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CFA 3_FRA Flashcards

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1
Q

Unearned revenue

A

Liability. Entity has received cash before it provides goods/services.

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2
Q

Accrued revenue

A

Asset. Entity provides goods/services before it receives payment (accounts receivable).

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3
Q

Prepaid expenses

A

Asset. Entity pays cash prior to incurring expense.

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4
Q

Accrued expenses

A

Liability. Entity has incurred expenses but has not paid cash (accounts payable).

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5
Q

Form DEF-14A

A

Definitive proxy statement. The form used to file a proxy statement with the SEC.

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6
Q

Form 144

A

Permits sale of unregistered shares to qualified institutional buyers (QIBs) (Rule 144)

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7
Q

Form S-1

A

Registration statement filed prior to sale of new securities

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8
Q

Fundamental qualitative characteristics (IFRS)

A

Relevance, Faithful representation

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9
Q

Characteristics that enhance fundamental qualitative characteristics (IFRS)

A

Comparability, Verifiability, Timeliness, Understandability (enhance Relevance and Faithful representation)

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10
Q

Long-term Contracts (can reliably estimate outcome)

A

GAAP and IFRS: Use Percentage-of-completion method.

1) (% of completion) = total cost incurred to date / total expected cost of the project
2) Multiply (% of completion in period) by (total expected contract revenue) to get (gross revenue to recognise)
3) Subtract revenue recognised in prior period from (gross revenue to recognise) to get (revenue to recognise in period).
4) Subtract expenses incurred in period from (revenue to recognise in period) to get net income for period.

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11
Q

Long-term Contracts (cannot reliably estimate outcome)

A

eg total project costs have significant uncertainty

IFRS: Recognise revenue to extent of contract costs, expense costs as incurred, and only recognise profit on completion.

GAAP: Use completed-contract method. Recognise revenue, expense, and profit only when contract is complete.

IFRS and GAAP: If a loss is expected on contract, recognise immediately.

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12
Q

Installment sales

A

Collectibility certain: Recognise revenue at time of sale (normal treatment).

Collectibility cannot be reasonably estimated: Use installment method. Profit = (cash collected in period) * (total profit / total sale)

Collectibility highly uncertain: Use cost recovery method. Recognise profit only when cash collected exceeds costs incurred.IFRS: discounted PV of installment payments recognised at sale. Difference between PV and contract amount is amortised as interest. If collectibility is uncertain then use similar to cost recovery method.

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13
Q

Barter transactions

A

GAAP: Revenue can only be recognised at FV if the firm has historically received cash for such goods/services and can use that to determine FV. Otherwise revenue is carrying value of asset surrendered.

IFRS: Revenue based on FV of revenue from similar nonbarter transactions with unrelated parties.

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14
Q

Double declining balance method

A

Ignores residual value. See DDB method = (2 / useful life) * (cost - accumulated depreciation)

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15
Q

Bad debt expense; warranty expense recognition

A

The matching principle requires that entities estimate and recognise bad debt expense as EXPENSE in period of sale for applicable goods/services sold; and warranty expense as LIABILITY in period of sale.

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16
Q

Discontinued operations (presentation)

A

Presented separately, net of tax, after income from continuing operations. Same treatment for extraordinary items (GAAP).

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17
Q

Basic EPS

A

basic EPS = (net income - preferred dividends) / (weighted avg number common shares outstanding)

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18
Q

Effect of stock dividend or stock split on weighted shares outstanding (EPS)

A

Apply to (increase) all shares outstanding prior to split/dividend (not to shares issued or repurchased after).

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19
Q

Diluted EPS

A

diluted EPS = (net income - preferred dividends) + (convertible preferred dividends) + (convertible debt interest net of tax) / (weighted avg shares) + (shares from conversion of conv. pfd. shares) + (shares from conversion of conv. debt) + (shares issuable from stock options [using treasury stock method])

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20
Q

Determining dilution effect of stock options/warrants (treasury stock method)

A

Only dilutive if exercise prices are less than average market price of stock. Then increase in denominator is # shares created by exercising options less # shares “repurchased” with proceeds of exercise.

Shortcut: (Avg Mkt Price - Exercise Price / Avg Mkt Price) * # shares can convert into

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21
Q

Determining dilution effect of convertible debt/preferred shares

A

Dilutive EPS should be larger than basic. Convertible debt interest (net of tax) or preferred dividend / # of shares that’ll be created

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22
Q

Gross/net profit margin

A

Gross/net profit / Revenue

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23
Q

Accounts receivable (measurement)

A

Measured at net realizable value, with gross amount reduced by allowance for doubtful accounts (increased by bad debt expense)..

