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Test your basic knowledge |
Advanced Financial Reporting And Analysis
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Study First
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. Profit is recognized only when it exceeds estimated total cost.
Intercorporate Investment: < 20% votes...
Cost recovery method...
Cash flow ratios
IFRS/US GAAP Frameworks: purpose of framework
2. 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)
IASB - Goals
Analysis: Market Value of Debt
Auditor/Audit Opinion
CFO - Direct/Indirect method
3. Is more relevant than book value: Recent changes allow more liability to be recorded at FMV (IFRS & GAAP require disclosure of FMV) - Downward adj. in liability will Increase equity and decrease leverage ratio - Upward adj in liability will decrease
Valuation allowance
IFRS/US GAAP Frameworks: underlying assumptions...
Analysis: Market Value of Debt
Impact on the B/S of a Par Bond...
4. NI/Avg. Total Assets - NI + Int (1-t) / Avg. Total Assets - Operating ROA: Operating INc/ Avg. Total Assets
IFRS/US GAAP Frameworks: objective of F/S
Return on Assets ROA...
Intangibles under IFRS...
Double-decline balance (DDB)
5. FIFO: EI = newest purchases - LIFO: EI = oldest purchases - Avg. Costs: EI = Available for sale/Units - Specific ID: high value items (cars - diamonds etc)
Which of the following characteristics should be of least concerned about management's opportunities to commit fraud?
Tax Loss Carryforward...
Barter (IASB & FASB)
Inventory Cost Flow Methods...
6. 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.]
days of inv. on hand =
4 General Categories for Creditworthiness/Capacity...
Free Cash Flow to the Firm - FCFF
Cost included in Inventory on b/s...
7. Interest Expense = Amortization
Vertical Common Size Statements...
Valuation Allowance...
Impact on the B/S of a Zero Coupon Bond...
Balance Sheet
8. G = (earnings Retention rate) x (ROE) - earnings retention rate = [1-(payout ratio)] - payout ratio = Common dividends/ NI - Pref. Div.
Cash Flow From Financing (USA) (Source of Cash)
Sustainable Growth
Credit Rating Process...
CFO - Direct/Indirect method
9. I/S and B/S - Each line is relative to base year
Not all CF increase are Sustainable. Example of how Mgmt can Manipulate Cash Flow Statement
Ending Inventory =
Motivation to Under-report Earnings
Horizontal Common Size Statements...
10. Inflow - (bringing bond UP to par)
Form DEF-14A...
Financial Ratios based on B/S: Solvency ratio
Amortization of Bond Discount = (in/out flow) in the indirect method CFO
Diluted EPS
11. Change in equity from transactions from nonownership sources. Include: NI - chg in foreign currency translation adj. - chg in pension adj to funded status - chg unrealized gains/losses on derivatives contracts accounted for as hedges - chng in unrea
Comprehensive income...
Cost included in Inventory on b/s...
IFRS/US GAAP Frameworks: objective of F/S
Finance (capital) Lease criteria GAAP vs. IFRS
12. 1) Incentive/Pressure (the motive to commit fraud) 2) Opportunity (exists with weak internal controls) 3) Attitude/rationalization (mindset that fraud is justified)
Footnote Finance Liability Disclosure
Amortization of Bond Discount = (in/out flow) in the indirect method CFO
Inv. Valuation reporting Inventory ABOVE costs...
Fraud Triangle
13. 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
Sources of Differences: Permanent
Forecasting Financial Performance: Top Down Approach...
Asset Revaluation: IFRS
Sources of Differences betweent F/S & T/
14. 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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15. You.S. GAAP
Defined Contribution Plans
FASB
Which set of accounting standards requires firms to disclose estimated amortization expense for the next five years on intangible assets?
Types of accounting changes: accounting estimate
16. EU 1) Int'l Accounting Standards Board; 2) Unified int'l frameworks of accounting standards (IFRS); 3) Addopted by EU in 2005
IASB
Straight-line depreciation (SL)
Inventory Systems...
Which set of accounting standards requires firms to disclose estimated amortization expense for the next five years on intangible assets?
17. Working Capital = CA - CL - Working Capital TO = Rev/Avg. Working Capital - Fixed Asset TO = Rev/Avg Net Fixed Assets
Sustainable Growth
Taxable Income
Effects of Lease Classification on Ratios - Operating Lease
Activity Ratios
18. 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
Valuation Allowance...
DTA Issues
Unusual OR Infrequent items...
Balance Sheet - formats
19. '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)
Return on Assets ROA...
Effects of Lease Classification on Ratios - Operating Lease
Effects of Lease Classification on F/S - Operating Lease
20. 1) Character: Mgmt reputation and history of repayment 2) Collateral: ability to pledge specific collateral reduces lender risk 3) Capacity: ability to replay debt. requires LT view of firms prospect.
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21. Cash collections less direct cash inputs less other cash outfllows
Inv. Valuation reporting Inventory ABOVE costs...
Taxation Analyst Adjustments...
ROE interpretation: if ROE is low...
CFO - Direct method
22. 1) Nature of industry/entity operations: 3rd party transactions; Power of customer/supplier; Acct est subjective; Unusual transactions; International operations; International operations; Operations in tax havens. 2) Opportunity complex/unstable org.
Credit Rating Process...
CFO Disclosure requirement...
Fraud Triangle - 2) Opportunity
Creative Cash Flows Accounting: Motivation
23. Reported BELOW the line.Prohibited under IAS1 1) Losses from expropriation of assets. 2) Uninsured losses from natural disasters - Analyst must determine if it is really THAT extraordinary and if should be included in forecasting
Fraud Triangle
Cash Flow From Operations (CFO) - FASB
Extraordinary Items: Unusual AND Infrequent items...
Finance (capital) Lease criteria GAAP vs. IFRS
24. 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
Return on Assets ROA...
Financial Implications of Capitalizing...
Not all CF increase are Sustainable. Example of how Mgmt can Manipulate Cash Flow Statement
Market Value (GAAP)...
25. 1) Increase comparability; 2) Reduce expense of overseas capital; 3) Reduce the expense of producing consolidated accounts
Cash Flow From Operations (CFO) - IFRS
Asset Revaluation: IFRS
Bond Issuance Cost under GAAP/IFRS
FASB - Harmonization
26. 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
Screening for Potential Equity Investment: Criteria
FIFO results in: (assuming inflationary period)
IFRS/US GAAP Frameworks: purpose of framework
DTA Issues
27. Selecting accounting principles to distort results - Structuring transactions to achieve a desired outcome - Using aggressive or unrealistic estimates and assumptions - Exploiting the intent of the accounting principle
Extraordinary Items: Unusual AND Infrequent items...
Low Quality Earnings is result of...
Net Periodic Benefit Costs
Not all CF increase are Sustainable. Example of how Mgmt can Manipulate Cash Flow Statement
28. 1) Unqualified opinion (good); 2) Qualified opinion (followed GAAP except for...); 3) Adverse opinion (bad)
Auditor/Audit Opinion
Inventory mangement: High T/O (low DOH) and sales growth above industry average
Disclosure for each segment...
Fundamental principles for PREPARING f/s under IFRS: (IAS No 10
29. 1) Capitalize interst during construction period when building its own operating facility; 2) Interest must actually be paid by the firm; 3) Specific and general debt interest is capitalized
Fraud Triangle - 3) Attitude/rationalization
Capitalization of Interest...
Low Quality Earnings is result of...
Taxation Analyst Adjustments...
30. 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
Finance (capital) Lease criteria (under US GAAP)
% of Completion
Cash Flow: Logic (A = L + E)
Cash Flow From Operations (CFO) - FASB
31. Refers to changes from one GAAP method or IFRS method to another IFRS & US GAAP require prior year data shown in f/s to be adjusted.
Deferred Tax Asset: (DTA)
Return on Assets ROA...
Types of accounting changes: accounting principle
Traditional DuPont Equation...
32. Ineffective corp. ethical values; non-financial managers invovled in selection of accounting principles/estimates; History of violation; Focus on stock price and earning trends; Commitment to unrealistic/aggressive forecasts; Failure to correct known
Add/ Sub changes to related b/s operating accounts
B/S - short-term investments
Financial Ration based on B/S: Liquidity Ratios
Fraud Triangle - 3) Attitude/rationalization
33. Ensure that information in f/s is useful to a wide range of users.
Which of the following characteristics should be of least concerned about management's opportunities to commit fraud?
Lessor Accounting Capital Lease: Sales: Direct Financing Lease
Cash Flow From Operations (CFO) - FASB
The objective of f/s is to...
