4. Financial Reporting Analysis Flashcards
Net Income (Formula)
Everything in
a. Revenues (-) COGS (-) SG&A (-) Dep/Amort (-) Taxes ----------------- = Net Income
Operating Profit (Formula)
Only COGS and SG&A
a. Revenues
b. (-) COGS
c. (-) SG&A
—————–
= Operating Profit
Gross Profit (Formula)
Only COGS
a. Revenues
b. (-) COGS
—————–
= Gross Profit
CFO (Cashflow formula)
a. NI (+) Dep/Amort (+) Working Capital (NCG) ----------------- = CFO ~ EBITDA (cuidado!)
CFO = NI + D + Deltas
Indirect v. Direct CFO Method
If using direct method, ignore depreciation
CFI (Formula)
CFI = Capex
\+ Sale of Assets - Purchase of Assets \+ Proceeds from Debt/Equity Investment - Loans Made / Equity bought ----------------- = CFI
CFF (Formula)
Equity/Debt related
+ Principal from Debt Issued
+ Proceeds from Issuing Stock
- Dividends paid
- Principal paid on debt
Dividends Paid v. Received (IFRS v. U.S. GAAP)
Gaap: dividends paid are always CFF; everything else is Operational
IFRS: If received, CFO/CFI. If paid, CFO / CFF
Inventory Accounting (Valuation Method)
Rule:
IFRS: Lower of (a) Cost or (b) Net Realizable Value (NRV)
U.S. GAAP: Lower of (a) Cost or (c) Market / Replacement, if LIFO or Retail Method
Others under U.S. GAAP: follow IFRS
- Assumptions:
(a) FIFO / LIFO / Weighted Avg Cost are assumptions for the outflow
Mkt Range (Gaap): If replacement (market) is out of the range, move to the range
Top: NRV (P * Q - SG&A)
Bottom: (NRV - Normal Profit)
PP and E Accounting (Valuation Method)
a. Cost Model (Purchase + Delivery & Installation), including depreciation, amortization
or
b. Revaluation Model
IFRS: Both accepted
U.S. GAAP: Cost model, only
Annual Test for Impairment: Impaired if Carrying Value > Recoverable Amount
Recoverable Amount = Higher (Value in use, NRV)
Accounts Receivable (Valuation Method)
Net Realizable Value (Gross + Bad Debt Allowances)
Inventory Costs
Sum of PRODUCT costs:
a. Purchase
b. Conversion
c. Transportation costs only to the plant
d. Labor and Overhead for manufacturing only
Obs.: Abnormal costs are expensed as incurred (storage, admin, selling costs, waste of materials)
Intangible Assets (IFRS v. US. GAAP)
IFRS: Purchased may be reported using cost or revaluation
U.S. GAAP: Cost method (only)
COGS (Formula)
Ending Inventory = Beggining Inv. + Purchases - COGS
Basic EPS
Basic EPS = (NI - Pref. Div) / Avg Shares
- Dividends via shares are adjusted backwards
Discontinued Operations Treatment
a. If sale is announced
b. Already sold, but the transference has not occurred yet
If (a) or (b), a separate result should be included in the Income Statement
Rationale for changes in:
a. Accounting Estimates
b. Accounting Rules / Principles
a. Assumptions = Restatement is not necessary
b, Principles = Restatement is necessary
Cost Recognizing Methods (IFRS)
a. Fair Value via P&L
b. Fair Value through OCI
c. Amortized Cost
Irrevocable choice for Equity Instrument to be treated as “b” is allowed
Cost Recognizing Methods (U.S. GAAP)
a. Trading Securities
b. Available for Sale
c. Held to Maturity
Goodwill Creation
Excess of Purchase Price in the Acquisition of Identifiable Net Assets
Condition: there is no internal goodwill
Classified Balance Sheet
Current / Non-Current Assets and Liabilities
Investment Property (IFRS v. U.S. GAAP)
IFRS: Amortized or Fair Value (in this case, any change is reported in the Income Statement)
U.S. GAAP: N/A. Treatment is the same as PP&E
Cashflow Representation (U.S. GAAP)
Indirect method is allowed (only). If the Direct method is included, it should be reconciled against Net Income
Interest / Taxes paid may be included in the Cashflow Statements or Audit Notes
