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CFA L1 Matheus > 4. Financial Reporting Analysis > Flashcards

4. Financial Reporting Analysis Flashcards

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1
Q

Net Income (Formula)

A

Everything in

a. Revenues
(-) COGS
(-) SG&A
(-) Dep/Amort
(-) Taxes
-----------------
= Net Income
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2
Q

Operating Profit (Formula)

A

Only COGS and SG&A

a. Revenues
b. (-) COGS
c. (-) SG&A
—————–
= Operating Profit

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3
Q

Gross Profit (Formula)

A

Only COGS

a. Revenues
b. (-) COGS
—————–
= Gross Profit

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4
Q

CFO (Cashflow formula)

A 
a. NI
(+) Dep/Amort
(+) Working Capital (NCG)
-----------------
= CFO ~ EBITDA (cuidado!)

CFO = NI + D + Deltas

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5
Q

Indirect v. Direct CFO Method

A

If using direct method, ignore depreciation

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6
Q

CFI (Formula)

A

CFI = Capex

\+ Sale of Assets
- Purchase of Assets
\+ Proceeds from Debt/Equity Investment
- Loans Made / Equity bought
-----------------
= CFI
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7
Q

CFF (Formula)

A

Equity/Debt related

+ Principal from Debt Issued
+ Proceeds from Issuing Stock
- Dividends paid
- Principal paid on debt

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8
Q

Dividends Paid v. Received (IFRS v. U.S. GAAP)

A

Gaap: dividends paid are always CFF; everything else is Operational

IFRS: If received, CFO/CFI. If paid, CFO / CFF

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9
Q

Inventory Accounting (Valuation Method)

A

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

  1. 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)

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10
Q

PP and E Accounting (Valuation Method)

A

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)

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11
Q

Accounts Receivable (Valuation Method)

A

Net Realizable Value (Gross + Bad Debt Allowances)

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12
Q

Inventory Costs

A

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)

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13
Q

Intangible Assets (IFRS v. US. GAAP)

A

IFRS: Purchased may be reported using cost or revaluation

U.S. GAAP: Cost method (only)

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14
Q

COGS (Formula)

A

Ending Inventory = Beggining Inv. + Purchases - COGS

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15
Q

Basic EPS

A

Basic EPS = (NI - Pref. Div) / Avg Shares

  • Dividends via shares are adjusted backwards
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16
Q

Discontinued Operations Treatment

A

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

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17
Q

Rationale for changes in:

a. Accounting Estimates
b. Accounting Rules / Principles

A

a. Assumptions = Restatement is not necessary

b, Principles = Restatement is necessary

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18
Q

Cost Recognizing Methods (IFRS)

A

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

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19
Q

Cost Recognizing Methods (U.S. GAAP)

A

a. Trading Securities
b. Available for Sale
c. Held to Maturity

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20
Q

Goodwill Creation

A

Excess of Purchase Price in the Acquisition of Identifiable Net Assets

Condition: there is no internal goodwill

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21
Q

Classified Balance Sheet

A

Current / Non-Current Assets and Liabilities

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22
Q

Investment Property (IFRS v. U.S. GAAP)

A

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

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23
Q

Cashflow Representation (U.S. GAAP)

A

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

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24
Q

Cashflow Representation (IFRS)

A

Direct / Indirect methods are both accepted

Interest / Taxes paid should be disclosed separately under each method

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25
Q

Cash Balance (Formula)

A

(a) CFI + CFO + CFF = Chg in Cash Balance

(b) Beggining Cash Balance + Chg = Ending Cash Balance

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26
Q

Double Declining Depreciation (DDB Formula)

A

DDB = (2 / Useful Life) * (Cost - Cumulative Dep)

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27
Q

Common-Size Cashflow (Basis)

A

% of Total Revenues

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28
Q

Free Cash Flow to Firm (Formula)

A

a. FCFF = NI + NCC + [(1-t) * Interest] - FCInv

b. NI + NCC = CFO

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29
Q

Free Cash Flow to Equity (Formula)

A

FCFE = CFO - Fixed Capital Inv + Net Borrowing

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30
Q

Debt Coverage Ratio (Formula)

A

Debt Coverage = CFO / Total Debt

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31
Q

Interest Coverage (Formula)

A

Interest Coverage = (CFO + Int Paid + Tax Paid) / Interest Paid

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32
Q

Unqualified Opinion

A

Audit opinion free of any issues

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33
Q

Qualified Opinion

A

Audit opinion with relevant issue

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34
Q

Vertical Analysis Basis for

a. Income Statement
b. Balance Sheet

A

a. Total Revenues

b. Total Assets

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35
Q

Receivables Turnover (Formula)

A

Rec Turnover = Annual Sales / Avg. Receivables

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36
Q

Inventory Turnover (Formula)

