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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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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. Amount deductible in future tax return
Complex Capital Structure
Impact on the B/S of a Par Bond...
Tax base of an asset
Auditor/Audit Opinion
2. For inventory that does not deteriorate with age.
Inventory Systems...
LIFO is appropriate
Fraud Triangle - 3) Attitude/rationalization
Gain/(loss) on bond early retirement: (derecognition of debt)
3. 1) Scale & Diversification - 2) Operational Efficiency - 3) Margin Stability - 4) Leverage
ROE interpretation: if ROE is low...
4 General Categories for Creditworthiness/Capacity...
CFO - Direct method
DTA/DTL: Effect on Net Income when Tax Rate decreases...
4. 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
Form 144...
Units of Production Method
Net Reporting of Revenue
Motivation to Under-report Earnings
5. 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)
CFO - Indirect method steps...
Asset Capitalization
Traditional DuPont Equation...
Add/ Sub changes to related b/s operating accounts
6. Potentially dilutive securitites [options - warrants - convertible securities]
Complex Capital Structure
Stock options: Use treasury stock method
Calculate dividends declared...
Unusual OR Infrequent items...
7. 1) Account format (A on left and L & E on right) 2) Report format ( A - L - E presented in one column) 3) Classified B/S (ordered)
Balance Sheet - formats
Asset Revaluation: IFRS
CFO - Direct method
Intercorporate Investment: 20% - 50% votes...
8. Profit is recognized only when it exceeds estimated total cost.
CFO Analysis...
Form DEF-14A...
Cost recovery method...
CFI Analysis...
9. 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
Simple capital structure
% of Completion
Taxable Income
10. 1) fair presentation; 2) going concern; 3) accrual basis; 4) consistency; 5) materiality
Motivation to Under-report Earnings
Measures of Operating Performance - Efficiency Ratios...
Fundamental principles for PREPARING f/s under IFRS: (IAS No 10
Creative Cash Flows Accounting: Technique
11. Asset is impaired if carrying value > recoverable amount - One-step process 1) Compare carrying value to: recoverable amount = the greater of the two. a) Fair value - selling costs b) Value in use = (PV of future cash flow from cont. use) - Loss reve
CFO - Direct/Indirect method
Impairments recognition (IFRS)
Financial Assets: US GAAP/Fair Market Value
Which of the following characteristics should be of least concerned about management's opportunities to commit fraud?
12. 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
IASB
Analyst Treaments of DTL
Which of the following characteristics should be of least concerned about management's opportunities to commit fraud?
Auditor/Audit Opinion
13. 1) Transparency; 2) Comprehensiveness; 3) Consistency
Financial Assets: US GAAP/Fair Market Value
Characteristics of an effective framework
Impact on the Cash Flow of a Zero Coupon Bond...
IFRS/US GAAP Frameworks: purpose of framework
14. Depreciation exp = (cost - accum depre)/useful life x 2 - Does NOT use residual value but depreciation stops when residual value has been reached - reduce EBIT - NI - Assets - Equity and decrease ROA & ROE
Double-decline balance (DDB)
Inventory Systems...
B/S - Stockholders' Equity
FASB - Harmonization
15. + Service Costs (recurring costs (actual)) - + Interest Costs (recurring costs (actual)) - - Expected return on plan assets (smoothed event) - +/- Amort of (gains) and losses (smoothed event) - +/- Amort of prior service costs* (smoothed event) - +/-
Intercorporate Investment: < 20% votes...
Net Periodic Benefit Costs
Potentially Dillutive Securities
Ending Inventory =
16. 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 =
Balance Sheet
Units of Production Method
Financial Adj to Facilitate Comparison...
Valuation allowance
17. Both: Recognize going concern & accrual assumptions - IASB: Going concern & accruals given more prominence in framework - FASB: Going concern assumption not well developed in framework.
IFRS/US GAAP Frameworks: underlying assumptions...
