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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. Int. Coverage = EBIT/Interest Expense - Fixed Charged Coverage = (EBIT+Lease Pymts) / Int. exp + Lease payments
Fraud Triangle - 3) Attitude/rationalization
Straight-line depreciation (SL)
Financial Ratios based on B/S: Solvency (Coverage)
Defined Contribution Plans
2. Nonreversal DTL - therefore it is permanent = Equity. therefore decrease in DTL = Increase in Equity - Reversal DTL - therefore it is temp = Liability
Balance Sheet - formats
Balance Sheet
Taxation Analyst Adjustments...
Tax base on a liability
3. Refers to change in mgmt judgement Does NOT require restatement of prior pd earnings; Disclose in footnotes
Types of accounting changes: accounting estimate
Free Cash Flow to Equity - FCFE
To investigate the stability of that structure - Kilgore would be best served by looking at...
IFRS: Required F/S
4. Management turnover.
Inv. Valuation reporting Inventory ABOVE costs...
Debt covenants
Cash Flow From Investing (USA) (Assets)
To investigate the stability of that structure - Kilgore would be best served by looking at...
5. 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
Motivation to Understate Assets/Overstate Liabilities
Auditor/Audit Opinion
Cost included in Inventory on b/s...
Common Size Statement
6. 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 =
Tax Loss Carryforward...
Financial Adj to Facilitate Comparison...
Analyzing Effective Tax Rate Reconciliation
B/S - Long-lived assets PP&E
7. 365/(AR T/O) = 365/(Rev/Avg. AR)
ROE interpretation: if ROE is low...
Inv. Valuation reporting Inventory ABOVE costs...
days of sales o/s =
Comprehensive income...
8. Adjustments Involves erros or new accounting standards - Resate prior period - Disclose nature and effect on NI - Errors may indicate weakness in internal controls
Measurement of A & L disclosure in footnotes
4 General Categories for Creditworthiness/Capacity...
Inventory mangement: High T/O (low DOH) and sales growth above industry average
Types of accounting changes: prior period adjustments
9. Profit recognized is the proportion of cash collected x total expected profit Revenue = (COG provided to date/total COG to be provided) x total expected revenue
Net Realizable Value (NRV) (IFRS)
Double-decline balance (DDB)
Installment Method...
Credit Analysis: Ratios
10. I/S: Income statement account/Sales - B/S: Balance sheet account/ Total Assets
Units of Production Method
Vertical Common Size Statements...
DTA/DTL: Effect on Net Income when Tax Rate decreases...
Warning Signs of Earnings Manipulation
11. FASB: No discussion of 'probables' - IASB: Asset - liabilities - are probable flows
IFRS/US GAAP Frameworks: F/S elements...
IFRS/US GAAP Frameworks: Recognition of Elements...
Common Size Statement
Capitalization of Interest...
12. It is the purchase of an asset using debt finance.
What is the economic substance of financial (capital) lease?
Effects of Lease Classification on F/S - Finance Lease
Taxable Income
Measurement of A & L disclosure in footnotes
13. 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
Segment Reporting
Intercorporate Investment: > 50% votes...
Diluted EPS
Inventory Systems...
14. ROE = (NI/Sales) x (Sales/Assets) x (Assets/Equity) or ROE= Net Profit Margin x Asset TO x Leverage Ratio
Traditional DuPont Equation...
Intercorporate Investment: 20% - 50% votes...
Ratios that directly affect choice of Inventory Account...
Impact on the B/S of a Discount Bond...
15. Income Tax Expense < Taxes Payable - F/S < Tax Return - Pay more tax now but more on reversal
Deferred Tax Asset: (DTA)
Funded Status US GAAP & IFRS
B/S - Long-term Liabilities
Capitalization of Interest...
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...
Steps of F/S Analysis
To investigate the stability of that structure - Kilgore would be best served by looking at...
