Financial Reporting Flashcards
What is the Assets, Liabilites and Owner equity equation?
Assets = Liabilities + Owner Equity (A = L+E)
What is a qualified opinion, unqualified opinion, adverse opinion and disclaimer of opinion?
Qualified - If auditor HAS concern
Unqualified - If auditor is satisfied with a company financial position
Adverse opinion - When accounting standards are not fairly presented.
Disclaimer of opinion - When the auditor is prevented from carrying out their function.
How should US audit reports be presented?
Fairly and Truly
Under IFRS accounting framework how should qualitative information be disclosed?
It should be ‘relevant’ to allow informed economic decisions.
What is the accrual basis regarding transactions?
Shows the effects of transactions and other events when they occur and not when cash comes in.
Difference between realisable value, historical cost and current cost?
realisable - cash obtained if sold in an ‘orderly disposle’
Historical cost - value of asset WHEN purchased.
Current cost - Replacement cost TODAY.
When are statements prepared on a ‘going concern’ basis?
Always UNLESS management intends to liquidate or cease trading. ‘Companies are not a going concern basis’
How should a coherant framework for financial reporting be displayed?
It should be ‘comprehensive’ and ‘transparent.’
What are the 6 steps for analysing data?
PCPACF Prince Charming Paid All Children Fairly
- Purpose - Financial report or objective?
- Collect data - Ask management for data, financial statements and complete questionnaires
- Process data - ‘Adjusted financial statements’
- Analyse data - Analytical results and ratios (gearing)
- Conclude - Answer questions set in phase 1
- Follow Up - Updated reports
What is financial statement analysis?
Enables analysts to evaluate ‘historic and current’ financial performance in order to make judgements on -> future performance
What are the 5 principle statements under US GAAP?
Stock holder equity Statement of comprehensive income Balance sheet Cash flow statement Income statement
What will the footnotes highlight?
At the bottom of a financial statement it will highlight accounting estimates and assumptions.
What are the Management discussions and analysis?
It highlights significant events effecting LIQUIDITY.
What are the three cash flow statements?
Investing - Financing - Operations
- Cash flow to investing activities
- Cash flow to financing activites
- Cash flow to operations
What makes up shareholder equity?
Retained earnings and Owner capital
What is more important disclosure detail or how items are classified?
Disclosure detail is more important than how items are classified.
What are the two Standard Setting bodies for financial reports?
IASB - International Accounting Standards Board - Under IFRS should be transparent and comparable.
FASB - US Financial Accounting Standards Board - US GAAP - Work closely with the SEC.
The Norwalk Agreement ‘attempts’ to harmonise standards.
What is IOSCO?
International Organisation of Securities Commission - 38 Members include SEC, FCA and other institutions with responsibility of securities regulation. -Principles based regulation based on being transparent, protecting investors and reducing systematic risk.
What is form: 10-K Annual report 8-K Proxy statement S-3
10-K (US) 40-F (Canada) - Financial summary required by the SEC.
Annual report - Goes out to shareholders
8-K = Issued if a MAJOR event such as a merger or acquisitions is likely
Proxy statement - sent prior to a share holder meeting
S-3 - reports beneficial ownership of securities
What are qualitative characteristics of the IFRS?
‘Relevance’ and ‘Faithful representation’
What are the two elements of financial statements?
Measuring financial position - assets, liabilities and equity
Measuring performance - Income and expenses
What does it mean for financial statements to be free misstatements and omissions which could influence the decision of an investor?
Materiality.
Which reporting framework allows LIFO for reporting?
US GAAP
What is the SEC?
The aim of the Securities and Exchange Commission is to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation. Much like the FCA.
How are US GAAP and IFRS being merged?
There are still some differences in accounting standards but the effort and goal is ‘ongoing’ to converge the two.
On the cash flow statement how is:
Purchase of inventory treated?
Purchase of PPE? (property, plant and equipment)
Taxes paid?
Inventory = CFO PPE = CFI Taxes = ALWAYS CFO unless payable because of investing or financing.
