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CFA Level 1 > Financial Reporting > Flashcards

Financial Reporting Flashcards

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1
Q

Financial Reporting

A

The way companies show their financial performance to investors, creditors, and other interested parties by preparing financial statements

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2
Q

Financial Statement Analysis

A

Use the information in a company’s financial statements, along with other relevant information, to make economic decisions

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3
Q

Balance Sheet

A

Reports the firm’s financial position at a point in time

  • Assets: resources controlled by the firm
  • Liabilities: amounts owed to lenders and other creditors
  • Shareholders’ Equity: residual interest in net assets of an entity that remains after deducting liabilities
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4
Q

Statement of Comprehensive Income

A

Reports all changes in equity except for shareholder transactions (issuing, repurchasing, paying dividends)

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5
Q

Income Statement

A

Reports the financial performance of the firm over a period of time

  • Revenues: inflows from delivering goods and services
  • Expenses: outflows from delivering or producing goods or services
  • Other Income: gains that may or may not arise in the ordinary course of business
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6
Q

Statement of Changes in Equity

A

Reports the amounts and sources of changes in equity investors’ investments in the firm over a period of time

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7
Q

Statement of Cash Flows

A

Reports the company’s cash receipts and payments

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8
Q

Operating Cash Flows

A

Cash effects of transactions that involve the normal business of the firm

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9
Q

Investing Cash Flows

A

Resulting from the acquisition or sale of property, plant and equipment, of a subsidiary or segment, of securities and of investments in other firms

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10
Q

Financing Cash Flows

A

Resulting from the issuance or retirement of the firm’s debt and equity securities (include dividends paid)

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11
Q

Footnotes

A

Disclosures that provide further details about the information summarized in the financial statements. Improve assessment of amount, timing and uncertainty of estimates

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12
Q

Management’s Commentary (MD&A)

A

Management discusses nature of the business, management’s objectives, company’s past performance, performance measures used, company’s key relationships, resources and risks

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13
Q

Audit

A

Independent review of an entity’s financial statements (fairness and reliability)

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14
Q

Standard Auditor’s Opinion

A
  1. Auditor has performed an independent review
  2. Reasonable assurance financial statements contain no material errors
  3. Statements prepared in accordance with accepted accounting principles and estimates are reasonable
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15
Q

Unqualified Opinion

A

Auditor believes the statements are free from material omissions and errors (clean opinion)

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16
Q

Qualified Opinion

A

Statements make exceptions to the accounting principles. Auditor report explains exceptions

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17
Q

Adverse Opinion

A

Statements are not presented fairly or are materially nonconforming with accounting standards

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18
Q

Disclaimer of Opinon

A

Auditor is unable to express an opinion (scope of limitation)

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19
Q

Going Concern Assumption

A

Assumption that the firm will continue to operate for the foreseeable future, despite probable material loss (cannot be reasonably estimated)

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20
Q

Internal Controls

A

Processes by which the company ensures that it presents accurate financial statements (responsibility of management)

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21
Q

Proxy Statements

A

Issued to shareholders when there are matters that require a shareholder vote (election of board members, compensation, management qualifications, issuance of stock options)

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22
Q

Earnings Guidance

A

Released prior to financial statements, conference call after where senior management discusses earnings

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23
Q

Financial Statement Analysis Framework

A
  1. Objective and Context
  2. Gather Data
  3. Process the Data
  4. Analyze and Interpret the Data
  5. Report the Conclusions or Recommendations
  6. Update the Analysis
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24
Q

Standard-Setting Bodies

A

Professional organizations of accountants and auditors that establish financial reporting standards (FASB and IASB)

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25
Q

Regulatory Authorities

A

Government agencies that have the legal authority to enforce compliance with financial reporting standards (SEC)

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26
Q

International Organization of Securities Commissions (IOSCO)

A
  1. Protect investors
  2. Ensure fairness, efficiency and transparency or markets
  3. Reduce systemic risk
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27
Q

Form S-1

A

Registration statement filed prior to the sale of new securities to the public

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28
Q

Form 10-K

A

Required annual filing including information about business and management, audited financial statements and disclosures

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29
Q

Form 10-Q

A

Filed quarterly with updated financial statements, do not have to be audited. Disclose legal proceedings or changes in accounting policy

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30
Q

Form DEF-14A

A

Company prepares a proxy statement for its shareholders prior to annual meeting or other shareholder vote

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31
Q

Form 8-K

A

Companies file to disclose material events including significant asset acquisitions and disposals, changes in management or corporate governance

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32
Q

Form 144

A

Company can issue securities to certain qualified buyers without registering the securities with the SEC

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33
Q

Forms 3, 4 and 5

A

Beneficial ownership of securities by company’s officers and directors

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34
Q

Convergence

A

Developing one universally accepted set of accounting standards

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35
Q

Relevance

A

Financial statements are relevant if the information in them can influence users’ economic decisions or affect users’ evaluations of past events or forecasts of future events

  • Predictive Value
  • Confirmatory Value
  • Materiality
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36
Q

Faithful Representation

A

Complete, neutral (non-biased), free from error

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37
Q

Comparability

A

Financial statements should be consistent among firms and across time periods

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38
Q

Verifiability

A

Independent observers using same methods should obtain similar results

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39
Q

Timeliness

A

Information is available to decision makers before the information is stale

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40
Q

Understandibility

A

Users with a basic knowledge of business and accounting who make a reasonable effort to study the financial statements should be able to readily understand the information

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41
Q

Assets

A

Resources controlled as a result of past transactions expected to provide future economic benefits

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42
Q

Liabilities

A

Obligations as a result of past events that are expected to require an outflow of economic resources

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43
Q

Equity

A

Owners’ residual interest in the assets after deducting the liabilities

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44
Q

Income

A

Increase in the economic benefits, either increasing assets or decreasing liabilities in a way that increases owners’ equity

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45
Q

Expenses

A

Decreases in economic benefits, either decreasing assets or increasing liabilities in a way that decreases owners’ equity

