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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
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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) Basis for measurement; 2) carrying value of inventory by category; 3) Amount of inventory carried at FV less cost to sell 4) Write-downs & reversals (discussion of circumstance that led to reversal); 5) Inventories pledged as collateral for liabil
Measurement of A & L disclosure in footnotes
Cash Flow From Operations (CFO) - FASB
BASIC EPS
Financial Liability: US GAAP/Amortized at Cost
2. 2 step-process 1) Recoverability: carrying value > undiscounted CF from asset's use and disposal 2) Loss measurement: Loss is the excess of carrying value over the asset's fair market value or PV of cash flows - Loss reversal for held-for-use assets
Taxable Income
Effects of Lease Classification on Ratios - Finance Lease
Impairments recognition (GAAP)
IFRS/US GAAP Frameworks: purpose of framework
3. It is the purchase of an asset using debt finance.
Cash Flow From Operations (CFO) - IFRS
Free Cash Flow -CFO
Impact on the Cash Flow of a Discount Bond...
What is the economic substance of financial (capital) lease?
4. 1) is a contra asset account used to reduce the value of a DTA - 2) it is used to reduce the asset when future taxable income is deemed to be insefficient to fully use the DTA.
Valuation allowance
Taxation Disclosure Requirements
Effects of Lease Classification on F/S - Finance Lease
Intercorporate Investment: 20% - 50% votes...
5. Slow moving or obsolete inventory
Cash Conversion Cycle =
Segment Reporting
IFRS: Required F/S
Inventory mangement: Low T/O (High DOH)...
6. Off B/S asset or liability = Footnotes disclosure - Lease payments are expensed when due via I/S - Payments are CFO outflows
Cost recovery method...
Operating Lease
Cash Flow From Financing (USA) (Source of Cash)
Characteristics of an effective framework
7. 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
Fraud Triangle - 3) Attitude/rationalization
Financial Implications of Capitalizing...
Finance (capital) Lease criteria (under US GAAP)
Taxation Disclosure Requirements
8. 1) Risk & Reward transferred; 2) No continued control; 3) Reliable measurement; 4) Probable flow of benefits; 5) Cost verifiable
Defined Benefit Obligations (DBO)
Steps of F/S Analysis
MD&A contains...
IFRS Revenue Recognition
9. Improve ROA and Asset TO Ratios - Report higher aquisition goodwill
Inventory mangement: High T/O (low DOH) and sales growth above industry average
Motivation to Understate Assets/Overstate Liabilities
The best indicator of overstating its profits is...
Capitalized Intangibles...
10. Adjustments Involves erros or new accounting standards - Resate prior period - Disclose nature and effect on NI - Errors may indicate weakness in internal controls
Cash Flow From Operations (CFO) - FASB
Types of accounting changes: prior period adjustments
The objective of f/s is to...
Inventory mangement: High T/O (low DOH) and sales growth above industry average
11. Income Tax Expense/Pretax Income (EBIT) Income Tax Exp. = Taxes payable + chg in deferred ta
FIFO ending inventory =
Credit Analysis: Ratios
Effective Tax Rate
Forecasting Financial Performance: Top Down Approach...
12. 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
Impact on the B/S of a Par Bond...
Income Statement
Inventory Systems...
Fraud Triangle - 3) Attitude/rationalization
13. Trade relief - Contingent consideration - Union concessions
Motivation to Under-report Earnings
CFI Analysis...
Horizontal Common Size Statements...
Statement of Cash Flow - relevance...
14. FASB: No discussion of 'probables' - IASB: Asset - liabilities - are probable flows
Funded status of the pension plan (under US GAAP & IFRS) is reported where?
Financial Adj to Facilitate Comparison...
IFRS/US GAAP Frameworks: Recognition of Elements...
Inventory mangement: Low T/O (High DOH)...
15. Primary) Relevance & Reliability - Secondary) Comparability - Lastly) Understandability - user specific
Taxation: Income Tax Expense
Horizontal Common Size Statements...
The 4 Qualitative Characteristics of FASB...
