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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. Interest Expense = Coupon - Amortization = PV of future CF x market yield @ issuance
Operating Risk Ratios...
Impact on the B/S of a Premium Bond...
An Increase in the Valuation Allowance Account...
Taxation Analyst Adjustments...
2. +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
B/S - short-term investments
Cash Flow From Operations (CFO) - FASB
Operating Risk Ratios...
Taxation Disclosure Requirements
3. 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
Stock options: Use treasury stock method
Amortization of Bond Discount = (in/out flow) in the indirect method CFO
Impact on the Cash Flow of a Discount Bond...
Straight-line depreciation (SL)
4. 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
Straight-line depreciation (SL)
Form 8-K...
Forecasting Financial Performance: Application
Net Realizable Value (NRV) (IFRS)
5. 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.
Measures of Operating Performance - Efficiency Ratios...
Inventory Cost Flow Methods...
Fraud Triangle - 1) Incentive/Pressure
Comprehensive income...
6. Reported BELOW the line. Operations mgmt has decided to dispose of but: 1) has not yet done so or 2) did so in CY after it generated profit/(loss) Must be physicallly and operationally distinct from firm. Analyst must determine effects on future inco
Motivation to Understate Assets/Overstate Liabilities
LIFO is appropriate
Types of accounting changes: prior period adjustments
Discontinued Operations...
7. It is the purchase of an asset using debt finance.
What is the economic substance of financial (capital) lease?
Intercorporate Investment: 20% - 50% votes...
Tax Loss Carryforward...
CFO Analysis...
8. Increasing CFI - may indicate growth OR Decreasing CFI or sell capital assets to conserve or generate cash.May result in higher outflows in the future as older assets are replaced or growth conts.
Balance Sheet - formats
CFI Analysis...
B/S - Long-lived assets PP&E
Impact on the Cash Flow of a Zero Coupon Bond...
9. Shows the financial position of a firm AT A SINGLE POINT in time A = L + E.
Return on total capital (ROTC)...
FIFO ending inventory =
Balance Sheet
IASB
10. FIFO: EI = newest purchases - LIFO: EI = oldest purchases - Avg. Costs: EI = Available for sale/Units - Specific ID: high value items (cars - diamonds etc)
CFO - Indirect method steps...
Credit Analysis: Ratios
Inventory Cost Flow Methods...
Fundamental principles for PREPARING f/s under IFRS: (IAS No 10
11. Off B/S asset or liability = Footnotes disclosure - Lease payments are expensed when due via I/S - Payments are CFO outflows
LIFO is appropriate
Cash Flow From Investing (USA) (Assets)
Sustainable Growth
Operating Lease
12. Lost sales from stock outs
Sarbanes-Oxley Management Report...
Component depreciation;
Ratios that directly affect choice of Inventory Account...
Inventory mangement: High T/O (low DOH) and sales growth below industry average
13. 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
Low Quality Earnings is result of...
Impact on the Cash Flow of a Zero Coupon Bond...
Segment Reporting
SEC guidance for Revenue Recognition
14. 1) Balance Sheet; 2) Comprehensive Income; 3) Change in Equity; 4) Cash Flow Statement; 5) Accounting policies and notes.
IFRS/US GAAP Frameworks: F/S elements...
Asset Revaluation: IFRS
Barter (IASB & FASB)
IFRS: Required F/S
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
Cash Flow From Operations (CFO) - IFRS
Finance (capital) Lease criteria (under US GAAP)
LIFO is appropriate
CFO - Direct/Indirect method
16. 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.
Lessor Accounting Capital Lease: Sales-Type Lease
IFRS: Presentation Requirements
Credit Analysis: Ratios
Financial Ratios based on B/S: Solvency (Coverage)
17. 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
Stock options: Use treasury stock method
Analysis: Market Value of Debt
Sources of Differences betweent F/S & T/
Financial Assets: US GAAP/Amortized at Cost
18. 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
Impairments recognition (IFRS)
Form 8-K...
Effects of Lease Classification on Ratios - Finance Lease
Simple capital structure
19. 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
Financial Ratio based on I/S...
Valuation Allowance...
MD&A contains...
Impact on the Cash Flow of a Zero Coupon Bond...
20. I/S: COGS lower - EBT higher - Taxes: higher - NI: higher - B/S: INV: higher - W/C: higher - are/E: higher - CF: CFO: lower
FIFO results in: (assuming inflationary period)
Intangibles under IFRS...
Gain/(loss) on bond early retirement: (derecognition of debt)
Types of accounting changes: prior period adjustments
21. Primary) Relevance & Reliability - Secondary) Comparability - Lastly) Understandability - user specific
Motivation to Under-report Earnings
Inventory mangement: Low T/O (High DOH)...
The 4 Qualitative Characteristics of FASB...
FIFO ending inventory =
22. Decreases DTA -> Decreases Net Income - [Decrease in Valuation Allowance; Increase DTA and Increases Net Income]
An Increase in the Valuation Allowance Account...
Inventory Valuatoin (LCM)
Finance (capital) Lease criteria (under US GAAP)
Discontinued Operations...
23. 1) Development of high quality - transparent and enforceable global standards; 2) Promote application of standards; 3) Take into account special needs (small & med entities & emerging markets); 4) Convergence of nat'l and int'l standards
ROE interpretation: if ROE is low...
IASB - Goals
Add/ Sub changes to related b/s operating accounts
Analyzing Effective Tax Rate Reconciliation
24. 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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25. 1) Unqualified opinion (good); 2) Qualified opinion (followed GAAP except for...); 3) Adverse opinion (bad)
The best indicator of overstating its profits is...
Net Periodic Benefit Costs
Effects of Lease Classification on F/S - Finance Lease
Auditor/Audit Opinion
26. 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.
Types of accounting changes: accounting estimate
Financial Lease Reporting
Financial Ratio based on I/S...
Comprehensive income...
27. Depreciation exp = (cost-residual value)/ useful life
Straight-line depreciation (SL)
Inventory mangement: High T/O (low DOH) and sales growth below industry average
Defined Benefit Obligations (DBO)
Operating vs. Non-operating Income
28. 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
Cash Flow From Operations (CFO) - IFRS
Not all CF increase are Sustainable. Example of how Mgmt can Manipulate Cash Flow Statement
Financial Ratios based on B/S: Solvency ratio
days of sales o/s =
29. I/S: Income statement account/Sales - B/S: Balance sheet account/ Total Assets
Vertical Common Size Statements...
Creative Cash Flows Accounting: Technique
Market Value (GAAP)...
Straight-line depreciation (SL)
30. CFO: cash interest expense - CFF: increased by amount rcvd at issuance and decreased by payment made at redemption
Cash Flow From Investing (USA) (Assets)
Implication for Analysts: Be aware of differences in tax reconcilation between periods
Impact on the Cash Flow of a Par Bond...
IFRS/US GAAP Frameworks: F/S elements...
31. Includes: cash flow from interst Rec'd and Paid - and Dividend received. Includes all income taxes paid.
Double-decline balance (DDB)
Intercorporate Investment: > 50% votes...
Valuation allowance
Cash Flow From Operations (CFO) - FASB
32. GAAP: more quantitative rules - IFRS: more qualitative approach based on whether the risks and reward of the asset have tranferred.
Finance (capital) Lease criteria GAAP vs. IFRS
Stock options: Use treasury stock method
Intercorporate Investment: > 50% votes...
Sources of Differences: Permanent
33. Inflow - (bringing bond UP to par)
Barter (IASB & FASB)
Taxation Disclosure Requirements
IASB - Goals
Amortization of Bond Discount = (in/out flow) in the indirect method CFO
34. 1) understandability; 2) relevance; 3) reliability; and 4)comparability - No hierarchy
The objective of f/s is to...
The 4 Qualitative Characteristics of IFRS
Tax Loss Carryforward...
Warning Signs of Earnings Manipulation
35. A company can issue securities to certain qualified buyers without registering the securities with the SEC - but must notify the SEC that it intends to do so.
Types of accounting changes: accounting estimate
Intercorporate Investment: > 50% votes...
Form 144...
B/S - investments
36. 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
Operating Risk Ratios...
MD&A contains...
Bond Issuance Cost under GAAP/IFRS
FIFO ending inventory =
37. Days of sales o/s + days of inv. on hand - # of days payable (shorter the better)
Cash Conversion Cycle =
Dilutive Securities
Analysis: Market Value of Debt
Market Value (GAAP)...
38. Income Tax Expense/Pretax Income (EBIT) Income Tax Exp. = Taxes payable + chg in deferred ta
Inventory Cost Flow Methods...
B/S - Long-lived assets
Double-decline balance (DDB)
Effective Tax Rate
39. 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
Intercorporate Investment: < 20% votes...
Market Value (GAAP)...
Fraud Triangle
Balance Sheet
40. 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)
Tax Loss Carryforward...
LIFO is appropriate
Financial Ratios based on B/S: Solvency ratio
Balance Sheet - formats
41. Assets: lower - Liabilities: lower - NI (Early yrs): higher - CFO: lower (b/c entire pymt is classed as CFO) - CFF: higher - Total CF: Same
Auditor/Audit Opinion
Types of accounting changes: accounting estimate
Effects of Lease Classification on F/S - Operating Lease
Net Periodic Benefit Costs
42. Asset is impaired if carrying value > recoverable amount - One-step process 1) Compare carrying value to: recoverable amount = the greater of the two. a) Fair value - selling costs b) Value in use = (PV of future cash flow from cont. use) - Loss reve
FIFO ending inventory =
Impairments recognition (IFRS)
Form DEF-14A...
Cash Flow From Investing (USA) (Assets)
43. 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
SEC guidance for Revenue Recognition
Warning Signs of Earnings Manipulation
Valuation Allowance...
Form 144...
44. Int. Coverage = EBIT/Interest Expense - Fixed Charged Coverage = (EBIT+Lease Pymts) / Int. exp + Lease payments
IFRS/US GAAP Frameworks: Recognition of Elements...
Financial Ratios based on B/S: Solvency (Coverage)
Forecasting Financial Performance: Application
Finance (capital) Lease criteria (under US GAAP)
45. 1) Transparency; 2) Comprehensiveness; 3) Consistency
Motivation to Overstate Assets/Understate Liabilities
Characteristics of an effective framework
Fraud Triangle - 1) Incentive/Pressure
Comprehensive income...
46. 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
Inventory mangement: High T/O (low DOH) and sales growth above industry average
Ending Inventory =
Defined Contribution Plans
Financial Implications of Capitalizing...
47. Improve ROA and Asset TO Ratios - Report higher aquisition goodwill
MD&A contains...
Motivation to Understate Assets/Overstate Liabilities
Discontinued Operations...
IFRS/US GAAP Frameworks: F/S elements...
48. When Statutory tax rate does NOT equal Effective tax rate - Tax expense does note equal pretax income x statutory rate
Sources of Differences: Permanent
Add/ Sub changes to related b/s operating accounts
Financial Ratios based on B/S: Solvency ratio
Inventory Valuatoin (LCM)
49. 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
Fraud Triangle - 3) Attitude/rationalization
FASB - Harmonization
Return on total capital (ROTC)...
Convergence IFRS/US GAAP...
50. 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.
CFO - Direct/Indirect method
Bond Issuance Cost under GAAP/IFRS
Form DEF-14A...
Impact on the B/S of a Par Bond...
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