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46
Q

Measurement Base

A

Determines the amounts at which items are reported in the financial statements

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47
Q

Historical Cost

A

The amount originally paid for the asset

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48
Q

Amortized Cost

A

Historical cost adjusted for depreciation, amortization, depletion and impairment

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49
Q

Current Cost

A

Amount the firm would have to pay today for the same asset

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50
Q

Net Realizable Value

A

Estimated selling price of the asset in the normal course of business minus the selling costs

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51
Q

Present Value

A

Discounted value of the asset’s expected future cash flows

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52
Q

Fair Value

A

Price at which an asset could be sold, or a liability transferred, in an orderly transaction between two willing parties

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53
Q

Accrual Accounting

A

Financial statements should reflect transactions at the time they actually occur, not necessarily when cash is paid (revenue recognize when earned, expenses recognized when incurred)

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54
Q

Going Concern

A

Assumes the company will continue to exist for the foreseeable future

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55
Q

Fair Presentation

A

Faithfully representing the effects of the entity’s transactions and events according to the standards for recognizing assets, liabilities, revenues

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56
Q

Going Concern Basis

A

Financial statements are based on the assumption the firm will continue to exist unless its management intends to liquidate it

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57
Q

Consistency

A

How items are presented and classified between periods, with prior-period amounts disclosed for comparison. Also across geographic areas and companies

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58
Q

Materiality

A

Financial statements should be free of misstatements or omissions that could influence decisions of users

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59
Q

Aggregation

A

Similar items grouped, dissimilar items separated

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60
Q

Offsetting

A

Assets can’t be offset against liabilities or income against expenses unless a certain standard permits it

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61
Q

Classified Balance Sheet

A

Shows current and non-current assets and liabilities

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62
Q

Minimum Information

A

Required on the face of each financial statement and in the notes (must show specific items)

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63
Q

Reconciliation Statement

A

Showing what financial results would have been under an alternative reporting system

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64
Q

Transparency

A

Full disclosure and fair presentation reveal underlying economics

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65
Q

Comprehensiveness

A

All types of transactions that have financial implications should be part of the framework

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66
Q

Valuation

A

Some measurement bases require little judgement and may be less relevant

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67
Q

Principles Based Approach

A

Relies on a broad framework

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68
Q

Rules Based Approach

A

Gives specific guidance about how to classify transactions

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69
Q

Objectives Based Approach

A

Combination of principles and rules based

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70
Q

Measurement

A

Properly valuing the elements at one point in time and properly valuing the changes between points in time (asset/liability approach vs revenue/expense approach)

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71
Q

Net Revenue

A

Revenue less adjustments for estimated returns and allowances

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72
Q

Expenses

A

Cost of goods sold, operating expenses, interest and taxes. Grouped by nature or by function

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73
Q

Net Income

A

revenues - ordinary expenses + other income - other expenses + gains - losses

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74
Q

Noncontrolling Interest

A

Pro rata share of the subsidiary’s income not owned by the parent is reported in parent’s income statement (minority interest). Subtracted when arriving at net income

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75
Q

Single Step Income Statement

A

All revenues are grouped together and all expenses are grouped together

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76
Q

Multi-Step Income Statement

A

Revenues - COGS to get gross profit and then net income

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77
Q

Gross Profit

A

Amount that remains after the direct costs of producing a product or service are subtracted from revenue

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78
Q

Operating Income

A

Subtracting operating expenses (selling, general and administrative expenses) from gross profits

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79
Q

Net Income

A

Subtracting interest expense and income taxes from operating profit (bottom line)

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80
Q

Revenue Recognition: Sale of Goods

A
  1. Risk and reward of ownership transferred
  2. No continuing control or management over goods sold
  3. Revenue reliably measured
  4. Probable flow of economic benefits
  5. Cost reliably measured
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81
Q

Revenue Recognition: Services Rendered

A
  1. Amount of revenue reliably measured
  2. Probable flow of economic benefits
  3. Stage of completion measured
  4. Cost incurred and cost of completion reliably measured
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82
Q

SEC Revenue Recognition

A
  1. Evidence of an arrangement between buyer and seller
  2. Product has been delivered or service rendered
  3. Price is determined or determinable
  4. Seller reasonably sure of collecting money
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83
Q

Unearned Revenue

A

Firm receives cash before revenue recognition is complete. reported on the balance sheet as a liability. Liability is reduced in the future as cash is earned

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84
Q

Percentage of Completion Method

A

Outcome of a long term contract can be reliably estimated. Revenue, expense, profit recognized as work is performed (total cost incurred to date divided by total expected cost of the project)

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85
Q

Completed Contract Method

A

If the firm can’t reliably measure the outcome of the project, revenue is recognized to the extent of contract costs. Costs expensed when incurred and recognized only at completion (loss must immediately be recognized)

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86
Q

Installment Sale

A

Occurs when a firm finances a sale and payments are expected to be received over an extended period of time

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87
Q

Installment Method

A

Used when collectibility cannot be reasonably estimated. Profit is recognized as cash is collected. Profit equal to cash collected during period multiplied by total expected profit as percentage of sales

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88
Q

Cost Recovery Method

A

Collectibility is highly uncertain. Profit is recognized only when cash collected exceeds costs incurred

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89
Q

Barter Transaction

A

Two parties exchange goods or services without cash payment. Recognized at fair value can use historical experience to determine

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90
Q

Round Trip Transaction

A

Sale of goods to one party with the simultaneous purchase of almost identical goods from the same party

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91
Q

Gross Revenue Reporting

A

Selling firm reports sales revenue and cost of goods sold separately (sales higher than in net revenue reporting)

  • Primary obligor under contract
  • Bear inventory and credit risk
  • Choose its supplier
  • Reasonable latitude to establish price
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92
Q

Net Revenue Reporting

A

Only the difference in sales and cost is reported

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93
Q

Contract

A

Agreement between two or more parties that specifies their obligations and rights (collectibility must be probable)

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94
Q

Performance Obligation

A

Promise to deliver a distinct good or service (customer benefits from good or service on its own or with other readily available resources, promise to transfer is separately identifiable from other promises)

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95
Q

Matching Principle

A

Expenses to generate revenue are recognized in the same period as revenue

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96
Q

Period Costs

A

Expenses that cannot directly be tied to revenue generation (administrative expenses). Expensed in period incurred

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97
Q

Specific Identification Method

A

Identify exactly which items were sold and which items remain in inventory

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98
Q

FIFO

A

First item purchased is assumed to be the first item sold. Cost of inventory acquired first used to calculate cost of goods sold for the period. Cost of most recent purchases used to calculate ending inventory

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99
Q

LIFO

A

Last item purchased is assumed to be the first item sold. Cost of inventory most recently purchased assigned to cost of goods sold for the period. Costs of beginning inventory and earlier purchases assigned to ending inventory

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100
Q

Weighted Average Cost

A

Makes no assumption about the physical flow of the inventory. Used to determine COGS and ending inventory (between LIFO and FIFO)

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101
Q

Long Lived Assets

A

Expected to provide economic benefits beyond one accounting period

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102
Q

Depreciation

A

Allocation of cost over a tangible asset’s life

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103
Q

Depletion

A

Allocation of cost over a natural resource’s life

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104
Q

Amortization

A

Allocation of cost over an intangible asset’s life

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105
Q

Straight Line Depreciation

A

Recognizes an equal amount of depreciation expense each period (assets generate more benefits in early years –> accelerated depreciation)

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106
Q

Accelerated Depreciation

A

Speeds up the recognition of depreciation expense in a systematic way to recognize more depreciation expense in the early years of the asset’s life and less in later years

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107
Q

Declining Balance Method

A

Applies a constant rate of depreciation to an asset’s declining book value each year

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108
Q

Double Declining Balance

A

Applies two times the straight-line rate to the declining balance

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109
Q

Discontinued Operations

A

Operation management has decided to dispose of, but has not yet done so, or disposed in current year after the operation had generated income or losses

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110
Q

Measurement Date

A

Date when the company develops a formal plan for disposing of an operation

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111
Q

Phaseout Period

A

Time between the measurement period and the actual disposal date

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112
Q

Unusual or Infrequent Items

A

Gains or losses from sale of assets of part of a business, impairments, write-offs, write-downs, restructuring costs

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113
Q

Extraordinary Items

A

Material transaction or event that was both unusual and infrequent (no longer allowed)

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114
Q

Change in Accounting Principles

A

Change from one GAAP or IFRS method to another

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115
Q

Retrospective Application

A

After change in accounting principle, all prior period financial statements currently presented are restated to reflect the change

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116
Q

Change in Accounting Estimate

A

Result of a change in management’s judgment, usually due to new information (prospective, no restating prior statements)

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117
Q

Prior Period Adjustment

A

Change from an incorrect accounting method to one that is acceptable under GAAP or IFRS or correction of accounting error in previous statements (restate prior periods in current statement, disclosure required)

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118
Q

Earnings per Share

A

Corporate profitability performance measure for publicly traded firms (only for shares of common stock)

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119
Q

Simple Capital Structure

A

Contains no potentially dilutive securities. Contains only common stock, nonconvertible debt, nonconvertible preferred stock

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120
Q

Complex Capital Structure

A

Contains potentially dilutive securities such as options, warrants or convertible securities (report basic and diluted EPS)

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121
Q

Weighted Average of Common Shares

A

Number of shares outstanding during the year weighted by the portion of the year they were outstanding

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122
Q

Stock Dividend

A

Distribution of additional shares to each shareholder in an amount proportional to their current number of shares

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123
Q

Stock Split

A

Division of each old share into a specific number of new shares (proportional ownership unchanged)

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124
Q

Dilutive Securities

A

Stock options, warrants, convertible debt, convertible preferred stock that would decrease EPS if exercised or converted to common stock

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125
Q

Antidilutive Securities

A

Stock options, warrants, convertible debt, convertible preferred stock that would increase EPS if exercised or converted to common stock

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126
Q

Treasury Stock Method

A

Assumes that funds received by the company from the exercise of options would be used to hypothetically purchase shares of the company’s common stock in the market at the average market price

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127
Q

Common Size Income Statement

A

Expresses each category of the income statement as a percentage of revenue (standardizes)

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128
Q

Effective Tax Rate

A

Tax expense when expressed as a percentage of pretax income

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129
Q

Gross Profit Margin

A

Ratio of gross profit (Revenue - COGS) to revenue (sales)

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130
Q

Net Profit Margin

A

Net income to revenue. Profit generated after considering all expenses

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131
Q

Retained Earnings

A

At the end of each accounting period, net income of the firm is added to stockholders’ equity through this account

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132
Q

Comprehensive Income

A

Includes all changes in equity except for owner contributions and distributions

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133
Q

Available for Sale Securities

A

Investment securities that are not expected to be held to maturity or sold in the near term. Reported on the balance sheet at fair value

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134
Q

Other Comprehensive Income

A

Not included in net income

  1. Foreign currency translation gains and losses
  2. Adjustments for minimum pension liability
  3. Unrealized gain and losses from cash flow hedging derivatives
  4. Unrealized gains and losses from available for sale securities
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135
Q

Liquidity

A

The ability to meet short term obligations

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136
Q

Solvency

A

The ability to meet long term obligations

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137
Q

Classified Balance Sheet

A

Reporting current assets and noncurrent assets, and current liabilities and noncurrent liabilities (evaluate liquidity)

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138
Q

Liquidity Based Format

A

Present assets and liabilities in order of liquidity (IFRS)

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139
Q

Current Assets

A

Include cash and other assets that will likely be converted into cash or used up within one year or one operating cycle (whichever is greater). Order of liquidity

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140
Q

Operating Cycle

A

Time it takes to produce or purchase inventory, sell the product and collect the cash

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141
Q

Current Liabilities

A

Obligations that will be satisfied within one year or one operating cycle (settlement dates, held for trading purposes)

