Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

CFA-2 > Financial Reporting > Flashcards

Financial Reporting Flashcards

You may prefer our related Brainscape-certified flashcards:
CFA flashcards
1
Q

Convert FIFO to LIFO

A

FIFO - LIFO = Inventory(LIFO) + LIFO reserve

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

COGS (FIFO Method)

A

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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

NI (FIFO Method)

A

NI (FIFO) = NI (LIFO) + Increase in LIFO Reserve x (1-Tr)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

RE (FIFO)

A

RE (FIFO) = RE(LIFO) + LIFO reserve X (1-Tr)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

Inventory IFRS vs. GAAP

A

IFRS: Specific, Weighted Average, FIFO

GAAP: Specific, Weight Ave, FIFO, LIFO

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

LIFO Liquidation (effect on IS)

A

LIFO Liquid: Beg Inventory > Ending Inventory

Increase in gross profits

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

Implication for years after a capitalized vs non-capitalized expense

A
  1. Capitalized Expense
    - Higher NI the first year
    - Lower NI in following years unless more expenses are capitalized
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

Asset Turnover

A

Sales / Average Assets

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

Effects on Income Statement of Impairment Loss (prior and post years)

A
  1. Prior years NI was likely overstated because depreciation was too low
  2. Year of Impairment will have lower NI
  3. Years following Impairment will have lower NI because depreciation has been increased.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

Estimate of remaining useful life

A

Est Remaining Useful Life = Net Plant & Equip / Annual Dep Expense

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

Net Plant & Equipment

A

Net Plant & Equip = Gross P&E - Accum Dep.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

Finance or Capital Lease

A
  1. The risk of the asset is transfered to the Leasee (IFRS)
  2. This is like a rent-to-own situation.
  3. GAAP qualifies a finance lease as one…
    - Ownership is transfered at the end of the lease
    - Lease includes a bargain purchase option
    - Term is 75% or more of the asset’s life
    - PV of lease payments is 90% or more of assets value
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

Operating Lease

A

This is a rental agreement

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

Effect on Fin Statements from Capitalizing an Expense

A
  1. Cash Flow from Operations is Higher / CF Investing is Lower
  2. NI is higher in first year
  3. Assets are higher in initial years
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

Effects of Capitalized Interest on Fin Statements and Ratios

A
  1. Interest payments are in CF from investing
  2. Assets are increased by the interest and it is expensed with the assets depreciation
  3. NI is increased initially as interest is capitalized on the BS
  4. Interest coverage ratio should include capitalized interest payments
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

Interest Coverage Ratio (adjusted for Capitalized Interest)

A
  1. EBIT / Interest Charges
  2. EBIT + (portion of cap interest expensed that period) / Interest expense + Cap interest payments ie (100 + 15) / (20 + 22)
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

Effects on Financial Statements of Capital(finance) Lease

A
  1. IS only shows % of payment that is interest expense
  2. Depreciation and % will be higher on IS than operating intially
  3. BS shows asset and associated liability
  4. CF statement shows lease payments (minus interest) as investment outflows
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

Two types of Financing or Capital Leases

A
  1. Direct Financing: when the PV of the lease payments = fair value of asset
  2. Sales Lease: when PV of lease payments > fair value of asset
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

Estimated Average Useful Life of P&E

A

Est Ave Useful Life = Ave remaining life + average age

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

Estimated Average Age of P&E

A

Ave age = Accum Dep / Dep Exp

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

Effects on Financial Statements for Asset Revaluation

A
  1. Asset values go up on BS
  2. Shown as “other comprehensive income” on BS Equity
  3. ROE will fall because equity goes up
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
22
Q

Effect of Converting SPE to VIE

A
  • Assets and/or liabilties will increase, effecting a change in equity
  • Net income is not changed… this effectively reduces ratios like ROA and ROE because A and E are increased while NI is not.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
23
Q

Defined Benefit Pension Plan Interest Expense

A

Int exp = -Funded status at beginning of year * Discount rate

This is interest charged on the amount the company essentially ‘owes’ the pension fund.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
24
Q

Remeasurement of pension plan assets

A

remeasurement =

Actuarial gains and losses on plan assets
+ Net return on Plan assets
Remeasurement

  • Net return = actual returns - (beginning plan assets * Discount rate used to calculate interest expense)
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
25
Q

Component of Pension Costs Shown in OCI

A
  • IFRS: Remeasurements
26
Q

Relationship between periodic pension cost and plan’s funded status

A

Periodic pension cost = Ending funded status - Employer Contributions - Beginning funded status

- FUNDED STATUS IS THE DIFFERENCE BETWEEN THE PBO AND FAIR VALUE

- FOLLOW THE FORMULA EXACTLY AND YOU WON’T GO WRONG.

