Deck 2 - Financial Statement Analysis & Corporate Issuers Flashcards
What is the statement of comprehensive income?
It is the results of a firm’s business activities
What is the framework for financial analysis
- State the objective of the analysis
- Gather data
- Process the data
- Analyze and interpret the data
- Report the conclusions or recommendations
- Update the analysis
What are the fundamental characteristics of financial statements and what are the primary assumptions
The fundamental characteristics are relevance and faithful representation, and the enhancing characteristics include comparability, verifiability, timeliness, and understandability. The primary assumptions are the accrual basis and the going concern assumption.
What is the difference between multistep and single step income statement
Multistep income provides a subtotal for gross profit while a single step does not
How do firms recognize revenue
- Identify the contract
- Identify performance obligations
- Determine the transaction price
- Allocate the transaction price to the performance obligations
- Recognize revenue when or as the entity satisfies a performance
How do intangible assets change their value?
If they have limited lives they should be amortized using a method that reflects the flow over time of their economic benefits. If the have indefinite lives like good will they are not amortized.
Where do you report value of discontinued operations?
Below income from continuing operations, net of tax
Changes in what require retrospective restatement of all prior year statements?
Changes in accounting standards, changes in accounting methods applied, and corrections of account errors require retrospective restatement
What is applied prospectively to statements?
A change in an accounting estimate is provided respectively.
What is basic EPS
Net Income - Preferred dividends/Weighted average number of common shares outstanding
What is diluted EPS
((net income - preferred dividends) + convertible preferred dividends + convertible debt (1-t))/(Weighted average shares + shares from conversion of conv. pfd. shares + shares from conversion of conv. debt + shares issuable from stock options
What are the gross and net profit margin used to determine profitability?
Gross profit margin - gross profit/revenue
Net Profit Margin - net income/revenue
What is in comprehensive income?
- Gains and losses from foreign currency translation
- Pension obligation adjustments
- Unrealized gains and losses from cash flow hedging derivatives
- Unrealized gains and losses on available-for-sale securities
What is a classified balance sheet and liquidity-based presentations?
Classified balance sheet separately reports current and noncurrent assets and liabilities
Liquidity is from most to least liquidity
How are accounts receivable reported?
It is reported at net realizable value by estimating bad debt expense
How are inventories reported?
Inventories are reported at the lower of cost or net realizable value (IFRS) or the lower of cost or market (U.S. GAAP).
How is PP&E reported
Using the cost model or the revaluation model under IFRS Under U.S. GAAP only cost. Recoveries allowed under IFRS but not US GAAP
How are different debts treated?
Those held to maturity - amortized cost
Sell before maturity - fair value through other comprehensive income
Sell them in the near term - fair value through profit and loss
What does owner’s equity include?
Contributed capital, preferred stock, treasury stock, retained earnings, noncontrolling interest, accumulated other comprehensive income
What is the difference between liquidity and solvency?
Liquidity is ability to meet short term obligations and solvency is ability to meet long term obligations
What is CFO?
Cash flow from operations - inflows and outflows of cash resulting from transactions that affect net income
What is CFI?
Cash flow from investing activities - flows of cash resulting from the acquisition or disposal of long-term assets
What is CFF?
Cash flow from financing activities are flows resulting from transactions affecting a firm’s capital structure, such as issuing or repaying debt and issuing or repurchasing stock
What is disclosed in the footnotes or a supplemental schedule
noncash investing and financing activities, such as taking on debt to the seller of a purchased asset
How are dividends paid and received, interest paid and received, taxes paid reported under U.S. GAAP?
Dividends paid - Financing cash flows
Dividends received - operating cash flow
Interest paid - operating cash flow
Interest received - operating cash flow
Taxes paid - operating cash flow
How are dividends paid and received, interest paid and received, taxes paid reported under IFRS?
Dividends paid - Financing or operating cash flows
Dividends received - operating or investing cash flow
Interest paid - Financing or operating cash flows
Interest received - operating or investing cash flow
Taxes paid - operating cash flow unless they arise from an investing or financing transaction
What are the main differences between operating, investing, and financing activities?
Opr - current assets and current liabilities
Investing - Noncurrent assets
Financing - noncurrent liabilities and equity
How to calculate CFO directly vs. indirectly?
Directly add Cash collections from customers, paid for inputs, operating expenses, interest paid, taxes paid
Indirectly - Net income and adjusts for gains or losses related to investing or financing cash flows, noncash charges to income, and changes in balances sheet
How to convert direct to indirect cash flow statement?
Eliminating noncash and non-operating items
What is Free Cash Flow to the Firm
FCFF = net income + noncash charges + [cash interest paid x (1-tax rate)] - fixed capital investment - working capital investment or CFO + [cash interest paid x (1-tax rate)] - fixed capital investment
What is Free cash flow to equity?
Cash available for distribution FCFE = CFO - Fixed capital investment + net borrowing
What are activity and valuation ratios?
Activity - how well the firm uses its assets
Valuation - Relative values of stocks
What is basic Dupont?
ROE = (Net Income/Sales) (Sales/Assets) (Assets/Equity) or net profit margin * asset turnover * leverage ratio
What is Extended Dupont?
ROE = (Net Income/EBT) (EBT/EBIT) (EBIT/Revenue)(Revenue/Total Assets) (Total Assets/ Total Equity)
What is a segment of the business?
Risk and return characteristics are distinguishable and account for more than 10% of the firm’s sales or assets.