Cheat Sheet - Financial Statement Analysis

Question 1

Unqualified (4 types of audit reports)

Answer 1

Unqualified
This is issued when the financial statements presented are free of material misstatements and are in accordance with GAAP. This is the best report a company can receive from an external auditor, as it means a company’s financial health is fairly presented in the financial statements.

Question 2

Qualified (4 types of audit reports)

Answer 2

Qualified
This is issued when one or two situations encountered did not comply with GAAP. However, the rest of the financial statements are fairly presented.

Question 3

Adverse (4 types of audit reports)

Answer 3

Adverse
An adverse audit opinion is the opposite of an unqualified opinion. This means that the financial statements of the company audited are materially misstated and generally do not comply with GAAP.

Question 4

Disclaimer (4 types of audit reports)

Answer 4

Disclaimer
A disclaimer opinion is issued when the auditor could not form, and consequently refuses to present, an opinion on the financial statements.

Question 5

Accrued Expenses (accrual accounting)

Answer 5

Accrued Expenses Cash not yet paid after expenses incurred (Liability)

Question 6

Accrued Revenue (accrual accounting)

Answer 6

Accrued Revenue Cash not yet received after goods/services provided (Asset)

Question 7

Prepaid Expenses (accrual accounting)

Answer 7

Prepaid Expenses Cash paid before expense incurred (Asset)

Question 8

Unearned Revenue (accrual accounting)

Answer 8

Unearned Revenue Cash received before goods/services provided (Liability)

Question 9

Accounting for gains or losses on marketable securities

Balance Sheet

Answer 9

Held-to-Maturity
Cost or Amortized Cost
Available-for-Sale
Fair Value
Trading Securities
Fair Value

Question 10

Accounting for gains or losses on marketable securities

Dividend, Interest &
Realized Gains & Losses

Answer 10

Held-to-Maturity
Income Statement
Available-for-Sale
Income Statement
Trading Securities
Income Statement

Question 11

Accounting for gains or losses on marketable securities

Unrealized Gains & Losses

Answer 11

Held-to-Maturity
Not Reported
Available-for-Sale
Other Comprehensive Income (OCI)
Trading Securities
Income Statement

Question 12

IFRS vs US GAAP for cash flow components

Dividend paid

Answer 12

IFRS
Operating & Financing
US GAAP
Financing

Question 13

IFRS vs US GAAP for cash flow components

Interest paid

Answer 13

IFRS
Operating & Financing
US GAAP
Operating

Question 14

IFRS vs US GAAP for cash flow components

Dividends received

Answer 14

IFRS
Operating & Investing
US GAAP
Operating

Question 15

IFRS vs US GAAP for cash flow components

Interest received

Answer 15

IFRS
Operating & Investing
US GAAP
Operating

Question 16

IFRS vs US GAAP for cash flow components

All taxes

Answer 16

IFRS
Generally categorized as operating. A portion can be categorized as financing or investing if attributable to these areas.
US GAAP
Operating

Question 17

IFRS vs US GAAP for cash flow components

Format of statement

Answer 17

IFRS
Both direct and indirect formats are allowed, but direct is preferred.
US GAAP
Both direct and indirect formats are allowed, but direct is preferred. A reconciliation of net income to cash flow from operating activities must be provided for any method.

Question 18

LIFO vs FIFO with rising prices and stable inventory levels

COGS

Answer 18

LIFO
Higher
FIFO
Lower

Question 19

LIFO vs FIFO with rising prices and stable inventory levels

Income Taxes

Answer 19

LIFO
Lower
FIFO
Higher

Question 20

LIFO vs FIFO with rising prices and stable inventory levels

Earnings before Taxes (EBT)

Answer 20

LIFO
Lower
FIFO
Higher

Question 21

LIFO vs FIFO with rising prices and stable inventory levels

Earnings after Taxes (net income)

Answer 21

LIFO
Lower
FIFO
Higher

Question 22

LIFO vs FIFO with rising prices and stable inventory levels

Ending inventory

Answer 22

LIFO
Lower
FIFO
Higher

Question 23

LIFO vs FIFO with rising prices and stable inventory levels

Working Capital

Answer 23

LIFO
Lower
FIFO
Higher

Question 24

LIFO vs FIFO with rising prices and stable inventory levels

Cash flow (after tax)

