CFA 1

Question 1

What is the most likely model for evaluating costs of PPE?

Answer 1

Cost model, however IFRS ermits revaluation model for some assets

Question 2

What is cost model for PPE?

Answer 2

Historical cost - accumulated depreciation/depletion - any impairment losses

Question 3

Historical costs include what?

Answer 3

purchas price + delivery plus any other costs to make the asset viable

Question 4

What is the revaluation model for PPE?

Answer 4

Asset is at fair value at the date of revaluation less any subsequent accumulated deprecitaion

Question 5

What are intangible assets?

Answer 5

identifiable non-monetary assets without physical substance eg patents, licenses and trademarks

Question 6

What are identifiable intangibles?

Answer 6

IFRS - assets recognized on balance sheet if it is probable that economic benefits will flow to the company and the cost of the asset can be measured reliably eg patents, tradmarks, franchises. Company must seperately identify research phase and development phase and only costs of the developmetn stage are reported on balance sheet
Under GAAP the costs of internally created identifiable assets are all expensed

Question 7

What is Goodwill?

Answer 7

after aquiring another company the purchase price is allocated to all identifiable assets and liabilities based on fair value and any leftover price is described as Goodwill

Question 8

What 3 reasons would a company pay more than fair value for assets?

Answer 8

1. certain items such as reputation, established distribution system, trained employees are not on finaincial statements
2. R&D expenses may not have resulted in seperately identifiable assett that meets criteria for recognition but has value
3. Value of acquisition may arise from sstrategic positioning or perceived synergies

Question 9

Whats the difference between accounting goodwill and economic goodwill?

Answer 9

Economic goodwill is based on the economic performance of the entity where as accounting goodwill is based on accounting standards and is reported in the case of acquisitions

Question 10

What is a bargain purchase?

Answer 10

essentially negative goodwill

Question 11

How is goodwill viewed by analysts?

Answer 11

Sometimes/often discluded from balance sheet due uncertainty of goodwills exact value

Question 12

What is a derivative?

Answer 12

a financial instrument for which the value is based on some underlying factor (interest rate, FX rate, commodit price or credit rating) and for which no initial investment is required

Question 13

What is “held to maturity”?

Answer 13

Method of evaluationg derivative based on if the company plans to hold it to maturity or not. Because asset prices can change based on external factors if it is held to maturity is is simply evaluated at its ammortized cost

Question 14

How are changes net changes in fair value (Holding period gains or losses) recognized?

Answer 14

1. Profit or loss on the income statement

2. other comprehensive income (which bypasses the income statement)

Question 15

What does “Mark to market” mean?

Answer 15

process of adjusting to reflect fair value prices

Question 16

How do you account for market gains or losses in retained earnings for Trading Portfolio assets that increase in value?

Answer 16

Retained earnings goes up. However for Available for sale assets comprehensive income would increase and for held to maturity assets there would be no changes

Question 17

wat r the 6 components of equity?

Answer 17

1. Capital contributed by owners
2. Preferred shares
3. Treasury shares - Non cancelled repurchased shares
4. Retained Earnings - cumulative earnings held that have not been paid to owners
5. Accumulated or other comprehensive income - includes net income and comprehensive income
6. Non-controlling interest

Question 18

What information is required as per IFRS in the statement in changes of equity?

Answer 18

1. Total comprehensive income for the period
2. The effects of any accounting changes that have been retrospectively applied to the previous periods
3. Capital transactions with owners and distribution to owners
4. reconcilaition of the carrying amounts of each component of equity at the beginning and end of the year

Question 19

What is the current ratio?

Answer 19

current assets/current liabilities

Question 20

What is the quick ratio?

Answer 20

(Cash + marketable securities + recievables)/ Current Liabilities

Question 21

What is the Cash ratio?

Answer 21

(Cash + marketable securities)/ current liabilities

Question 22

What are the 3 liquidity ratios?

Answer 22

Quick, current and cash ratios

Question 23

What are the 4 Solvency ratios?

Answer 23

Long-term debt to equity, debt to equity, total debt and financial leverage ratios

Question 24

What is the denominator in solvency ratios? (except total debt ratio)

Answer 24

Total equity

Question 25

What is total debt ratio?