Valuation allowance
FIFO results in: (assuming inflationary period)
Stock options: Use treasury stock method
18. Current Ratio (CA/CL): Higher - Work. Cap (CA -CL): Higher - Asset TO: (Sales/TA): Higher - ROA (EAT/TA): Higher - ROE (EAT/E): Higher - Debt/Equity: Lower - Understates Leverage ratios (b/c not recognized as a liability) - Overstates Coverage ratios
DTA Issues
Revaluation below historic cost...
Antidilutive Securities
Effects of Lease Classification on Ratios - Operating Lease
19. It is the purchase of an asset using debt finance.
Free Cash Flow to the Firm - FCFF
Financial Assets: US GAAP/Fair Market Value
What is the economic substance of financial (capital) lease?
Roles of financial reporting & analysis include...
20. CFO: cash interest expense - CFF: increased by amount rcvd at issuance and decreased by payment made at redemption
Sustainable Growth
Form DEF-14A...
Impact on the Cash Flow of a Par Bond...
IFRS: Required F/S
21. Unlisted instruments - Held-to-maturity investments - Loans - Receivables
Vertical Common Size Statements...
Effects of Lease Classification on Ratios - Finance Lease
Financial Assets: US GAAP/Amortized at Cost
FIFO ending inventory =
22. G = (earnings Retention rate) x (ROE) - earnings retention rate = [1-(payout ratio)] - payout ratio = Common dividends/ NI - Pref. Div.
Income Statement
Sustainable Growth
Intangibles under IFRS...
Traditional DuPont Equation...
23. 365/(AR T/O) = 365/(Rev/Avg. AR)
Impact on the B/S of a Premium Bond...
FASB - Harmonization
The 4 Qualitative Characteristics of FASB...
days of sales o/s =
24. 1) Consider the growth rate and capital spending levels when determining whether temp diff due to accelerated depre will reverse 2) Look for cumulative differences due to asset impairments and post-retirement benefits 3) Restructuring charges can c
The account format of B/S
Defined Benefit Obligations (DBO)
4 General Categories for Creditworthiness/Capacity...
Implication for Analysts: Be aware of differences in tax reconcilation between periods
25. Efficient inventory managment
Inventory mangement: High T/O (low DOH) and sales growth above industry average
Defined Contribution Plans
Steps of F/S Analysis
Financial Adj to Facilitate Comparison...
26. 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
Types of accounting changes: accounting principle
Finance (capital) Lease criteria (under US GAAP)
Financial Adj to Facilitate Comparison...
Warning Signs of Earnings Manipulation
27. 365/(Inv. T/O) = 365/( COGS/ Avg. Inv.)
Installment Method...
days of inv. on hand =
The objective of f/s is to...
Extraordinary Items: Unusual AND Infrequent items...
28. 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
Free Cash Flow -CFO
Component depreciation;
Analysis: Market Value of Debt
Forecasting Financial Performance: Application
29. 365/(AP T/O) = 365/(purchases/ Avg. AP)
Reasons to Lease...
Inventory Valuatoin (LCM)
Intercorporate Investment: > 50% votes...
# of days payable =
30. BV - cash paid = gain/(loss) + any unamortized issue costs (US only) = Gain/Loss on repurchase [I/S as continuing operations)
Cash Flow From Operations (CFO) - FASB
Impact on the B/S of a Premium Bond...
Gain/(loss) on bond early retirement: (derecognition of debt)
Ending Inventory =
31. 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
Which of the following characteristics should be of least concerned about management's opportunities to commit fraud?
DTA/DTL: Effect on Net Income when Tax Rate decreases...
Cash flow ratios
32. 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.
The 4 Qualitative Characteristics of FASB...
Defined Benefit Obligations (DBO)
CFO - Indirect method steps...
B/S - Long-lived assets PP&E
33. 1) if 50% of its revenue is earned externally 2) if a business area has at least 10% of a firm's: Revenue; or Operating profit; or Use of asset 3) Business and geographical segments
Finance (capital) Lease criteria (under US GAAP)
Segment Reporting
CFO - Direct/Indirect method
Disclosure for each segment...
34. 1) Character: Mgmt reputation and history of repayment 2) Collateral: ability to pledge specific collateral reduces lender risk 3) Capacity: ability to replay debt. requires LT view of firms prospect.
