Financial Reporting & Analysis (20%) Flashcards
Characteristics of a Coherent
Financial Reporting Framework
- Transparency
- Comprehensiveness
- Consistency
Fundamental Characteristics of Financial Statements
U.S. GAAP
- Relevence
- Faithful Representation
IFRS
- Fair Presentation
- Going Concern
- Accrual Basis
- Consistency & Materiality
Qualitative Characteristics of
Financial Statements in IFRS
- C omparability
- U nderstandability
- R elevance
- R eliability
(CURRy)
Enhancing Characteristics of Financial Statements
- V erifyability
- C omparability
- U nderstandability
- T imeliness
Elements of
Financial Statements
Balance Sheet
- Assets
- Liabilities
- Owners Equity
Income Statement
- Revenues
- Expenses
- Gains & Losses
Factors that Contribute to Reliability in IFRS
- Substance over Form
- Faithful Representation
- Nutrality
- Prudence
- Completeness
(SUFFR’N-PC)
Activity Ratios
- Receivables Turnover, DSO
- Inventory Turnover, DOH
- Payables Turnover, DOP
- Total Asset Turnover
- Fixed Asset Turnover
- Working Capital Turnover
Receivables Turnover
Revenue
————————————
Average Receivables
Days Sales Outstanding
DSO
365
————————————
Receivables Turnover
Inventory Turnover
COGS
———————————
Average Inventory
- number of times invetory is sold or used in yr.
Days of Inventory on Hand
DOH
365
———————————
Inventory Turnover
Payables Turnover
Purchases
——————————
Average Payables
Number of days of Payables
DOP
365
——————————
Payables Turnover
Total Asset Turnover
Revenue
————————————
Average Total Assets
Fixed Asset Turnover
Revenue
——————————————
Average Net Fixed Assets
- ppe net of depreciation
Working Capital Turnover
Revenue
—————————————
Average Working Capital
working cap - ca-cl
Liquidity Ratios
- Current Ratio
- Quick Ratio
- Cash Ratio
- Defensive Interval
- Cash Conversion Cycle
Current Ratio
Current Assets
——————————
Current Liabilities
Quick Ratio
(Acid Test)
Cash + Marketable Securities + Receivables
————————————————————————
Current Liabilities
Cash Ratio
Cash + Marketable Securities
————————————————
Current Liabilities
Defensive Interval
Cash + Marketable Securities + Receivables
———————————————————————
Average Daily Expenditures
- how many days can a company operate without having to access noncurrent assets.
Cash Conversion Cycle
DSO + DOH - DOP
Solvency Ratios
- Debt-to-Equity
- Debt-to-Capital
- Debt-to-Assets
- Financial Leverage
- Interest Coverage
- Fixed Charge Coverage
Debt-to-Equity Ratio
Total Debt
———————
Total Equity
Debt-to-Capital Ratio
Total Debt
—————————————
Total Debt + Total Equity
Debt-to-Assets Ratio
(Debt Ratio)
Total Debt
———————
Total Assets
Financial Leverage Ratio
Average Total Assets
————————————
Average Total Equity
Interest Coverage Ratio
EBIT
——————————
Interest Payments
A ratio used to determine how easily a company can pay interest on outstanding debt.
Fixed Charge Coverage Ratio
EBIT + Lease Payments
————————————————————
Interest Payments + Lease Payments
- A ratio that indicates a firm’s ability to satisfy fixed financing expenses, such as interest and leases.
Profitability Ratios
- Net Profit Margin
- Gross Profit Margin
- Operating Profit Margin
- Pretax Margin
- ROA
- Operating Return on Assets
- Return on Total Capital
- Return on Equity
- Return on Common Equity
Net Profit Margin
Net Income
———————
Revenue
Gross Profit Margin
Gross Profit
———————
Revenue
Operating Profit Margin
EBIT
——————
Revenue
Pretax Margin
EBT
——————
Revenue
Return on Assets
ROA
Net Income
————————————
Average Total Assets
or
Net Income + Interest Expense (1 - t)
———————————————————
Average Total Assets
Operating Return on Assets
EBIT
————————————
Average Total Assets
Return on Total Capital
ROTC
EBIT
————————————
Average Total Capital
Return on Common Equity
Net Income - Preferred Dividend
——————————————————
Average Common Equity
Performance Ratios
- Cash Flow-to-Revenue
- Cash Return-on-Assets
- Cash Return-on-Equity
- Cash-to-income
- Cash Flow Per Share
Cash Flow-to-Revenue Ratio
CFO
————————
Net Revenue
Cash Return-on-Assets Ratio
CFO
————————————
Average Total Assets
Cash Return-on-Equity Ratio
CFO
————————————
Average Total Equity
Cash-to-Income Ratio
CFO
——————————
Operating Income
Cash Flow Per Share
CFO - Preferred Dividends
———————————————
WASO
Coverage Ratios
- Debt Coverage Ratio
- Interest Coverage Ratio
- Reinvestment Ratio
- Debt Payment Ratio
- Dividend Payment Ratio
- Investing and Financing Ratio
Debt Coverage Ratio
CFO
——————
Total Debt
Interest Coverage Ratio
CFO + Interest Paid + Taxes Paid
——————————————————
Interest Paid
Reinvestment Ratio
CFO
—————————————————
Cash Paid for Long Term Assets
Debt Payment Ratio
CFO
——————————————————
Cash Long-Term Debt Repayment
