FINANCIAL ANALYSIS III

Question 1

Auditors opinions (3)

Answer 1

1. Unqualified (clean),
2. qualified (notes exceptions) and
3. adverse

Question 2

Proxy statements

Answer 2

News about anything requiring a shareholder vote. Changes in management, etc.

Question 3

8-K

Answer 3

Acquisitions, disposal of major assets or changes in corporate governance

Question 4

10K / 10Q

Answer 4

Annual (k) and quarterly (q) statements

Question 5

Owner’s equity formula

Answer 5

Owner’s equity = contributed capital + retained earnings

Question 6

Ending retained earnings formula

Answer 6

Beginning RE + revenue - expenses - dividends

Question 7

Contra account

Answer 7

Used for entries that offset some part of the value of another account (e.g. accumulated depreciation or allowance for bad debts)

Question 8

Required statements (5)

Answer 8

1. Balance sheet
2. Cash flow statement
3. Comprehensive income
4. Change in owner’s equity
5. Explanatory notes

Question 9

US GAAP reconciliation

Answer 9

Companies not using GAAP but trading in the US must reconcile their statements back to GAAP

Question 10

IASB Framework emphasis (2)

Answer 10

1. More emphasis to accrual and,

2. Going concern assumption

Question 11

Long-term contracts: % of completion

Answer 11

1. Recognizes revenue as a % of cost incurred

2. Used when cost & rev can be reliability estimated

Question 12

Long-term contracts: completed contract

Answer 12

1. Recognizes revenue only when contract is complete

2. Used when outcome cannot be reliably estimated

Question 13

Installment sales: normal recognition

Answer 13

If collect ability is reasonably assured

Question 14

Installment sales: installment method

Answer 14

1. Profit recognized as % of payments received

2. Used if customer collections are unreliable

Question 15

Installment sales: cost recovery method

Answer 15

1. Recover all costs before recognizing profit

2. Used if outcome is highly uncertain

Question 16

Depreciation: double-declining

Answer 16

No salvage value

Use 2x the straight-line % for each period

Question 17

LIFO

Answer 17

Allowed in GAAP, not allowed in IFRS

Question 18

Intangible assets w/ indefinite lives

Answer 18

Not amortized, tested for impairment at least annually

Question 19

Discontinued operations

Answer 19

1. after tax

2. Not included in net income from continuing operations

Question 20

Unusual OR infrequent items

Answer 20

1. before tax

2. Included in net income from continuing operations

Question 21

Unusual AND infrequent items (extraordinary items)

Answer 21

1. after tax

2. Not included in income from continuing operations (GAAP), included for IFRS

Question 22

Changes in accounting methods and errors

Answer 22

Must fix retroactively for all periods reported

Question 23

Note on EPS and dividends

Answer 23

Stock dividends and SPLITS should be applied prior to weighting the shares if they are retroactive

Question 24

Other comprehensive income

Answer 24

Transactions that affect equity, but not net income:

1. Gains/losses from fx translation
2. Pension adjustments
3. Unrealized G/L from hedging/derivative transactions
4. Unrealized G/L from available for sale securities.

Question 25

Warrants share adjustment (treasury method)

Answer 25

[ (avg share price - warrant price) / avg share price] * warranty quantity

Question 26

Balance sheet formats

Answer 26

Account = two columns
Report = one column
Classified = groups into subtotals

Question 27

Balance sheet cost or fair value?

Answer 27

Mixture of the two

Question 28

B.S. Accounts receivable

Answer 28

Net realizable value

Question 29

B.S. Inventory

Answer 29

Lower of cost or net realizable value

Question 30

B.S. Tangible noncurrent assets

Answer 30

Historical cost - accumulated depreciation

Question 31

B.S. Intangible w/ definite lives

Answer 31

Historical cost - accumulated depreciation

Question 32

B.S. Intangible w/ indefinite lives

Answer 32

Historical cost, tested for impairment annually

Question 33

B.S. Held-to-maturity

Answer 33

Ammortized cost

Question 34

B.S. Trading securities

Answer 34

Fair value, unrealized gains/losses hit net income

Question 35

B.S. Available-for-sale securities

Answer 35

Fair value, unrealized gains/losses are reported in stockholder’s equity (NOT net income)

Question 36

I.S. Trading securities

Answer 36

Dividends, interest, realized g/l, unrealized g/l

Question 37

I.S. Available for sale securities

Answer 37

Dividends, interest, realized g/l

Question 38

I.S. Held-to-maturity securities

Answer 38

Interest , realized g/l

Question 39

Internal goodwill

Answer 39

Expensed as occurred