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CFA L1 Matheus > 4. Financial Reporting Analysis > Flashcards

4. Financial Reporting Analysis Flashcards

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
Cash Balance (Formula)
(a) CFI + CFO + CFF = Chg in Cash Balance | (b) Beggining Cash Balance + Chg = Ending Cash Balance
26
Double Declining Depreciation (DDB Formula)
DDB = (2 / Useful Life) * (Cost - Cumulative Dep)
27
Common-Size Cashflow (Basis)
% of Total Revenues
28
Free Cash Flow to Firm (Formula)
a. FCFF = NI + NCC + [(1-t) * Interest] - FCInv | b. NI + NCC = CFO
29
Free Cash Flow to Equity (Formula)
FCFE = CFO - Fixed Capital Inv + Net Borrowing
30
Debt Coverage Ratio (Formula)
Debt Coverage = CFO / Total Debt
31
Interest Coverage (Formula)
Interest Coverage = (CFO + Int Paid + Tax Paid) / Interest Paid
32
Unqualified Opinion
Audit opinion free of any issues
33
Qualified Opinion
Audit opinion with relevant issue
34
Vertical Analysis Basis for a. Income Statement b. Balance Sheet
a. Total Revenues | b. Total Assets
35
Receivables Turnover (Formula)
Rec Turnover = Annual Sales / Avg. Receivables
36
Inventory Turnover (Formula)
Inventory Turnover = COGS / Avg Inventory
37
Payables Turnover (Formula)
Payables Turnover = Purchases / Avg. Payables
38
Days of Inventory in Hand (Formula)
DIH = 365 / Inventory Turnover
39
Current Ratio (Formula)
Current Ratio = Current Assets / Current Liabilities
40
Quick Ratio (Formula)
Quick Ratio = (Cash + TVM + Receivables) / Current Liabilities
41
Cash Ratio (Formula)
Cash Ratio = Cash + TVM / Current Liabilities
42
Defensive Interval (concept and formula)
Defensive Interval = (Cash + Mkt Securities + Receivables) / Avg Daily Expenditures
43
Cash Conversion Cycle (Formula)
CCCycle = Dias a Receber + Dias de Inventário - Dias a Pagar
44
Interest Coverage (Formula)
Int. Coverage = EBIT / Interest Payments
45
Net Profit Margin (Formula)
Net Profit Margin = Net Income / Revenues
46
ROE (Formula)
ROE = NI / Avg Equity
47
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
48
Extended Dupont Formula
ROE = (NI / EBT) * (EBT/EBIT) * (EBIT/Rev) * (Rev/Asset) * (Asset / Equity) Ordem: EBT, EBIT, Rev, Avg Asset
49
Growth Formula
g = RR * ROE, where RR = Retention Rate = (1 - Payout)
50
Coefficient of Variation (Formula)
CV = Std Dev / Avg Item It works for: a. Sales, Operating Income, Net Income
51
LIFO Reserve (Concept and formula)
FIFO End Inv = LIFO End Inv + LIFO Reserve
52
FIFO COGS (from LIFO / Formula)
FIFO COGS = LIFO COGS - (End LIFO Reserve - Begin LIFO Reserve) FIFO COGS = (LIFO COGS - Δ LIFO Reserve)
53
FIFO COGS v. LIFO COGS
FIFO COGS < LIFO COGS
54
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
55
Steps to convert LIFO to FIFO
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
Identifiable Intangible Asset
1. There is a legal reason to exist 2. Controlled by the firm 3. Expected to provide future economic benefits
57
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
58
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
59
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
60
Finite-Lived Long Lived Asset (Valuation)
Amortized over its useful life
61
Indefinite-Lived Long Lived Asset (Valuation)
Tested for Impairment
62
Purchase / Sale of Securities (CFO / CFF / CFI)
CFO under both U.S. Gaap and IFRS
63
Cash Collections (Formula)
Cash Collections = Sales - Increase Acc Receivables
64
Cash to Suppliers (Formula)
Cash to Suppliers = - COGS + Decrease in Inv + Increase in Accounts Payable
65
Cash Wages (Formula)
Cash Wages = - Wages - Decrease in Wages Payable
66
Cash Interest (Formula)
= - Interest Expense + Increase in Interest Payable
67
CFO Direct Method (Formula)
CFO = Cash Collections + Cash to Suppliers + Cash Wages + Cash Interest + Cash Taxes
68
Cash Taxes (Formula)
Cash Taxes = - Tax Expense + Increase in Taxes Payable + Increase in Deferred Tax Liability
69