Dividend Payment Ratio
CFO
————————
Dividends Paid
Investing and Financing Ratio
CFO
————————————————————————————
Cash Outflows from Investing and Financing Activities
Return on Equity
ROE
Net Income
————————————
Average Total Equity
Original DuPont Equation
ROE = ROA * Financial Leverage
or
ROE = Profit Margin * Asset Turnover * Leverage Ratio
Net income Revenue Assets
——————— X —————— X —————
Revenue Assets Equity
(NRAE)
Extended DuPont Equation
ROE = Tax Burden * Interest Burden * EBIT Margin *
Asset Turnover * Financial Leverage
NI EBT EBIT Revenue Assets
——— X ——— X ————— X ————— X —————
EBT EBIT Revenue Assets Equity
(NeERAE)
Free Cash Flow to the Firm
FCFF
from CFO
CFO
- Fixed Captial Investment
+ Interest Expense(1 - t)
FCFF = N/I-NCC+int exp(1-t) -FCinv - WCinv
Free Cash Flow to the Firm
FCFF
from Net Income
Net Income
- Fixed Capital Investment
+ Interest Expense(1 - t)
+ Non-Cash Charges to Income
- Working Capital Investment
Free Cash Flow to Equity
FCFE
from CFO
CFO
- Fixed Capital Investment
+ Net Borrowing
Basic EPS
Net Income - Preferred Dividends
——————————————————
WASO
Diluted EPS
NI - Pref Div + Conv Debt Int(1 - t) + Conv Pref Div
————————————————————————————
WASO + Debt Shares + Pref Shares + Option Shares
Ending Inventory
Beginning Inventory + Purchases - COGS
FIFO from LIFO
FIFO Inv = LIFO Inv + LIFO Reserve
FIFO COGS
from
LIFO COGS
FIFO COGS = LIFO COGS - Change in LIFO Reserve
Deferred Taxes
Income Tax Expense = Tax Payable + ►DTL - ►DTA
Working Capital
Current Assets - Current Liabilities
CFO
Indirect Method
Net Income
- Cash Gains from Investing & Financing
+ Non-Cash Charges to Income (Dep,Amort)
- Non-Cash Components to Revenue
- Increases in Asset Accounts
+ Increases in Liability Accounts
- Analyst gathered following:
- Net sales $4000
- dividends declared $170
- COGS $2000
- Inventory increase $100
- A/P increased by $300
- Cash expense $500
- Long term debt repayment - $250
- cash tax payment $200
- purchase of new equipment $300
4000 - Since no change in A/R
(2000)
(100) - use
300 - source of cash
(500) -
(200)
=1500.
- GAAP - dividends rcvd are CFO inflow, paid are financing outflow.
- All debt =CFF. equipment and land = CFI
The following data pertains to comp common size statements.
CA - 40%, Total debt - 40%, N/I - 16% , Total assets - $2,000, Sales - $1500, Total asset turnover ratio - .75
Company’s after-tax return on common equity is closest to?
a. 15% b. 20%. c. 25%
return on common equity - N/I / avg equity
= .16(1500)/ (1-.4)(2000) = 20%
B. 20%.
In accounting the prior service costs refers to?
PV of increase in future pension benefit from change in terms of benefit plan.
Average Age of Assets
Accumulated Depreciation
————————————————
Annual Depreciation Expense
Fraud Triangle
- R ationalizations
- I ncentives
- O pportunities
(Blame it on Rio)
Beta
ß
Covariance [Asset,Market]
——————————————
Market Variance
What are extraordinary items?
unusual and infrequent items that are reported seperately, net of tax, a**fter net income from continuing operations. **
Impairment Loss Under IFRS
Carrying Value - Recoverable Amount
Recoverable Amount = The greater of the value in use or the fair value less costs to sell.
Price to Earnings Ratio
P/E
Dividend Payout Ratio
————————————
Required ROE - g
Total Comprehensive income?
Other comprehensive income?
- net income + other comprehensive income
- Loss and gains on available for sale securities and translation adjustments on foreign subsidies.
Net realizable value?
- IFRS for inventory
- Net realizable value = sales price - selling and completion costs
- if Net realizable value is less than balance sheet value of inventory, then you use it. And write down asset. You can also write up asset.
- done through a valuation allowance acc
*
- done through a valuation allowance acc
Income tax expense =?
Valuation allowance?
- income tax expense = taxes payable + ►DTL - ►DTA
- reduction of deferred tax assets based on likelihood the assets will not be realized.
purchases
purchases = ending inventory - beginning inventory + COGS
tax burden ratio
Net income/EBT
EBT is pretax income
Interest burden ratio
EBT/EBIT
EBT = pretax income
higher = better
operating cash flow
operating cash flow/N/I
Less than 1, means you gots problems.
IOSCO?
The IOSCO is not a regulator of financial markets. To ensure consistent application of international financial standards, it is important to have uniform regulation and enforcement across national boundaries. IOSCO assists in attaining this goal of uniform regulation as well as cross-border cooperation in combating violations of securities and derivatives laws.
net profit margin
ROA/asset turnover
Financial leverage?
ROE/ROA