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24
Q

Dividends and interest in CF statement

A

IFRS: Interest/dividends received either operating or investing. Interest/dividends paid either operating or financing.

GAAP: Dividends paid in financing. Rest in operating.

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25
Q

Relationship between changes in liability/asset account and use of cash

A

Change in asset: inverse relationship. Increase in asset is use of cash.Change in liability: Direct relationship. Increase in liability is source of cash.

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26
Q

Cash received from asset sold

A

book value of asset + gain (- loss) on sale

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27
Q

Cash collections from customers

A

1) Begin with sales; 2) Subtract (add) any increase (decrease) in AR balance from indirect method; 3) Add (subtract) an increase (decrease) in unearned revenue. Cash has been received in unearned revenue but it hasn’t been included in sales,s o must be added in

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28
Q

Cash payments to suppliers

A

1) Begin with COGS; 2) Add back depreciation included in COGS; 3) Reduce (increase) COGS by any increase (decrease) in AP; 4) Add (subtract) any increase (decrease) in inventory, because it was capitalised but not expensed; 5) Subtract inventory write-offs

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29
Q

Free cash flow to firm (FCFF)

A

FCFF = NI + Noncash charges + (Interest expense * (1 - tax rate)) - Net Capital Expenditures - Working Capital Investment

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30
Q

Free cash flow to firm (FCFF) (from CFO)

A

FCFF = CFO + (Interest expense * (1 - tax rate)) - Net capital expenditures

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31
Q

Free cash flow to equity (FCFE)

A

FCFE = CFO - Net capital expenditures + net borrowing

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32
Q

Debt coverage ratio

A

CFO / total debt

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33
Q

Interest coverage ratio

A

CFO + interest paid + taxes paid / interest paid

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34
Q

Reinvestment ratio

A

CFO / cash paid for LT assets

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35
Q

Debt payment ratio

A

CFO / cash LT debt repayment

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36
Q

Receivables turnover

A

sales / avg receivables

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37
Q

Days of sales outstanding

A

365 / receivables turnover; (receivables turnover = sales / avg receivables)

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38
Q

Inventory turnover

A

COGS / avg inventory

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39
Q

Days of inventory on hand

A

365 / inventory turnover; (inventory turnover = COGS / avg inventory)

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40
Q

Payables turnover

A

purchases / avg trade payables

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41
Q

Number of days of payables

A

365 / payables turnover (payables turnover = purchases / avg trade payables)

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42
Q

Asset turnover

A

revenue / avg assets

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43
Q

Fixed asset turnover

A

revenue / avg net fixed assets

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44
Q

Working capital turnover

A

revenue / avg working capital

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45
Q

Current ratio

A

current assets / current liabilities

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46
Q

Quick ratio

A

cash + marketable securities + receivables / current liabilities

47
Q

Cash ratio

A

cash + marketable securities / current liabilities

48
Q

Defensive interval

A

cash + marketable securities + receivables / avg daily expenditures

49
Q

Cash conversion cycle

A

days sales outstanding + days inventory on hand - number of days payables

50
Q

Cash conversion cycle (expanded)

A

(365 / receivables turnover) + (365 / inventory turnover) - (365 / payables turnover)

51
Q

Debt-to-equity

A

debt / equity

52
Q

Debt-to-capital

A

debt / debt + equity

53
Q

Financial leverage

A

avg assets / avg equity

54
Q

Interest coverage

A

earnings before interest and taxes (EBIT) / interest payments

55
Q

Fixed charge coverage

A

EBIT + lease payments / interest payments + lease payments

56
Q

Net profit margin

A

net income / revenue

57
Q

Gross profit margin

A

gross profit (net sales - COGS) / revenue

58
Q

Operating profit margin

A

operating profit (EBIT) / revenue

59
Q

Pretax margin

A

EBT / revenue

60
Q

Return on assets

A

net income (+ interest expense*[1-tax rate]) / avg assets

ie

ROA = net income / assets

ROA = (net income / sales) * (sales / assets)

ROE = ROA * (assets / equity)

61
Q

Operating return on assets

A

operating income (EBIT) / avg total assets

62
Q

Return on capital

A

EBIT / avg capital

63
Q

Return on equity

A

net income / avg equity

64
Q

Return on common equity (simplified)

A

net income - preferred dividends / avg common equity

65
Q

Return on equity (simplified)