Answer 25

Total debt/ total assets

Question 26

What is financial leverage ratio?

Answer 26

Total assets/Total Equity

Question 27

What is a classified balance sheet?

Answer 27

Seperately classifies current and non-current assets and liabilities

Question 28

The carrying value of inventories reflects what?

Answer 28

The lower of historical costs and net realizeable value

Question 29

What two main bits of info can an analyst understand from a cash flow statement?

Answer 29

1. Doesthe company generate enough cash to pay for investments or does it rely on debts?
2. Does the company pay dividends to common stockholders using cash generated from operations, selling assets or debt?

Question 30

Whats the difference between IFRS and GAAP for cash flow statemetns?

Answer 30

IFRS more lenient - interest, dividdends can be operating or financing
GAAP - interest and dividends recieved are operating while dividends paid are financing activities

Question 31

What is the direct method of reporting cash flows?

Answer 31

Specific cash inflows and outflows that result from operating activities. Each inflow/outflow related to receipts/disbursements and provides information on sources of cash

Question 32

What is the indirect method of reporting cash flows?

Answer 32

Begins with net income and makes adjustments for non cash items, non operating items and net changes in operating items. Shows the reasons for differences between net income an operating cash flows

Question 33

On the Cash flow statement how do you calculate cash recieved from customers?

Answer 33

Revenue less increase in accounts recievable

Question 34

On the Cash flow statement how do you calculate cash paid to suppliers?

Answer 34

COGS + increase in inventory (= purchases from suppliers) - Increase in accounts payable

Question 35

On the Cash flow statement how do you calculate Ending inventory?

Answer 35

Beginning inventory + purchases - COGS

Question 36

On the Cash flow statement how do you calculate ending accounts payable?

Answer 36

Beginning accounts payable - cash paid to suppliers + purchases

Question 37

On the Cash flow statement how do you calculate cash paid to employees?

Answer 37

Salary and wage expense less increas in salary and wages payable

Question 38

On the Cash flow statement how do you calculate cash paid for operating expenses?

Answer 38

Other operating expenses less decrease in prepaid expenses less increase in other accrued liabiliites

Question 39

On the Cash flow statement how do you calculate cash paid for interest?

Answer 39

Interest expense Plus decrease in interest payabel

Question 40

On the Cash flow statement how do you calculate cash paid for for income taxes?

Answer 40

Income tax expense minus increase in income tax payable

Question 41

On the Cash flow statement how do you calculate the historical cost of sold equipment?

Answer 41

Beginning balance equipment plus equipment purchased minus ending balance equipment

Question 42

On the Cash flow statement how do you calculate accumulated depreciation o0n equipment sold?

Answer 42

beginning balance on accumulated depreciation + depreciation expense minus ending balance accumulated depreciation

Question 43

On the Cash flow statement how do you calculate cash recieved from sale of equipment?

Answer 43

Historical cost of equipment sold - accumulated depreciation on sold equipment + gain on sale of equipment

Question 44

How does you calculate retained earnings?

Answer 44

beginning retained reanings - net income - dividends

Question 45

how does u calculate dividends paid?

Answer 45

retained earnings + net income - ending balance of retained earnings

Question 46

How do you reconcile cash flow with net income using the indirect method?

Answer 46

Net income is adjust for any non-operating activites, non cash expensed and changes in operating working capitalitems

Question 47

On the Cash flow statement how does an analyst convert the indirect method to the direct method?

Answer 47

1) seperate into total revenues and total expenses
2) remove any non-operating and non cash items
3) convert accrual amounts of revenues and expenses to cash flow amounts and receipts and payments by adjusting for changes in working capital accounts

Question 48

What are the 4 steps of evaluating the cash flow statement?

Answer 48

1. evaluate where the major sources and uses of cash flow are between opertaing, investing and financing activities
2. evaluate primary determinants of cash flow
3. Evaluate primary determinants of investing cash flow
4. Determine primary determinantes of financing cash flow

Question 49

What is free cash flow?

Answer 49

cash flows in excess of capital expenditures.

Question 50

How do you calculate free cash flow?

Answer 50

Net income + Non-cash charges(such as depreciation and amortization) +Interest expense *91-tax rate) - Capital expenditures - Working capital expenditures