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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. 1) installment sales (If collection is certain - rev is recognized at time of sale) 2) installment method: (if collection cannot be estimated) 3) cost recovery (if collectability is highly uncertain)
Asset Revaluation: IFRS
Sales Basis Revenue Recognitions
Cash Conversion Cycle =
Free Cash Flow to Equity - FCFE
2. 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
Fraud Triangle
Defined Benefit Obligations (DBO)
Impact on the Cash Flow of a Zero Coupon Bond...
Financial Ratio based on I/S...
3. FIFO: EI = newest purchases - LIFO: EI = oldest purchases - Avg. Costs: EI = Available for sale/Units - Specific ID: high value items (cars - diamonds etc)
Fraud Triangle - 1) Incentive/Pressure
Screening for Potential Equity Investment: Criteria
Inventory Cost Flow Methods...
Inventory mangement: Low T/O (High DOH)...
4. GAAP: direct method must disclose adj to reconcile NI to CFO. reconciliation is NOT required for IFRS. IFRS: pymts for Int & Taxes MUST be disclosed separately in the CF Stmnt under direct or indirect. Under GAAP - this can be reported in CF stmnt or
Deferred Tax Liability: (DTL)
One major difference between the presentation of deferred tax assets and liabilities under IFRS and under U.S. GAAP is that...
CFO Disclosure requirement...
Financial Liability: US GAAP/Fair Market Value
5. When Statutory tax rate does NOT equal Effective tax rate - Tax expense does note equal pretax income x statutory rate
Financial Assets: US GAAP/Fair Market Value
Sources of Differences: Permanent
Fraud Triangle - 2) Opportunity
DBO Funded Status =
6. Pd after more than 1 year - notes & bonds: at PV of future CF pymets - Capital leases - Provisions - Deferred tax
Sales Basis Revenue Recognitions
Cash Flow From Operations (CFO) - FASB
B/S - Long-term Liabilities
Dilutive Securities
7. Delay Supplier pymt: boost CFO; review days' sales in AP; Financing of payables: use N/P to pay off AP; manipulate timing of CFO; Securitization of A/are: accelerates appearance of collection - boosts CFO; Tax benefit of stock options: lower tax paid
Impairments recognition (GAAP)
Cash Flow From Investing (USA) (Assets)
Creative Cash Flows Accounting: Technique
Taxation: Tax Payable
8. GAAP: more quantitative rules - IFRS: more qualitative approach based on whether the risks and reward of the asset have tranferred.
Sales Basis Revenue Recognitions
Finance (capital) Lease criteria GAAP vs. IFRS
Financial Liability: US GAAP/Amortized at Cost
Intercorporate Investment: < 20% votes...
9. 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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10. 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.
Form 144...
Cash flow ratios
Sales Basis Revenue Recognitions
Types of accounting changes: accounting principle
11. Depreciation exp = (cost - residual value) x (# units produced / total expected to produce)
Income Tax Paid...
Units of Production Method
IFRS: Required F/S
Convergence IFRS/US GAAP...
12. Replacement cost subject to: Upper limit = NRV - Loewr limit = NRV - normal profit margin
Intangible Assets
Return on total capital (ROTC)...
DTA/DTL: Effect on Net Income when Tax Rate decreases...
Market Value (GAAP)...
13. 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
Screening for Potential Equity Investment: Criteria
Tax base of an asset
Dilutive Securities
Cash Flow From Operations (CFO) - IFRS
14. 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 -
Free Cash Flow to the Firm - FCFF
Finance (capital) Lease criteria (under US GAAP)
The best indicator of overstating its profits is...
Taxation: Income Tax Expense
15. FASB: Asset is a future economic benefit - IASB: Asset is a RESOURCE from which future economic benefit is expected to flow.
IFRS/US GAAP Frameworks: objective of F/S
Cash Conversion Cycle =
Cash Flow From Operations (CFO) - FASB
IFRS/US GAAP Frameworks: F/S elements...