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142
Q

Working Capital

A

Current assets minus current liabilities (indicates liquidity)

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143
Q

Noncurrent Assets

A

Will not be converted to cash or used up within one year or operating cycle. Firm’s investing activities

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144
Q

Noncurrent Liabilities

A

Provide information about firm’s long term financing activities

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145
Q

Cash Equivalents

A

Short term, highly liquid investments that are readily convertible to cash and near enough to maturity that interest rate risk is insignificant (T bills, commercial paper, money market funds)

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146
Q

Marketable Securities

A

Financial assets traded in a public market and whose value can be readily determined (T bills, notes, bonds, equities)

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147
Q

Accounts Receivable

A

Financial assets that represent amounts owed to the firm by customers for goods or services sold on credit

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148
Q

Contra Account

A

Used to reduce the value of its controlling account (allowance for doubtful accounts)

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149
Q

Written Off

A

Receivables removed from the balance sheet because they are uncollectible (gross receivables and allowance accounts reduced)

150
Q

Inventories

A

Goods held for sale to customers or used in manufacture of goods to be sold (raw materials, work in process, finished goods)

151
Q

Standard Costing

A

Assigning predetermined amounts of materials, labor and overhead to goods produced

152
Q

Retail Method

A

Measure inventory at retail prices and then subtract gross profit in order to determine cost

153
Q

Net Realizable Value

A

Equal to the selling price less any completion costs and selling costs

154
Q

Other Current Assets

A

Amounts that may not be material if shown separately, so items are combined into a single amount (prepaid expenses, deferred tax assets)

155
Q

Prepaid Expenses

A

Operating costs that have been paid in advance

156
Q

Deferred Taxes

A

Result of temporary differences between financial reporting income and tax reporting income

157
Q

Deferred Tax Assets

A

Created when the amount of taxes payable exceeds the amount of income tax expense recognized in the income statement

158
Q

Accounts Payable

A

Amounts the firm owes to suppliers for goods or services purchased on credit

159
Q

Notes Payable

A

Obligations in the form of promissory notes owed to creditors and lenders (can be noncurrent if greater than a year)

160
Q

Current Portion of Long Term Debt

A

Principal portion of debt due within one year or operating cycle

161
Q

Accrued Liabilities

A

Expenses that have been recognized in the income statement but are not yet contractually due

162
Q

Taxes Payable

A

Current taxes that have been recognized in the income statement but have not yet been paid

163
Q

Unearned Revenue

A

Deferred income. Cash collected in advance of providing goods and services

164
Q

Property, Plant and Equipment

A

Tangible assets used in the production of goods and services (land, buildings, machinery, furniture, natural resources)

165
Q

Cost Model

A

PP&E other than land (indefinite life) is reported at amortized cost (historical minus accumulated depreciation, amortization, depletion). IFRS and GAAP

166
Q

Historical Cost

A

Purchase price plus any cost necessary to get the asset ready for use (delivery, installation costs)

167
Q

Impairment

A

If an asset’s carrying value exceeds the recoverable amount

168
Q

Recoverable Value

A

Greater of fair value less any selling costs, or an asset’s value in use

169
Q

Value in Use

A

Present value of an asset’s future cash flow stream

170
Q

Revaluation Model

A

PP&E is reported at fair value less any accumulated depreciation (IFRS)

171
Q

Investment Property

A

Assets that generate rental income or capital appreciation

172
Q

Fair Value Model

A

Any change in fair value is recognized in the income statement

173
Q

Intangible Assets

A

Non-monetary assets that lack physical substance

174
Q

Identifiable Intangible Assets

A

Can be acquired separately or are the result of rights or privileges conveyed to their owner (patents, trademarks, copyrights)

175
Q

Unidentifiable Intangible Assets

A

Cannot be acquired separately and may have unlimited life (goodwill)

176
Q

Accounting Goodwill

A

Excess of purchase price over the fair value of the identifiable net assets acquired in a business acquisition (result of past acquisitions)

177
Q

Economic Goodwill

A

Derives from the expected future performance of the firm (price paid relative to the earning power of the acquired asset)

178
Q

Held to Maturity Securities

A

Debt securities acquired with the intent to be held to maturity (measured at amortized cost –> issue price minus principal payment, plus amortized discount or minus amortized premium, minus impairment losses)

179
Q

Mark to Market Securities

A

Financial assets measured at fair value (trading securities, available for sale securities, derivatives)

180
Q

Trading Securites

A

Debt and equity securities acquired with the intent to profit over the near term

181
Q

Holding Period Gains and Losses

A

Unrealized gains and losses recognized on the income statement

182
Q

Available for Sale Securities

A

Debt or equity securities not expected to be held to maturity or traded in the near term (reported at fair value, unrealized gains or losses not in income statement, in other comprehensive income)

183
Q

Long Term Financial Liabilities

A

Bank loans, notes payable, bonds payable, derivatives. Not issued at face value, reported on balance sheet as amortized cost

184
Q

Deferred Tax Liabilities

A

Amounts of income taxes payable in future periods as a result of taxable temporary differences. Created when income tax expense recognized in the income statement is greater than taxes payable

185
Q

Owners’ Equity

A

Residual interest in assets that remains after subtracting an entity’s liability (contributed capital, preferred stock, treasury stock, retained earnings, etc.)

186
Q

Contributed Capital

A

Issued capital, amount contributed by equity shareholders

187
Q

Authorized Shares

A

The number of shares that may be sold under the firm’s articles of incorporation

188
Q

Issued Shares

A

Number of shares that have actually been sold to shareholders

189
Q

Outstanding Shares

A

Equal to the the issued shares less the shares that have been reacquired by the firm (treasury stock)

190
Q

Preferred Stock

A

Certain rights and privileges not conferred by common stock. Paid dividends at a specified rate, have priority over claims of common shareholders in event of liquidation

191
Q

Noncontrolling Interest

A

Minority shareholders’ pro-rata share of the net assets (equity) of a subsidiary that is not wholly owned by the parent

192
Q

Retained Earnings

A

Undistributed earnings (net income) of the firm since inception, cumulative earnings not paid out to shareholders as dividends (Net Income - Dividends Declared)

193
Q

Treasury Stock

A

Stock that has been reacquired by the issuing firm but not yet retired (reduces shareholders’ equity). No voting rights and no dividends

194
Q

Accumulated Other Comprehensive Income

A

All changes in stockholders’ equity except for transactions recognized in the income statement and transactions with shareholders (issuing/reacquiring stock, paying dividends)

195
Q

Statement of Changes in Stockholders’ Equity

A

Summarizes all transactions that increase or decrease the equity account for the period (capital stock, additional paid in capital, retained earnings, accumulated other comprehensive income)

196
Q

Common Size Balance Sheet

A

Expresses each item of the balance sheet as a percentage of total assets (eliminates effects of size). Time series and cross sectional comparisons

197
Q

Liquidity Ratios

A

Measure the firm’s ability to satisfy its short term obligations as they come due

198
Q

Current Ratio

A

Current Assets/Current Liabilities

199
Q

Quick Ratio

A

Cash + Marketable Securities + Receivables/Current Liabilities –> excludes inventory from current ratio

200
Q

Cash Ratio

A

Cash + Marketable Securities/Current Liabilities –> excludes inventory and receivables

201
Q

Solvency Ratios

A

Measure the firm’s ability to satisfy its long term obligations

202
Q

Long Term Debt to Equity Ratio

A

Long Term Debt/Total Equity

203
Q

Total Debt to Equity Ratio

A

Total Debt/Total Equity

204
Q

Debt Ratio

A

Total Debt/Total Assets

205
Q

Financial Leverage

A

Total Assets/Total Equity

206
Q

Cash Flow Statement

A

Provides information beyond that available from the income statement (cash accounting rather than accrual)

  • Cash receipts and cash payments
  • Company’s operating, investing and financing activities
207
Q

Cash Flow from Operating Activities

A

Inflows and outflows of cash resulting from transactions that affect the firm’s net income (cash collected from sales, interest and dividends received, taxes paid, interest paid on debt or leases, cash paid to employees)

208
Q

Cash Flow from Investing Activities

A

Inflows and outflows of cash resulting from the acquisition or disposal of long term assets and certain investments (sales of fixed assets, sales of debt or equity investments, loans made to others, acquisition of debt and equity investments)

209
Q

Cash Flow from Financing Activities

A

Inflows and outflows of cash resulting from transactions affecting the firm’s capital structure (proceeds from issuing stock, principal from debt issuance, principal paid on debt or leases, payments to reacquire stock, dividends paid)

210
Q

Noncash Activities

A

Not reported in cash flow statement since they do not result in inflows or outflows of cash. Disclosed in a footnote or supplemental schedule

211
Q

Direct Method

A

Each line item of the accrual based income statement is converted into cash receipts or cash payments (revenue and expense recognition occur when cash is received or paid) –> Converts accrual based income statement to cash based. Results in operating cash flow

212
Q

Indirect Method

A

Net income is converted to operating cash flow by making adjustments for transactions that affect net income but are not cash transactions (eliminate noncash expenses such as depreciation and amortization, nonoperating items)

213
Q

Converting Indirect to Direct

A

Find CFO using a combination of the income statement and a statement of cash flows prepared under indirect method. Adjust each income statement item for its corresponding balance sheet accounts and eliminate noncash and nonoperating transactions

214
Q

Cash Collections

A

Sales - Increase in Accounts Receivable –> Beginning Receivables + Sales - Cash Collections = Ending Receivables

215
Q

Cash Paid to Suppliers

A

-COGS + Decrease in Inventory + Increase in Accounts Payable

216
Q

Free Cash Flow

A

Measure of the cash that is available for discretionary purposes (cash available once firm has covered capital expenditures)

217
Q

Free Cash Flow to the Firm (FCFF)

A

Cash available to all investors, both equity owners and debt owners

218
Q

Free Cash Flow to Equity (FCFE)

A

Cash flow that would be available for distribution to common shareholders

219
Q

Cash Flow to Revenue

A

Amount of operating cash flow generated for each dollar of revenue –> CFO/Net Revenue

220
Q

Cash Return on Assets Ratio

A

Return of operating cash flow attributed to all providers of capital –> CFO/Avg Total Assets

221
Q

Cash Return on Equity Ratio

A

Return of operating cash flow attributed to shareholders –> CFO/Avg Total Equity

222
Q

Cash to Income Ratio

A

Ability to generate cash from firm operations –> CFO/Operating Income

223
Q

Cash Flow per Share

A

CFO - Preferred Dividends/Weighted Avg Number of Common Shares

224
Q

Debt Coverage Ratio

A

Financial risk and leverage –> CFO/Total Debt

225
Q

Interest Coverage Ratio

A

Firm’s ability to meet its interest obligations –> CFO + Interest Paid + Taxes Paid/Interest Paid –> EBIT/Interest

226
Q

Reinvestment Ratio

A

Firm’s ability to acquire long-term assets with operating cash flow –> CFO/Cash Paid for Long Term Assets

227
Q

Debt Payment Ratio

A

Firm’s ability to satisfy long term debt with operating cash flow –> CFO/Cash Long Term Debt Repayment

228
Q

Dividend Payment Ratio

A

Firm’s ability to make dividend payments from operating cash flow –> CFO/Dividends Paid

229
Q

Investing and Financing Ratio

A

Firm’s ability to purchase assets, satisfy debts and pay dividends –> CFO/Cash Outflows from Investing and Financing Activities

230
Q

Stacked Column Graph

A

Shows changes in items from year to year

231
Q

Activity Ratios

A

Indicate how well a firm utilizes various assets such as inventory and fixed assets (inventory turnover, receivables turnover, total asset turnover)

232
Q

Liquidity Ratios

A

Ability to pay short term obligations as they come due

233
Q

Solvency Ratios

A

Financial leverage and ability to meet longer term obligations

234
Q

Profitability Ratios

A

How well the company generates operating profits and net profits from its sales

235
Q

Valuation Ratios

A

Compare the relative valuation of companies (sales per share, earnings per share)