Segment Reporting
16. 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
Net Reporting of Revenue
IOSCO
B/S - Long-lived assets
Deferred Tax Liability: (DTL)
17. Contributed capital = c/s @ par plus add'l paid-in capital - Treasury stock (reaquired by frim but not yet retired) - are/E = Accum' NI less dividends - Minority (non-controlling) interest - Comprehensive income items: all chg in SOE not in I/S or fr
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18. = LIFO ending inventory + LIFO reserve FIFO after-tax profit
Inventory Systems...
FIFO ending inventory =
Depreciation Methods...
Low Quality Earnings is result of...
19. 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
3 C's for Credit Analysis...
Screening for Potential Equity Investment: Criteria
Convergence IFRS/US GAAP...
Analyst Treaments of DTL
20. 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
Intercorporate Investment: < 20% votes...
Form 8-K...
Free Cash Flow to the Firm - FCFF
Discontinued Operations...
21. Inflow - (bringing bond UP to par)
Sources of Differences: Permanent
Amortization of Bond Discount = (in/out flow) in the indirect method CFO
IFRS/US GAAP Frameworks: underlying assumptions...
Which set of accounting standards requires firms to disclose estimated amortization expense for the next five years on intangible assets?
22. Depreciation exp = (cost-residual value)/ useful life
4 General Categories for Creditworthiness/Capacity...
Cash flow ratios
Straight-line depreciation (SL)
Financial Assets: US GAAP/Amortized at Cost
23. Income Tax Expense < Taxes Payable - F/S < Tax Return - Pay more tax now but more on reversal
The 4 Qualitative Characteristics of IFRS
Deferred Tax Asset: (DTA)
CFI Analysis...
Sources of Differences: Permanent
24. 1) Nature of industry/entity operations: 3rd party transactions; Power of customer/supplier; Acct est subjective; Unusual transactions; International operations; International operations; Operations in tax havens. 2) Opportunity complex/unstable org.
Analysis: Market Value of Debt
Balance Sheet
Fraud Triangle - 2) Opportunity
The 4 Qualitative Characteristics of IFRS
25. Replacement cost subject to: Upper limit = NRV - Loewr limit = NRV - normal profit margin
Credit Rating Process...
IFRS/US GAAP Frameworks: F/S elements...
Market Value (GAAP)...
Cash Conversion Cycle =
26. IAS 39 Marketable securities - IAS 2 Inventories (LIFO prohibited) - IAS 16 PP&E - JV (IFRS: proportional consolidation) - IAS 38 Intangibles - IAS 18 & 11 Contruction Contracts - Extraordinary Items: Prohibited in IFRS - Cash Flow Statement
Simple capital structure
Convergence IFRS/US GAAP...
IFRS: Presentation Requirements
MD&A contains...
27. For inventory that does not deteriorate with age.
Return on total capital (ROTC)...
LIFO is appropriate
Inventory Valuatoin (LCM)
Impact on the B/S of a Premium Bond...
28. Amount deductible in future tax return
Tax base of an asset
IOSCO
Straight-line depreciation (SL)
LIFO results in: (assuming inflationary period)
29. (GAAP) Internally created intangibles 1) (R&D) are expensed 2) Advertising 3) Software (developed to establish feasibility)
CFO Analysis...
4 General Categories for Creditworthiness/Capacity...
Expensed Intangibles...
The 4 Qualitative Characteristics of IFRS
30. All other liabilities (e.g. bonds - notes payables - leases)
Impairments recognition (IFRS)
Financial Liability: US GAAP/Amortized at Cost
Traditional DuPont Equation...
Analysis: Market Value of Debt
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
Revaluation below historic cost...
Taxation: Tax Payable
Dilutive Securities
Gross Reporting of Revenue
32. Refers to change in mgmt judgement Does NOT require restatement of prior pd earnings; Disclose in footnotes
Types of accounting changes: accounting estimate
IOSCO
Cash Flow From Operations (CFO) - IFRS
Financial Ratio based on I/S...
33. 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
Footnote Finance Liability Disclosure
Segment Reporting
Impact on the Cash Flow of a Par Bond...
Capitalization of Interest...