How are the below taxed under US GAAP? Interest Received Interest paid Dividend received Dividend paid
Interest Received - CFO
Interest paid - CFO
Dividend received - CFO
Dividend paid - CFF
How are the below taxed under IAS GAAP (IFRS)? Interest Received Interest paid Dividend received Dividend paid
Interest Received - CFO or CFI
Interest paid - CFO or CFF
Dividend received - CFO or CFI
Dividend paid - CFO or CFF
What is the Cash Flow from Financing calculation?
CFF = Proceeds from bond issuance + proceeds from sale of common stock - dividend PAID
(Ignore dividend received from the list of flows)
How are the below treated for calculation of the CFO when working back from net income? (The non-direct method)
Non-cash Depreciation
Non-cash revenues
Decrease in Accounts receivables/inventory
Increase in accounts payable/tax/interest
Gain on disposal of an asset
Star with Net Income and then:
ADD - Non-cash expenses / Depreciation
SUBTRACT - Non-cash revenues
ADD - Decrease in Accounts receivables/inventory (assets)
ADD - Increase in Accounts payable/tax/interest (Liabilities)
SUBTRACT - Gain on disposal of an asset
ADD - Loss on Disposal of an asset
?How is cash flow from Investing Activity calculated?
- (Cost of long lived asset acquired) - negative value
+ Disposal proceeds of long lived asset - (book value + profit made)
What is common size analysis?
Making balance sheets a percentage of ‘total assets’ or ‘net revenues’ to make comparative company analysis easier
How is cash flow from financing CFF calculated?
How is dividend paid calculted?
CFF = Proceeds from bond issuance + proceeds from sale of common stock - dividend paid
Dividend paid = Net Income - retained earnings
How is CFI calculated?
Start with the ‘Long term assets’ on the cash flow statement. This is the PPandE
Beginning Long term assets (PPE) - Minus depreciation +Purchase of long term assets = CFI PPE
Remember you only need three of the four inputs.
What is a liquidity ratio?
What is an activity ratio?
- Shows ability to cover short term obligations
- Shows ability to complete day-to-day tasks managing assets such as inventory.
How is Inventory turnover calculated and what is it?
Cost of goods sold / Avg inventory
DOH - Days Of inventory on Hand is calculated as 365/IT.
How is receivables turnover calculated and what is it?
Net sales / Avg receivables
DOS - Days Of Sales outstanding is calculated as 365/IT.
What is the three stage DuPont Calculation?
What is ROA?
Return on total equity = EAT/Revenue (net profit margin) x Revenue/Assets (asset turnover) x Assets/Equity (leverage)
ROA = EAT/Revenue (net profit margin) x Revenue/Assets (asset turnover)
What is the pay-out-ratio?
What is Net Income?
Common stock dividend/ (NI - Pref Dividend)
NI = Revenue - All Costs (operating and non operating costs)
When is a deferred tax asset occurring vs when is a deferred tax liability occurring?
(When taxable income and pretax income are involved.)
A deferred tax asset occurs if taxable income is more than pretax income and this will reverse in future.
A deferred tax liability occurs when taxable income is less than pretax income and this will reverse in future
What is the payout ratio?
Common stock dividend/ Net Income Preference Dividend
How are Assets and Liabilities taxed?
On a ‘Tax Base’ basis and accounted for on a carrying basis.
What is the deferred tax liability/asset?
Which is more likely to produce errors? US GAAP or IFRS?
Differences in tax accounting - temporary difference between income tax payable and accounting tax expense.
US GAAP reconciliations are generally more erroneous for private companies.
What is the Effective tax rate calculation
Tax expense (on income statement)/ Pre-tax income
With regard to taxable income and accounting profit/pretax income when do you get a deferred tax asset or liability?
When taxable income is MORE than accounting profit/pretax income you get deferred tax ASSET. The deferred tax asset can be carried forward to offset future profits.
What is the deferred tax liability known as on the income statement?
Any reference to the deferred tax liability on the income statement is known as an income tax expense.
What is a valuation allowance?
