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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. 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
Unusual OR Infrequent items...
ROE interpretation: if ROE is low...
Net Reporting of Revenue
From creditor POV: Int. Coverage;
2. FIFO: EI = newest purchases - LIFO: EI = oldest purchases - Avg. Costs: EI = Available for sale/Units - Specific ID: high value items (cars - diamonds etc)
DTA/DTL: Effect on Net Income when Tax Rate decreases...
Inventory Cost Flow Methods...
Free Cash Flow to the Firm - FCFF
The best indicator of overstating its profits is...
3. EU 1) Int'l Accounting Standards Board; 2) Unified int'l frameworks of accounting standards (IFRS); 3) Addopted by EU in 2005
B/S - investments
IASB
Tax base of an asset
Complex Capital Structure
4. Net income + non-cash charges - working cap investment
Free Cash Flow -CFO
Unusual OR Infrequent items...
Footnote Finance Liability Disclosure
Net Periodic Benefit Costs
5. Off B/S asset or liability = Footnotes disclosure - Lease payments are expensed when due via I/S - Payments are CFO outflows
IFRS/US GAAP Frameworks: underlying assumptions...
Return on Equity (ROE)...
Impairments recognition (GAAP)
Operating Lease
6. 1) Risk & Reward transferred; 2) No continued control; 3) Reliable measurement; 4) Probable flow of benefits; 5) Cost verifiable
Cash Flow: Logic (A = L + E)
IFRS Revenue Recognition
Activity Ratios
Intercorporate Investment: < 20% votes...
7. Assets - liabilities - and equity are presented in a single column.
The report format of B/S
Finance (capital) Lease criteria (under US GAAP)
Add/ Sub changes to related b/s operating accounts
B/S - Long-term Liabilities
8. +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
Effects of Lease Classification on Ratios - Operating Lease
Cost recovery method...
Intercorporate Investment: < 20% votes...
Cash Flow From Operations (CFO) - FASB
9. 1) Consider the growth rate and capital spending levels when determining whether temp diff due to accelerated depre will reverse 2) Look for cumulative differences due to asset impairments and post-retirement benefits 3) Restructuring charges can c
Activity Based Restrictions
IFRS/US GAAP Frameworks: purpose of framework
Barter (IASB & FASB)
Implication for Analysts: Be aware of differences in tax reconcilation between periods
10. Days of sales o/s + days of inv. on hand - # of days payable (shorter the better)
Cash Conversion Cycle =
Impact on the B/S of a Premium Bond...
Funded status of the pension plan (under US GAAP & IFRS) is reported where?
Depreciation Methods...
11. '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
Taxable Income
Cash Flow From Investing (USA) (Assets)
Analyst Treaments of DTL
Footnote Finance Liability Disclosure
12. 1) Relevance vs. reliability; 2) Benefit > cost; 3) Excludes intangibles and non-quantifiable info.
Cash Flow From Financing (USA) (Source of Cash)
Trade-Offs Qualitative Characteristics of IFRS
Defined Benefit Plans
Net Realizable Value (NRV) (IFRS)
13. 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 =
B/S - Long-lived assets
Credit Analysis: Ratios
Complex Capital Structure
4 General Categories for Creditworthiness/Capacity...
14. 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)
Amortization of Bond Premium = (in/out flow) in the indirect method CFO
Antidilutive Securities
Roles of financial reporting & analysis include...
15. 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
Extraordinary Items: Unusual AND Infrequent items...
B/S - Stockholders' Equity
Footnote Finance Liability Disclosure
Sustainable Growth
16. 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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17. 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)
Valuation allowance
Revaluation above historic cost...
Finance (capital) Lease criteria GAAP vs. IFRS
18. EBIT/ Avg. total capital - Total capital includes: debt capital - so int. is aded back to NI
Free Cash Flow to the Firm - FCFF
Installment Method...
Cost included in Inventory on b/s...
Return on total capital (ROTC)...
19. Depreciation exp = (cost-residual value)/ useful life
Deferred Tax Asset: (DTA)
Straight-line depreciation (SL)
Funded Status US GAAP & IFRS
Inventory mangement: High T/O (low DOH) and sales growth above industry average
20. Pd after more than 1 year - notes & bonds: at PV of future CF pymets - Capital leases - Provisions - Deferred tax
B/S - Long-term Liabilities
Taxation Disclosure Requirements
Characteristics of an effective framework
From creditor POV: Int. Coverage;
21. 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.
Capitalized Intangibles...
Form DEF-14A...
Motivation to Understate Assets/Overstate Liabilities
Analyzing Effective Tax Rate Reconciliation
22. CFO: cash interest expense - CFF: increased by amount rcvd at issuance and decreased by payment made at redemption
Impact on the Cash Flow of a Par Bond...
B/S - short-term investments
Sources of Differences: Temporary
Impact on the B/S of a Zero Coupon Bond...
23. Current Ratio (CA/CL): Higher - Work. Cap (CA -CL): Higher - Asset TO: (Sales/TA): Higher - ROA (EAT/TA): Higher - ROE (EAT/E): Higher - Debt/Equity: Lower - Understates Leverage ratios (b/c not recognized as a liability) - Overstates Coverage ratios
Effects of Lease Classification on F/S - Operating Lease
Double-decline balance (DDB)
Simple capital structure
Effects of Lease Classification on Ratios - Operating Lease
24. Held for continuing use within the business (not for resale) 1) investment property; 2) Assets held for sale; 3) Natural resources; 4) PP&E
B/S - Long-lived assets
Gross Reporting of Revenue
IFRS Revenue Recognition
Which set of accounting standards requires firms to disclose estimated amortization expense for the next five years on intangible assets?
25. Actual cash outflow for taxes paid during current period
Income Tax Paid...
Common Size Statement
Statement of Cash Flow - relevance...
IFRS: Required F/S
26. 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
Operating Risk Ratios...
Fraud Triangle - 3) Attitude/rationalization
Sarbanes-Oxley Management Report...
Horizontal Common Size Statements...
27. FASB: No discussion of 'probables' - IASB: Asset - liabilities - are probable flows
IFRS/US GAAP Frameworks: Recognition of Elements...
Intercorporate Investment: < 20% votes...
The 4 Qualitative Characteristics of IFRS
Analysis: Market Value of Debt
28. Depreciation exp = (cost - residual value) x (# units produced / total expected to produce)
Cost recovery method...
Units of Production Method
Intangible Assets
Capitalized Intangibles...
29. A: Increase = use cash (-) - Decrease = source cash (+) - L: Increase = source cash (+) - Decrease = use of cash (-) - E: Increase = source cash (+) - Decrease = use of cash (-)
Cash Flow: Logic (A = L + E)
Motivation to Overstate Assets/Understate Liabilities
Financial Liability: US GAAP/Amortized at Cost
Credit Analysis: Ratios
30. 1) Diff tax rate in diff. tax jurisdictions (countries) (continuous)2) Permanent tax differences: tax credit - tax-exempt income - nondeductible expenses - & tax diff between capital gains and operating income. (continuous) 3)in tax rates and legisl
Fraud Triangle
Expensed Intangibles...
Implication for Analysts: Be aware of differences in tax reconcilation between periods
Analyzing Effective Tax Rate Reconciliation
31. 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.
Financial Ration based on B/S: Liquidity Ratios
Component depreciation;
B/S - Long-lived assets PP&E
Fraud Triangle - 2) Opportunity
32. FASB: Asset is a future economic benefit - IASB: Asset is a RESOURCE from which future economic benefit is expected to flow.
The 4 Qualitative Characteristics of FASB...
Balance Sheet - formats
Types of accounting changes: prior period adjustments
IFRS/US GAAP Frameworks: F/S elements...
33. Higher share price - Lower borrowing cost - Higher incentive compensation
Creative Cash Flows Accounting: Motivation
Operating Risk Ratios...
Fraud Triangle - 3) Attitude/rationalization
Intercorporate Investment: 20% - 50% votes...
34. Inventory TO = COGS / Avg. Inventory - LIFO = Higher - FIFO = Lower - DOH = 365/(Inv. T/O) = 365/( COGS/ Avg. Inv.) - LIFO = lower days - FIFO = higher days - Gross Profit margin = Gross profit/ revenues - LIFO = lower - FIFO = higher
Ratios that directly affect choice of Inventory Account...
Types of accounting changes: prior period adjustments
The account format of B/S
Form 144...
35. Nature of liability; Maturity dates; Stated and effective int. rates; Call and conversion features; covenants; security pledged as collateral; Amount of Debt maturity in each of the next 5 years; Fair value of o/s instrutments
The objective of f/s is to...
Net Realizable Value (NRV) (IFRS)
Footnote Finance Liability Disclosure
Form DEF-14A...
36. For inventory that does not deteriorate with age.
LIFO is appropriate
Credit Rating Process...
Financial Lease Reporting
Which of the following characteristics should be of least concerned about management's opportunities to commit fraud?
37. NRV = Est. selling cost - Est. cost of complition - selling costs
Double-decline balance (DDB)
Net Realizable Value (NRV) (IFRS)
Asset Revaluation: IFRS
Sales Basis Revenue Recognitions
38. 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
Ratios that directly affect choice of Inventory Account...
Finance (capital) Lease criteria (under US GAAP)
Warning Signs of Earnings Manipulation
Creative Cash Flows Accounting: Technique
39. Decreases DTA -> Decreases Net Income - [Decrease in Valuation Allowance; Increase DTA and Increases Net Income]
To investigate the stability of that structure - Kilgore would be best served by looking at...
An Increase in the Valuation Allowance Account...
Valuation allowance
Deferred Tax Liability: (DTL)
40. 1) Change in accounting principle; 2) Change in accounting estimate; 3) Prior period adjustments
Types of accounting changes...
Antidilutive Securities
Barriers to a single framework...
DBO Funded Status =
41. Both: Broadly consistent - lack fully developed concepts - FASB: Assets revaluations prohibited (except some financial instruments)
Income Tax Paid...
IFRS/US GAAP Frameworks: Measurement of Elements...
Expensed Intangibles...
Impact on the B/S of a Zero Coupon Bond...
42. 'Equity' -Chg in debt - Cash raised from equity and debt - -Chg in c/s - Cash spent on repurchasing equity or redeeming debt -Dividends paid - Calculate dividend declared: NI -*Div.Declared = chg in are/E - Div. Declared +(-) chg in div. payable = c
Gain/(loss) on bond early retirement: (derecognition of debt)
Cash Flow From Financing (USA) (Source of Cash)
Impairments recognition (IFRS)
SEC guidance for Revenue Recognition
43. 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.
DTA/DTL: Effect on Net Income when Tax Rate decreases...
IFRS/US GAAP Frameworks: F/S elements...
Inv. Valuation reporting Inventory ABOVE costs...
Valuation allowance
44. Working Capital = CA - CL - Working Capital TO = Rev/Avg. Working Capital - Fixed Asset TO = Rev/Avg Net Fixed Assets
SEC guidance for Revenue Recognition
Activity Ratios
Income Statement
Motivation to Overstate Assets/Understate Liabilities
45. 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.
Simple capital structure
Bond Issuance Cost under GAAP/IFRS
Fundamental principles for PREPARING f/s under IFRS: (IAS No 10
Fraud Triangle - 1) Incentive/Pressure
46. 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 =
Intangibles under IFRS...
Lessor Accounting Capital Lease: Sales: Direct Financing Lease
FASB - Harmonization
47. 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
Revaluation below historic cost...
Taxation: Tax Payable
Gain/(loss) on bond early retirement: (derecognition of debt)
LIFO results in: (assuming inflationary period)
48. 1) Balance Sheet; 2) Comprehensive Income; 3) Change in Equity; 4) Cash Flow Statement; 5) Accounting policies and notes.
One major difference between the presentation of deferred tax assets and liabilities under IFRS and under U.S. GAAP is that...
Characteristics of an effective framework
IFRS: Required F/S
Fundamental principles for PREPARING f/s under IFRS: (IAS No 10
49. Both: Recognize going concern & accrual assumptions - IASB: Going concern & accruals given more prominence in framework - FASB: Going concern assumption not well developed in framework.
Return on total capital (ROTC)...
Types of accounting changes: prior period adjustments
IFRS/US GAAP Frameworks: underlying assumptions...
Cash flow ratios
50. 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
Fraud Triangle - 3) Attitude/rationalization
B/S - Stockholders' Equity
Taxation Disclosure Requirements
Cash Flow From Operations (CFO) - IFRS