Answer 24

LIFO
Higher
FIFO
Lower

Question 25

Converting LIFO to FIFO

FIFO Inventory

Answer 25

FIFO Inventory = LIFO Inventory + LIFO Reserve

Question 26

Converting LIFO to FIFO

FIFO COGS

Answer 26

FIFO COGS = LIFO COGS – change in LIFO Reserve

Question 27

Converting LIFO to FIFO

FIFO Net Income

Answer 27

FIFO Net Income = LIFO Net Income + change in LIFO Reserve * (1-t)

Question 28

Converting LIFO to FIFO

FIFO Retained Earnings

Answer 28

FIFO Retained Earnings = LIFO Retained Earnings + LIFO Reserve * (1-t)

Question 29

Revaluation of long lived assets

Answer 29

IFRS allows the use of cost model or revaluation model, but US GAAP only allows cost model.

If a revaluation initially decreases asset value, this is recognized as a loss in income statement.

In future, if a revaluation subsequently increases asset value, the increase – to the extent that it reverses the amount previously decreased – is recognized as a gain in income statement.

Any excess gains beyond the reversal amount is recognized directly in equity as a revaluation surplus.

If a revaluation initially increases asset value, the increase goes directly in equity as a revaluation surplus.

A subsequent decrease in the valuation amount first reduces the revaluation surplus, and any excess beyond the reversal amount is recognized as a loss in income statement.

Question 30

IFRS vs GAAP: Impairment of Property, Plant & Equipment and Intangible A

IFRS

Answer 30

• Assets tested for impairment annually
• An asset is impaired when carrying value > recoverable amount
• If impaired, the asset is written down to recoverable amount and a loss is recognized
• Subsequent recoveries are allowed, but cannot exceed historical cost

Question 31

IFRS vs GAAP: Impairment of Property, Plant & Equipment and Intangible A

US GAAP

Answer 31

• Assets tested for impairment only when firm may not recover carrying value through future use
• An asset is impaired when carrying value > undiscounted future cash flows
• If impaired, the asset is written down to fair value and a loss is recognized
• Loss recoveries are not permitted

Question 32

Finance lease classification under US GAAP

A lease must be classified by a lessee as a finance lease if any one of the 5 criteria below is met:

Answer 32

• Ownership transfer: Ownership of the asset is transferred to the lessee at the end of the lease term.
• Purchase option: Lessee has the option to purchase the asset and is likely to do so.
• Lease term: The lease term covers most of the leased asset’s useful life.
• Minimum lease payment: The present value of lease payments at inception is close to the asset’s fair value.
• Specialized asset: the asset is highly specialized and only the lessee can use it without modification, and has no alternative use to the lessor.

If none of the criteria above is met, then the lessee should classify the lease as an operating lease under US GAAP.

IFRS requires all leases to be treated the same manner as finance lease under US GAAP.

Question 33

Unterschiede zwischen Lessee accounting nach IFRS und US GAAP

Balance sheet

Answer 33

IFRS: Es gibt nur ein Modell für Leasingverhältnisse (unabhängig von der Art des Leasings: Finanz- oder Operating Lease). Bei einem Finanzleasing werden die Barwerte zukünftiger Leasingzahlungen als Vermögenswert und die entsprechende Verbindlichkeit erfasst. Der Vermögenswert wird linear abgeschrieben, die Verbindlichkeit wird über die Laufzeit des Leasings amortisiert. Ein Operating Lease wird nicht als Leasingverhältnis klassifiziert.

US GAAP: Es gibt unterschiedliche Modelle für Finanz- und Operating Leasing. Bei einem Finanzleasing wird das gleiche Verfahren wie nach IFRS angewendet. Beim Operating Lease wird ebenfalls der Barwert der zukünftigen Zahlungen als Vermögenswert und Verbindlichkeit erfasst, wobei der Vermögenswert und die Verbindlichkeit über die Laufzeit gleich bleiben (da beide gleichermaßen amortisiert werden).

