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Test your basic knowledge |
Advanced Financial Reporting And Analysis
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Study First
Subject
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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. 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.
CFO Analysis...
Inventory Cost Flow Methods...
IFRS/US GAAP Frameworks: purpose of framework
FIFO after-tax profit =
2. 1) Lack physical form (patent - copyrights etc; 2) Good will is an ex. of an unidentifiable intangible asset - not amortized but subject to annual impairment reviews; 3) Identifiable intangibles are amortized.(eliminate goodwill from ratio analysis)
Intangible Assets
Amortization of Bond Premium = (in/out flow) in the indirect method CFO
Convergence IFRS/US GAAP...
Dilutive Securities
3. 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
B/S - Long-term Liabilities
CFO - Direct method
Financial Ratios based on B/S: Solvency ratio
Cash Conversion Cycle =
4. Timing differences (depreciations) - Permanent differences
Impact on the B/S of a Premium Bond...
Not all CF increase are Sustainable. Example of how Mgmt can Manipulate Cash Flow Statement
Sources of Differences betweent F/S & T/
Lessor Accounting Capital Lease: Sales-Type Lease
5. Divdends and share repurchases - Production and investment - M&A - New debt issuance - Payoff pattern and liquidation priority - Maintenance of assets used as collateral
Measures of Operating Performance - Efficiency Ratios...
Inventory mangement: High T/O (low DOH) and sales growth below industry average
Activity Based Restrictions
Impact on the Cash Flow of a Premium Bond...
6. 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
Activity Ratios
Motivation to Understate Assets/Overstate Liabilities
Sales Basis Revenue Recognitions
Fraud Triangle - 3) Attitude/rationalization
7. 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 =
Financial Adj to Facilitate Comparison...
LIFO results in: (assuming inflationary period)
Impairments recognition (IFRS)
Stock options: Use treasury stock method
8. Income Tax Expense/Pretax Income (EBIT) Income Tax Exp. = Taxes payable + chg in deferred ta
Extraordinary Items: Unusual AND Infrequent items...
Effective Tax Rate
Cost recovery method...
CFO Disclosure requirement...
9. Slow moving or obsolete inventory
Valuation Allowance...
B/S - short-term investments
Inventory mangement: Low T/O (High DOH)...
FIFO is appropriate
10. Lost sales from stock outs
Inventory mangement: High T/O (low DOH) and sales growth below industry average
Expensed Intangibles...
IFRS Revenue Recognition For Service
Which of the following characteristics should be of least concerned about management's opportunities to commit fraud?
11. Contra asset account used to reduce DTA for probability that it will NOT be realized - Increase in valuation = decrease in DTA and NI - Decrease in valuation = increase in DTA and NI
CFO - Direct method
From creditor POV: Int. Coverage;
Valuation Allowance...
Lessor Accounting Capital Lease: Sales-Type Lease
12. Working Capital = CA - CL - Working Capital TO = Rev/Avg. Working Capital - Fixed Asset TO = Rev/Avg Net Fixed Assets
Analysis: Market Value of Debt
Stock options: Use treasury stock method
Depreciation Methods...
Activity Ratios
13. 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)
Balance Sheet
Segment Reporting
Fraud Triangle - 3) Attitude/rationalization
Reasons to Lease...
14. Beginning Inv. (BI) + Purchases (P) = Available for Sale - Available for sale - COGS = Ending Inventory (EI)
The best indicator of overstating its profits is...
Sustainable Growth
Ending Inventory =
Analysis: Market Value of Debt
15. 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
MD&A contains...
B/S - Stockholders' Equity
Valuation allowance
Fraud Triangle
16. 365/(AP T/O) = 365/(purchases/ Avg. AP)
Motivation to Understate Assets/Overstate Liabilities
# of days payable =
Double-decline balance (DDB)
B/S - investments
17. FIFO: EI = newest purchases - LIFO: EI = oldest purchases - Avg. Costs: EI = Available for sale/Units - Specific ID: high value items (cars - diamonds etc)
Activity Based Restrictions
Effects of Lease Classification on Ratios - Finance Lease
Inventory Cost Flow Methods...