A

Inventory Turnover = COGS / Avg Inventory

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37
Q

Payables Turnover (Formula)

A

Payables Turnover = Purchases / Avg. Payables

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38
Q

Days of Inventory in Hand (Formula)

A

DIH = 365 / Inventory Turnover

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39
Q

Current Ratio (Formula)

A

Current Ratio = Current Assets / Current Liabilities

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40
Q

Quick Ratio (Formula)

A

Quick Ratio = (Cash + TVM + Receivables) / Current Liabilities

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41
Q

Cash Ratio (Formula)

A

Cash Ratio = Cash + TVM / Current Liabilities

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42
Q

Defensive Interval (concept and formula)

A

Defensive Interval = (Cash + Mkt Securities + Receivables) / Avg Daily Expenditures

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43
Q

Cash Conversion Cycle (Formula)

A

CCCycle = Dias a Receber + Dias de Inventário - Dias a Pagar

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44
Q

Interest Coverage (Formula)

A

Int. Coverage = EBIT / Interest Payments

45
Q

Net Profit Margin (Formula)

A

Net Profit Margin = Net Income / Revenues

46
Q

ROE (Formula)

A

ROE = NI / Avg Equity

47
Q

Dupont Formula

A

ROE = (NI / Rev) * (Rev /Asset) * (Asset / Eqt)

a. NI / Rev = Net Profit Margin
b. Rev / Asset = Asset Turnover
c. Asset / Equity = Leverage Ratio

48
Q

Extended Dupont Formula

A

ROE = (NI / EBT) * (EBT/EBIT) * (EBIT/Rev) * (Rev/Asset) * (Asset / Equity)

Ordem: EBT, EBIT, Rev, Avg Asset

49
Q

Growth Formula

A

g = RR * ROE, where

RR = Retention Rate = (1 - Payout)

50
Q

Coefficient of Variation (Formula)

A

CV = Std Dev / Avg Item

It works for:
a. Sales, Operating Income, Net Income

51
Q

LIFO Reserve (Concept and formula)

A

FIFO End Inv = LIFO End Inv + LIFO Reserve

52
Q

FIFO COGS (from LIFO / Formula)

A

FIFO COGS = LIFO COGS - (End LIFO Reserve - Begin LIFO Reserve)

FIFO COGS = (LIFO COGS - Δ LIFO Reserve)

53
Q

FIFO COGS v. LIFO COGS

A

FIFO COGS < LIFO COGS

54
Q

LIFO Liquidation (Concept)

A

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

55
Q

Steps to convert LIFO to FIFO

A
  1. Add LIFO Reserve to Inventory
  2. FIFO COGS = LIFO COGS - Δ Increase LIFO Reserve
  3. Decrease Cash by (1-t) * LIFO Reserve
  4. Increase Retained Earnings by LIFO Reserve * (1 - tax rate)

LIFO to FIFO =

↑ Inventory (↑ Asset)
↓ Cash due to increasing assets
↓ COGS = ↑ Gross Profit

56
Q

Identifiable Intangible Asset

A
  1. There is a legal reason to exist
  2. Controlled by the firm
  3. Expected to provide future economic benefits
57
Q

Long-Lived Assets (Valuation Method)

A

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

58
Q

Impairment Differences (IFRS v. U.S. GAAP)

A

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

59
Q

Research and Development (IFRS criteria)

A

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

60
Q

Finite-Lived Long Lived Asset (Valuation)

A

Amortized over its useful life

61
Q

Indefinite-Lived Long Lived Asset (Valuation)

A

Tested for Impairment

62
Q

Purchase / Sale of Securities (CFO / CFF / CFI)

A

CFO under both U.S. Gaap and IFRS

63
Q

Cash Collections (Formula)

A

Cash Collections = Sales - Increase Acc Receivables

64
Q

Cash to Suppliers (Formula)

A

Cash to Suppliers = - COGS + Decrease in Inv + Increase in Accounts Payable

65
Q

Cash Wages (Formula)

A

Cash Wages = - Wages - Decrease in Wages Payable

66
Q

Cash Interest (Formula)

A

= - Interest Expense + Increase in Interest Payable

67
Q

CFO Direct Method (Formula)

A

CFO = Cash Collections + Cash to Suppliers + Cash Wages + Cash Interest + Cash Taxes

68
Q

Cash Taxes (Formula)

A

Cash Taxes = - Tax Expense + Increase in Taxes Payable + Increase in Deferred Tax Liability

69
Q

Cash Effect from substituting debt for equity

A

No cash effects

70
Q

Efficiency Ratios (Concept)

A

Higher Inventory Turnover, the better (unless if sales are already decreasing in comparison to the industry average)

71
Q

Long Lived Assets (Sold / Abandoned / Exchanged)

A

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

72
Q

Income Tax Expense (Formula)

A

Income Tax Expense = Tax Payable + ΔDTL - ΔDTA

73
Q

DTA v. DTL

A

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)

74
Q

Tax Base of Assets / Liabilities

A

Carrying Value - Amount Deductible in the future

75
Q

Tax Base of Assets (examples)

A
  • Depreciable Equipment
  • Research and Development
  • Accounts Receivable
76
Q

Tax Base of Liabilities (examples)

A
  • Customer advance
  • Warranty Liability
  • Note Payable
77
Q

Statutory v. Effective Tax Rate

A

Permanent Differences create a difference between both.