Question 34

Unterschiede zwischen Lessee accounting nach IFRS und US GAAP

Income statement

Answer 34

IFRS: Der Zinssatzaufwand für ein Finanzleasing wird als Produkt des Anfangsbestands der Verbindlichkeit und des Diskontsatzes berechnet. Beim Operating Lease sind die Leasingzahlungen als Betriebsausgaben erfasst.

US GAAP: Ähnlich wie bei IFRS für Finanzleasing. Beim Operating Lease werden Zinsaufwand und Amortisation jedoch als eine einzige Leasingzahlung zusammengefasst, die als Betriebsausgabe behandelt wird.

Question 35

Unterschiede zwischen Lessee accounting nach IFRS und US GAAP

Cashflow statement

Answer 35

**IFRS: **Der Zinsaufwand aus Finanzleasingzahlungen kann entweder als Betriebs- oder Finanzierungscashflow klassifiziert werden. Die Tilgung der Finanzleasingverbindlichkeit wird als Finanzierungscashflow behandelt.

US GAAP: Für Finanzleasing gilt, dass der Zinsanteil der Leasingzahlung als Betriebsausgabe erfasst wird. Beim Operating Lease wird die gesamte Leasingzahlung als Betriebsausgabe erfasst, wobei Zins- und Tilgungszahlungen nicht getrennt aufgeführt werden.

Question 36

Unterschiede zwischen Lessor accounting nach IFRS und US GAAP

Balance sheet

Answer 36

Operating Lease (beide IFRS & US GAAP): Der Leasinggeber bleibt Eigentümer des Vermögenswerts. Das Vermögensgut wird in der Bilanz des Leasinggebers erfasst, und der Leasingvertrag führt zu einer Leasingforderung (Barwert der zukünftigen Leasingzahlungen) und dem Restwert des Vermögens.

Finance Lease (beide IFRS & US GAAP): Der Leasinggeber entfernt das Leasinggut aus seiner Bilanz, da das Eigentum im Wesentlichen auf den Leasingnehmer übergeht. Stattdessen wird eine Leasingforderung (Barwert der zukünftigen Zahlungen) und der Restwert des Vermögens als Forderung verbucht.

Question 37

Unterschiede zwischen Lessor accounting nach IFRS und US GAAP

Income statement

Answer 37

Operating Lease (beide IFRS & US GAAP): Der Leasinggeber erfasst die Leasingeinnahmen sowie die Abschreibungen auf das Leasinggut als Aufwand.

Finance Lease (beide IFRS & US GAAP): Der Leasinggeber erfasst die Zinseinnahmen aus der Leasingforderung als Ertrag.

Question 38

Unterschiede zwischen Lessor accounting nach IFRS und US GAAP

Cashflow statement

Answer 38

Operating Lease (beide IFRS & US GAAP): Erhaltene Leasingzahlungen werden als operativer Cashflow klassifiziert.

Finance Lease (beide IFRS & US GAAP): Erhaltene Leasingzahlungen werden als operativer Cashflow klassifiziert.

Question 39

Deferred Tax Assets (DTA) & Deferred Tax Liabilities (DTL)

Deferred Tax Assets (DTA)

Answer 39

Created when income tax payable exceeds income tax expense due to temporary difference.

This means that taxable income is higher than accounting profit.

• Assets tax base > carrying amount
• Liability’s carrying amount > tax base

Question 40

Deferred Tax Assets (DTA) & Deferred Tax Liabilities (DTL)

Deferred Tax Liability (DTL)

Answer 40

Created when income tax payable is less than income tax expense due to temporary difference.

This means that taxable income is lower than accounting profit.

• Assets carrying amount > tax base
• Liability’s tax base > carrying amount

Question 41

Deferred Tax Assets (DTA) & Deferred Tax Liabilities (DTL)

Income tax expense

Answer 41

Income tax expense = Income tax payable + Change in DTL – Change in DTA

Question 42

Depreciation methods

Straight line

Answer 42

(Original cost – Salvage value) / Depreciable life

Question 43

Depreciation methods

Double declining balance (DDB)

Answer 43

2 / (Depreciable life) x Book value at beginning of year t

Question 44

Depreciation methods

Units of production

Answer 44

(Cost – Salvage value) / (Total output) x Output units at time t