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Test your basic knowledge |
Advanced Financial Reporting And Analysis
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Study First
Subject
:
business-skills
Instructions:
Answer 50 questions in 15 minutes.
If you are not ready to take this test, you can
study here
.
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. Part of indenture that place restrictions on the firm that protect bondholderns and increase value of the firm's bond - Breach is technical default
Funded status of the pension plan (under US GAAP & IFRS) is reported where?
Free Cash Flow to the Firm - FCFF
ROE interpretation: if ROE is low...
Debt covenants
2. Replacement cost subject to: Upper limit = NRV - Loewr limit = NRV - normal profit margin
Funded status of the pension plan (under US GAAP & IFRS) is reported where?
Market Value (GAAP)...
Return on Equity (ROE)...
Forecasting Financial Performance: Application
3. 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
Analyst Treaments of DTL
Low Quality Earnings is result of...
Extended DuPont Equation...
Motivation to Over-report Earnings
4. Cash collections less direct cash inputs less other cash outfllows
% of Completion
Effective Tax Rate
CFO - Direct method
Cash Flow: Logic (A = L + E)
5. Outflow - (bringing bond DOWN to par)
Fraud Triangle
Form DEF-14A...
Amortization of Bond Premium = (in/out flow) in the indirect method CFO
Installment Method...
6. Management turnover.
Deferred Tax Asset: (DTA)
Cost included in Inventory on b/s...
Intercorporate Investment: < 20% votes...
To investigate the stability of that structure - Kilgore would be best served by looking at...
7. Follows the traditional ledger account - assets on the left hand side and liabilities and equity on the right hand side.
The account format of B/S
Fraud Triangle - 3) Attitude/rationalization
Expensed Intangibles...
Disclosure for each segment...
8. I/S: COGS higher - EBT lower - Taxes: lower - NI: Lower - B/S: INV: lower - W/C: Lower - are/E: lower - CF: CFO: higher
Free Cash Flow to the Firm - FCFF
Double-decline balance (DDB)
Form 8-K...
LIFO results in: (assuming inflationary period)
9. Divdends and share repurchases - Production and investment - M&A - New debt issuance - Payoff pattern and liquidation priority - Maintenance of assets used as collateral
Activity Based Restrictions
Horizontal Common Size Statements...
Financial Ration based on B/S: Liquidity Ratios
Sources of Differences betweent F/S & T/
10. 1) Incentive/Pressure (the motive to commit fraud) 2) Opportunity (exists with weak internal controls) 3) Attitude/rationalization (mindset that fraud is justified)
Fraud Triangle
Cash Flow From Operations (CFO) - IFRS
Return on total capital (ROTC)...
Revaluation above historic cost...
11. Potentially dilutive securitites [options - warrants - convertible securities]
Discontinued Operations...
Complex Capital Structure
The objective of f/s is to...
Forecasting Financial Performance: Top Down Approach...
12. Required by IFRS - Permited by US GAAP
Cash flow ratios
Component depreciation;
Barter (IASB & FASB)
CFO - Indirect method steps...
13. EU 1) Int'l Accounting Standards Board; 2) Unified int'l frameworks of accounting standards (IFRS); 3) Addopted by EU in 2005
IASB
Under Completed Contract Method...
Inventory mangement: Low T/O (High DOH)...
Free Cash Flow to the Firm - FCFF
14. 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
DBO Funded Status =
Sources of Differences: Permanent
Dilutive Securities
15. 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
IFRS/US GAAP Frameworks: purpose of framework
Comprehensive income...
Deferred Tax Liability: (DTL)
Fraud Triangle
16. Lost sales from stock outs
Inventory mangement: High T/O (low DOH) and sales growth below industry average
Financial Liability: US GAAP/Amortized at Cost
Form 8-K...
What is the economic substance of financial (capital) lease?
17. Both: Recognize going concern & accrual assumptions - IASB: Going concern & accruals given more prominence in framework - FASB: Going concern assumption not well developed in framework.
Expensed Intangibles...
IFRS/US GAAP Frameworks: underlying assumptions...
Revaluation below historic cost...
Impairments recognition (GAAP)
18. IFRS Allows firm to report PP&E at FMV less Accm' Depr' - Must disclose carrying vlaue using historic cost model.
Comprehensive income...
Asset Revaluation: IFRS
Income Statement
Motivation to Over-report Earnings
19. LT D-to-E = Total LT Debt / Total Equity - D-to-E = Total Debt / Total Equity - Financial leverage ratio = Total Assets/Total Equity - Total Debt Ratio = Total Debt / Total Asset - Debt-to-Capital = Total Debt/ Total Debt + SOE - All Solvency are ove
Form DEF-14A...
Financial Ratios based on B/S: Solvency ratio
IFRS/US GAAP Frameworks: F/S elements...
To investigate the stability of that structure - Kilgore would be best served by looking at...
20. 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
Discontinued Operations...
B/S - short-term investments
Form 8-K...
Effects of Lease Classification on Ratios - Finance Lease
21. 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
Fraud Triangle - 1) Incentive/Pressure
Segment Reporting
Impairments recognition (IFRS)
Ratios that directly affect choice of Inventory Account...
22. Efficient inventory managment
Inventory mangement: High T/O (low DOH) and sales growth above industry average
CFO Analysis...
Tax base of an asset
Balance Sheet
23. You.S. GAAP
# of days payable =
IFRS/US GAAP Frameworks: F/S elements...
Which set of accounting standards requires firms to disclose estimated amortization expense for the next five years on intangible assets?
Forecasting Financial Performance: Top Down Approach...
24. 1) fair presentation; 2) going concern; 3) accrual basis; 4) consistency; 5) materiality
Activity Based Restrictions
Bond Issuance Cost under GAAP/IFRS
DTA/DTL: Effect on Net Income when Tax Rate decreases...
Fundamental principles for PREPARING f/s under IFRS: (IAS No 10
25. 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
Forecasting Financial Performance: Top Down Approach...
Intangible Assets
B/S - Long-term Liabilities
Motivation to Overstate Assets/Understate Liabilities
26. 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
Defined Benefit Plans
Creative Cash Flows Accounting: Motivation
Inventory Cost Flow Methods...
Balance Sheet
27. 1) Transparency; 2) Comprehensiveness; 3) Consistency
Effects of Lease Classification on Ratios - Operating Lease
Low Quality Earnings is result of...
Characteristics of an effective framework
Cost included in Inventory on b/s...
28. Assets: higher - Liabilities: Higher - NI (Early yrs): Lower - CFO: Higher (b/c only interest portion is classed as CFO) - CFF: Lower (b/c principal repayment portion) - Total CF: Same - Since Int. exp + depre > lease pymt in the early years. This de
Funded Status US GAAP & IFRS
Footnote disclosure of Reconciliation of opening and closing carrying values...
IFRS Revenue Recognition For Service
Effects of Lease Classification on F/S - Finance Lease
29. Securities that would DECREASE EPS if exercised - If X< Avg. stock price then could be exercised - If X> Avg. stock price then will not be exercised
% of Completion
Dilutive Securities
CFO - Indirect method steps...
Defined Benefit Obligations (DBO)
30. Assets held for continuing usage in the business NOT for resale ( Invoice price - Sales Tax - Freight & Insurance - and Installation costs) 1) capitalize costs that result in higher future earnings 2) expense costs that have uncertain/NO impact on fu
Which set of accounting standards requires firms to disclose estimated amortization expense for the next five years on intangible assets?
Inventory mangement: Low T/O (High DOH)...
Asset Capitalization
Sources of Differences: Permanent
31. When Statutory tax rate does NOT equal Effective tax rate - Tax expense does note equal pretax income x statutory rate
Inventory Valuatoin (LCM)
Balance Sheet
Financial Ration based on B/S: Liquidity Ratios
Sources of Differences: Permanent
32. 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
Footnote Finance Liability Disclosure
CFO - Direct method
FIFO is appropriate
IOSCO
33. Trade relief - Contingent consideration - Union concessions
CFO Analysis...
Motivation to Under-report Earnings
Amortization of Bond Discount = (in/out flow) in the indirect method CFO
From creditor POV: Int. Coverage;
34. Share are to ensure significant influence over the company - Affiliate/Associate - Equity Method
Return on Equity (ROE)...
Common Size Statement
days of sales o/s =
Intercorporate Investment: 20% - 50% votes...
35. Days of sales o/s + days of inv. on hand - # of days payable (shorter the better)
Inventory Systems...
An Increase in the Valuation Allowance Account...
Cash Conversion Cycle =
Double-decline balance (DDB)
36. 1) Calculate cash raised on exercise 2) Repurchase shares at avg. price 3) New Shares = exercised - repurchased
FIFO is appropriate
Stock options: Use treasury stock method
Analysis: Market Value of Debt
Convergence IFRS/US GAAP...
37. 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
Not all CF increase are Sustainable. Example of how Mgmt can Manipulate Cash Flow Statement
B/S - investments
Impact on the Cash Flow of a Discount Bond...
Gross Reporting of Revenue
38. 365/(AR T/O) = 365/(Rev/Avg. AR)
Sustainable Growth
days of sales o/s =
Inventory mangement: Low T/O (High DOH)...
The report format of B/S
39. I/S: COGS lower - EBT higher - Taxes: higher - NI: higher - B/S: INV: higher - W/C: higher - are/E: higher - CF: CFO: lower
Tax Loss Carryforward...
Impairments recognition (IFRS)
CFO - Direct method
FIFO results in: (assuming inflationary period)
40. 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
IFRS/US GAAP Frameworks: F/S elements...
MD&A contains...
Finance (capital) Lease criteria GAAP vs. IFRS
Income Statement
41. 1) Cheaper Financing; 2) Reduce risk of obsolescence; 3) Less restrictive provisions; 4) Off-B/S reporting; 5) Tax Reporting Advantages (treated as ownership for tax ( deduct depreciation and interest expense)
Reasons to Lease...
Cost recovery method...
The 4 Qualitative Characteristics of IFRS
days of sales o/s =
42. 1) will only benefit on reversal if there is sufficient taxable earnings 2) can only utilize loss carryforwards if we have future profits 3) If asset cannot be utilized in full it is reduced by a contra 'valuation allowance'. REDUCE DTA - REDUCE NI
DTA Issues
Warning Signs of Earnings Manipulation
Trade-Offs Qualitative Characteristics of IFRS
Impairments recognition (GAAP)
43. 1) Unqualified opinion (good); 2) Qualified opinion (followed GAAP except for...); 3) Adverse opinion (bad)
Auditor/Audit Opinion
Tax base on a liability
Free Cash Flow -CFO
days of inv. on hand =
44. Nonreversal DTL - therefore it is permanent = Equity. therefore decrease in DTL = Increase in Equity - Reversal DTL - therefore it is temp = Liability
Taxation Analyst Adjustments...
Form 144...
Inv. Valuation reporting Inventory ABOVE costs...
Analysis: Market Value of Debt
45. 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
FIFO after-tax profit =
Ending Inventory =
Financial Ratio based on I/S...
FASB - Harmonization
46. Beginning Inv. (BI) + Purchases (P) = Available for Sale - Available for sale - COGS = Ending Inventory (EI)
Intangible Assets
Ending Inventory =
Net Periodic Benefit Costs
Characteristics of an effective framework
47. All other liabilities (e.g. bonds - notes payables - leases)
Double-decline balance (DDB)
Deferred Tax Liability: (DTL)
An Increase in the Valuation Allowance Account...
Financial Liability: US GAAP/Amortized at Cost
48. Assets - liabilities - and equity are presented in a single column.
Forecasting Financial Performance: Application
Taxation: Tax Payable
Inventory mangement: High T/O (low DOH) and sales growth above industry average
The report format of B/S
49. 1) Relevance vs. reliability; 2) Benefit > cost; 3) Excludes intangibles and non-quantifiable info.
Impairments recognition (GAAP)
Complex Capital Structure
Trade-Offs Qualitative Characteristics of IFRS
Fraud Triangle - 1) Incentive/Pressure
50. US Gaap: lower of cost or market value - (does NOT allow subsequent reverasals) - IFRS: lower of cost or NET realizable value - (allows subsequent reversals)
The report format of B/S
Inventory Valuatoin (LCM)
The 4 Qualitative Characteristics of FASB...
Taxation Disclosure Requirements