16. 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
CFO - Direct method
Depreciation Methods...
From creditor POV: Int. Coverage;
Lessor Accounting Capital Lease: Sales-Type Lease
17. 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)
Motivation to Over-report Earnings
Financial Implications of Capitalizing...
Effects of Lease Classification on F/S - Finance Lease
18. 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
Reasons to Lease...
IASB - Goals
ROE interpretation: if ROE is low...
Deferred Tax Liability: (DTL)
19. 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
Cost included in Inventory on b/s...
Measures of Operating Performance - Efficiency Ratios...
Traditional DuPont Equation...
20. Assess liquidity - solvency and financial flexibiliy
Statement of Cash Flow - relevance...
The best indicator of overstating its profits is...
Motivation to Overstate Assets/Understate Liabilities
B/S - Stockholders' Equity
21. Taxes payable + chg deferred Tax as per Financial Report
Income Statement
Taxation: Income Tax Expense
Auditor/Audit Opinion
Traditional DuPont Equation...
22. 1) held-to-maturity: @ amortized cost (i.e Bonds) 2) trading: @ fair value through P&L @ fair mkt value - unrealized g/(l) are recognized on the I/S. 3) available-for-sale: @ fair mkt value - unrealized g/(l) are NOT recognized on the I/S - instead r
CFO Analysis...
4 General Categories for Creditworthiness/Capacity...
Types of accounting changes: accounting estimate
B/S - short-term investments
23. = LIFO ending inventory + LIFO reserve FIFO after-tax profit
Impairments recognition (IFRS)
FIFO ending inventory =
Fundamental principles for PREPARING f/s under IFRS: (IAS No 10
Vertical Common Size Statements...
24. Research = Expensed Development may be capitalized when the following critera is met: (ie if in the Development stage and NOT research stage) 1) process is clearly identified 2) Cost can be clearly idenfified 3) Technical feasibility established 4) M
Intangibles under IFRS...
Common Size Statement
Installment Method...
4 General Categories for Creditworthiness/Capacity...
25. You.S. GAAP
Which set of accounting standards requires firms to disclose estimated amortization expense for the next five years on intangible assets?
Horizontal Common Size Statements...
DTA Issues
Forecasting Financial Performance: Top Down Approach...
26. 1) understandability; 2) relevance; 3) reliability; and 4)comparability - No hierarchy
The 4 Qualitative Characteristics of IFRS
Impact on the Cash Flow of a Par Bond...
B/S - Long-term Liabilities
Impact on the B/S of a Par Bond...
27. +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
Cash Flow From Operations (CFO) - FASB
Debt covenants
Revaluation below historic cost...
Creative Cash Flows Accounting: Motivation
28. Cash collections less direct cash inputs less other cash outfllows
IFRS: Presentation Requirements
IFRS: Required F/S
CFO - Direct method
The 4 Qualitative Characteristics of IFRS
29. 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
IFRS/US GAAP Frameworks: underlying assumptions...
Comprehensive income...
Cash Flow From Operations (CFO) - IFRS
Valuation allowance
30. For inventory that has a limited shelf life ex) Because the movies have a very limited shelf life and will greatly deteriorate in value with age - especially after the first year - FIFO is the most appropriate method of accounting for the movies for
FIFO is appropriate
Intangibles under IFRS...
Ratios that directly affect choice of Inventory Account...
Low Quality Earnings is result of...
31. 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...
Inventory Cost Flow Methods...
Activity Ratios
Comprehensive income...
32. Is required under IFRS but not under GAAP
Footnote disclosure of Reconciliation of opening and closing carrying values...
Depreciation Methods...
Creative Cash Flows Accounting: Technique
IFRS: Required F/S
33. 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
Return on Equity (ROE)...
Types of accounting changes...
Warning Signs of Earnings Manipulation
Impact on the Cash Flow of a Par Bond...
34. 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
Financial Adj to Facilitate Comparison...
Which set of accounting standards requires firms to disclose estimated amortization expense for the next five years on intangible assets?
