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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.
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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. 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.
Bond Issuance Cost under GAAP/IFRS
DBO Funded Status =
Installment Method...
Defined Benefit Obligations (DBO)
2. 1) Calculate cash raised on exercise 2) Repurchase shares at avg. price 3) New Shares = exercised - repurchased
Stock options: Use treasury stock method
Bond Issuance Cost under GAAP/IFRS
Fraud Triangle - 2) Opportunity
Impact on the Cash Flow of a Premium Bond...
3. 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.
CFI Analysis...
Sustainable Growth
3 C's for Credit Analysis...
Convergence IFRS/US GAAP...
4. Days of sales o/s + days of inv. on hand - # of days payable (shorter the better)
From creditor POV: Int. Coverage;
Intercorporate Investment: 20% - 50% votes...
Cash Conversion Cycle =
Footnote Finance Liability Disclosure
5. [net income - preferred dividends] + [convertible prf.dividends] + [convertible debt int.] (1-t) / (weighted avg. of c/s o/s) + (shares from conversion of conv. pfd. shares) + (shares from conversion of conv. debt) + (shares issuable from stock optio
Financial Liability: US GAAP/Amortized at Cost
Diluted EPS
The 4 Qualitative Characteristics of FASB...
What is the economic substance of financial (capital) lease?
6. BV - cash paid = gain/(loss) + any unamortized issue costs (US only) = Gain/Loss on repurchase [I/S as continuing operations)
Trade-Offs Qualitative Characteristics of IFRS
IASB - Goals
Tax Loss Carryforward...
Gain/(loss) on bond early retirement: (derecognition of debt)
7. Periodic: Inventory and COGS determined at p/e - Perpetual: Inv. & COGS updated for each sale (no purchase account need) - Cost flow method impact: FIFO = same for both - LIFO = different - Avg. cost = different - FIFO & LIFO relationship remain
Inventory Systems...
The 4 Qualitative Characteristics of IFRS
Asset Revaluation: IFRS
Valuation Allowance...
8. 1) Relevance vs. reliability; 2) Benefit > cost; 3) Excludes intangibles and non-quantifiable info.
Warning Signs of Earnings Manipulation
Trade-Offs Qualitative Characteristics of IFRS
Motivation to Overstate Assets/Understate Liabilities
Cost included in Inventory on b/s...
9. To improve liquidity and leverage ratios
Inventory Cost Flow Methods...
Which set of accounting standards requires firms to disclose estimated amortization expense for the next five years on intangible assets?
Motivation to Overstate Assets/Understate Liabilities
Reasons to Lease...
10. 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
The objective of f/s is to...
DTA Issues
Taxation Disclosure Requirements
Form 144...
11. 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.
3 C's for Credit Analysis...
CFO Analysis...
Lessor Accounting Capital Lease: Sales-Type Lease
Diluted EPS
12. 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
Net Realizable Value (NRV) (IFRS)
Reasons to Lease...
Creative Cash Flows Accounting: Technique
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
Dilutive Securities
Auditor/Audit Opinion
Segment Reporting
IFRS: Presentation Requirements
14. 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...
Net Realizable Value (NRV) (IFRS)
CFO Analysis...
Convergence IFRS/US GAAP...
15. Part of indenture that place restrictions on the firm that protect bondholderns and increase value of the firm's bond - Breach is technical default
Debt covenants
Common Size Statement
Which set of accounting standards requires firms to disclose estimated amortization expense for the next five years on intangible assets?
Sources of Differences: Temporary
16. 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
Financial Assets: US GAAP/Fair Market Value
Financial Ratios based on B/S: Solvency ratio
What is the economic substance of financial (capital) lease?
Types of accounting changes: prior period adjustments
17. Employer contributes specific % - No guarantee on future benefits - Employee bears investment risk - Pension expense = employer contribution
BASIC EPS
Financial Liability: US GAAP/Fair Market Value
Defined Contribution Plans
Cash Flow From Operations (CFO) - FASB
18. 1) fair presentation; 2) going concern; 3) accrual basis; 4) consistency; 5) materiality
Motivation to Over-report Earnings
Fundamental principles for PREPARING f/s under IFRS: (IAS No 10
DBO Funded Status =
Comprehensive income...
