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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. 1) Scale & Diversification - 2) Operational Efficiency - 3) Margin Stability - 4) Leverage
Effects of Lease Classification on Ratios - Operating Lease
CFO - Direct method
Intangibles under IFRS...
4 General Categories for Creditworthiness/Capacity...
2. Decreases DTA -> Decreases Net Income - [Decrease in Valuation Allowance; Increase DTA and Increases Net Income]
Bond Issuance Cost under GAAP/IFRS
Cash Flow From Operations (CFO) - FASB
An Increase in the Valuation Allowance Account...
Financial Assets: US GAAP/Fair Market Value
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
Steps of F/S Analysis
Impairments recognition (GAAP)
Low Quality Earnings is result of...
Reasons to Lease...
4. Capital structure that contains NO potentially dillutive securities - (contains only c/s - nonconvertible debt - and nonconvertible pref. stock)
Unusual OR Infrequent items...
Simple capital structure
Motivation to Understate Assets/Overstate Liabilities
DBO Funded Status =
5. 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 =
Taxation: Tax Payable
Creative Cash Flows Accounting: Technique
Financial Adj to Facilitate Comparison...
Fraud Triangle - 2) Opportunity
6. 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 -
days of sales o/s =
The best indicator of overstating its profits is...
DTA Issues
LIFO results in: (assuming inflationary period)
7. Lost sales from stock outs
Antidilutive Securities
Inventory mangement: High T/O (low DOH) and sales growth below industry average
Impairments recognition (IFRS)
Intercorporate Investment: > 50% votes...
8. It is the purchase of an asset using debt finance.
Auditor/Audit Opinion
Activity Ratios
What is the economic substance of financial (capital) lease?
Free Cash Flow to Equity - FCFE
9. 1) when differences are expected to REVERSE and reslut in future tax payment - treate DTL as a LIABILITY in calculating leverage ratios 2) when differences are NOT expected to REVERSE and result in future tax payment - treat DTL as EQUITY in calculat
Diluted EPS
LIFO results in: (assuming inflationary period)
3 C's for Credit Analysis...
Analyst Treaments of DTL
10. 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
Tax base on a liability
Footnote Finance Liability Disclosure
Income Tax Paid...
Financial Ratio based on I/S...
11. 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
Types of accounting changes: accounting estimate
Creative Cash Flows Accounting: Technique
Impact on the Cash Flow of a Discount Bond...
Intangibles under IFRS...
12. Both: Recognize going concern & accrual assumptions - IASB: Going concern & accruals given more prominence in framework - FASB: Going concern assumption not well developed in framework.
Cost recovery method...
Effective Tax Rate
Analyst Treaments of DTL
IFRS/US GAAP Frameworks: underlying assumptions...
13. CFO: cash interest expense - CFF: increased by amount rcvd at issuance and decreased by payment made at redemption
The best indicator of overstating its profits is...
Financial Assets: US GAAP/Amortized at Cost
IFRS/US GAAP Frameworks: objective of F/S
Impact on the Cash Flow of a Par Bond...
14. NI/Avg. Total Assets - NI + Int (1-t) / Avg. Total Assets - Operating ROA: Operating INc/ Avg. Total Assets
Return on Assets ROA...
Sources of Differences: Permanent
Implication for Analysts: Be aware of differences in tax reconcilation between periods
Capitalized Intangibles...
15. PV of future obligation or the PV of the amount owed to employees for future pension benefits earned to date - Payments are determined based on expected final salary.
IFRS: Presentation Requirements
Bond Issuance Cost under GAAP/IFRS
Defined Benefit Obligations (DBO)
Units of Production Method
16. Ensure that information in f/s is useful to a wide range of users.
Debt covenants
Footnote Finance Liability Disclosure
The objective of f/s is to...
B/S - Long-lived assets PP&E
17. Days of sales o/s + days of inv. on hand - # of days payable (shorter the better)
Not all CF increase are Sustainable. Example of how Mgmt can Manipulate Cash Flow Statement
Cash Conversion Cycle =
Expensed Intangibles...
Segment Reporting
18. Interest Expense = Amortization
Revaluation above historic cost...