Effective = Derives from the I/S
Statutory = Refers to the jurisdiction
78
Q

Valuation Allowance Effect

A

Same as Increasing Loan Loss Reserves.

↑ Valuation Allowance
↓ Assets
↓ Net Income / Earnings

79
Q

PP and E Revaluation Effects

A

Taken direct to Equity

80
Q

Bonds Interest Expense

A

Int Expense = Balance Sheet Amount * interest rate @ issuance

81
Q

Bond Issued @ Par

Bond Issued @ Discount

Bond Issued @ Premium

A

@ Par: Coupon = Discount @ Issuance

@ Discount: Coupon < Discount @ Issuance

@ Premium: Coupon > Discount @ Issuance

82
Q

Ending Book Value for Bonds (Formula)

A

Ending Book Value = (Int Expense - Coupon)

83
Q

Finance Lease (Concept)

A

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)

84
Q

Operating Lease (Concept)

A

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)

85
Q

Leasing types for Lessees

A

IFRS: all like purchase of long-term asset financed by debt

Gaap: Finance / Operating

86
Q

Leasing types for Lessors

A

IFRS: Finance / Operating

Gaap: Sales-Type (transferred risks, collection is probable), Direct Financing, Operating

87
Q

Net Pension Asset

A

Fair Value of Assets > Liabilities = Overfund (and vice-versa)

  • Only Defined Benefit Pensions Plan
88
Q

Financial Reporting Quality (Concept)

A

Adherence to the standards. General compliance.

89
Q

Quality of Earnings (Concept)

A

Based in the sustainability of the earnings

90
Q

Circumstances for low-quality or fraudulent reporting

A
  • Motivation
  • Opportunity
  • Rationalization (less than ethical actions)
91
Q

FOB @ shipping in comparison to FOB @ destination

A

Early revenue recognition

92
Q

Channel Stuffing

A

Delivering goods and overloading a distribution channel

93
Q

Bill and Hold Transaction

A

Compra antecipada.

1) Buy
2) Asks supplier to hold the item while already recognizes the revenue

= Artificial increase of earnings

94
Q

Notes Payable Treatment (U.S. Gaap)

A

Notes Payable is a CFF

95
Q

Reinvestment Ratio (Formula)

A

CFO / Cash Paid for Long-Term Assets

96
Q

Fixed Charge Coverage Ratio (Fomula)

A

Fixed Charge = (EBIT + Lease Payments) / (Interest Payments + Lease Payments)

Solvency Ratio

97
Q

Defensive Ratio (Fomula)

A

Defensive Interval = Current Assets / Daily Operational Expenses

98
Q

Inventory write-down affects which accounts in the I/S

A

Addition to COGS or as a separate line item

99
Q

Intangible Asset Amortization (when)

A
  1. It has finite a live

2. It was purchased or acquired in a business combination

100
Q

Quality Order (Financial Reports)

A

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.

101
Q

Gains / Losses recognized under Fair Value Model on Investment Property (IFRS)

A

Recognized in the I/S

102
Q

Effects from Capitalizing Costs

A

↑ CFO / ↓ CFI (in CFI, this is a non-cash component)

↓ Variability of Income (due to amortizing)
↓ Leverage Ratios (increase both assets and equity)

103
Q

Component Depreciation (IFRS v. U.S. Gaap)

A
  • IFRS requires firms to use component depreciation.

- U.S. GAAP permits component depreciation but does not require firms to use it.

104
Q

Land in Revaluation Model

Cost: EUR 2 MM

B/S Value: EUR 2.2 MM

New Fair Value: EUR 1.8MM

A

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

105
Q

Intangible Assets (treatment

A
  • Amortized if finite lives

- Not amortized if to be renewed at minimum cost

106
Q

Gross asset value / Accumulated depreciation requirement

A

For both IFRS and U.S. Gaap

107
Q

Bad Debt Allowances effect on DTA/DTL

A

No effect since for tax purposes you will only deduct this once it occurs

108
Q

Determining the B/S value of DTA/DTL (IFRS v. U.S. Gaap)

A
  • 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

109
Q

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

A

Only US Gaap

CFA L1 Matheus (5 decks)

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