FINANCIAL ANALYSIS IV

Question 1

GAAP financing cash flows

Answer 1

Dividends paid

Question 2

GAAP operating cash flows

Answer 2

Taxes, interest paid, interest received and dividends received

Question 3

IFRS operating/financing cash flows

Answer 3

Dividends paid and interest paid

Question 4

IFRS operating/investing cash flows

Answer 4

Dividends received and interest received

Question 5

IFRS operating cash flows

Answer 5

Taxes

Question 6

Sustainable growth rate

Answer 6

(1-dividend payout ratio) * ROE

Question 7

B.S. Inventory costs

Answer 7

purchase cost, conversion costs and other costs necessary to bring inventory to present location and condition

Question 8

B.S. Period costs (inventory)

Answer 8

Abnormal waste, most storage costs, administrative and selling costs are expensed as incurred

Question 9

IFRS inventory values

Answer 9

1. Lower of cost or net realizable value

2. Write-ups allowed = to previous write-down

Question 10

GAAP inventory value

Answer 10

1. Lower of cost or market value

2. No subsequent write-up is allowed

Question 11

Interest during construction (expense/capitalize)

Answer 11

Generally capitalized, and depreciated over useful life

Question 12

Cost of internally developed intangible asset

Answer 12

Expensed

Question 13

IFRS research/development costs

Answer 13

1. Research = expensed

2. Development = capitalized

Question 14

GAAP research/development costs

Answer 14

Both are expensed

Question 15

Revaluation IFRS

Answer 15

1. Permissible
2. If gain originally, bypass net income and go to equity.
3. If loss, hit net income. Revaluation gain will hit net income, any surplus goes to equity.

Question 16

Revaluation GAAP

Answer 16

Not permissible

Question 17

IFRS impairment

Answer 17

1. When carrying value > recoverable amount
2. Recoverable amount: greater of fair value - selling costs, or discounted cash flows
3. Loss recoveries permitted, but not above historical cost

Question 18

GAAP impairment

Answer 18

1. Carrying value > undercounted future cash flows
2. Written down to fair value
3. Loss recoveries not allowed

Question 19

Asset impairments

Answer 19

Result in losses on the income statement

Question 20

Long-lived asset abandoned

Answer 20

Removed from balance sheet, loss recognized in that amount

Question 21

Long-lived asset exchanged

Answer 21

Gain/loss based on carrying value vs. fair value (new or old asset, whichever you can tell)

Question 22

Premium bond

Answer 22

Coupon rate > market yield. Amortized down to maturity where = face value.

Question 23

Bonds redeemed before maturity

Answer 23

Difference between carrying and book value results in gain/loss.

1. GAAP: Unamortized cost included in gain/loss.
2. IFRS: Already included in book value.

Question 24

Operating vs. finance lease

Answer 24

1. Finance lease keeps the asset and debt on the books

2. Operating lease does not

Question 25

IFRS: finance lease

Answer 25

If substantially all rights and risks are transferred to the lease, finance

Question 26

GAAP: finance lease

Answer 26

Any of the following criteria met:

1. Title is transferred at end of period
2. Bargain purchase option exists
3. Lease period is 75% or more of useful life
4. Present value of payments is 90% or more of fair value

Question 27

Finance lease: cash flow treatment (lessee)

Answer 27

Expense = depreciation and interest
Operating outflow = interest payment
Financing outflow = principal payment

Question 28

Operating lease: cash flow treatment (lessee)

Answer 28

Rental payment reported as expense, and operating cash outflow

Question 29

Finance lease: lessor

Answer 29

Lease payments are CFO (interest) and CFF (principal)

Sales-type: profit at inception and interest over the life

Direct financing: interest income only

Question 30

GAAP: Defined benefit (over and underfunded)

Answer 30

Reported on balance sheet
Overfunded = asset
Underfunded = liability

Question 31

IFRS: Defined benefit

Answer 31

Firms remove unrecognized actuarial gains and losses from fund status. Does not represent reality

Question 32

Capitalize - cash flow treatment

Answer 32

Cash outflow for capitalized item is reported in cash flow from investing (CFI)

Question 33

Expense - cash flow treatment

Answer 33

Cash outflow from expense is reported in operating cash flows (CFO)

Question 34

IFRS component depreciation

Answer 34

IFRS requires companies to have separate depreciation schedules for building/machinery.

Question 35

GAAP component depreciation

Answer 35

Recommends, but does not require separate depreciation schedules.

Question 36

Statutory vs. effective tax rate

Answer 36

Caused by permanent difference, like reinvesting earnings of a foreign subsidiary

Question 37

LIFO reserve

Answer 37

Companies using GAAP LIFO must report

FIFO inventory - LIFO inventory

COGS (FIFO) = COGS(LIFO) - change in LIFO reserve

Question 38

Characteristics of effective financial reporting system

Answer 38

1) transparency
2) consistency
3) comprehensiveness

Question 39

Barriers to creating an effective financial reporting system

Answer 39

1) valuation
2) standard-setting approach
3) measurement

Question 40

IFRS technological developments

Answer 40

Expensed until feasibility is determined, then capitalized

Question 41

Inventory - use of different methods

Answer 41

Permitted, but must use the same method for similar assets.

Question 42

Change in salvage value or useful life

Answer 42

Changes in depreciation in subsequent periods, but does not retroactively change accumulated depreciation.

Question 43

Enterprise value

Answer 43

Market value of common stock + market value of debt - cash and short term securities