34. EBIT/ Avg. total capital - Total capital includes: debt capital - so int. is aded back to NI
Return on total capital (ROTC)...
Impact on the B/S of a Discount Bond...
Disclosure for each segment...
LIFO results in: (assuming inflationary period)
35. Actual cash outflow for taxes paid during current period
B/S - Long-term Liabilities
DTA Issues
Income Tax Paid...
Potentially Dillutive Securities
36. Includes: cash flow from interst Rec'd and Paid - and Dividend received. Includes all income taxes paid.
Impact on the Cash Flow of a Premium Bond...
Cash Flow From Operations (CFO) - FASB
Return on Equity (ROE)...
IFRS/US GAAP Frameworks: Measurement of Elements...
37. 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
Finance (capital) Lease criteria GAAP vs. IFRS
Unusual OR Infrequent items...
Impact on the Cash Flow of a Discount Bond...
Fraud Triangle
38. 1) fair presentation; 2) going concern; 3) accrual basis; 4) consistency; 5) materiality
Reasons to Lease...
Impact on the B/S of a Par Bond...
Fundamental principles for PREPARING f/s under IFRS: (IAS No 10
IASB - Goals
39. Interest Expense = Coupon - Amortization = PV of future CF x market yield @ issuance
The report format of B/S
Finance (capital) Lease criteria GAAP vs. IFRS
Convergence IFRS/US GAAP...
Impact on the B/S of a Premium Bond...
40. 1) Lack physical form (patent - copyrights etc; 2) Good will is an ex. of an unidentifiable intangible asset - not amortized but subject to annual impairment reviews; 3) Identifiable intangibles are amortized.(eliminate goodwill from ratio analysis)
CFO Disclosure requirement...
Auditor/Audit Opinion
Intangible Assets
Straight-line depreciation (SL)
41. 1) Calculate cash raised on exercise 2) Repurchase shares at avg. price 3) New Shares = exercised - repurchased
Inv. Valuation reporting Inventory ABOVE costs...
Tax Loss Carryforward...
Stock options: Use treasury stock method
Income Tax Paid...
42. 365/(AR T/O) = 365/(Rev/Avg. AR)
Implication for Analysts: Be aware of differences in tax reconcilation between periods
Finance (capital) Lease criteria (under US GAAP)
Creative Cash Flows Accounting: Motivation
days of sales o/s =
43. Is required under IFRS but not under GAAP
Finance (capital) Lease criteria (under US GAAP)
# of days payable =
Footnote disclosure of Reconciliation of opening and closing carrying values...
Financial Implications of Capitalizing...
44. 1) Purchase cost; 2) conversion costs; 3) Allocation of fixed production OH based on normal capacity levels; 4) Other costs necessary to bring the inventory to its present location and condition (freight costs & installation) - Exclude: Admin OH - S
Traditional DuPont Equation...
Simple capital structure
Cost included in Inventory on b/s...
Footnote disclosure of Reconciliation of opening and closing carrying values...
45. 1) Purpose and context 2) Data Collection 3) Data Processing 4) Analysis/Interpretation of data 5) Develop conclusions and recommendations 6) Follow-up
Steps of F/S Analysis
Amortization of Bond Premium = (in/out flow) in the indirect method CFO
Forecasting Financial Performance: Application
Add/ Sub changes to related b/s operating accounts
46. 1st: Net Income - dividends declared = chg in are/E - Then: Dividends declared +/- chg dividends payable = cash dividends paid.
Intercorporate Investment: > 50% votes...
Calculate dividends declared...
CFO - Direct/Indirect method
IFRS/US GAAP Frameworks: purpose of framework
47. 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.
Defined Benefit Obligations (DBO)
LIFO is appropriate
Barriers to a single framework...
Finance (capital) Lease criteria (under US GAAP)
48. 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)
Activity Based Restrictions
Intangible Assets
Extended DuPont Equation...
Unusual OR Infrequent items...
49. 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.
IFRS/US GAAP Frameworks: underlying assumptions...
Measurement of A & L disclosure in footnotes
Effects of Lease Classification on F/S - Operating Lease
Financial Lease Reporting
50. 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 -
CFI Analysis...
Ending Inventory =
The best indicator of overstating its profits is...
FIFO ending inventory =