The report format of B/S
18. 1) fair presentation; 2) going concern; 3) accrual basis; 4) consistency; 5) materiality
Discontinued Operations...
SEC guidance for Revenue Recognition
Fundamental principles for PREPARING f/s under IFRS: (IAS No 10
Free Cash Flow -CFO
19. Capital structure that contains NO potentially dillutive securities - (contains only c/s - nonconvertible debt - and nonconvertible pref. stock)
Simple capital structure
Inventory Valuatoin (LCM)
DBO Funded Status =
Taxation: Income Tax Expense
20. 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
Analyzing Effective Tax Rate Reconciliation
Inventory mangement: Low T/O (High DOH)...
Inventory Cost Flow Methods...
Impact on the Cash Flow of a Zero Coupon Bond...
21. Efficient inventory managment
FASB - Harmonization
Capitalization of Interest...
Inventory mangement: High T/O (low DOH) and sales growth above industry average
Antidilutive Securities
22. 1) Show each item as a % of Net Revenue 2) Show each inflow as a % of total inflows 3) Show each outflow as a % of total outflow
Common Size Statement
IFRS/US GAAP Frameworks: F/S elements...
Straight-line depreciation (SL)
Diluted EPS
23. 1) Credit Scoring (CF Forecast) 2) Equity Investment screening (cutoff values)
IOSCO
Net Reporting of Revenue
Forecasting Financial Performance: Application
Financial Ratios based on B/S: Solvency ratio
24. 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
Financial Liability: US GAAP/Fair Market Value
Sources of Differences: Temporary
Asset Capitalization
IFRS/US GAAP Frameworks: purpose of framework
25. Nonreversal DTL - therefore it is permanent = Equity. therefore decrease in DTL = Increase in Equity - Reversal DTL - therefore it is temp = Liability
Taxation Analyst Adjustments...
Cost included in Inventory on b/s...
IFRS: Presentation Requirements
Financial Lease Reporting
26. 1) Start with NI 2) Sub Gains or add losses from financing or investing CFs 3) Add non-cash charges (depr't & amort'z) & sub all non cash revenue 4) Add/ Sub changes to related b/s operating accounts:
Financial Adj to Facilitate Comparison...
IASB
CFO - Indirect method steps...
Intangibles under IFRS...
27. Shows sales and cost of goods sold.Under GAAP: 1) must be primary obligor under the contract; 2) bear inventory and credit risk; 3) have the ability to choose its supplier; 4) have reasonable latitude to set the price.
Net Periodic Benefit Costs
Auditor/Audit Opinion
Gross Reporting of Revenue
Fundamental principles for PREPARING f/s under IFRS: (IAS No 10
28. Assess liquidity - solvency and financial flexibiliy
days of sales o/s =
The report format of B/S
Statement of Cash Flow - relevance...
DTA Issues
29. Follows the traditional ledger account - assets on the left hand side and liabilities and equity on the right hand side.
Impact on the Cash Flow of a Premium Bond...
The account format of B/S
DTA Issues
FASB - Harmonization
30. Int. Coverage = EBIT/Interest Expense - Fixed Charged Coverage = (EBIT+Lease Pymts) / Int. exp + Lease payments
Barriers to a single framework...
Financial Ratios based on B/S: Solvency (Coverage)
Intangible Assets
Operating vs. Non-operating Income
31. 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
The account format of B/S
Amortization of Bond Discount = (in/out flow) in the indirect method CFO
Simple capital structure
Revaluation below historic cost...
32. When Statutory tax rate does NOT equal Effective tax rate - Tax expense does note equal pretax income x statutory rate
MD&A contains...
IFRS Revenue Recognition For Service
Cash Flow From Operations (CFO) - FASB
Sources of Differences: Permanent
33. 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
FASB - Harmonization
The 4 Qualitative Characteristics of IFRS
Income Tax Paid...
