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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
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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) Change in accounting principle; 2) Change in accounting estimate; 3) Prior period adjustments
Operating Lease
Impact on the Cash Flow of a Discount Bond...
Cost recovery method...
Types of accounting changes...
2. 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 =
Amortization of Bond Premium = (in/out flow) in the indirect method CFO
Operating vs. Non-operating Income
Income Tax Paid...
Credit Analysis: Ratios
3. Share are to ensure significant influence over the company - Affiliate/Associate - Equity Method
Motivation to Understate Assets/Overstate Liabilities
Intercorporate Investment: 20% - 50% votes...
Potentially Dillutive Securities
Tax Loss Carryforward...
4. Income subject to tax as per Tax Return
Taxable Income
Amortization of Bond Premium = (in/out flow) in the indirect method CFO
Vertical Common Size Statements...
Types of accounting changes: accounting principle
5. Income Tax Expense/Pretax Income (EBIT) Income Tax Exp. = Taxes payable + chg in deferred ta
Creative Cash Flows Accounting: Technique
Effective Tax Rate
Fundamental principles for PREPARING f/s under IFRS: (IAS No 10
FIFO after-tax profit =
6. 1) Scale & Diversification - 2) Operational Efficiency - 3) Margin Stability - 4) Leverage
Inventory Systems...
4 General Categories for Creditworthiness/Capacity...
Extended DuPont Equation...
Effects of Lease Classification on F/S - Operating Lease
7. To improve liquidity and leverage ratios
Not all CF increase are Sustainable. Example of how Mgmt can Manipulate Cash Flow Statement
Motivation to Overstate Assets/Understate Liabilities
Defined Benefit Obligations (DBO)
Forecasting Financial Performance: Application
8. 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)
Fraud Triangle - 1) Incentive/Pressure
DBO Funded Status =
CFO - Indirect method steps...
Market Value (GAAP)...
9. 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
Low Quality Earnings is result of...
The report format of B/S
Inventory mangement: High T/O (low DOH) and sales growth below industry average
FIFO ending inventory =
10. Tax liability based on taxable income as per TAX Report/RETURN
Taxation: Tax Payable
Valuation allowance
Funded status of the pension plan (under US GAAP & IFRS) is reported where?
Effects of Lease Classification on Ratios - Finance Lease
11. 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
Effects of Lease Classification on F/S - Finance Lease
FIFO results in: (assuming inflationary period)
Discontinued Operations...
Not all CF increase are Sustainable. Example of how Mgmt can Manipulate Cash Flow Statement
12. FASB: Asset is a future economic benefit - IASB: Asset is a RESOURCE from which future economic benefit is expected to flow.
Defined Benefit Plans
Analysis: Market Value of Debt
IFRS/US GAAP Frameworks: F/S elements...
Footnote Finance Liability Disclosure
13. Potentially dilutive securitites [options - warrants - convertible securities]
Inventory Systems...
Cash Conversion Cycle =
Complex Capital Structure
IASB
14. 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
Effects of Lease Classification on Ratios - Finance Lease
Fraud Triangle - 2) Opportunity
Analyst Treaments of DTL
Intercorporate Investment: < 20% votes...
15. 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.
IFRS: Required F/S
Effects of Lease Classification on F/S - Operating Lease
IFRS: Presentation Requirements
Net Reporting of Revenue
16. Improve ROA and Asset TO Ratios - Report higher aquisition goodwill
Disclosure for each segment...
Stock options: Use treasury stock method
Motivation to Understate Assets/Overstate Liabilities
Traditional DuPont Equation...
17. 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
Financial Liability: US GAAP/Amortized at Cost
Warning Signs of Earnings Manipulation
Horizontal Common Size Statements...
Form 8-K...
18. EU 1) Int'l Accounting Standards Board; 2) Unified int'l frameworks of accounting standards (IFRS); 3) Addopted by EU in 2005
Ending Inventory =
IASB
Taxation Analyst Adjustments...
Cost included in Inventory on b/s...
19. CFO = NI - means high quality of earnings but may be affect by the stage of business cycle and firm's life cycle - CFO > NI - means premature recognition of revenue or delayed recognition of expenses.
Intangible Assets
CFO Analysis...
IASB - Goals
Defined Benefit Obligations (DBO)
20. For inventory that does not deteriorate with age.
LIFO is appropriate
Financial Adj to Facilitate Comparison...
Inventory Systems...
Complex Capital Structure
21. 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
IASB - Goals
# of days payable =
Comprehensive income...
22. Taxes payable + chg deferred Tax as per Financial Report
Warning Signs of Earnings Manipulation
IASB - Goals
Taxation: Income Tax Expense
Debt covenants
23. Lost sales from stock outs
Inventory mangement: High T/O (low DOH) and sales growth below industry average
FIFO after-tax profit =
IFRS Revenue Recognition For Service
Analyzing Effective Tax Rate Reconciliation
24. 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
Potentially Dillutive Securities
CFO Disclosure requirement...
Form 144...
Impact on the Cash Flow of a Par Bond...
25. US 1) Financial Accounting Standards Board; 2) Standards form GAAP; 3) Aims - useful - relevant - reliable - consistent and comparable; 4) SEC deems FASB standard authoritative
Financial Ratio based on I/S...
Footnote disclosure of Reconciliation of opening and closing carrying values...
FASB
Revaluation above historic cost...
26. 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
Financial Implications of Capitalizing...
Form 8-K...
Discontinued Operations...
27. 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
Types of accounting changes...
Depreciation Methods...
