mindset that fraud is justified)
Screening for Potential Equity Investment: Criteria
Fraud Triangle
Impact on the B/S of a Zero Coupon Bond...
Income Statement
4. It is the purchase of an asset using debt finance.
Financial Ration based on B/S: Liquidity Ratios
What is the economic substance of financial (capital) lease?
Inv. Valuation reporting Inventory ABOVE costs...
Forecasting Financial Performance: Top Down Approach...
5. Improve ROA and Asset TO Ratios - Report higher aquisition goodwill
Motivation to Understate Assets/Overstate Liabilities
Inventory mangement: High T/O (low DOH) and sales growth above industry average
Potentially Dillutive Securities
CFI Analysis...
6. 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
Effects of Lease Classification on Ratios - Finance Lease
B/S - Long-lived assets
Comprehensive income...
Effective Tax Rate
7. Assets - liabilities - and equity are presented in a single column.
LIFO results in: (assuming inflationary period)
Unusual OR Infrequent items...
Fraud Triangle - 1) Incentive/Pressure
The report format of B/S
8. I/S: COGS higher - EBT lower - Taxes: lower - NI: Lower - B/S: INV: lower - W/C: Lower - are/E: lower - CF: CFO: higher
Fraud Triangle - 1) Incentive/Pressure
LIFO results in: (assuming inflationary period)
The 4 Qualitative Characteristics of FASB...
Deferred Tax Asset: (DTA)
9. Securities that would INCREASE EPS if exercised
Antidilutive Securities
Intangible Assets
Cost included in Inventory on b/s...
FIFO results in: (assuming inflationary period)
10. Cash Flow available for distribution to all investors (stockholders & debt holders) CFO + int(1-t) - fixed capital investment or [FCFF calculated from NI = NI + noncash charged + (Int exp(1-tax rate) - net cap investment - working capital invt.]
Impact on the B/S of a Discount Bond...
Free Cash Flow to the Firm - FCFF
Inv. Valuation reporting Inventory ABOVE costs...
Cash Conversion Cycle =
11. 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
Measurement of A & L disclosure in footnotes
Depreciation Methods...
Gain/(loss) on bond early retirement: (derecognition of debt)
Steps of F/S Analysis
12. 1) Change in accounting principle; 2) Change in accounting estimate; 3) Prior period adjustments
One major difference between the presentation of deferred tax assets and liabilities under IFRS and under U.S. GAAP is that...
Calculate dividends declared...
Inventory mangement: Low T/O (High DOH)...
Types of accounting changes...
13. Same as other ratios using NI in this case substitut NI for CFO.
Forecasting Financial Performance: Top Down Approach...
FIFO ending inventory =
Cash flow ratios
ROE interpretation: if ROE is low...
14. GAAP: more quantitative rules - IFRS: more qualitative approach based on whether the risks and reward of the asset have tranferred.
Credit Analysis: Ratios
Tax base of an asset
Types of accounting changes: accounting estimate
Finance (capital) Lease criteria GAAP vs. IFRS
15. Replacement cost subject to: Upper limit = NRV - Loewr limit = NRV - normal profit margin
IOSCO
Financial Lease Reporting
Lessor Accounting Capital Lease: Sales-Type Lease
Market Value (GAAP)...
16. 1) will only benefit on reversal if there is sufficient taxable earnings 2) can only utilize loss carryforwards if we have future profits 3) If asset cannot be utilized in full it is reduced by a contra 'valuation allowance'. REDUCE DTA - REDUCE NI
Financial Ratio based on I/S...
Sarbanes-Oxley Management Report...
Types of accounting changes: accounting principle
DTA Issues
17. Timing differences (depreciations) - Permanent differences
Sources of Differences betweent F/S & T/
Form 144...
Under Completed Contract Method...
DTA/DTL: Effect on Net Income when Tax Rate decreases...
18. Int. Coverage = EBIT/Interest Expense - Fixed Charged Coverage = (EBIT+Lease Pymts) / Int. exp + Lease payments
days of sales o/s =
Financial Ratios based on B/S: Solvency (Coverage)
Footnote disclosure of Reconciliation of opening and closing carrying values...