A

net income / equity

66
Q

Return on equity (extended)

A

(net income / sales [net profit margin]) * (revenue / assets [asset turnover]) * (assets / equity [leverage ratio aka equity multiplier])

67
Q

Return on equity (DuPont disaggregated)

A

(net income / EBT) * (EBT / EBIT) * (EBIT / revenue) * (revenue / assets) * (assets / equity); NB first three terms are disaggregated net profit margin

68
Q

Return on equity (DuPont aggregated)

A

(tax burden) * (interest burden) * (EBIT margin) * (asset turnover) * (financial leverage, aka equity multiplier)

69
Q

Sustainable growth rate (how fast firm can grow w/o additional external equity issue)

A

g = retention rate * ROE

g = (1 - dividend payout ratio) * ROE

70
Q

Retention rate

A

net income available to common - dividends declared / net income available to common (= 1 - dividend payout ratio)

71
Q

Dividend payout ratio

A

dividends declared / net income available to common

72
Q

COGS

A

beginning inventory + purchases - ending inventory

73
Q

Product costs (costs capitalised in inventory)

A

Conversion costs (labor and overhead); Other costs necessary to bring inventory to present location and condition

74
Q

Period costs (costs not capitalised from inventory)

A

Abnormal waste; storage costs (unless required to produce); administrative overhead; selling costs; interest costs; forex differences

75
Q

Capitalised interest

A

Interest that accrues on construction costs is capitalised. Under IFRS, income earned by temporarily investing borrowed funds reduces amt available for capiatlisation, not so for GAAP. Cash outflow from investing activities.

76
Q

Research and development

A

GAAP: expensed as incurred

IFRS: research costs are expensed; development costs are capitalised

77
Q

Software development costs

A

Capitalised after technical feasibility is established.

GAAP exception: all costs are capitalised if software is developed for own use

78
Q

Revaluation model (PP&E)

A

Revaluation to FV below historical cost results in a loss, a subsequent upward revaluation is a gain to extent in reverses previous loss. Any increase above historical cost is reported in equity as revaluation surplus.

79
Q

Impairment (IFRS)

A

IFRS: Tested annually. Impairment occurs when carrying value exceeds recoverable amount (greater of FV less selling costs and its value in use [PV of future CFs]). Loss can be reversed, limited to original loss amt.

80
Q

Impairment (GAAP)

A

Tested on loss event. 1) Recoverability test: is CV > future undiscounted CFs?; 2) if yes, write down to FV. Loss recoveries not permitted.

81
Q

Income tax expense

A

taxes payable + change in DTL - change in DTA

82
Q

Deferred tax assets

A

Result from excess of taxes payable (tax return) over income tax expense (IS). ie, a greater amount of deductions on the IS than the tax return. Eventually this will be reversed back to the tax return.

83
Q

Deferred tax liabilities

A

Result from an excess of income tax expense (IS) over taxes payable (tax return). ie, a greater amount of deductions on the tax return than the IS. Eventually this will be reversed back.

84
Q

Tax base of assets

A

Amount that will be deducted (expensed) on tax return in future.

85
Q

Tax base of liabilities

A

Carrying value of liability minus amounts that will be deductible on tax return in future

86
Q

Bond issuance costs

A

IFRS: Reduce initial bond liability thereby increasing EIR. In effect are treated as unamortised discount.

GAAP: Capitalised as an asset. Under both issuance costs are netted against proceeds.

87
Q

Days’ sales in accounts payable

A

(AP / COGS) * number of days [ie 365]Used to determine if a firm is stretching accounts payable to temporarily increase CFO.

88
Q

Treatment of gain/loss on disposal of assets when computing CFO

A

Subtract gains from net income, because sales of assets are CFI. Likewise, add back losses.

89
Q

Treatment of increase in deferred taxes when computing CFO

A

Add increase in deferred taxes to net income.

90
Q

Treatment of increase in income tax payable when computing CFO

A

Add increase in income taxes payable to net income.

91
Q

Treatment of unusual or infrequent items and extraordinary items (US GAAP)

A

Unusual or infrequent: included in income from continuing operations and reported before tax

Extraordinary: reported separately net of tax, after income from continuing operations

92
Q

How does an increase in minimum pension liability affect comprehensive income?

A

It is treated as an expense that goes through OCI.

93
Q

Interest expense in any given year on bond

A

Calculated by multiplying the market interest rate (at time of issuance) by the bond carrying value.The amount of interest that is “too high” or “too low” is applied to the carrying value of the bond.

94
Q

Total interest expense on bond

A

Equal to the amount paid by the issuer less the amount received from the bondholder.

95
Q

Tax rate that can be used to determine DTAs and DTLs (US GAAP vs IFRS)

A

US GAAP: Enacted tax rates

IFRS: Enacted or substantially enacted tax rates

96
Q

Presentation of deferred taxes on BS (US GAAP vs IFRS)

A

US GAAP: classified current or noncurrent based on underlying liability

IFRS: netted and classified as noncurrent

97
Q

Deferred tax asset recognition (US GAAP vs IFRS)

A

GAAP: Recognised in full. Reduced by valuation allowance if “more likely than not” some or all of asset will not be realised.I

FRS: Recognised if “probable” that sufficient taxable profit will be available.

98
Q

Deferred taxes for undistributed profit from an investment in an associate firm (US GAAP vs IFRS)

A

GAAP: Deferred taxes recognised from temporary differences.

IFRS: Deferred taxes recognised unless investor is able to control sharing of profit, and is probable temporary difference will not reverse in future.

99
Q

Deferred taxes for undistributed profit from an investment in a JV (US GAAP vs IFRS)

A

GAAP: No deferred taxes for foreign corporate JVs that meet indefinite reversal criterion

IFRS: Deferred taxes are recognised unless venturer is able to control sharing of profit and is probable temporary difference will not reverse in the future.

100
Q

Deferred taxes for undistributed profit from an investment in a subsidiary (US GAAP vs IFRS)

A

GAAP: No deferred taxes for foreign subsidiaries that meet indefinite reversal criterion, and none for domestic subsidiaries if the amounts are tax free.

IFRS: Deferred taxes recognised unless parent is able to control the distribution of profit and it’s probable the temporary difference will not reverse in the future.

101
Q

Deferred taxes for revaluation of fixed assets and intangible assets (US GAAP vs IFRS)

A

GAAP: N/A, revaluation not allowed

IFRS: Deferred taxes recognised in equity

102
Q

Weighted average cost of inventory

A

Total $ cost of inventory purchased / Total number of units purchased = Avg cost per unit of inventory

(Beginning inventory + purchases) / Number of units in beginning and purchased inventory

103
Q

Effect of warranty expense being overestimated or not deductible on tax return

A

DTA will result, because it will be deducted on FS but not deducted on tax return. Therefore taxes payable will be greater than income tax expense. Delayed recognition of this expense in tax return results in DTA.

104
Q

CF effects of financing lease payments

A

Lessee: interest portion is CFO outflow. Principal portion is CFF outflow.

Lessor: interest portion is CFO inflow. Principal portion is CFI inflow.*For an operating lease, all reported as CFO.

105
Q

Effective tax rate

A

income tax expense / pretax income

106
Q

Inventory, cost of sales, and gross profit can be different under periodic and perpetual inventory systems if a firm uses which inventory cost method

A

LIFO or weighted average cost, but not FIFO.

When using the FIFO inventory method the ending inventory, the cost of goods sold and the gross margin, are the same under either the perpetual or periodic methods. The use of a perpetual or periodic system makes a difference under weighted average, and LIFO.

107
Q

Adjusting for inventory cost flow differences in financial analysis

A

Add LIFO reserve to both assets and equity of the FIFO entity.

FIFO ending inventory = LIFO ending inventory + LIFO reservefurthermoreFIFO after-tax profit = LIFO after-tax profit + (change in LIFO reserve)(1 − t)

108
Q

Price-to-book (P/B)

A

P/B = market price per share / book value per share

Book Value per Share = Common Equity / Common Shares Outstanding*Commonly shown as Stock price / Tangible assets - Liabilities; but that is not for our purpose

109
Q

Adjusting for lease differences in financial analysis

A

Add the PV of an operating liability to adjust. This is added to assets and liabilities, not equity.

110
Q

Fraud triangle

A

incentive/pressure, opportunity, and attitude/rationalization

111
Q

Adjustments for repurchasing stock to offset dilution

A

Net cash outflow for share repurchases to avoid dilution should be reclassified from CFF to CFO.

112
Q

How does an increase in non-cash working capital affect the calculation of actual cash flow?

A

It is subtracted from net income

113
Q

Framework elements related to performance

A

IASB: income and expenses

FASB: revenues, expenses, gains, losses, and comprehensive income

114
Q

Investment property

A

For investment properties, when using the fair value model of revaluing assets, all increases and decreases affect net income.

CFA (9 decks)

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