Fraud Triangle - 3) Attitude/rationalization
Defined Benefit Plans
28. '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
Add/ Sub changes to related b/s operating accounts
Cash Flow From Investing (USA) (Assets)
Steps of F/S Analysis
Characteristics of an effective framework
29. 1) Purpose and context 2) Data Collection 3) Data Processing 4) Analysis/Interpretation of data 5) Develop conclusions and recommendations 6) Follow-up
Footnote Finance Liability Disclosure
B/S - Long-lived assets
Steps of F/S Analysis
Intercorporate Investment: > 50% votes...
30. 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)
Creative Cash Flows Accounting: Technique
CFI Analysis...
Deferred Tax Liability: (DTL)
CFO - Direct/Indirect method
31. Diff. in depreciation methods/assumptions; Diff. in inventory methods/assumptions; Diff. in treatment of the effect of exchg rate chgs; Diff. in classifications of investment securities - Goodwill: Internally Generated DON'T capitalize - Purchased =
Funded Status US GAAP & IFRS
Stock options: Use treasury stock method
Tax Loss Carryforward...
Financial Adj to Facilitate Comparison...
32. 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
Capitalization of Interest...
Antidilutive Securities
Financial Assets: US GAAP/Amortized at Cost
The 4 Qualitative Characteristics of FASB...
33. Shares are to take over control - Subsidiary - Consolidate financials
B/S - investments
Intercorporate Investment: > 50% votes...
IASB - Goals
Impact on the B/S of a Zero Coupon Bond...
34. Return on Total Equity = NI/ Avg. Total Equity - Return on C/E = NI - Pref. Div/ Avg. Common Equity
Financial Liability: US GAAP/Amortized at Cost
3 C's for Credit Analysis...
Return on Equity (ROE)...
Activity Ratios
35. 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
# of days payable =
B/S - Stockholders' Equity
Barriers to a single framework...
36. When Statutory tax rate does NOT equal Effective tax rate - Tax expense does note equal pretax income x statutory rate
Impact on the B/S of a Zero Coupon Bond...
Sources of Differences: Permanent
FASB - Harmonization
Deferred Tax Asset: (DTA)
37. Derivatives - Non-derivative investments with fair value exposure hedged by derivatives
Return on Equity (ROE)...
Financial Liability: US GAAP/Fair Market Value
Cash Flow: Logic (A = L + E)
Impact on the B/S of a Par Bond...
38. 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
Unusual OR Infrequent items...
Net Periodic Benefit Costs
Sustainable Growth
IFRS/US GAAP Frameworks: underlying assumptions...
39. Higher share price - Lower borrowing cost - Higher incentive compensation
Measurement of A & L disclosure in footnotes
Creative Cash Flows Accounting: Motivation
Financial Liability: US GAAP/Amortized at Cost
Income Statement
40. Trading securities - Available-for-sale - Derivatives (standalone or embedded in non-derivative intrument) - Assets with fair value exposure hedged by derivatives
Impact on the B/S of a Zero Coupon Bond...
Market Value (GAAP)...
Financial Assets: US GAAP/Fair Market Value
Effects of Lease Classification on Ratios - Operating Lease
41. 1) Meet CFO (strategy; industry overview - accounting policy) 2) Tour major facilities 3) Vote on analyst recommendations (bus.& fin. risk) 4) Monitor publicly distributed ratings
IFRS/US GAAP Frameworks: Recognition of Elements...
Impact on the Cash Flow of a Zero Coupon Bond...
IASB
Credit Rating Process...
42. Trade relief - Contingent consideration - Union concessions
Bond Issuance Cost under GAAP/IFRS
Valuation allowance
Effective Tax Rate
Motivation to Under-report Earnings
43. Income Tax Expense < Taxes Payable - F/S < Tax Return - Pay more tax now but more on reversal
Auditor/Audit Opinion
IFRS Revenue Recognition For Service
Deferred Tax Asset: (DTA)
Financial Ratios based on B/S: Solvency ratio
44. Beginning Inv. (BI) + Purchases (P) = Available for Sale - Available for sale - COGS = Ending Inventory (EI)
Net Realizable Value (NRV) (IFRS)
Sources of Differences: Temporary
Ending Inventory =
Diluted EPS
45. Working Capital = CA - CL - Working Capital TO = Rev/Avg. Working Capital - Fixed Asset TO = Rev/Avg Net Fixed Assets
Activity Ratios
Taxation Analyst Adjustments...
B/S - Long-term Liabilities
IFRS/US GAAP Frameworks: Measurement of Elements...
46. Net income + non-cash charges - working cap investment
Free Cash Flow -CFO
BASIC EPS
Financial Liability: US GAAP/Fair Market Value
Inventory mangement: Low T/O (High DOH)...
47. CV of Op. Inc = std dev. EBIT/ Mean EBIT - CV of Revenue: std. dev Rev/ mean Rev. - Operating Leverage = %chg in EBIT/ %chg in Sales
Operating Risk Ratios...
Cost recovery method...
The 4 Qualitative Characteristics of IFRS
Fundamental principles for PREPARING f/s under IFRS: (IAS No 10
48. Employer contributes specific % - No guarantee on future benefits - Employee bears investment risk - Pension expense = employer contribution
4 General Categories for Creditworthiness/Capacity...
Defined Contribution Plans
Roles of financial reporting & analysis include...
MD&A contains...
49. (GAAP) Internally created intangibles 1) (R&D) are expensed 2) Advertising 3) Software (developed to establish feasibility)
The best indicator of overstating its profits is...
Expensed Intangibles...
Cash Flow: Logic (A = L + E)
Capitalization of Interest...
50. Nonreversal DTL - therefore it is permanent = Equity. therefore decrease in DTL = Increase in Equity - Reversal DTL - therefore it is temp = Liability
Vertical Common Size Statements...
Taxation Analyst Adjustments...
Cost included in Inventory on b/s...
Amortization of Bond Premium = (in/out flow) in the indirect method CFO