27
Q

Effect of a company’s excess pension plan contributions on cash flow statement

A

Excess contributions are an outflow from financing activities

28
Q

Pension Plan Retirement Benefits Paid During Year

A

Beginning Pension Obligation
+ Current and Past service costs
+ Interest expense (beg pension obligation X discount rate)
+ Increase due to actuarial loss
- Ending Pension Obligation
Pension Plan Retirement Benefits Paid During Year

29
Q

Pension Plan’s Funded Status

A

= PV of Benefit obligations at beginning of year - Plan assets at beginning of year

= PV of Benefit obligations at end of year - Plan assets at end of year

30
Q

Periodic Pension Expense on P&L

A

IFRS:
Service costs (past and current)
+ Net interest expense (net pension liability X discount rate)
Periodic Pension Expense on P&L

GAAP:
Current service costs
+ Interest expense on beginning pension obligation
+ Amortized past service costs
- Expected Return on plan assets

Period Pension Expense on P&L (GAAP)

31
Q

Three Components of Periodic Pension Cost

A
  1. Service Costs (changes in obligations because of employee service)
  2. Net interest expense (net pension liability/asset X PV discount rate)
  3. Remeasurement (difference between actual return on plan assets and net interest/income)
32
Q

Functional Currency for a Subsidiary Determines which Translation Method?

A
  1. Well integrated with parent when functional currency = parent’s currency: Temporal method
  2. Self contained and managed independently when functional currency is local currency: Current rate method
33
Q

Methods for Translating Forex Financial Statement

A
  • Temporal Method: Monetary and non-monetary assets that are carried at current value on the balance sheet are translated at current exchange rate
  • Current rate method: Translate IS first at current rate (average over reporting period) All assets and liabilities are translated at current exchange rate and common equity/dividends at historical rate.
  • Monetary/non-monetary method: Only monetary assets and liabilites are translated at currency exchange rate. (cash, AR, AP)
34
Q

Quick way to tell whether financial statements will show a translation gain or loss

A
  1. Current rate method: Equity exposure… If exchange rate increased in favor of foriegn then gain is recognized on BS.
  2. Temporal method: Cash/receivables vs. liabilities exposure: If liabilities exceed monetary assets then exchange rate increased in favor of foriegn will create a loss on IS.
35
Q

Current Rate Translation of Financial Statement Items

A

Assets - Current

Liabilities - Current

Common equity - Historical

Dividends - Historical rate at declaration

Retained earnings - Change in RE at average rate (from IS)

IS items - Average rate

36
Q

Temporal Method Translation of Financial Statement items

A

Monetary Assets - Current

Nonmonetary assets - Historic (unless measured at current market rate like inventory under lower of cost or market)

Liabilities - Current (except deferred rev - historical)

Common equity - Historical

Retained earnings - Beginning balance + translated NI - Divdends (historical)

Revenue - Average

Most expenses - Average

Expenses related to historical BS items - Historical

37
Q

Dealing with Currency Pairs in Translation

A
  1. Base/Quote = 1/X = ratio
  2. Converting from quote to base (multiply by ratio)
  3. Converting from base to quote (divide by ratio)
38
Q

Equity Method for Acquisition Accounting

A
  1. Investment is recorded at cost
  2. Share of investment’s income/loss increase/decrease value on BS
  3. Dividends are a return of capital and decrease value on BS
  4. Percentage earnings or loss recorded on IS as well.
39
Q

Calculate Goodwill for Minority Investment

A

Investment
- % of target’s BV
Excess Investment
+/- Adjustment for PPE (if fair value is greater than BV then this is reduced)
Good will

40
Q

Calculate new BS value of investment (Equity Method)

A

Initial value
+ % of income
- % of additional depreciation if fair value of investment’s assets were greater than bv
- % of dividends
Ending value

41
Q

Treatment of Intercompany Transactions to account for Doubtful Income (Equity Method)

A

Doubtful income X % share of income = reduction in income from investment

    • Doubtful income could be items sold to the parent by the investee with a percentage that is still in inventory. $100 of inventory sold to parent for $30 in profit. Parent owns 20% of investee. Half of the inventory still on the books at the parent. *
  • $30 x 20% x 50% = $3 reduction in income from investee*
42
Q

Equity versus Acquisition

  1. Both methods are identical under GAAP and IFRS
  2. Both methods report same NI on parrent’s BS
  3. Both methods report same equity on parent’s BS
A
  1. Both methods are identical under GAAP and IFRS: True
  2. Both methods report same NI on parrent’s BS: True
  3. Both methods report same equity on parent’s BS: False
    * - Equity under acquisition method includes minority interest so it will be greater than equity reported under equity method.*
43
Q