19. 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)
Unusual OR Infrequent items...
Asset Revaluation: IFRS
Valuation Allowance...
20. US 1) Financial Accounting Standards Board; 2) Standards form GAAP; 3) Aims - useful - relevant - reliable - consistent and comparable; 4) SEC deems FASB standard authoritative
Intercorporate Investment: < 20% votes...
Sources of Differences: Temporary
FASB
Deferred Tax Asset: (DTA)
21. Financial Services Companies: Operating activities: Interest - Dividends - G/(L) on disposal Non-Financial Services Companies: Non-operating activities: Interest - Dividends - G/(L) on disposal
Impairments recognition (GAAP)
Tax Loss Carryforward...
Taxation Analyst Adjustments...
Operating vs. Non-operating Income
22. Securities that would INCREASE EPS if exercised
Net Realizable Value (NRV) (IFRS)
Antidilutive Securities
Barter (IASB & FASB)
Gross Reporting of Revenue
23. FIFO: EI = newest purchases - LIFO: EI = oldest purchases - Avg. Costs: EI = Available for sale/Units - Specific ID: high value items (cars - diamonds etc)
IFRS/US GAAP Frameworks: purpose of framework
Antidilutive Securities
Inventory Cost Flow Methods...
One major difference between the presentation of deferred tax assets and liabilities under IFRS and under U.S. GAAP is that...
24. Income Tax Expense/Pretax Income (EBIT) Income Tax Exp. = Taxes payable + chg in deferred ta
Effective Tax Rate
Fraud Triangle - 2) Opportunity
An Increase in the Valuation Allowance Account...
Convergence IFRS/US GAAP...
25. '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
Cash Flow From Investing (USA) (Assets)
Inventory Cost Flow Methods...
IOSCO
Credit Analysis: Ratios
26. 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
LIFO is appropriate
B/S - investments
Impact on the Cash Flow of a Discount Bond...
The 4 Qualitative Characteristics of IFRS
27. Carrying amount of the liability minus the amount that will be deductible in the future.
Intercorporate Investment: 20% - 50% votes...
Effects of Lease Classification on Ratios - Operating Lease
Tax base on a liability
Operating Lease
28. 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...
Barter (IASB & FASB)
Activity Based Restrictions
Types of accounting changes: accounting estimate
29. Higher share price - Lower borrowing cost - Higher incentive compensation
Creative Cash Flows Accounting: Motivation
Horizontal Common Size Statements...
Disclosure for each segment...
Operating Risk Ratios...
30. Current ratio = CA/CL - Quick/Acid test = (cash + mkt sec + AR)/CL - Cash ratio = (Cash + mkt sec)/ CL - Defensive interval = (cash + mkt sec + AR)/Daily Cash Exp - Liquidity is over current Liabilities
Motivation to Understate Assets/Overstate Liabilities
Auditor/Audit Opinion
Free Cash Flow -CFO
Financial Ration based on B/S: Liquidity Ratios
31. Share are to ensure significant influence over the company - Affiliate/Associate - Equity Method
Impact on the B/S of a Par Bond...
Intercorporate Investment: 20% - 50% votes...
CFO - Direct/Indirect method
Capitalized Intangibles...
32. 1) Evidence of an arrangement; 2) Completion of earnings process; 3) Price is determined or determinable; 4) Assurance of payment
Financial Lease Reporting
Not all CF increase are Sustainable. Example of how Mgmt can Manipulate Cash Flow Statement
BASIC EPS
SEC guidance for Revenue Recognition
33. Return on Total Equity = NI/ Avg. Total Equity - Return on C/E = NI - Pref. Div/ Avg. Common Equity
IFRS Revenue Recognition For Service
Vertical Common Size Statements...