236
Q

Receivables Turnover

A

Annual Sales/Average Receivables

237
Q

Days of Sales Outstanding

A

Average collection period. 365/Receivables Turnover

238
Q

Inventory Turnover

A

Firm’s efficiency with respect to its processing and inventory management. COGS/Average Inventory

239
Q

Days of Inventory on Hand

A

365/Inventory Turnover

240
Q

Payables Turnover

A

Use of trade credit. Purchases/Average Trades Payable

241
Q

Payables Payment Period

A

Average amount of time it takes the company to pay its bills. 365/Payables Turnover Ratio

242
Q

Total Asset Turnover

A

Effectiveness of firm’s use of its total assets to create revenue. Revenue/Average Total Assets

243
Q

Fixed Asset Turnover Ratio

A

Revenue/Average Net Fixed Assets

244
Q

Working Capital Turnover Ratio

A

Revenue/Average Working Capital

245
Q

Defensive Interval Ratio

A

Number of days of average cash expenditures the firm could pay with its current liquid assets
Cash + Marketable Securities + Receivables/Average Daily Expenditures

246
Q

Cash Conversion Cycle

A

Length of time it takes to turn the firm’s cash investment in inventory back into cash, in the form of collections from the sales of that inventory
Days Sales Outstanding + Days of Inventory on Hand - Number of Days Payables

247
Q

Debt Ratios

A

Solvency ratios based on the balance sheet

248
Q

Coverage Ratios

A

Solvency ratios based on the income statement

249
Q

Debt to Equity Ratio

A

Use of fixed cost financing sources. Total Debt/Total Shareholders’ Equity

250
Q

Debt to Capital Ratio

A

Total Debt/Total Debt + Total Shareholders’ Equity

251
Q

Debt to Assets Ratio

A

Total Debt/Total Assets

252
Q

Financial Leverage Ratio

A

Average Total Assets/Average Total Equity

253
Q

Interest Coverage Ratio

A

Earnings Before Interest and Taxes/Interest Payments

254
Q

Fixed Charge Coverage Ratio

A

EBIT + Lease Payments/Interest Payments + Lease Payments

255
Q

Net Profit Margin

A

Net Income/Revenue

256
Q

Gross Profits

A

Net Sales - COGS

257
Q

Operating Profits

A

Earnings Before Interest and Taxes (EBIT)

258
Q

Net Income

A

Earnings after taxes but before dividends

259
Q

Total Capital

A

LT Debt + ST Debt + Common and Preferred Equity or just Total Assets

260
Q

Gross Profit Margin

A

Gross Profit/Revenue

261
Q

Operating Profit Margin

A

Operating Profit/Revenue = EBIT/Revenue

262
Q

Pretax Margin

A

EBT/Revenue

263
Q

Return on Assets

A

Net Income/Average Total Assets or Net Income + Interest Expense (1 - Tax Rate)/ Average Total Assets

264
Q

Return on Total Capital

A

EBIT/Average Total Capital

265
Q

Return on Equity

A

Net Income/Average Total Equity

266
Q

Return on Common Equity

A

Net Income - Preferred Dividends/Average Common Equity

267
Q

DuPont Equation

A

Breaks Return on Equity down into components of Net Profit Margin, Asset Turnover and Leverage

268
Q

Price to Earnings Ratio

A

Current Market Price per Share/Earnings per Share

269
Q

Retention Rate

A

Proportion of earnings reinvested (1 - dividend payout ratio)

270
Q

Sustainable Growth Rate

A

How fast the firm can grow without additional external issues while holding leverage constant
g = RR x ROE

271
Q

Coefficient of Variation

A

Standard Deviation/Expected Value

272
Q

Capital Adequacy

A

Ratio of some dollar measure of risk (operational and functional) of the firm to its equity capital

273
Q

Value at Risk

A

Estimate of the dollar size of the loss that a firm will exceed only some specific percent of the time, over a specific period

274
Q

Liquid Asset Requirement

A

Ratio of a bank’s liquid assets to certain liabilities

275
Q

Net Interest Margin

A

Performance of financial companies that lend funds. Interest Income/Firm’s Interest Earning Assets

276
Q

Business Segment

A

Portion of a larger company that accounts for more than 10% of the company’s revenues or assets, distinguishable from the company’s other lines of business in terms of risk and return characteristics

277
Q

Geographic Segments

A

Business segment that has an environment that is different from other segments or the remainder of the company’s business

278
Q

Sensitivity Analysis

A

Based on “what if” questions

279
Q

Scenario Analysis

A

Based on a specific set of outcomes for key variables. Will yield a range of values for financial statement items

280
Q

Simulation

A

Probability distributions for key variables selected on a computer used to generate a distribution of values for outcomes based on repeated random selection

281
Q

Product Costs

A

Capitalized in inventories account on balance sheet:

  • Purchase cost less trade discount and rebates
  • Conversion costs (labor, overhead)
  • Transportation costs
282
Q

Period Costs

A

Costs expensed in the period incurred:

  • Abnormal waste of materials, labor, overhead
  • Storage costs (unless part of production)
  • Administrative overhead
  • Selling costs
283
Q

Cost Flow Assumption/Cost Flow Formula

A

GAAP/IFRS. Cost flow method used when cost of purchasing or producing inventory will change over time

  • Specific Identification
  • FIFO
  • Weighted Average Cost
  • LIFO (GAAP only)
284
Q

Specific Identification

A

Each unit is sold and matched with the unit’s actual cost (used when inventory items are not interchangeable –> small number of costly and easily distinguishable items)

285
Q

First In, First Out

A

First item purchased is assumed to be the first item sold. Ending inventory based on most recent purchases, COGS understated compared to current costs in inflationary

286
Q

Last In, First Out

A

Item purchased most recently is assumed to be the first item sold, COGS higher and earnings lower in inflationary (lower taxes).

