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Advanced Financial Reporting And Analysis
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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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1. 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
Intangibles under IFRS...
Intercorporate Investment: < 20% votes...
Impairments recognition (GAAP)
Calculate dividends declared...
2. Assets held for continuing usage in the business NOT for resale ( Invoice price - Sales Tax - Freight & Insurance - and Installation costs) 1) capitalize costs that result in higher future earnings 2) expense costs that have uncertain/NO impact on fu
Asset Capitalization
Taxation Analyst Adjustments...
What is the economic substance of financial (capital) lease?
Financial Assets: US GAAP/Fair Market Value
3. 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 =
B/S - investments
Financial Adj to Facilitate Comparison...
Cash Flow From Financing (USA) (Source of Cash)
The report format of B/S
4. 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
The best indicator of overstating its profits is...
Auditor/Audit Opinion
FIFO is appropriate
The 4 Qualitative Characteristics of IFRS
5. Contra asset account used to reduce DTA for probability that it will NOT be realized - Increase in valuation = decrease in DTA and NI - Decrease in valuation = increase in DTA and NI
Under Completed Contract Method...
Valuation Allowance...
Auditor/Audit Opinion
Activity Ratios
6. 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)
Form DEF-14A...
Sales Basis Revenue Recognitions
Return on Equity (ROE)...
IFRS/US GAAP Frameworks: Measurement of Elements...
7. I/S: COGS lower - EBT higher - Taxes: higher - NI: higher - B/S: INV: higher - W/C: higher - are/E: higher - CF: CFO: lower
Tax base on a liability
FIFO results in: (assuming inflationary period)
IFRS/US GAAP Frameworks: F/S elements...
DTA/DTL: Effect on Net Income when Tax Rate decreases...
8. '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
Analysis: Market Value of Debt
Calculate dividends declared...
Cash Flow From Investing (USA) (Assets)
Market Value (GAAP)...
9. 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.
Segment Reporting
Cash Flow From Operations (CFO) - FASB
The best indicator of overstating its profits is...
Fraud Triangle - 1) Incentive/Pressure
10. I/S: Income statement account/Sales - B/S: Balance sheet account/ Total Assets
SEC guidance for Revenue Recognition
Cash Flow From Operations (CFO) - IFRS
Vertical Common Size Statements...
IFRS/US GAAP Frameworks: F/S elements...
11. Means that at least ONE of the following is true: Company has poor profit margin; Company has poor asset TO; Company is underleveraged
Sources of Differences betweent F/S & T/
Simple capital structure
LIFO results in: (assuming inflationary period)
ROE interpretation: if ROE is low...
12. Return on Total Equity = NI/ Avg. Total Equity - Return on C/E = NI - Pref. Div/ Avg. Common Equity
Financial Ratio based on I/S...
Market Value (GAAP)...
Motivation to Over-report Earnings
Return on Equity (ROE)...
13. 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
Which set of accounting standards requires firms to disclose estimated amortization expense for the next five years on intangible assets?
Inventory mangement: High T/O (low DOH) and sales growth below industry average
Sales Basis Revenue Recognitions
Inventory Systems...
14. 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
Financial Assets: US GAAP/Fair Market Value
Lessor Accounting Capital Lease: Sales-Type Lease
Impact on the B/S of a Premium Bond...
Screening for Potential Equity Investment: Criteria
15. Derivatives - Non-derivative investments with fair value exposure hedged by derivatives
Financial Liability: US GAAP/Fair Market Value
Ending Inventory =
Intercorporate Investment: < 20% votes...
Deferred Tax Liability: (DTL)
16. 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...
Gain/(loss) on bond early retirement: (derecognition of debt)
3 C's for Credit Analysis...
IASB - Goals
17. 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
Complex Capital Structure
Impact on the B/S of a Premium Bond...
One major difference between the presentation of deferred tax assets and liabilities under IFRS and under U.S. GAAP is that...
Market Value (GAAP)...
18. Shows the performance of the company over a reporting period.
Income Statement
The 4 Qualitative Characteristics of IFRS
CFO - Direct method
Impact on the B/S of a Par Bond...