It allows for the possibility that all or part of the deferred tax asset may not be realised. (Perhaps warranties aren’t as high as expected when the deferred tax asset was created.) A falling valuation allowance suggest the companies profitability is improving from the assets.
What is the Cost of Goods Sold equation?
COGS = Beginning Inventory + Purchases in period - Ending Inventory
Cost of inventories can be ‘capitalised’
Which accounting body allows for LIFO and FIFO?
Why?
Which creates higher net income and higher total assets?
Only US GAAP Allows both.
FIFO is usually used as LIFO can overstate costs in a rising cost environment.
FIFO creates higher net income as you base costs on older lower prices and higher total assets. as the leftover goods were the ones which cost more.
- Inventory Turnover = COGS/Avg Inventory
Inventory Turnover = COGS/Avg Inventory
Days of Inventory = Avg inventory/ COGS or 365/IT
A high inventory turnover ratio and a low number of days of inventory could indicate that a company has effective inventory management or that it does not carry an adequate amount of inventory.
What does FIFO do for cost of sales and net income regarding
FIFO results in lower cost of sales and higher net income.
What is a ‘tax base’ and a ‘carrying amount’? When an asset carryying amount is greater than it’s tax base is it a DTL or DTA?
Asset carrying amount > tax base = DTL
Liability carrying amount > tax base = DTA
Tax base is the total assets to be taxed and carrying amount is the amount shown on the books for an asset or a liability. If assets on the book are showing more than the expected tax base then there is a liability of tax to be paid.
How would a construction contract be measured under IFRS if unable to reliably measure the outcome?
Companies should not recognise profit. Revenue can be reported to the extent of costs incurred.
How would a construction contract be measured under US GAAP if unable to reliably measure the outcome?
Revenue can only be reported when the contract is completed- This is known as the ‘completed contract method. ‘
When the completion of a project CAN be reliably measured what method of revenue recognition can be used?
Percentage of completion method.
On the income statement what is another name for the gross profit?
The multi-step format income statement.
What happens if you capitalise an expense interest costs vs what happens if you expense interest costs?
Capitalise - CFI will be lower
Expense - CFO will be lower
If a company uses a loan to invest and makes interest on that loan durign the construction period, what are the differences under IFRS and US GAAP?
Under IFRS you can deduct the investment proceeds from the construction cost.
Under US GAAP - You divide full interest and loan amount over the life of the asset in question.
What is the effect of capitalising an asset on the balance sheet?
Asset = Liabilites + Shareholder Equity
Assets increase and so does shareholder equity.
What is EPS?
What is diluted EPS?
EPS = Net Income - Preference dividends / No. common shares
Diluted EPS = Adjustable income for common shareholders / No. common shares + potential shares
Such as if convertible bonds and convertible preference shares. Note that diluted EPS cannot be higher than basic EPS and so the Basic would be reported in that instance.
What is comprehensive income?
Most likely defined as net assets.
It shows changes in equity from non-owner sources such as FX effects on demand or unrealised gains/losses on derivatives used for hedging. Defined benefit schemes may change the comprehensive income.
What is retained earnings?
How will unrealised losses on trading securities held affect the Retained earnings?
How are assets classified as available for sale reflected?
Net income minus Dividends paid
Losses will effect retained earnings even if they have not yet been realised..
Assets classified as ‘available for sale’ are reflected at their fair value
Under the double declining balance method of depreciation how are the early years affected compared to later years vs straight line depreciation?
What is is?
It is an accelerated method of depreciation whereby early years depreciate quicker than later years. This gives lower assets, earnings and shareholder equity in the early years. It is the depreciable cost of an asset over its useful life. For Accelerated (DDB) early years: Asset ratios = lower Earnings ratios = lower Shareholder equity ratios = lower cash flow = same Profit margin = lower current ratio = same asset turnover rev/assets = higher debt/equity = higher ROA Income/Assets = lower ROE income/equity = lower
Where are proceeds from sales of long term assets shown in cash flow statements?
Are abandoned assets cash proceeds recorded?
Cash Flow from Investing
When abandoning an asset proceeds are NOT recorded.