Units of Production Method
17. 1) Calculate cash raised on exercise 2) Repurchase shares at avg. price 3) New Shares = exercised - repurchased
IASB - Goals
Stock options: Use treasury stock method
Impact on the Cash Flow of a Par Bond...
CFO - Indirect method steps...
18. Lost sales from stock outs
An Increase in the Valuation Allowance Account...
Net Realizable Value (NRV) (IFRS)
Inventory mangement: High T/O (low DOH) and sales growth below industry average
Types of accounting changes: accounting estimate
19. Funds from Operations to debt = NI adj for non cash items/ total debt - Free operating CF to Total Debt = CFO - Capex / total debt - Total Debt to EBITDA = total debt / EBITDA - Return on Capital = EBIT / Capital - Total debt to total debt + equity =
Credit Analysis: Ratios
B/S - Stockholders' Equity
Form 8-K...
An Increase in the Valuation Allowance Account...
20. Meet Analyst Expectations - Meet debt covenants - Incentive compensation
Gain/(loss) on bond early retirement: (derecognition of debt)
Motivation to Over-report Earnings
FIFO ending inventory =
Capitalized Intangibles...
21. Unlisted instruments - Held-to-maturity investments - Loans - Receivables
Financial Assets: US GAAP/Amortized at Cost
Types of accounting changes: prior period adjustments
Balance Sheet - formats
Impact on the Cash Flow of a Premium Bond...
22. Stock options - Warrants - Convertible debt - Convertible preferred stock
Ratios that directly affect choice of Inventory Account...
Potentially Dillutive Securities
Operating Risk Ratios...
Intercorporate Investment: < 20% votes...
23. Depreciation exp = (cost-residual value)/ useful life
IFRS/US GAAP Frameworks: underlying assumptions...
Roles of financial reporting & analysis include...
Reasons to Lease...
Straight-line depreciation (SL)
24. Interest Expense = Coupon + Amortization = PV of future CF x market yield @ issuance
Impact on the Cash Flow of a Premium Bond...
Revaluation below historic cost...
Impact on the B/S of a Discount Bond...
CFI Analysis...
25. 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
Taxable Income
Tax base of an asset
The objective of f/s is to...
26. 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 Ratio based on I/S...
Lessor Accounting Capital Lease: Sales-Type Lease
Gross Reporting of Revenue
IFRS: Required F/S
27. FASB: Asset is a future economic benefit - IASB: Asset is a RESOURCE from which future economic benefit is expected to flow.
Taxable Income
Activity Ratios
IFRS/US GAAP Frameworks: F/S elements...
Effects of Lease Classification on F/S - Finance Lease
28. 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
Valuation Allowance...
IOSCO
% of Completion
From creditor POV: Int. Coverage;
29. 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 -
The best indicator of overstating its profits is...
Free Cash Flow to the Firm - FCFF
Warning Signs of Earnings Manipulation
Simple capital structure
30. 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
Types of accounting changes: accounting estimate
Installment Method...
Taxation Disclosure Requirements
Analyzing Effective Tax Rate Reconciliation
31. 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.
Effects of Lease Classification on F/S - Finance Lease
Income Tax Paid...
Sustainable Growth
Valuation allowance
32. Beginning Inv. (BI) + Purchases (P) = Available for Sale - Available for sale - COGS = Ending Inventory (EI)
B/S - short-term investments
Cost recovery method...
Ending Inventory =
Types of accounting changes: accounting estimate
33. 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.
Finance (capital) Lease criteria (under US GAAP)
Free Cash Flow -CFO
CFO - Direct method
Form DEF-14A...
34. 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
IFRS/US GAAP Frameworks: F/S elements...
Impact on the B/S of a Discount Bond...
From creditor POV: Int. Coverage;
35. 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)
Add/ Sub changes to related b/s operating accounts
Intercorporate Investment: > 50% votes...
Steps of F/S Analysis
MD&A contains...