Taxation: Income Tax Expense
19. Slow moving or obsolete inventory
Cash Flow From Investing (USA) (Assets)
Debt covenants
Inventory Valuatoin (LCM)
Inventory mangement: Low T/O (High DOH)...
20. 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)
FIFO results in: (assuming inflationary period)
Impact on the Cash Flow of a Premium Bond...
B/S - short-term investments
Tax Loss Carryforward...
21. 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
Funded status of the pension plan (under US GAAP & IFRS) is reported where?
Financial Ration based on B/S: Liquidity Ratios
Deferred Tax Liability: (DTL)
Complex Capital Structure
22. CFO: cash interest expense - CFF: increased by amount rcvd at issuance and decreased by payment made at redemption - CFO is lower CFF is higher
Cash Flow From Operations (CFO) - IFRS
IFRS: Presentation Requirements
Defined Contribution Plans
Impact on the Cash Flow of a Premium Bond...
23. Required by IFRS - Permited by US GAAP
Component depreciation;
Net Realizable Value (NRV) (IFRS)
Inventory mangement: High T/O (low DOH) and sales growth above industry average
B/S - Long-lived assets PP&E
24. CFO: cash interest expense - CFF: increased by amount rcvd at issuance and decreased by payment made at redemption
Activity Based Restrictions
Inventory Valuatoin (LCM)
Impact on the Cash Flow of a Par Bond...
Types of accounting changes: accounting principle
25. 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.
Sales Basis Revenue Recognitions
Bond Issuance Cost under GAAP/IFRS
Taxation: Tax Payable
Fraud Triangle
26. 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.
Financial Assets: US GAAP/Fair Market Value
Effects of Lease Classification on F/S - Finance Lease
Form DEF-14A...
Motivation to Overstate Assets/Understate Liabilities
27. FASB: No discussion of 'probables' - IASB: Asset - liabilities - are probable flows
IFRS/US GAAP Frameworks: underlying assumptions...
IFRS/US GAAP Frameworks: Recognition of Elements...
One major difference between the presentation of deferred tax assets and liabilities under IFRS and under U.S. GAAP is that...
Motivation to Overstate Assets/Understate Liabilities
28. +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
Market Value (GAAP)...
CFO Disclosure requirement...
Cash Flow From Operations (CFO) - FASB
Lessor Accounting Capital Lease: Sales-Type Lease
29. Periodic: Inventory and COGS determined at p/e - Perpetual: Inv. & COGS updated for each sale (no purchase account need) - Cost flow method impact: FIFO = same for both - LIFO = different - Avg. cost = different - FIFO & LIFO relationship remain
Low Quality Earnings is result of...
Disclosure for each segment...
Inventory Systems...
CFO - Indirect method steps...
30. Interest expense = Coupon rate
Barter (IASB & FASB)
Impact on the B/S of a Par Bond...
Taxation Analyst Adjustments...
Reasons to Lease...
31. '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
Cash Flow From Investing (USA) (Assets)
Impact on the B/S of a Par Bond...
Taxable Income
Cash Flow: Logic (A = L + E)
32. If PV of min lease pymt = cost of asset 1) lessor is not a dealer of leased equipment (fin. co.)2) no gross profit is recognized at time of lease inception 3) all profit is int. revenue recognized over period of lease. CFO = Int. Income inflow - CFI
Intercorporate Investment: < 20% votes...
Lessor Accounting Capital Lease: Sales: Direct Financing Lease
Cash Flow From Investing (USA) (Assets)
Double-decline balance (DDB)
33. [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
Diluted EPS
Expensed Intangibles...
Defined Contribution Plans
Steps of F/S Analysis
34. Outflow - (bringing bond DOWN to par)
Motivation to Overstate Assets/Understate Liabilities
Diluted EPS
Amortization of Bond Premium = (in/out flow) in the indirect method CFO
FIFO is appropriate
35. Amount deductible in future tax return
CFO Disclosure requirement...
Segment Reporting
Tax base of an asset
Cash Conversion Cycle =
36. Both: Recognize going concern & accrual assumptions - IASB: Going concern & accruals given more prominence in framework - FASB: Going concern assumption not well developed in framework.