19. Carrying amount of the liability minus the amount that will be deductible in the future.
Impact on the Cash Flow of a Discount Bond...
Tax base on a liability
Return on Assets ROA...
FASB - Harmonization
20. Off B/S asset or liability = Footnotes disclosure - Lease payments are expensed when due via I/S - Payments are CFO outflows
Operating Lease
Taxation Disclosure Requirements
3 C's for Credit Analysis...
Reasons to Lease...
21. 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.
% of Completion
Intercorporate Investment: > 50% votes...
LIFO is appropriate
FASB
22. (net income - preferred dividends)/weighted average of common shares outstanding - only income from continuing operations is considered
B/S - Long-lived assets PP&E
Extended DuPont Equation...
Capitalized Intangibles...
BASIC EPS
23. Lost sales from stock outs
Inventory mangement: High T/O (low DOH) and sales growth below industry average
Complex Capital Structure
Impairments recognition (GAAP)
Asset Revaluation: IFRS
24. Assets - liabilities - and equity are presented in a single column.
The report format of B/S
Financial Implications of Capitalizing...
Fraud Triangle - 1) Incentive/Pressure
Impact on the B/S of a Par Bond...
25. Depreciation exp = (cost-residual value)/ useful life
Lessor Accounting Capital Lease: Sales: Direct Financing Lease
Financial Assets: US GAAP/Amortized at Cost
Intercorporate Investment: 20% - 50% votes...
Straight-line depreciation (SL)
26. All other liabilities (e.g. bonds - notes payables - leases)
Financial Liability: US GAAP/Amortized at Cost
CFO - Direct/Indirect method
Trade-Offs Qualitative Characteristics of IFRS
Ending Inventory =
27. 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...
FIFO results in: (assuming inflationary period)
Installment Method...
Potentially Dillutive Securities
28. Securities that would INCREASE EPS if exercised
Antidilutive Securities
Financial Liability: US GAAP/Amortized at Cost
Valuation Allowance...
B/S - investments
29. 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
IOSCO
Balance Sheet - formats
days of inv. on hand =
Tax base of an asset
30. 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
Impact on the Cash Flow of a Premium Bond...
Not all CF increase are Sustainable. Example of how Mgmt can Manipulate Cash Flow Statement
Tax Loss Carryforward...
Warning Signs of Earnings Manipulation
31. 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)
Financial Liability: US GAAP/Fair Market Value
Tax Loss Carryforward...
The 4 Qualitative Characteristics of FASB...
Taxation: Income Tax Expense
32. 1) Forecast GDP 2) Regress industry sales against GDP 3) Forecast industry sales 4) Cosider changes to firm's mkt share 5) Forecast firms sales 6) Use hisoric margins for stable firms or forecast individual expense items 7) Remove non-recurring items
Fraud Triangle
Footnote Finance Liability Disclosure
Financial Liability: US GAAP/Fair Market Value
Forecasting Financial Performance: Top Down Approach...
33. G = (earnings Retention rate) x (ROE) - earnings retention rate = [1-(payout ratio)] - payout ratio = Common dividends/ NI - Pref. Div.
Credit Rating Process...
Impact on the Cash Flow of a Par Bond...
Capitalized Intangibles...
Sustainable Growth
34. 1) Intention to hold >1 year (e.g. debt or equity) valued @ cost or mkt value 2) Equity accounted investments
Defined Benefit Plans
Free Cash Flow to the Firm - FCFF
Defined Contribution Plans
B/S - investments
35. Interest Expense = Coupon + Amortization = PV of future CF x market yield @ issuance
Impact on the B/S of a Discount Bond...
Sources of Differences betweent F/S & T/
Motivation to Over-report Earnings
Form 8-K...
36. Fair Value of Plan Assets - Defined Benefit Obligation (DBO) - Fair Value > DBO: overfunded (asset on B/S - GAAP) - Fair Value < DBO: underfunded (liability on B/S - GAAP) - (Funded Status = Economic Position of Plan)
DBO Funded Status =
Impact on the B/S of a Zero Coupon Bond...
