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Test your basic knowledge |
Advanced Financial Reporting And Analysis
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Study First
Subject
:
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. You.S. GAAP
Installment Method...
IFRS/US GAAP Frameworks: purpose of framework
Which set of accounting standards requires firms to disclose estimated amortization expense for the next five years on intangible assets?
CFO - Direct/Indirect method
2. 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
Depreciation Methods...
Fraud Triangle - 3) Attitude/rationalization
Fundamental principles for PREPARING f/s under IFRS: (IAS No 10
Funded status of the pension plan (under US GAAP & IFRS) is reported where?
3. 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.
From creditor POV: Int. Coverage;
Forecasting Financial Performance: Application
Valuation allowance
Discontinued Operations...
4. Higher share price - Lower borrowing cost - Higher incentive compensation
Creative Cash Flows Accounting: Motivation
Deferred Tax Asset: (DTA)
Net Reporting of Revenue
Sustainable Growth
5. 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
Financial Liability: US GAAP/Fair Market Value
Motivation to Understate Assets/Overstate Liabilities
Credit Rating Process...
Impact on the Cash Flow of a Premium Bond...
6. 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
Operating Risk Ratios...
Component depreciation;
Discontinued Operations...
Roles of financial reporting & analysis include...
7. Amount deductible in future tax return
Inventory mangement: High T/O (low DOH) and sales growth below industry average
Depreciation Methods...
Tax base of an asset
Capitalization of Interest...
8. 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
Free Cash Flow to the Firm - FCFF
Fraud Triangle - 2) Opportunity
LIFO results in: (assuming inflationary period)
Implication for Analysts: Be aware of differences in tax reconcilation between periods
9. Change in equity from transactions from nonownership sources. Include: NI - chg in foreign currency translation adj. - chg in pension adj to funded status - chg unrealized gains/losses on derivatives contracts accounted for as hedges - chng in unrea
Tax base on a liability
Effects of Lease Classification on F/S - Finance Lease
Double-decline balance (DDB)
Comprehensive income...
10. A: Increase = use cash (-) - Decrease = source cash (+) - L: Increase = source cash (+) - Decrease = use of cash (-) - E: Increase = source cash (+) - Decrease = use of cash (-)
Antidilutive Securities
Asset Capitalization
Impact on the Cash Flow of a Premium Bond...
Cash Flow: Logic (A = L + E)
11. Profit recognized is the proportion of cash collected x total expected profit Revenue = (COG provided to date/total COG to be provided) x total expected revenue
Net Realizable Value (NRV) (IFRS)
Installment Method...
Lessor Accounting Capital Lease: Sales-Type Lease
Steps of F/S Analysis
12. 1st: Net Income - dividends declared = chg in are/E - Then: Dividends declared +/- chg dividends payable = cash dividends paid.
Revaluation above historic cost...
Calculate dividends declared...
Motivation to Understate Assets/Overstate Liabilities
Reasons to Lease...
13. 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
IFRS/US GAAP Frameworks: F/S elements...
Extended DuPont Equation...
Analysis: Market Value of Debt
Simple capital structure
14. Current Ratio (CA/CL): lower - Work. Cap (CA -CL): Lower - Asset TO: (Sales/TA): Lower - ROA (EAT/TA): Lower - ROE (EAT/E): Lower - Debt/Equity: Higher - Since Int. exp + depre > lease pymt in the early years. This decreases NI - and Profitability ra
Cash Flow: Logic (A = L + E)
Cash Flow From Operations (CFO) - FASB
Effects of Lease Classification on Ratios - Finance Lease
Income Statement
15. Income Tax Expense/Pretax Income (EBIT) Income Tax Exp. = Taxes payable + chg in deferred ta
Types of accounting changes: accounting estimate
IFRS/US GAAP Frameworks: Measurement of Elements...
Amortization of Bond Discount = (in/out flow) in the indirect method CFO
Effective Tax Rate
16. 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
Capitalized Intangibles...
LIFO is appropriate
Creative Cash Flows Accounting: Technique
Convergence IFRS/US GAAP...