The account format of B/S
IFRS/US GAAP Frameworks: underlying assumptions...
Characteristics of an effective framework
Comprehensive income...
37. US Gaap: Balance Sheet - IFRS:Disclosed in Footnotes - May be mentioned in MD&A if mgnt considers it significant
Funded status of the pension plan (under US GAAP & IFRS) is reported where?
Defined Contribution Plans
Roles of financial reporting & analysis include...
B/S - Long-term Liabilities
38. CFO: cash interest expense - CFF: increased by amount rcvd at issuance and decreased by payment made at redemption - CFO is higher and CFF is lower
An Increase in the Valuation Allowance Account...
days of inv. on hand =
Impact on the Cash Flow of a Discount Bond...
Characteristics of an effective framework
39. All DTA and DTL are classified as noncurrent under IFRS - Under U.S. GAAP - deferred tax assets and liabilities are classified as current or non-current according to the classification of the underlying asset or liability. Under IFRS - deferred tax a
Capitalization of Interest...
Cost included in Inventory on b/s...
One major difference between the presentation of deferred tax assets and liabilities under IFRS and under U.S. GAAP is that...
Operating Risk Ratios...
40. Trade relief - Contingent consideration - Union concessions
The report format of B/S
Free Cash Flow to the Firm - FCFF
Motivation to Under-report Earnings
Types of accounting changes: accounting principle
41. Tax liability based on taxable income as per TAX Report/RETURN
MD&A contains...
Taxation: Tax Payable
Which of the following characteristics should be of least concerned about management's opportunities to commit fraud?
Inventory Cost Flow Methods...
42. 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
Footnote disclosure of Reconciliation of opening and closing carrying values...
Intangibles under IFRS...
Revaluation below historic cost...
Measurement of A & L disclosure in footnotes
43. Reported ABOVE the line 1) G/(L) from disposal of a business segment 2) G/(L) from sale of investment in subsidiary 3) Provisions for environmental remediation - impairments - write-offs - write-downs - restructuring.4) Integration expense for recent
Defined Contribution Plans
Unusual OR Infrequent items...
Expensed Intangibles...
Financial Ratios based on B/S: Solvency ratio
44. 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
Financial Liability: US GAAP/Fair Market Value
Capitalization of Interest...
Dilutive Securities
Implication for Analysts: Be aware of differences in tax reconcilation between periods
45. Held for continuing use within the business (not for resale) 1) investment property; 2) Assets held for sale; 3) Natural resources; 4) PP&E
Gross Reporting of Revenue
Creative Cash Flows Accounting: Technique
B/S - Long-lived assets
Impact on the B/S of a Premium Bond...
46. I/S: Income statement account/Sales - B/S: Balance sheet account/ Total Assets
Form 144...
Effects of Lease Classification on Ratios - Finance Lease
Vertical Common Size Statements...
B/S - short-term investments
47. 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
Financial Ratios based on B/S: Solvency ratio
Impairments recognition (GAAP)
Roles of financial reporting & analysis include...
Depreciation Methods...
48. 1) Stretching A/P (increase in # days in payable) = 365/(AP T/O) = 365/(purchases/ Avg. AP)) 2) Financing payables (allows to great AP as CFF) 3) Securitizing A/are: (allows to recognize gains in I/S) 4) Income Tax Benefit from stock options 5) Buyba
Valuation allowance
Not all CF increase are Sustainable. Example of how Mgmt can Manipulate Cash Flow Statement
Barriers to a single framework...
Financial Adj to Facilitate Comparison...
49. 1) Cheaper Financing; 2) Reduce risk of obsolescence; 3) Less restrictive provisions; 4) Off-B/S reporting; 5) Tax Reporting Advantages (treated as ownership for tax ( deduct depreciation and interest expense)
Reasons to Lease...
Which of the following characteristics should be of least concerned about management's opportunities to commit fraud?
Deferred Tax Liability: (DTL)
Ending Inventory =
50. EU 1) Int'l Accounting Standards Board; 2) Unified int'l frameworks of accounting standards (IFRS); 3) Addopted by EU in 2005
B/S - Long-lived assets PP&E
Horizontal Common Size Statements...
IASB
Balance Sheet - formats