36. Securities that would INCREASE EPS if exercised
Inventory mangement: High T/O (low DOH) and sales growth above industry average
Auditor/Audit Opinion
Financial Ratios based on B/S: Solvency ratio
Antidilutive Securities
37. Assess liquidity - solvency and financial flexibiliy
Vertical Common Size Statements...
Income Tax Paid...
Convergence IFRS/US GAAP...
Statement of Cash Flow - relevance...
38. 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...
Vertical Common Size Statements...
IFRS/US GAAP Frameworks: Measurement of Elements...
B/S - Stockholders' Equity
39. 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
Deferred Tax Liability: (DTL)
FIFO results in: (assuming inflationary period)
Potentially Dillutive Securities
Roles of financial reporting & analysis include...
40. Any I/S subtotal is expressed a margin ratio (to revenues) - Gross profit margin = gross profit/ revenue - Net profit margin = Net Inc/revenue - Operating profit margin = EBIT/ revenue - Pre-tax margin = EBT/ revenue
Not all CF increase are Sustainable. Example of how Mgmt can Manipulate Cash Flow Statement
Financial Ratio based on I/S...
Impact on the Cash Flow of a Premium Bond...
SEC guidance for Revenue Recognition
41. '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)
B/S - short-term investments
Impact on the Cash Flow of a Zero Coupon Bond...
Types of accounting changes...
42. Assets: lower - Liabilities: lower - NI (Early yrs): higher - CFO: lower (b/c entire pymt is classed as CFO) - CFF: higher - Total CF: Same
Effects of Lease Classification on F/S - Operating Lease
Lessor Accounting Capital Lease: Sales: Direct Financing Lease
Balance Sheet - formats
Cost included in Inventory on b/s...
43. Is required under IFRS but not under GAAP
Footnote disclosure of Reconciliation of opening and closing carrying values...
Impact on the B/S of a Par Bond...
Financial Assets: US GAAP/Amortized at Cost
Credit Rating Process...
44. Required by IFRS - Permited by US GAAP
Component depreciation;
Footnote disclosure of Reconciliation of opening and closing carrying values...
IOSCO
Sarbanes-Oxley Management Report...
45. Trading securities - Available-for-sale - Derivatives (standalone or embedded in non-derivative intrument) - Assets with fair value exposure hedged by derivatives
IFRS/US GAAP Frameworks: Recognition of Elements...
Which set of accounting standards requires firms to disclose estimated amortization expense for the next five years on intangible assets?
IFRS/US GAAP Frameworks: objective of F/S
Financial Assets: US GAAP/Fair Market Value
46. Aggressive Revenue Recognition - Diff. growth rates of operating cash flow and earnings - Abnormal comparative sales growth - Abnormal inventory growth as compared to sales - Moving nonoperating income and nonrecurring gains up to I/S to boost revenu
Warning Signs of Earnings Manipulation
Valuation allowance
Sustainable Growth
One major difference between the presentation of deferred tax assets and liabilities under IFRS and under U.S. GAAP is that...
47. Inflow - (bringing bond UP to par)
Units of Production Method
Amortization of Bond Discount = (in/out flow) in the indirect method CFO
Operating vs. Non-operating Income
% of Completion
48. Follows the traditional ledger account - assets on the left hand side and liabilities and equity on the right hand side.
FIFO results in: (assuming inflationary period)
The account format of B/S
LIFO results in: (assuming inflationary period)
Complex Capital Structure
49. Divdends and share repurchases - Production and investment - M&A - New debt issuance - Payoff pattern and liquidation priority - Maintenance of assets used as collateral
B/S - Long-term Liabilities
Activity Based Restrictions
Impact on the B/S of a Par Bond...
Revaluation above historic cost...
50. 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
Financial Assets: US GAAP/Fair Market Value
Common Size Statement
Double-decline balance (DDB)
Impairments recognition (GAAP)
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