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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: cash interest expense - CFF: increased by amount rcvd at issuance and decreased by payment made at redemption
Financial Ratios based on B/S: Solvency ratio
Amortization of Bond Discount = (in/out flow) in the indirect method CFO
Barriers to a single framework...
Impact on the Cash Flow of a Par Bond...
2. Income variability lower - Profitability early years (ROE - ROA & NI) is Higher - Profitability later years: lower - Total Cash Flows: Same - CFO: higher - CFI: Lower - Leverage ratios: D/E & D/A: lower - Opposite fore Expensing
Financial Implications of Capitalizing...
Revaluation below historic cost...
Impairments recognition (IFRS)
Cash Flow From Investing (USA) (Assets)
3. 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
Gain/(loss) on bond early retirement: (derecognition of debt)
Segment Reporting
Operating Lease
Calculate dividends declared...
4. 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
SEC guidance for Revenue Recognition
Footnote disclosure of Reconciliation of opening and closing carrying values...
Lessor Accounting Capital Lease: Sales: Direct Financing Lease
Sustainable Growth
5. 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
Fraud Triangle - 3) Attitude/rationalization
The best indicator of overstating its profits is...
Defined Benefit Plans
IASB - Goals
6. 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...
Financial Ratios based on B/S: Solvency (Coverage)
Characteristics of an effective framework
FIFO after-tax profit =
7. '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)
Stock options: Use treasury stock method
Return on Equity (ROE)...
Depreciation Methods...
8. Assets - liabilities - and equity are presented in a single column.
The report format of B/S
Financial Assets: US GAAP/Amortized at Cost
Credit Rating Process...
Extraordinary Items: Unusual AND Infrequent items...
9. US Gaap: Balance Sheet - IFRS:Disclosed in Footnotes - May be mentioned in MD&A if mgnt considers it significant
days of inv. on hand =
DTA/DTL: Effect on Net Income when Tax Rate decreases...
Funded status of the pension plan (under US GAAP & IFRS) is reported where?
One major difference between the presentation of deferred tax assets and liabilities under IFRS and under U.S. GAAP is that...
10. It is the purchase of an asset using debt finance.
What is the economic substance of financial (capital) lease?
Analyst Treaments of DTL
Intangible Assets
The objective of f/s is to...
11. 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
Dilutive Securities
Finance (capital) Lease criteria (under US GAAP)
Common Size Statement
Cash Flow From Investing (USA) (Assets)
12. 1) Credit Scoring (CF Forecast) 2) Equity Investment screening (cutoff values)
Impairments recognition (IFRS)
Footnote disclosure of Reconciliation of opening and closing carrying values...
days of inv. on hand =
Forecasting Financial Performance: Application
13. Tax Rate down: DTL down -> Inc. Tax Exp down -> NI up - DTA down -> Inc. Tax Exp up -> NI down
DTA/DTL: Effect on Net Income when Tax Rate decreases...
Credit Analysis: Ratios
Measurement of A & L disclosure in footnotes
Analyst Treaments of DTL
14. 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)
MD&A contains...
Add/ Sub changes to related b/s operating accounts
Creative Cash Flows Accounting: Motivation
Balance Sheet - formats
15. If any ONE out of the FOUR are met must be classifed as Financial Lease: 1) Title transfered to lessee at the end of lease; 2) Bargain purchase option at the end of the lease; 3) Lease period is at least 75% of asset's useful life; 4) The PV of least
Impact on the B/S of a Zero Coupon Bond...
Expensed Intangibles...
Finance (capital) Lease criteria (under US GAAP)
Cash Flow From Operations (CFO) - IFRS
16. FASB: No discussion of 'probables' - IASB: Asset - liabilities - are probable flows
Which of the following characteristics should be of least concerned about management's opportunities to commit fraud?
Funded Status US GAAP & IFRS
IFRS/US GAAP Frameworks: Recognition of Elements...
IFRS/US GAAP Frameworks: Measurement of Elements...