# of days payable =
35. 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.
The 4 Qualitative Characteristics of IFRS
Financial Ratio based on I/S...
Financial Lease Reporting
FASB - Harmonization
36. 1) Valuation; 2) Standard setting; 3) Measurement
B/S - Long-lived assets
Barriers to a single framework...
Financial Ratios based on B/S: Solvency ratio
Amortization of Bond Premium = (in/out flow) in the indirect method CFO
37. Part of indenture that place restrictions on the firm that protect bondholderns and increase value of the firm's bond - Breach is technical default
IFRS: Presentation Requirements
Debt covenants
Motivation to Over-report Earnings
Intangibles under IFRS...
38. 1) Risk & Reward transferred; 2) No continued control; 3) Reliable measurement; 4) Probable flow of benefits; 5) Cost verifiable
4 General Categories for Creditworthiness/Capacity...
Finance (capital) Lease criteria (under US GAAP)
IFRS Revenue Recognition
MD&A contains...
39. 1st: Net Income - dividends declared = chg in are/E - Then: Dividends declared +/- chg dividends payable = cash dividends paid.
Inventory mangement: Low T/O (High DOH)...
Calculate dividends declared...
The objective of f/s is to...
SEC guidance for Revenue Recognition
40. 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
Intercorporate Investment: < 20% votes...
Financial Ratios based on B/S: Solvency ratio
Financial Assets: US GAAP/Amortized at Cost
The report format of B/S
41. Trading securities - Available-for-sale - Derivatives (standalone or embedded in non-derivative intrument) - Assets with fair value exposure hedged by derivatives
Fraud Triangle
Cash flow ratios
Financial Assets: US GAAP/Fair Market Value
IFRS: Presentation Requirements
42. Both: General agreement on objectives; focus on wide range of users - IASB: One objective for all users - FASB: Separate objectives for business entities and non-business entities.
Component depreciation;
Fraud Triangle - 1) Incentive/Pressure
Horizontal Common Size Statements...
IFRS/US GAAP Frameworks: objective of F/S
43. 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)
Footnote Finance Liability Disclosure
Taxation: Income Tax Expense
Cash Flow From Financing (USA) (Source of Cash)
44. IFRS: Funded status is NOT on B/S Asset/Liability - Result in a b/s that does NOT represent econ reality - GAAP: Funded status = B/S Asset/Liability -Both disclose components of DBO - plan assets - expenses - and assumptions used to calculate pensio
Measurement of A & L disclosure in footnotes
Horizontal Common Size Statements...
Deferred Tax Asset: (DTA)
Funded Status US GAAP & IFRS
45. 365/(AR T/O) = 365/(Rev/Avg. AR)
Complex Capital Structure
days of sales o/s =
Tax Loss Carryforward...
Characteristics of an effective framework
46. EU 1) Int'l Accounting Standards Board; 2) Unified int'l frameworks of accounting standards (IFRS); 3) Addopted by EU in 2005
IASB
From creditor POV: Int. Coverage;
Steps of F/S Analysis
B/S - Stockholders' Equity
47. Beginning Inv. (BI) + Purchases (P) = Available for Sale - Available for sale - COGS = Ending Inventory (EI)
Extraordinary Items: Unusual AND Infrequent items...
Ending Inventory =
Forecasting Financial Performance: Application
IOSCO
48. 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...
Impact on the B/S of a Zero Coupon Bond...
Unusual OR Infrequent items...
IFRS: Presentation Requirements
49. Financial Services Companies: Operating activities: Interest - Dividends - G/(L) on disposal Non-Financial Services Companies: Non-operating activities: Interest - Dividends - G/(L) on disposal
Sarbanes-Oxley Management Report...
B/S - Stockholders' Equity
Sustainable Growth
Operating vs. Non-operating Income
50. 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
FIFO ending inventory =
Auditor/Audit Opinion
Stock options: Use treasury stock method
Analysis: Market Value of Debt