Cash Effect from substituting debt for equity
No cash effects
70
Efficiency Ratios (Concept)
Higher Inventory Turnover, the better (unless if sales are already decreasing in comparison to the industry average)
71
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
72
Income Tax Expense (Formula)
Income Tax Expense = Tax Payable + ΔDTL - ΔDTA
73
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)
74
Tax Base of Assets / Liabilities
Carrying Value - Amount Deductible in the future
75
Tax Base of Assets (examples)
- Depreciable Equipment - Research and Development - Accounts Receivable
76
Tax Base of Liabilities (examples)
- Customer advance - Warranty Liability - Note Payable
77
Statutory v. Effective Tax Rate
Permanent Differences create a difference between both. ``` Effective = Derives from the I/S Statutory = Refers to the jurisdiction ```
78
Valuation Allowance Effect
Same as Increasing Loan Loss Reserves. ↑ Valuation Allowance ↓ Assets ↓ Net Income / Earnings
79
PP and E Revaluation Effects
Taken direct to Equity
80
Bonds Interest Expense
Int Expense = Balance Sheet Amount * interest rate @ issuance
81
Bond Issued @ Par Bond Issued @ Discount Bond Issued @ Premium
@ Par: Coupon = Discount @ Issuance @ Discount: Coupon < Discount @ Issuance @ Premium: Coupon > Discount @ Issuance
82
Ending Book Value for Bonds (Formula)
Ending Book Value = (Int Expense - Coupon)
83
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)
84
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)
85
Leasing types for Lessees
IFRS: all like purchase of long-term asset financed by debt Gaap: Finance / Operating
86
Leasing types for Lessors
IFRS: Finance / Operating Gaap: Sales-Type (transferred risks, collection is probable), Direct Financing, Operating
87
Net Pension Asset
Fair Value of Assets > Liabilities = Overfund (and vice-versa) - Only Defined Benefit Pensions Plan
88
Financial Reporting Quality (Concept)
Adherence to the standards. General compliance.
89
Quality of Earnings (Concept)
Based in the sustainability of the earnings
90
Circumstances for low-quality or fraudulent reporting
- Motivation - Opportunity - Rationalization (less than ethical actions)
91
FOB @ shipping in comparison to FOB @ destination
Early revenue recognition
92
Channel Stuffing
Delivering goods and overloading a distribution channel
93
Bill and Hold Transaction
Compra antecipada. 1) Buy 2) Asks supplier to hold the item while already recognizes the revenue = Artificial increase of earnings
94
Notes Payable Treatment (U.S. Gaap)
Notes Payable is a CFF
95
Reinvestment Ratio (Formula)
CFO / Cash Paid for Long-Term Assets
96
Fixed Charge Coverage Ratio (Fomula)
Fixed Charge = (EBIT + Lease Payments) / (Interest Payments + Lease Payments) Solvency Ratio
97
Defensive Ratio (Fomula)
Defensive Interval = Current Assets / Daily Operational Expenses
98
Inventory write-down affects which accounts in the I/S
Addition to COGS or as a separate line item
99
Intangible Asset Amortization (when)
1. It has finite a live | 2. It was purchased or acquired in a business combination
100
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.
101
Gains / Losses recognized under Fair Value Model on Investment Property (IFRS)
Recognized in the I/S
102
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)
103
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.
104
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
105
Intangible Assets (treatment
- Amortized if finite lives | - Not amortized if to be renewed at minimum cost
106
Gross asset value / Accumulated depreciation requirement
For both IFRS and U.S. Gaap
107
Bad Debt Allowances effect on DTA/DTL
No effect since for tax purposes you will only deduct this once it occurs
108
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
109
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

CFA L1 Matheus (5 decks)

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