287
Q

Weighted Average Cost

A

Average cost per unit of inventory (Goods Available for Sale/Total Quantity Available for Sale) –> Between FIFO and LIFO

288
Q

Periodic Inventory System

A

Inventory values and COGS are determined at the end of the accounting period. Inventory acquired is purchases, which are added to beginning inventory to find COGS

289
Q

Perpetual Inventory System

A

Inventory values and COGS are updated continuously. Inventory purchased and sold is recorded directly in inventory when transactions occur

290
Q

LIFO Reserve

A

Amount by which LIFO inventory is less than FIFO inventory (add this to LIFO Inventory on the balance sheet, increase retained earnings by this as well)

  • Decrease cash by tax rate times LIFO Reserve
  • Increase retained earnings by LIFO reserve * (1-tax rate)
291
Q

LIFO Liquidation

A

LIFO firm’s inventory quantities decline. Older, lower costs are included in COGS. Higher profit margins and higher income taxes

292
Q

Net Realizable Value

A

Expected sales price less the estimated selling costs and completion costs

293
Q

“Written Down”

A

Net realizable value is less than balance sheet value of inventory. Loss recognized on income statement by increasing COGS

294
Q

“Written Up”

A

Recovery in inventory value, inventory on balance sheet increases, COGS on income statement is decreased by amount of recovery

295
Q

Lower of Cost or Market

A

For GAAP companies using LIFO reporting on balance sheet.

Market is replacement cost, cannot be greater than NRV or less than NRV minus normal profit margin

296
Q

Inventory Disclosures

A

Cost flow method, carrying value of inventory (and by classification), cost of inventory as an expense, carrying value of inventory (FV - selling costs), inventory write downs, write ups, inventories pledged as collateral

297
Q

Capitalizing Costs

A

Expenditure that is recorded as an asset on the balance sheet at its fair value at acquisition plus any costs to prepare for use. Expected to provide future benefit over multiple accounting periods
-Regular maintenance of the asset expensed, rebuilding capitalized

298
Q

Expensing Costs

A

Asset’s cost put on income statement in period incurred if future economic benefit is unlikely or highly uncertain

299
Q

Construction Interest

A

Interest that accrues during construction of an asset is capitalized as part of the asset’s cost (interest not reported on income statement)

300
Q

Intangible Assets

A

Long term assets that lack physical substance (patents, brand names, copyrights, franchises)

  • Finite Lived: cost amortized over useful life
  • Indefinite Lived: tested for impairment annually (reduction value recognized in income statement as loss)
301
Q

Identifiable Intangible Asset

A

Capable of being separated from firm, controlled by the firm, expected to provide future economic benefits (probable, cost reliably measured)

302
Q

Unidentifiable Intangible Asset

A

Cannot be purchased separately and may have an indefinite life (goodwill)

303
Q

Research Costs

A

Costs aimed at the discovery of new scientific or technical knowledge (expensed as incurred under IFRS and GAAP)

304
Q

Development Costs

A

Translate research findings into a plan or design of a new product or process (generally expensed as incurred, can be capitalized

305
Q

Software Costs

A

Developed for sale to others. Expensed as incurred until product’s technological feasibility has been established, then costs of developing salable product are capitalized

306
Q

Acquisition Method

A

Used in business combinations. Purchase price is allocated to the identifiable assets and liabilities of the acquired firm on the basis of fair value. Remaining purchase price is recorded as goodwill (capitalized if part of combination, if internal it’s expensed)

307
Q

Carrying (Book) Value

A

Net value of an asset on the balance sheet (Historical Cost minus accumulated depreciation)

308
Q

Historical Cost

A

Original purchase price of an asset including installation and transportation costs

309
Q

Economic Depreciation

A

Actual decline in the value of an asset over the period

310
Q

Straight Line Depreciation

A

Same amount each year over the asset’s life

311
Q

Accelerated Depreciation

A

More depreciation expense is recognized in the early years of an asset’s life

312
Q

Units of Production

A

Based on usage rather than time (depreciation higher in periods of high usage) –> depletion for natural resources

313
Q

Component Depreciation

A

Useful life of each component of an asset is estimated and depreciation expense is computed separately for each (required under IFRS, barely used under GAAP)

314
Q

Revaluation Model

A

IFRS permits a long lived asset to be reported at its fair value, as long as an active market exists for the asset so its fair value can be reliably estimated

315
Q

Revaluation Surplus

A

Fair value at first revaluation date is greater than carrying value, difference is recorded as surplus (component of equity)

316
Q

Impairment

A

Asset’s carrying value (original cost minus accumulated depreciation) exceeds recoverable amount

317
Q

Recoverable Amount

A

Greater of fair value less selling costs and value in use (PV of future cash flows)

318
Q

Recoverability Test

A

Based on the estimate of asset’s future undiscounted cash flow stream

319
Q

Loss Measurement

A

If impaired, asset value written down to fair value on balance sheet, and loss equal to excess of carrying value over fair value is recognized on income statement

320
Q

Held for Sale

A

If an asset is reclassified as held for sale instead of held for use, it is tested for impairment –> this time if carrying value exceeds net realizable value. Loss can be reversed if asset recovers in the future

321
Q

Derecognition

A

Long lived assets are eventually removed from the balance sheet when they are sold, exchanged or abandoned

322
Q

Investment Property

A

IFRS only. Property that a firm owns for the purpose of collecting rental income, earning capital appreciation or both (cost model or fair value)

323
Q

Lease

A

Contractual arrangement where the lessor (owner of an asset) allows a lessee to use the asset for a specified period of time in return for periodic payments

324
Q

Finance (Capital) Lease

A

A purchase of an asset that is financed with debt (depreciation expense on the asset, interest expense on the liability). Increase assets and liabilities

325
Q

Operating Lease

A

Rental arrangement. Periodic lease payments recognized as rental expense on income statement of lessee

326
Q

Taxable Income

A

Income subject to tax based on the tax return

327
Q

Taxes Payable

A

Tax liability caused by taxable income (current tax expense)