17. EBIT/ Avg. total capital - Total capital includes: debt capital - so int. is aded back to NI
Types of accounting changes: accounting estimate
Return on total capital (ROTC)...
Steps of F/S Analysis
Activity Based Restrictions
18. 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
Net Reporting of Revenue
Calculate dividends declared...
IFRS/US GAAP Frameworks: Recognition of Elements...
19. PV of future obligation or the PV of the amount owed to employees for future pension benefits earned to date - Payments are determined based on expected final salary.
Cash Flow From Financing (USA) (Source of Cash)
Defined Benefit Obligations (DBO)
Free Cash Flow -CFO
CFO - Direct/Indirect method
20. 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
Impact on the B/S of a Zero Coupon Bond...
Horizontal Common Size Statements...
Effects of Lease Classification on Ratios - Operating Lease
Credit Rating Process...
21. 365/(Inv. T/O) = 365/( COGS/ Avg. Inv.)
Low Quality Earnings is result of...
Screening for Potential Equity Investment: Criteria
days of inv. on hand =
B/S - short-term investments
22. Interest Rec'd - CFO/CFI Divs Rec'd - CFO/CFI Interst Paid - CFO/CFF Divs Paid - CFF/CFO Overdraft = cash - not CFF
Barriers to a single framework...
Cash Flow From Operations (CFO) - IFRS
Impact on the Cash Flow of a Discount Bond...
DBO Funded Status =
23. 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
Inventory mangement: High T/O (low DOH) and sales growth below industry average
From creditor POV: Int. Coverage;
Net Realizable Value (NRV) (IFRS)
Return on Assets ROA...
24. Adjustments Involves erros or new accounting standards - Resate prior period - Disclose nature and effect on NI - Errors may indicate weakness in internal controls
Types of accounting changes: prior period adjustments
Capitalized Intangibles...
Net Realizable Value (NRV) (IFRS)
Dilutive Securities
25. I/S: Income statement account/Sales - B/S: Balance sheet account/ Total Assets
Expensed Intangibles...
Vertical Common Size Statements...
Tax base of an asset
IFRS: Required F/S
26. When Statutory tax rate does NOT equal Effective tax rate - Tax expense does note equal pretax income x statutory rate
Sources of Differences: Permanent
Not all CF increase are Sustainable. Example of how Mgmt can Manipulate Cash Flow Statement
Auditor/Audit Opinion
Impact on the Cash Flow of a Premium Bond...
27. Depreciation exp = (cost-residual value)/ useful life
Implication for Analysts: Be aware of differences in tax reconcilation between periods
Disclosure for each segment...
Straight-line depreciation (SL)
Financial Ratios based on B/S: Solvency (Coverage)
28. Int. Coverage = EBIT/Interest Expense - Fixed Charged Coverage = (EBIT+Lease Pymts) / Int. exp + Lease payments
The 4 Qualitative Characteristics of IFRS
Sales Basis Revenue Recognitions
Defined Benefit Obligations (DBO)
Financial Ratios based on B/S: Solvency (Coverage)
29. Financial Services Companies: Operating activities: Interest - Dividends - G/(L) on disposal Non-Financial Services Companies: Non-operating activities: Interest - Dividends - G/(L) on disposal
Operating vs. Non-operating Income
DBO Funded Status =
Inventory Valuatoin (LCM)
Free Cash Flow to Equity - FCFE
30. I/S: COGS lower - EBT higher - Taxes: higher - NI: higher - B/S: INV: higher - W/C: higher - are/E: higher - CF: CFO: lower
Traditional DuPont Equation...
Impact on the Cash Flow of a Par Bond...
FIFO results in: (assuming inflationary period)
To investigate the stability of that structure - Kilgore would be best served by looking at...
31. Carrying amount of the liability minus the amount that will be deductible in the future.
Tax base on a liability
Impact on the Cash Flow of a Premium Bond...