Screening for Potential Equity Investment: Criteria
Return on Equity (ROE)...
34. 1) Purpose and context 2) Data Collection 3) Data Processing 4) Analysis/Interpretation of data 5) Develop conclusions and recommendations 6) Follow-up
DTA Issues
Funded Status US GAAP & IFRS
Steps of F/S Analysis
Free Cash Flow to Equity - FCFE
35. 1) B/S asset increased to FMV 2) Increase above original cost to equity via revaluation surplus account (comprehensive Income)
Revaluation above historic cost...
Which of the following characteristics should be of least concerned about management's opportunities to commit fraud?
Add/ Sub changes to related b/s operating accounts
Impact on the B/S of a Discount Bond...
36. 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.
Financial Lease Reporting
Cost recovery method...
Amortization of Bond Premium = (in/out flow) in the indirect method CFO
Barter (IASB & FASB)
37. All other liabilities (e.g. bonds - notes payables - leases)
Valuation Allowance...
Measurement of A & L disclosure in footnotes
Financial Liability: US GAAP/Amortized at Cost
Cost included in Inventory on b/s...
38. FASB & IASB -LT projects under contract - reliable estimates of revenue - cost and completion time -Rev - exp and profit are recognized in proportion to total cost incurred to date - divided by total expected cost.
Straight-line depreciation (SL)
% of Completion
Tax base on a liability
Net Periodic Benefit Costs
39. 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.
Motivation to Over-report Earnings
Form DEF-14A...
BASIC EPS
Impact on the Cash Flow of a Discount Bond...
40. 365/(AR T/O) = 365/(Rev/Avg. AR)
Reasons to Lease...
CFO - Direct/Indirect method
days of sales o/s =
Financial Lease Reporting
41. Required by IFRS - Permited by US GAAP
Component depreciation;
Types of accounting changes: accounting estimate
Intercorporate Investment: < 20% votes...
Lessor Accounting Capital Lease: Sales-Type Lease
42. Improve ROA and Asset TO Ratios - Report higher aquisition goodwill
Motivation to Understate Assets/Overstate Liabilities
Low Quality Earnings is result of...
Amortization of Bond Discount = (in/out flow) in the indirect method CFO
The account format of B/S
43. More than a third of Maxwell's total sales go to its own consolidated subsidiaries High levels of related-party transactions are worrisome - particularly when those parties are not audited. But transactions within the company between subsidiaries con
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44. I/S and B/S - Each line is relative to base year
Characteristics of an effective framework
Impact on the B/S of a Zero Coupon Bond...
Statement of Cash Flow - relevance...
Horizontal Common Size Statements...
45. Cash Flow available for distribution to all investors (stockholders & debt holders) CFO + int(1-t) - fixed capital investment or [FCFF calculated from NI = NI + noncash charged + (Int exp(1-tax rate) - net cap investment - working capital invt.]
Free Cash Flow to the Firm - FCFF
Antidilutive Securities
Tax Loss Carryforward...
IFRS/US GAAP Frameworks: underlying assumptions...
46. Outflow - (bringing bond DOWN to par)
Convergence IFRS/US GAAP...
Sources of Differences betweent F/S & T/
Amortization of Bond Premium = (in/out flow) in the indirect method CFO
Effects of Lease Classification on F/S - Finance Lease
47. 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
Effects of Lease Classification on Ratios - Finance Lease
IFRS/US GAAP Frameworks: purpose of framework
IFRS/US GAAP Frameworks: F/S elements...
Discontinued Operations...
48. Taxes payable + chg deferred Tax as per Financial Report
Taxation: Income Tax Expense
Potentially Dillutive Securities
Straight-line depreciation (SL)
IFRS Revenue Recognition
49. Cash collections less direct cash inputs less other cash outfllows
Revaluation above historic cost...
IFRS: Presentation Requirements
CFO - Direct method
Valuation Allowance...
50. 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...
4 General Categories for Creditworthiness/Capacity...
Tax base on a liability
B/S - Long-lived assets
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