Cashflow Representation (IFRS)
Direct / Indirect methods are both accepted
Interest / Taxes paid should be disclosed separately under each method
Cash Balance (Formula)
(a) CFI + CFO + CFF = Chg in Cash Balance
(b) Beggining Cash Balance + Chg = Ending Cash Balance
Double Declining Depreciation (DDB Formula)
DDB = (2 / Useful Life) * (Cost - Cumulative Dep)
Common-Size Cashflow (Basis)
% of Total Revenues
Free Cash Flow to Firm (Formula)
a. FCFF = NI + NCC + [(1-t) * Interest] - FCInv
b. NI + NCC = CFO
Free Cash Flow to Equity (Formula)
FCFE = CFO - Fixed Capital Inv + Net Borrowing
Debt Coverage Ratio (Formula)
Debt Coverage = CFO / Total Debt
Interest Coverage (Formula)
Interest Coverage = (CFO + Int Paid + Tax Paid) / Interest Paid
Unqualified Opinion
Audit opinion free of any issues
Qualified Opinion
Audit opinion with relevant issue
Vertical Analysis Basis for
a. Income Statement
b. Balance Sheet
a. Total Revenues
b. Total Assets
Receivables Turnover (Formula)
Rec Turnover = Annual Sales / Avg. Receivables
Inventory Turnover (Formula)
Inventory Turnover = COGS / Avg Inventory
Payables Turnover (Formula)
Payables Turnover = Purchases / Avg. Payables
Days of Inventory in Hand (Formula)
DIH = 365 / Inventory Turnover
Current Ratio (Formula)
Current Ratio = Current Assets / Current Liabilities
Quick Ratio (Formula)
Quick Ratio = (Cash + TVM + Receivables) / Current Liabilities
Cash Ratio (Formula)
Cash Ratio = Cash + TVM / Current Liabilities
Defensive Interval (concept and formula)
Defensive Interval = (Cash + Mkt Securities + Receivables) / Avg Daily Expenditures
Cash Conversion Cycle (Formula)
CCCycle = Dias a Receber + Dias de Inventário - Dias a Pagar
Interest Coverage (Formula)
Int. Coverage = EBIT / Interest Payments
Net Profit Margin (Formula)
Net Profit Margin = Net Income / Revenues
ROE (Formula)
ROE = NI / Avg Equity
Dupont Formula
ROE = (NI / Rev) * (Rev /Asset) * (Asset / Eqt)
a. NI / Rev = Net Profit Margin
b. Rev / Asset = Asset Turnover
c. Asset / Equity = Leverage Ratio
Extended Dupont Formula
ROE = (NI / EBT) * (EBT/EBIT) * (EBIT/Rev) * (Rev/Asset) * (Asset / Equity)
Ordem: EBT, EBIT, Rev, Avg Asset
Growth Formula
g = RR * ROE, where
RR = Retention Rate = (1 - Payout)
Coefficient of Variation (Formula)
CV = Std Dev / Avg Item
It works for:
a. Sales, Operating Income, Net Income
LIFO Reserve (Concept and formula)
FIFO End Inv = LIFO End Inv + LIFO Reserve
FIFO COGS (from LIFO / Formula)
FIFO COGS = LIFO COGS - (End LIFO Reserve - Begin LIFO Reserve)
FIFO COGS = (LIFO COGS - Δ LIFO Reserve)
FIFO COGS v. LIFO COGS
FIFO COGS < LIFO COGS
LIFO Liquidation (Concept)
a. LIFO Reserve increases when prices are rising and inventories are stable
b. Companies draw down inventory to make money
Rationale: firm sells more inventory than it creates
As they go to older inventory, COGS is lower, Net Income is higher
Steps to convert LIFO to FIFO
- Add LIFO Reserve to Inventory
- FIFO COGS = LIFO COGS - Δ Increase LIFO Reserve
- Decrease Cash by (1-t) * LIFO Reserve
- Increase Retained Earnings by LIFO Reserve * (1 - tax rate)
LIFO to FIFO =
↑ Inventory (↑ Asset)
↓ Cash due to increasing assets
↓ COGS = ↑ Gross Profit
Identifiable Intangible Asset
- There is a legal reason to exist
- Controlled by the firm
- Expected to provide future economic benefits
Long-Lived Assets (Valuation Method)
Tipically capitalized @ Fair Value, plus any preparation and depreciation costs
IFRS allows REVALUATION dates. If gains surpass original Fair Value, they go to a specific Revaluation Account
Impairment Differences (IFRS v. U.S. GAAP)
IFRS: Annual test. Impair if carrying value > recoverable amount.