IASB - Goals
Trade-Offs Qualitative Characteristics of IFRS
32. Replacement cost subject to: Upper limit = NRV - Loewr limit = NRV - normal profit margin
Implication for Analysts: Be aware of differences in tax reconcilation between periods
Impairments recognition (IFRS)
Motivation to Under-report Earnings
Market Value (GAAP)...
33. CFO: cash interest expense - CFF: increased by amount rcvd at issuance and decreased by payment made at redemption - CFO is lower CFF is higher
Financial Ration based on B/S: Liquidity Ratios
Impact on the Cash Flow of a Premium Bond...
Form 8-K...
Bond Issuance Cost under GAAP/IFRS
34. Income Tax Expense < Taxes Payable - F/S < Tax Return - Pay more tax now but more on reversal
Under Completed Contract Method...
Impact on the Cash Flow of a Par Bond...
Tax base of an asset
Deferred Tax Asset: (DTA)
35. 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.
Debt covenants
IFRS/US GAAP Frameworks: purpose of framework
Capitalization of Interest...
IFRS: Presentation Requirements
36. Working Capital = CA - CL - Working Capital TO = Rev/Avg. Working Capital - Fixed Asset TO = Rev/Avg Net Fixed Assets
Activity Ratios
Free Cash Flow to Equity - FCFE
Funded Status US GAAP & IFRS
IOSCO
37. 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
Capitalization of Interest...
IFRS Revenue Recognition For Service
Convergence IFRS/US GAAP...
Financial Ration based on B/S: Liquidity Ratios
38. Higher share price - Lower borrowing cost - Higher incentive compensation
Operating Risk Ratios...
Fraud Triangle - 3) Attitude/rationalization
Creative Cash Flows Accounting: Motivation
Financial Assets: US GAAP/Amortized at Cost
39. 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
Financial Ration based on B/S: Liquidity Ratios
IASB - Goals
Cost recovery method...
40. 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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41. Nonreversal DTL - therefore it is permanent = Equity. therefore decrease in DTL = Increase in Equity - Reversal DTL - therefore it is temp = Liability
What is the economic substance of financial (capital) lease?
One major difference between the presentation of deferred tax assets and liabilities under IFRS and under U.S. GAAP is that...
Taxation Analyst Adjustments...
Characteristics of an effective framework
42. Required by IFRS - Permited by US GAAP
The 4 Qualitative Characteristics of IFRS
Credit Analysis: Ratios
FASB - Harmonization
Component depreciation;
43. More than a third of Maxwell's total sales go to its own consolidated subsidiaries High levels of related-party transactions are worrisome - particularly when those parties are not audited. But transactions within the company between subsidiaries con
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44. Cash collections less direct cash inputs less other cash outfllows
CFO - Direct method
4 General Categories for Creditworthiness/Capacity...
Types of accounting changes: accounting estimate
days of inv. on hand =
45. Capital structure that contains NO potentially dillutive securities - (contains only c/s - nonconvertible debt - and nonconvertible pref. stock)
Simple capital structure
Unusual OR Infrequent items...
Dilutive Securities
Return on Equity (ROE)...
46. ROE = (NI/Sales) x (Sales/Assets) x (Assets/Equity) or ROE= Net Profit Margin x Asset TO x Leverage Ratio
Potentially Dillutive Securities
Traditional DuPont Equation...
Impact on the B/S of a Premium Bond...
Double-decline balance (DDB)
47. 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
Financial Liability: US GAAP/Amortized at Cost
Net Reporting of Revenue
Amortization of Bond Discount = (in/out flow) in the indirect method CFO
IASB
48. Income Tax Expense > Taxes Payable - F/S > Tax Return - Pay less tax now but more on reversal
Taxable Income
Low Quality Earnings is result of...
Deferred Tax Liability: (DTL)
LIFO is appropriate
49. 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
B/S - Long-term Liabilities
B/S - short-term investments
Form 8-K...
IFRS/US GAAP Frameworks: Measurement of Elements...
50. Income subject to tax as per Tax Return
Roles of financial reporting & analysis include...
Sales Basis Revenue Recognitions
Taxable Income
Screening for Potential Equity Investment: Criteria