IFRS/US GAAP Frameworks: Recognition of Elements...
B/S - Long-term Liabilities
37. 1) Relevance vs. reliability; 2) Benefit > cost; 3) Excludes intangibles and non-quantifiable info.
Types of accounting changes: accounting principle
Trade-Offs Qualitative Characteristics of IFRS
FIFO ending inventory =
Operating Lease
38. 1) Results of operations and discussions of trend; 2) Capital resources - liquidity - and cash flow trends; 3) General business overview based on known trends; 4) Effects of trends - events - and uncertainties; 5) Discontinued operations - extraordin
Impact on the B/S of a Par Bond...
MD&A contains...
Sarbanes-Oxley Management Report...
Unusual OR Infrequent items...
39. Refers to change in mgmt judgement Does NOT require restatement of prior pd earnings; Disclose in footnotes
Types of accounting changes: accounting estimate
Intercorporate Investment: 20% - 50% votes...
Effects of Lease Classification on Ratios - Operating Lease
Which set of accounting standards requires firms to disclose estimated amortization expense for the next five years on intangible assets?
40. IFRS: Funded status is NOT on B/S Asset/Liability - Result in a b/s that does NOT represent econ reality - GAAP: Funded status = B/S Asset/Liability -Both disclose components of DBO - plan assets - expenses - and assumptions used to calculate pensio
Vertical Common Size Statements...
Impact on the Cash Flow of a Discount Bond...
Funded Status US GAAP & IFRS
Net Realizable Value (NRV) (IFRS)
41. 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.
Valuation allowance
Deferred Tax Asset: (DTA)
Inventory mangement: High T/O (low DOH) and sales growth above industry average
Operating Lease
42. Impairment is recorded on a Contra asset account - revalued below original cost means contra asset account is 0 1) B/S asset reduced to FMV 2) Loss take to I/S 3) Reversal of org. loss allowed I/S 4) Increase above org. cost to equity (comprehenive
Taxation: Income Tax Expense
Taxable Income
Revaluation below historic cost...
Financial Ratios based on B/S: Solvency ratio
43. US Gaap: lower of cost or market value - (does NOT allow subsequent reverasals) - IFRS: lower of cost or NET realizable value - (allows subsequent reversals)
Sustainable Growth
Intercorporate Investment: > 50% votes...
Return on Assets ROA...
Inventory Valuatoin (LCM)
44. A: Increase = use cash (-) - Decrease = source cash (+) - L: Increase = source cash (+) - Decrease = use of cash (-) - E: Increase = source cash (+) - Decrease = use of cash (-)
Sources of Differences: Permanent
Convergence IFRS/US GAAP...
Cash Flow: Logic (A = L + E)
FASB
45. 1) Change in accounting principle; 2) Change in accounting estimate; 3) Prior period adjustments
Types of accounting changes...
Bond Issuance Cost under GAAP/IFRS
Simple capital structure
Potentially Dillutive Securities
46. 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)
Cash Flow From Financing (USA) (Source of Cash)
Balance Sheet - formats
Not all CF increase are Sustainable. Example of how Mgmt can Manipulate Cash Flow Statement
Net Reporting of Revenue
47. Companies should not recognize revenue from barter transactions. The additional revenue is likely to improperly boost profits. While an unusually high sales-growth rate may indicate fraud - it could also indicate good management. It's a yellow flag -
Calculate dividends declared...
The best indicator of overstating its profits is...
B/S - short-term investments
The objective of f/s is to...
48. [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
Tax base of an asset
DBO Funded Status =
Cash flow ratios
Diluted EPS
49. Employer promises specific payment stream at retirement - Payments are based on yrs of service - retirement age - and final salary - Employers bears investment risk - Funded by pool of assets - Complicated accounting
Defined Benefit Plans
Amortization of Bond Discount = (in/out flow) in the indirect method CFO
Measurement of A & L disclosure in footnotes
Finance (capital) Lease criteria (under US GAAP)
50. 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
MD&A contains...
Unusual OR Infrequent items...
Credit Rating Process...
Inventory Valuatoin (LCM)
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