34. US Gaap: Balance Sheet - IFRS:Disclosed in Footnotes - May be mentioned in MD&A if mgnt considers it significant
Effects of Lease Classification on F/S - Finance Lease
Funded status of the pension plan (under US GAAP & IFRS) is reported where?
Measures of Operating Performance - Efficiency Ratios...
Types of accounting changes: accounting principle
35. Share are to ensure significant influence over the company - Affiliate/Associate - Equity Method
Types of accounting changes...
Footnote disclosure of Reconciliation of opening and closing carrying values...
Intercorporate Investment: 20% - 50% votes...
FASB
36. EBIT/ *Gross Interest EBITDA/ *Gross Interest *(inc'd capitalized interest) - How many times is EBIT or EBITDA bigger than gross interest? Higher ratio is desired. Shows ability to cover int. payment
Add/ Sub changes to related b/s operating accounts
Which of the following characteristics should be of least concerned about management's opportunities to commit fraud?
From creditor POV: Int. Coverage;
Low Quality Earnings is result of...
37. 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.
Financial Ration based on B/S: Liquidity Ratios
Defined Benefit Obligations (DBO)
Types of accounting changes: prior period adjustments
IASB
38. 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
Units of Production Method
Expensed Intangibles...
Low Quality Earnings is result of...
4 General Categories for Creditworthiness/Capacity...
39. Both: Recognize going concern & accrual assumptions - IASB: Going concern & accruals given more prominence in framework - FASB: Going concern assumption not well developed in framework.
Fraud Triangle - 3) Attitude/rationalization
Lessor Accounting Capital Lease: Sales-Type Lease
IFRS/US GAAP Frameworks: underlying assumptions...
Effective Tax Rate
40. I/S: COGS higher - EBT lower - Taxes: lower - NI: Lower - B/S: INV: lower - W/C: Lower - are/E: lower - CF: CFO: higher
Characteristics of an effective framework
Financial Assets: US GAAP/Amortized at Cost
Balance Sheet
LIFO results in: (assuming inflationary period)
41. 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:
What is the economic substance of financial (capital) lease?
Ending Inventory =
IFRS/US GAAP Frameworks: objective of F/S
CFO - Indirect method steps...
42. Income subject to tax as per Tax Return
DBO Funded Status =
Taxable Income
Implication for Analysts: Be aware of differences in tax reconcilation between periods
Ending Inventory =
43. Meet Analyst Expectations - Meet debt covenants - Incentive compensation
Motivation to Over-report Earnings
IFRS/US GAAP Frameworks: F/S elements...
Dilutive Securities
Activity Based Restrictions
44. [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
Sustainable Growth
Cash Flow: Logic (A = L + E)
B/S - Long-lived assets PP&E
45. 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
Comprehensive income...
Antidilutive Securities
Impact on the Cash Flow of a Premium Bond...
46. Interest Expense = Coupon - Amortization = PV of future CF x market yield @ issuance
FIFO ending inventory =
Common Size Statement
Sustainable Growth
Impact on the B/S of a Premium Bond...
47. Both: Broadly consistent - lack fully developed concepts - FASB: Assets revaluations prohibited (except some financial instruments)
ROE interpretation: if ROE is low...
Debt covenants
IFRS/US GAAP Frameworks: Measurement of Elements...
Inv. Valuation reporting Inventory ABOVE costs...
48. (net income - preferred dividends)/weighted average of common shares outstanding - only income from continuing operations is considered
Net Realizable Value (NRV) (IFRS)
4 General Categories for Creditworthiness/Capacity...
BASIC EPS
Component depreciation;
49. 1) Relevance vs. reliability; 2) Benefit > cost; 3) Excludes intangibles and non-quantifiable info.
Trade-Offs Qualitative Characteristics of IFRS
Cash Flow From Operations (CFO) - FASB
Impact on the Cash Flow of a Par Bond...
Market Value (GAAP)...
50. Refers to changes from one GAAP method or IFRS method to another IFRS & US GAAP require prior year data shown in f/s to be adjusted.
Types of accounting changes: accounting principle
Effects of Lease Classification on F/S - Finance Lease
# of days payable =
Which of the following characteristics should be of least concerned about management's opportunities to commit fraud?