Market Value (GAAP)...
FIFO results in: (assuming inflationary period)
Impact on the B/S of a Zero Coupon Bond...
19. [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
Diluted EPS
The report format of B/S
Sustainable Growth
Tax base on a liability
20. FASB: No discussion of 'probables' - IASB: Asset - liabilities - are probable flows
IFRS/US GAAP Frameworks: purpose of framework
Asset Capitalization
IFRS/US GAAP Frameworks: Recognition of Elements...
B/S - investments
21. 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.
DTA Issues
% of Completion
4 General Categories for Creditworthiness/Capacity...
Taxation: Income Tax Expense
22. 1) Intention to hold >1 year (e.g. debt or equity) valued @ cost or mkt value 2) Equity accounted investments
B/S - investments
Taxation Analyst Adjustments...
Impact on the Cash Flow of a Par Bond...
Motivation to Over-report Earnings
23. 1)DTL - DTA - valuation allowance - Net ? in valutaion allowance over the period 2) unrecognized DTL or undistributed earning from subsidiaries & JVs 3) Current yr tax effect of each type of temp difference 4)Components of Inc Tax Expense 5)Tax loss
Operating Lease
Defined Contribution Plans
Taxation Disclosure Requirements
B/S - Long-lived assets PP&E
24. Meet Analyst Expectations - Meet debt covenants - Incentive compensation
Debt covenants
Funded Status US GAAP & IFRS
Net Realizable Value (NRV) (IFRS)
Motivation to Over-report Earnings
25. Required by IFRS - Permited by US GAAP
Tax base of an asset
Free Cash Flow to Equity - FCFE
IFRS/US GAAP Frameworks: purpose of framework
Component depreciation;
26. 1) Evaluating equity investments for a portfolio; 2) Evaluating potential M&A; 3) Evaluating a subsidiary of a parent company; 4) Deciding on private equity/ venture cap investment 5) Determine creditworthiness - borrowing; 6) Extending credit to
days of sales o/s =
Roles of financial reporting & analysis include...
Gain/(loss) on bond early retirement: (derecognition of debt)
Fundamental principles for PREPARING f/s under IFRS: (IAS No 10
27. 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.
Depreciation Methods...
The account format of B/S
Bond Issuance Cost under GAAP/IFRS
Debt covenants
28. 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)
Sales Basis Revenue Recognitions
Inventory Valuatoin (LCM)
CFO Analysis...
Sources of Differences: Permanent
29. Employer contributes specific % - No guarantee on future benefits - Employee bears investment risk - Pension expense = employer contribution
Footnote disclosure of Reconciliation of opening and closing carrying values...
Tax base of an asset
Defined Contribution Plans
Extraordinary Items: Unusual AND Infrequent items...
30. 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)
Component depreciation;
Motivation to Understate Assets/Overstate Liabilities
Valuation Allowance...
31. 1) Unqualified opinion (good); 2) Qualified opinion (followed GAAP except for...); 3) Adverse opinion (bad)
Auditor/Audit Opinion
Motivation to Under-report Earnings
Installment Method...
What is the economic substance of financial (capital) lease?
32. 365/(AP T/O) = 365/(purchases/ Avg. AP)
Sources of Differences: Permanent
Revaluation above historic cost...
Income Statement
# of days payable =
33. Shows the performance of the company over a reporting period.
Low Quality Earnings is result of...
Income Statement
Screening for Potential Equity Investment: Criteria
Cash Flow From Operations (CFO) - FASB
34. Reported BELOW the line.Prohibited under IAS1 1) Losses from expropriation of assets. 2) Uninsured losses from natural disasters - Analyst must determine if it is really THAT extraordinary and if should be included in forecasting
Valuation allowance
FIFO after-tax profit =
Unusual OR Infrequent items...
Extraordinary Items: Unusual AND Infrequent items...
35. Replacement cost subject to: Upper limit = NRV - Loewr limit = NRV - normal profit margin
Form DEF-14A...
Market Value (GAAP)...
Asset Revaluation: IFRS
Inventory mangement: Low T/O (High DOH)...