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35. ROE = (NI/Sales) x (Sales/Assets) x (Assets/Equity) or ROE= Net Profit Margin x Asset TO x Leverage Ratio
Types of accounting changes: accounting principle
Which set of accounting standards requires firms to disclose estimated amortization expense for the next five years on intangible assets?
Traditional DuPont Equation...
Intercorporate Investment: > 50% votes...
36. Days of sales o/s + days of inv. on hand - # of days payable (shorter the better)
Measures of Operating Performance - Efficiency Ratios...
Lessor Accounting Capital Lease: Sales: Direct Financing Lease
Financial Adj to Facilitate Comparison...
Cash Conversion Cycle =
37. Capital structure that contains NO potentially dillutive securities - (contains only c/s - nonconvertible debt - and nonconvertible pref. stock)
From creditor POV: Int. Coverage;
Simple capital structure
Lessor Accounting Capital Lease: Sales: Direct Financing Lease
Intangibles under IFRS...
38. Financial Services Companies: Operating activities: Interest - Dividends - G/(L) on disposal Non-Financial Services Companies: Non-operating activities: Interest - Dividends - G/(L) on disposal
Funded status of the pension plan (under US GAAP & IFRS) is reported where?
IFRS: Required F/S
IASB
Operating vs. Non-operating Income
39. 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
Creative Cash Flows Accounting: Technique
Net Periodic Benefit Costs
Measures of Operating Performance - Efficiency Ratios...
Disclosure for each segment...
40. Refers to change in mgmt judgement Does NOT require restatement of prior pd earnings; Disclose in footnotes
Types of accounting changes: accounting estimate
Trade-Offs Qualitative Characteristics of IFRS
Revaluation below historic cost...
B/S - Long-term Liabilities
41. 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)
Analyzing Effective Tax Rate Reconciliation
DBO Funded Status =
Net Reporting of Revenue
Cash Flow: Logic (A = L + E)
42. 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 =
Credit Analysis: Ratios
Inv. Valuation reporting Inventory ABOVE costs...
Tax base on a liability
One major difference between the presentation of deferred tax assets and liabilities under IFRS and under U.S. GAAP is that...
43. Depreciation exp = (cost-residual value)/ useful life
Effects of Lease Classification on Ratios - Operating Lease
Measurement of A & L disclosure in footnotes
Straight-line depreciation (SL)
Motivation to Over-report Earnings
44. Includes: cash flow from interst Rec'd and Paid - and Dividend received. Includes all income taxes paid.
Deferred Tax Asset: (DTA)
Cash Flow From Operations (CFO) - FASB
Inventory Valuatoin (LCM)
Low Quality Earnings is result of...
45. 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...
Operating vs. Non-operating Income
Debt covenants
Financial Assets: US GAAP/Fair Market Value
46. When Statutory tax rate does NOT equal Effective tax rate - Tax expense does note equal pretax income x statutory rate
Defined Benefit Obligations (DBO)
Expensed Intangibles...
Sources of Differences: Permanent
Impact on the Cash Flow of a Discount Bond...
47. Decreases DTA -> Decreases Net Income - [Decrease in Valuation Allowance; Increase DTA and Increases Net Income]
Valuation Allowance...
An Increase in the Valuation Allowance Account...
FASB - Harmonization
Inventory mangement: High T/O (low DOH) and sales growth below industry average
48. Trade relief - Contingent consideration - Union concessions
Amortization of Bond Premium = (in/out flow) in the indirect method CFO
IFRS Revenue Recognition For Service
Motivation to Under-report Earnings
Inventory mangement: High T/O (low DOH) and sales growth above industry average
49. Total assets TO = Revenue/Avg. total asset - Fixed asset TO = Revenue/ Avg. net fixed assets - Working Cap TO = Revenue/Avg. working captial
The account format of B/S
CFI Analysis...
Complex Capital Structure
Measures of Operating Performance - Efficiency Ratios...
50. 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
4 General Categories for Creditworthiness/Capacity...
Capitalization of Interest...
Inventory mangement: High T/O (low DOH) and sales growth below industry average
Cash Flow From Operations (CFO) - FASB