17. 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
Analyst Treaments of DTL
Cash Flow From Financing (USA) (Source of Cash)
Financial Implications of Capitalizing...
18. Replacement cost subject to: Upper limit = NRV - Loewr limit = NRV - normal profit margin
FIFO results in: (assuming inflationary period)
Market Value (GAAP)...
Funded Status US GAAP & IFRS
Creative Cash Flows Accounting: Motivation
19. Outflow - (bringing bond DOWN to par)
Fundamental principles for PREPARING f/s under IFRS: (IAS No 10
Amortization of Bond Premium = (in/out flow) in the indirect method CFO
B/S - short-term investments
Capitalized Intangibles...
20. 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)
Intangibles under IFRS...
Warning Signs of Earnings Manipulation
Segment Reporting
DBO Funded Status =
21. 1) Purchase cost; 2) conversion costs; 3) Allocation of fixed production OH based on normal capacity levels; 4) Other costs necessary to bring the inventory to its present location and condition (freight costs & installation) - Exclude: Admin OH - S
Form 144...
Deferred Tax Asset: (DTA)
Cost included in Inventory on b/s...
Forecasting Financial Performance: Application
22. 1) Relevance vs. reliability; 2) Benefit > cost; 3) Excludes intangibles and non-quantifiable info.
Inventory mangement: High T/O (low DOH) and sales growth above industry average
Impact on the B/S of a Par Bond...
Trade-Offs Qualitative Characteristics of IFRS
Segment Reporting
23. 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
SEC guidance for Revenue Recognition
LIFO is appropriate
Cost recovery method...
Unusual OR Infrequent items...
24. 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.
CFO - Direct/Indirect method
IFRS/US GAAP Frameworks: Measurement of Elements...
Form 144...
Sources of Differences: Temporary
25. Assets - liabilities - and equity are presented in a single column.
Stock options: Use treasury stock method
From creditor POV: Int. Coverage;
The report format of B/S
Financial Ration based on B/S: Liquidity Ratios
26. Interest Expense = Amortization
Impact on the B/S of a Zero Coupon Bond...
One major difference between the presentation of deferred tax assets and liabilities under IFRS and under U.S. GAAP is that...
Auditor/Audit Opinion
Financial Ratios based on B/S: Solvency ratio
27. Both: General agreement on objectives; focus on wide range of users - IASB: One objective for all users - FASB: Separate objectives for business entities and non-business entities.
Sales Basis Revenue Recognitions
Free Cash Flow -CFO
Valuation Allowance...
IFRS/US GAAP Frameworks: objective of F/S
28. 1) Intention to hold >1 year (e.g. debt or equity) valued @ cost or mkt value 2) Equity accounted investments
Activity Based Restrictions
B/S - investments
Net Reporting of Revenue
Unusual OR Infrequent items...
29. 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
Finance (capital) Lease criteria (under US GAAP)
Effects of Lease Classification on F/S - Finance Lease
Stock options: Use treasury stock method
Convergence IFRS/US GAAP...
30. 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)
Trade-Offs Qualitative Characteristics of IFRS
Add/ Sub changes to related b/s operating accounts
# of days payable =
Tax base of an asset
31. Tax liability based on taxable income as per TAX Report/RETURN
Not all CF increase are Sustainable. Example of how Mgmt can Manipulate Cash Flow Statement
Taxation: Tax Payable
Measurement of A & L disclosure in footnotes
Intercorporate Investment: < 20% votes...
32. Slow moving or obsolete inventory
Return on total capital (ROTC)...
Inventory mangement: Low T/O (High DOH)...
Free Cash Flow -CFO
Double-decline balance (DDB)
33. 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
IFRS: Required F/S
Asset Capitalization
Measurement of A & L disclosure in footnotes
DTA/DTL: Effect on Net Income when Tax Rate decreases...
34. 1) understandability; 2) relevance; 3) reliability; and 4)comparability - No hierarchy
Free Cash Flow -CFO
CFO Analysis...
The 4 Qualitative Characteristics of IFRS
days of sales o/s =
35. 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...