36. Assess liquidity - solvency and financial flexibiliy
Financial Liability: US GAAP/Amortized at Cost
Common Size Statement
Statement of Cash Flow - relevance...
Intercorporate Investment: > 50% votes...
37. 1) Calculate cash raised on exercise 2) Repurchase shares at avg. price 3) New Shares = exercised - repurchased
Stock options: Use treasury stock method
LIFO is appropriate
Intercorporate Investment: < 20% votes...
Impact on the Cash Flow of a Discount Bond...
38. Net income + non-cash charges - working cap investment
Free Cash Flow -CFO
Sources of Differences: Permanent
Return on Assets ROA...
Inventory mangement: High T/O (low DOH) and sales growth below industry average
39. Efficient inventory managment
Inventory Valuatoin (LCM)
Free Cash Flow to Equity - FCFE
Inventory mangement: High T/O (low DOH) and sales growth above industry average
Income Tax Paid...
40. Interest Rec'd - CFO/CFI Divs Rec'd - CFO/CFI Interst Paid - CFO/CFF Divs Paid - CFF/CFO Overdraft = cash - not CFF
Cash Flow From Operations (CFO) - IFRS
Cash Flow From Operations (CFO) - FASB
Return on Assets ROA...
Effects of Lease Classification on F/S - Operating Lease
41. All DTA and DTL are classified as noncurrent under IFRS - Under U.S. GAAP - deferred tax assets and liabilities are classified as current or non-current according to the classification of the underlying asset or liability. Under IFRS - deferred tax a
Tax Loss Carryforward...
One major difference between the presentation of deferred tax assets and liabilities under IFRS and under U.S. GAAP is that...
Taxation Analyst Adjustments...
Financial Lease Reporting
42. I/S: COGS lower - EBT higher - Taxes: higher - NI: higher - B/S: INV: higher - W/C: higher - are/E: higher - CF: CFO: lower
Ending Inventory =
Warning Signs of Earnings Manipulation
FIFO ending inventory =
FIFO results in: (assuming inflationary period)
43. 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
Credit Rating Process...
Finance (capital) Lease criteria (under US GAAP)
Cash Flow From Financing (USA) (Source of Cash)
days of inv. on hand =
44. G = (earnings Retention rate) x (ROE) - earnings retention rate = [1-(payout ratio)] - payout ratio = Common dividends/ NI - Pref. Div.
Sustainable Growth
Comprehensive income...
Screening for Potential Equity Investment: Criteria
B/S - Long-term Liabilities
45. Exchange of goods or services between two parties (no cash) IASB: Revenue = FMV of similar non-barter transaction with unrelated parties FASB: Revenue = FMV only if the company has received cash payments for such services in the past
Barter (IASB & FASB)
CFO - Indirect method steps...
LIFO is appropriate
The best indicator of overstating its profits is...
46. Assets - liabilities - and equity are presented in a single column.
Statement of Cash Flow - relevance...
Not all CF increase are Sustainable. Example of how Mgmt can Manipulate Cash Flow Statement
CFO Analysis...
The report format of B/S
47. Shows only the difference between sales and cost of goods sold Users are usually: 1) internet-based merchandising companies; 2) Sell prodict but never hold inventory; 3) Arrangement for supplier to ship directly to end customer. Discolsure policies
B/S - Stockholders' Equity
Gain/(loss) on bond early retirement: (derecognition of debt)
CFO - Direct/Indirect method
Net Reporting of Revenue
48. Beginning Inv. (BI) + Purchases (P) = Available for Sale - Available for sale - COGS = Ending Inventory (EI)
The report format of B/S
Net Periodic Benefit Costs
Ending Inventory =
Fraud Triangle
49. Cash Flow available for distribution to the c/s; after all obligations have been paid. CFO - fixed capital investment + net debt increase or CFO - net cap expenditure + net borrowings
Return on Equity (ROE)...
Free Cash Flow to Equity - FCFE
Inv. Valuation reporting Inventory ABOVE costs...
ROE interpretation: if ROE is low...
50. 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
FASB
Financial Ration based on B/S: Liquidity Ratios
Income Tax Paid...
Taxation: Income Tax Expense