Recoverable Amount = Higher (Fair Value - Costs / Value in Use).
Write down to the Recoverable Amount. Subsequent gains may be reverted to the extent of original value.
U.S. GAAP: Test only if there is an event suggesting that recoverable amount will not be achieved.
Recoverability Test = Undiscounted CFs
Research and Development (IFRS criteria)
IFRS:
- Research may be expensed
- Development costs may be capitalized (tech feasibility, intend to use)
U.S. GAAP: Both are expensed
Exception: software for use
Finite-Lived Long Lived Asset (Valuation)
Amortized over its useful life
Indefinite-Lived Long Lived Asset (Valuation)
Tested for Impairment
Purchase / Sale of Securities (CFO / CFF / CFI)
CFO under both U.S. Gaap and IFRS
Cash Collections (Formula)
Cash Collections = Sales - Increase Acc Receivables
Cash to Suppliers (Formula)
Cash to Suppliers = - COGS + Decrease in Inv + Increase in Accounts Payable
Cash Wages (Formula)
Cash Wages = - Wages - Decrease in Wages Payable
Cash Interest (Formula)
= - Interest Expense + Increase in Interest Payable
CFO Direct Method (Formula)
CFO = Cash Collections + Cash to Suppliers + Cash Wages + Cash Interest + Cash Taxes
Cash Taxes (Formula)
Cash Taxes = - Tax Expense + Increase in Taxes Payable + Increase in Deferred Tax Liability
Cash Effect from substituting debt for equity
No cash effects
Efficiency Ratios (Concept)
Higher Inventory Turnover, the better (unless if sales are already decreasing in comparison to the industry average)
Long Lived Assets (Sold / Abandoned / Exchanged)
Sale: G/L reported in the Income Statement
Abandoned: Loss in the I/S @ the Carrying Amount
Exchanged: G/L is reported in the I/S as per the difference
Income Tax Expense (Formula)
Income Tax Expense = Tax Payable + ΔDTL - ΔDTA
DTA v. DTL
DTA: Excess of Tax Expense > Tax Payable
DTL: Excess of Tax Payable > Tax Expense
DTA: Tough IRS (lets you depreciate less)
DTL: Easy IRS (lets you depreciate more)
Tax Base of Assets / Liabilities
Carrying Value - Amount Deductible in the future
Tax Base of Assets (examples)
- Depreciable Equipment
- Research and Development
- Accounts Receivable
Tax Base of Liabilities (examples)
- Customer advance
- Warranty Liability
- Note Payable
Statutory v. Effective Tax Rate
Permanent Differences create a difference between both.
Effective = Derives from the I/S Statutory = Refers to the jurisdiction
Valuation Allowance Effect
Same as Increasing Loan Loss Reserves.
↑ Valuation Allowance
↓ Assets
↓ Net Income / Earnings
PP and E Revaluation Effects
Taken direct to Equity
Bonds Interest Expense
Int Expense = Balance Sheet Amount * interest rate @ issuance
Bond Issued @ Par
Bond Issued @ Discount
Bond Issued @ Premium
@ Par: Coupon = Discount @ Issuance
@ Discount: Coupon < Discount @ Issuance
@ Premium: Coupon > Discount @ Issuance
Ending Book Value for Bonds (Formula)
Ending Book Value = (Int Expense - Coupon)
Finance Lease (Concept)
Lease transfers all ownership risks to the lessee
Lessee:
- BS: Asset (right to use) and Lease Payable
- I/S: Interest Expense only
- CFF is impacted
Lessor:
B/S: Receivable in Liabilities
I/S: Income, given payments
Similar to borrowing money to buy an asset.