Screening for Potential Equity Investment: Criteria
% of Completion
Operating vs. Non-operating Income
36. 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
4 General Categories for Creditworthiness/Capacity...
Return on Equity (ROE)...
Intangibles under IFRS...
Cost recovery method...
37. Any I/S subtotal is expressed a margin ratio (to revenues) - Gross profit margin = gross profit/ revenue - Net profit margin = Net Inc/revenue - Operating profit margin = EBIT/ revenue - Pre-tax margin = EBT/ revenue
Defined Benefit Plans
Stock options: Use treasury stock method
Inventory Valuatoin (LCM)
Financial Ratio based on I/S...
38. Beginning Inv. (BI) + Purchases (P) = Available for Sale - Available for sale - COGS = Ending Inventory (EI)
Not all CF increase are Sustainable. Example of how Mgmt can Manipulate Cash Flow Statement
Fraud Triangle - 3) Attitude/rationalization
IOSCO
Ending Inventory =
39. 1) Timing Differences: Accrual vs. modified cash accounting - Differences in reporting methods estimates
Sources of Differences: Temporary
LIFO results in: (assuming inflationary period)
IOSCO
Stock options: Use treasury stock method
40. Profit is recognized only when it exceeds estimated total cost.
Intercorporate Investment: > 50% votes...
IFRS Revenue Recognition For Service
Cost recovery method...
Types of accounting changes: accounting estimate
41. Return on Total Equity = NI/ Avg. Total Equity - Return on C/E = NI - Pref. Div/ Avg. Common Equity
IFRS/US GAAP Frameworks: Recognition of Elements...
FASB - Harmonization
Financial Ratios based on B/S: Solvency (Coverage)
Return on Equity (ROE)...
42. 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 -
Free Cash Flow to Equity - FCFE
The best indicator of overstating its profits is...
Inventory Systems...
DTA/DTL: Effect on Net Income when Tax Rate decreases...
43. US 1) Financial Accounting Standards Board; 2) Standards form GAAP; 3) Aims - useful - relevant - reliable - consistent and comparable; 4) SEC deems FASB standard authoritative
Tax base on a liability
FASB
The objective of f/s is to...
B/S - Stockholders' Equity
44. Lost sales from stock outs
Finance (capital) Lease criteria GAAP vs. IFRS
Extended DuPont Equation...
Inventory mangement: High T/O (low DOH) and sales growth below industry average
FASB - Harmonization
45. Decreases DTA -> Decreases Net Income - [Decrease in Valuation Allowance; Increase DTA and Increases Net Income]
Extraordinary Items: Unusual AND Infrequent items...
An Increase in the Valuation Allowance Account...
Footnote Finance Liability Disclosure
Impairments recognition (GAAP)
46. Loss that could not be deducted on the tax return in current period but may be used to reduce taxable income and taxes payable in future (i.e. warranty)
IFRS: Presentation Requirements
Tax Loss Carryforward...
# of days payable =
Capitalized Intangibles...
47. [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
Extended DuPont Equation...
What is the economic substance of financial (capital) lease?
Net Periodic Benefit Costs
Diluted EPS
48. 1) Aggregation where appropriate; 2) No offsetting assets against liabilities or income against exp.; 3) Classifed B/S; 4) Minimum Info on face; 5) Minimum disclosure; 6) Comparative info.
IFRS: Presentation Requirements
CFO - Direct/Indirect method
Inventory Valuatoin (LCM)
# of days payable =
49. When Statutory tax rate does NOT equal Effective tax rate - Tax expense does note equal pretax income x statutory rate
Analysis: Market Value of Debt
Fraud Triangle - 2) Opportunity
Cash Flow From Operations (CFO) - FASB
Sources of Differences: Permanent
50. ROE = (NI/Sales) x (Sales/Assets) x (Assets/Equity) or ROE= Net Profit Margin x Asset TO x Leverage Ratio
Traditional DuPont Equation...
Lessor Accounting Capital Lease: Sales-Type Lease
Valuation allowance
Unusual OR Infrequent items...