34. Return on Total Equity = NI/ Avg. Total Equity - Return on C/E = NI - Pref. Div/ Avg. Common Equity
Inv. Valuation reporting Inventory ABOVE costs...
Finance (capital) Lease criteria (under US GAAP)
Effects of Lease Classification on F/S - Finance Lease
Return on Equity (ROE)...
35. GAAP: more quantitative rules - IFRS: more qualitative approach based on whether the risks and reward of the asset have tranferred.
Free Cash Flow to Equity - FCFE
The account format of B/S
Finance (capital) Lease criteria GAAP vs. IFRS
Common Size Statement
36. Refers to change in mgmt judgement Does NOT require restatement of prior pd earnings; Disclose in footnotes
Capitalization of Interest...
Valuation allowance
Types of accounting changes: accounting estimate
Cost included in Inventory on b/s...
37. To improve liquidity and leverage ratios
The 4 Qualitative Characteristics of IFRS
Motivation to Overstate Assets/Understate Liabilities
Sarbanes-Oxley Management Report...
B/S - investments
38. Tax liability based on taxable income as per TAX Report/RETURN
Taxation: Tax Payable
Financial Ratios based on B/S: Solvency ratio
Which of the following characteristics should be of least concerned about management's opportunities to commit fraud?
BASIC EPS
39. Depreciation exp = (cost - residual value) x (# units produced / total expected to produce)
Extraordinary Items: Unusual AND Infrequent items...
Intangibles under IFRS...
Units of Production Method
Asset Revaluation: IFRS
40. 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
Debt covenants
Operating Risk Ratios...
Dilutive Securities
CFO - Direct/Indirect method
41. 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...
Stock options: Use treasury stock method
Impact on the B/S of a Par Bond...
Form 8-K...
42. Depreciation exp = (cost-residual value)/ useful life
Analyst Treaments of DTL
Straight-line depreciation (SL)
Deferred Tax Asset: (DTA)
Intercorporate Investment: 20% - 50% votes...
43. CFO: no impact - CFF: increased by amount rcvd at issuance and decreased by payment made at redemption - CFO is lower (b/c no impact) and CFF is higher
Impact on the Cash Flow of a Zero Coupon Bond...
Asset Revaluation: IFRS
Not all CF increase are Sustainable. Example of how Mgmt can Manipulate Cash Flow Statement
Measures of Operating Performance - Efficiency Ratios...
44. 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
Barter (IASB & FASB)
Form 8-K...
Credit Rating Process...
Financial Ratio based on I/S...
45. BV - cash paid = gain/(loss) + any unamortized issue costs (US only) = Gain/Loss on repurchase [I/S as continuing operations)
Gain/(loss) on bond early retirement: (derecognition of debt)
Convergence IFRS/US GAAP...
Operating Risk Ratios...
FIFO is appropriate
46. Inflow - (bringing bond UP to par)
Financial Assets: US GAAP/Fair Market Value
Revaluation below historic cost...
Amortization of Bond Discount = (in/out flow) in the indirect method CFO
Valuation allowance
47. 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
IASB - Goals
Ending Inventory =
Revaluation below historic cost...
Inventory Systems...
48. Derivatives - Non-derivative investments with fair value exposure hedged by derivatives
Measurement of A & L disclosure in footnotes
Financial Liability: US GAAP/Fair Market Value
Extraordinary Items: Unusual AND Infrequent items...
Implication for Analysts: Be aware of differences in tax reconcilation between periods
49. = LIFO ending inventory + LIFO reserve FIFO after-tax profit
Intangibles under IFRS...
Forecasting Financial Performance: Top Down Approach...
Effects of Lease Classification on Ratios - Operating Lease
FIFO ending inventory =
50. EBIT/ Avg. total capital - Total capital includes: debt capital - so int. is aded back to NI
Return on total capital (ROTC)...
IFRS/US GAAP Frameworks: Measurement of Elements...
CFO - Direct/Indirect method
From creditor POV: Int. Coverage;