(IFRS / US Gaap)
Operating Lease (Concept)
No transfer of ownership risks to lessee
Lessee:
I/S: Only reports expenses (Interest, Amortization)
Lessor:
B/S: Reports the Lease Asset
I/S: Reports Income
(IFRS / US Gaap: in this case, I/S has interest payment only)
Leasing types for Lessees
IFRS: all like purchase of long-term asset financed by debt
Gaap: Finance / Operating
Leasing types for Lessors
IFRS: Finance / Operating
Gaap: Sales-Type (transferred risks, collection is probable), Direct Financing, Operating
Net Pension Asset
Fair Value of Assets > Liabilities = Overfund (and vice-versa)
- Only Defined Benefit Pensions Plan
Financial Reporting Quality (Concept)
Adherence to the standards. General compliance.
Quality of Earnings (Concept)
Based in the sustainability of the earnings
Circumstances for low-quality or fraudulent reporting
- Motivation
- Opportunity
- Rationalization (less than ethical actions)
FOB @ shipping in comparison to FOB @ destination
Early revenue recognition
Channel Stuffing
Delivering goods and overloading a distribution channel
Bill and Hold Transaction
Compra antecipada.
1) Buy
2) Asks supplier to hold the item while already recognizes the revenue
= Artificial increase of earnings
Notes Payable Treatment (U.S. Gaap)
Notes Payable is a CFF
Reinvestment Ratio (Formula)
CFO / Cash Paid for Long-Term Assets
Fixed Charge Coverage Ratio (Fomula)
Fixed Charge = (EBIT + Lease Payments) / (Interest Payments + Lease Payments)
Solvency Ratio
Defensive Ratio (Fomula)
Defensive Interval = Current Assets / Daily Operational Expenses
Inventory write-down affects which accounts in the I/S
Addition to COGS or as a separate line item
Intangible Asset Amortization (when)
- It has finite a live
2. It was purchased or acquired in a business combination
Quality Order (Financial Reports)
Financial reports that depart from generally accepted accounting principles are WORSE than biased accounting choices. Financial reports that reflect unsustainable earnings can still be of high quality if they state the situation clearly.
Gains / Losses recognized under Fair Value Model on Investment Property (IFRS)
Recognized in the I/S
Effects from Capitalizing Costs
↑ CFO / ↓ CFI (in CFI, this is a non-cash component)
↓ Variability of Income (due to amortizing)
↓ Leverage Ratios (increase both assets and equity)
Component Depreciation (IFRS v. U.S. Gaap)
- IFRS requires firms to use component depreciation.
- U.S. GAAP permits component depreciation but does not require firms to use it.
Land in Revaluation Model
Cost: EUR 2 MM
B/S Value: EUR 2.2 MM
New Fair Value: EUR 1.8MM
1) Original Value: EUR 2.0MM
2) Revaluation: EUR 2.2 MM (reported in Revaluation Surplus Account)
3) Take it to zero
4) I/S: recognize EUR 0.2MM loss
Intangible Assets (treatment
- Amortized if finite lives
- Not amortized if to be renewed at minimum cost
Gross asset value / Accumulated depreciation requirement
For both IFRS and U.S. Gaap
Bad Debt Allowances effect on DTA/DTL
No effect since for tax purposes you will only deduct this once it occurs
Determining the B/S value of DTA/DTL (IFRS v. U.S. Gaap)
- IFRS: a tax rate that has been enacted or substantively enacted is used
U.S. GAAP: only a tax rate that has actually been enacted can be used
For a company which owns a majority of the equity of a subsidiary, whether to create a deferred tax liability for undistributed profits from the subsidiary depends on an “indefinite reversal criterion” under
Only US Gaap