328
Q

Income Tax Paid

A

Actual cash flow for income taxes including payments or refunds from other years

329
Q

Tax Loss Carryforward

A

Current or past loss that can be used to reduce taxable income in the future (reduce taxes payable)

330
Q

Tax Base

A

Net amount of an asset or liability used for tax reporting purposes. Amount that will be deducted on the tax return in the future as the economic benefits of the asset are realized

331
Q

Accounting Profit

A

Pretax financial income based on financial accounting standards (earnings before tax)

332
Q

Income Tax Expense

A

Expense recognized in the income statement that includes taxes payable and changes in deferred tax assets and liabilities

333
Q

Deferred Tax Liabilities

A

Balance sheet amounts that result from an excess of income tax expense over taxes payable (temporary difference) that are expected to result in future cash outflows –> Pretax income exceeds taxable income

334
Q

Deferred Tax Assets

A

Balance sheet amounts that result from an excess of taxes payable over income tax expense (temporary difference) that are expected to be recovered from future operations

335
Q

Valuation Allowance

A

Reduction of deferred tax assets based on the likelihood the assets will not be realized

336
Q

Carrying Value

A

Net balance sheet value of an asset or liability

337
Q

Permanent Difference

A

Difference between taxable income (tax return) and pretax income (income statement) that will not reverse in the future

338
Q

Temporary Difference

A

Difference between tax base and the carrying value of an asset or liability that will result in either taxable amounts or deductible amounts in the future

339
Q

Carrying Value

A

Value of the asset reported on the financial statements, net of depreciation and amortization

340
Q

Customer Advance

A

Revenue received in advance is taxable when collected. Tax base is carrying value minus amounts that will not be taxed in the future

341
Q

Warranty Expense

A

Not deductible on tax return until the warranty work is actually performed. Tax base is carrying value minus amount deductible in future

342
Q

Note Payable

A

Principal balance is carrying value and tax base. interest paid is included in both pre-tax income on income statement and taxable income on the tax return

343
Q

Statutory Tax Rate

A

Tax rate of the jurisdiction where the firm operates

344
Q

Effective Tax Rate

A

Income Tax Expense/Pretax Income

345
Q

Valuation Allowance

A

Contra account that reduces the net balance sheet value of the DTA. Used if it is more likely than not that some or all of a DTA will not be realized

346
Q

Bond

A

Contractual obligation between a borrower (bond issuer) and a lender (bondholder) that obligates the issuer to make payments to the bondholder over the term of the bond

347
Q

Face Value

A

Par or maturity value. Amount of principal that will be paid to the bondholder at maturity. Used to calculate coupon payments

348
Q

Coupon Rate

A

Interest rate stated on the bond used to calculate payments

349
Q

Coupon Payments

A

Periodic interest payments to bondholders calculated by multiplying face value by coupon rate

350
Q

Effective Rate of Interest

A

Interest rate that equates the present value of the future cash flows of the bond and the issue price. Market rate of interest required by bondholders

351
Q

Balance Sheet Liability of a Bond

A

Book value or carrying value. Present value of its remaining cash flows discounted at market rate of interest at issuance (at maturity, liability equals face value)

352
Q

Interest Expense

A

Reported on income statement. Multiplying book value of bond liability at beginning of period by market rate of interest when bond was issued

353
Q

Discount Bonds

A

Coupon rate is less than the bond’s yield (proceeds received less than face value). Investor pays less than face value

354
Q

Premium Bonds

A

Coupon rate is greater than the bond’s yield. Bond price greater than face value (investors pay more than face value)

355
Q

Zero Coupon Bonds

A

Make no periodic interest payments (pure discount bond). Issued at a deep discount. Interest payment is instead included in the face value paid at maturity

356
Q

Redeeming Bonds

A

Happens before maturity if interest rates fall, firm has generated surplus cash, or funds from issuance of equity make it possible

357
Q

Debt Covenants

A

Restrictions imposed by the lender on the borrower to protect the lender’s position (reduce default risk and borrowing costs)

358
Q

Affirmative Covenants

A

Borrower promises to do certain things such as make timely payments of principal and interest, maintain certain ratios, maintain collateral

359
Q

Negative Covenants

A

Borrower promises to refrain from from certain activities that might adversely affect ability to repay outstanding debt (won’t increase dividends, repurchase shares, issue more debt, engage in M&A)

360
Q

Technical Default

A

Bondholders can demand immediate repayment of principal if firm violates a covenant

361
Q

Synthetic Lease

A

Lease is treated as an ownership position for tax reporting. Allows lease to deduct depreciation expense and interest expense

362
Q

Bargain Purchase Option

A

Permits lessee to purchase leased asset for a price significantly lower than fair market value at some future date

363
Q

Sales Type Lease

A

PV of lease payments exceeds carrying value of the asset. Treated as if the lessor sold the asset for PV of lease payments and provided a loan to the buyer in the same amount

364
Q

Direct Financing Lease

A

PV of the lease payments is equal to the carrying value. No gross profit recognized by lessor at inception.

365
Q

Lease Receivable

A

When an asset is leased, asset is removed from the balance sheet and receivable is created, equal to PV of lease payments (reduced by principal portion of lease payments)

366
Q

Pension

A

Form of deferred compensation earned over time through employee service

367
Q

Defined Contribution Plan

A

Retirement plan in which the firm contributes a sum each period to the employee’s account (years of service, employee’s age, compensation, profitability). Firm makes no promise to the employee on future value of assets. Employee assumes investment risk

368
Q

Defined Benefit Plan

A

Firm promises to make periodic payments to employees after retirement (based on employee’s years of service and employee’s compensation at or near retirement). Employer assumes investment risk

369
Q

Net Pension Asset

A

Fair value of plan’s assets is greater than estimated pension obligation (overfunded)

370
Q

Net Pension Liability

A

Fair value of plan’s assets is less than the estimated pension obligation (underfunded)

371
Q

Fixed Charge Coverage

A

(EBIT + Lease Payments)/(Interest Payments + Lease Payments)

CFA Level 1 (7 decks)

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