Balance Sheet Accrual Ratio

A

YoY + in Net operating assets / Average net operating assets

*- *

44
Q

Steps to convert operating lease into capitalized lease

A
  1. Add operating lease payments back into EBIT
  2. Calculate NPV of lease payments (=cost of equipment)
  3. Divide (NPV - salvage value) by depreciation period/method to get depreciation expense
  4. NPV X Discount rate = Interest expense
  5. New EBIT = Old EBIT + Op Lease payment - Depreciation
45
Q

Cash Flow Acrual Ratio

A

Net Income

  • Cash from operations

- Cash from financing

= Accruals

Accruals/ Average net operating assets = cash flow accrual ratio

46
Q

Combine financial statements when purchasing majority interest in subsidiary

A
  1. T’s assets added at fair value
  2. T’s good will added (full or partial)
  3. T’s debt added at fair value
47
Q

Affect on Gross Profit Margin by current method translation

A
  1. If currency depreciating - profit margin will be higher because inventory (COGS) will be lower (average rate) than inventory cost (current rate on BS)
  2. If currency appreciating - Profit market will be lower.
48
Q

Currency translation method must be temporal if country is experiencing what level of inflation?

A

more than a cumulative 100% over a 3 year period.

49
Q

Effect of change in discount rate (increase) for pension

A
  1. Service costs decrease
  2. Pension plan looks more funded
  3. Higher retained earnings
50
Q

Solve for pension plan contributions

A

Ending fair value assets

  • Beginning fair value assets
  • Actual return on plan assets

+ Benefits Paid

= Contributions

51
Q

Effect of a change (increase) in expected return of plan assets (pension)

A
  1. Net income increases
  2. Lower pension expense
52
Q

Total Pension Cost (GAAP) from PBO

A

Ending PBO

  • Beginning PBO

+ Benefits Paid

= Total Periodic pension cost

53
Q

Net operating Assets (for accrual ratio)

A

Assets - cash - investments = Operating Assets

Liabilities - LT debt - current portion of LT debt = Operating Liabilities

OA - OL = NOA

54
Q

Calculate Annual Expense for a Stock Grant

A

Fair value of stock on grant date / vesting years. = Expense

55
Q

Adjust IS and BS for LIFO to FIFO (from tax perspective)

A
  1. Add LIFO reserve to inventory on BS
  2. Deduct change in LIFO reserve from current year IS (pre-tax)
  3. Deduct the taxes that would have been paid from entire LIFO reserve from cash on balance sheet. You may have to break it up by years if the tax rate has changed.
56
Q

Interest coverage ratio (when including capitalized interest)

A

EBT + Interest expense + interest capitalized through depreciation = Ajusted EBIT

Ajusted EBIT / Interest expense + Capitalized Interest from CFfromInvesting

- Interest paid on construction is still paid but included in CF from Investing so it doesn’t show up on the income statement UNTIL it is expensed through depreciation. You have to reconcile that by adding the depreciated interest back to EBIT and including the entire interest paid in CF f Investing in the denominator.

57
Q

Determine which division is becoming less significant over time?

A

Divide % of Capital Spending / % of capital assets

  • A ratio less than one means the company isn’t investing in that division.
58
Q

Joint control accounting method (equity or consolidation?)

A

Equity method for both partners.

59
Q

Effect on Financial Statements (Equity or Consolidation Method)
1. Net income

  1. Revenues
  2. Net profit margin
  3. Equity
  4. ROE
  5. Total Assets
  6. ROA
A
  1. Net income: Same under both (consolidation includes minority interest)
  2. Revenues: Higher under consolidation
  3. Net profit margin: Lower under consolidation
  4. Equity: Higher under consolidation
  5. ROE: Higher under equity
  6. Total Assets: Lower under equity
  7. ROA: Higher under equity
60
Q

Calculate PBO in Year n for Employee

A

Step One: Calculate PV of Pension Benefit at Retirement
Ending Salary X Factors = PMT, etc., CPT PV

Step Two: Divide PV of PBO at retirement by years of service under plan

Step three: Discount PVofPBO/Retirement year to first year, second year… n-year

Step Four: Bring step 4’s numbers up to N-year by multiplying by 1+dR%^x

Step Five: Sum all years up to year N

61
Q

Periodic Pension Cost (US GAAP)

A

GAAP:
Current service costs
+ Interest expense on beginning pension obligation
+ Amortization of past service costs
- Expected Return on plan assets

Period Pension COST (GAAP)

CFA-2 (6 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions