Financial Reporting & Analysis

Question 1

How are dividends from a subsidiary accounted for?

Answer 1

The dividend will be taken off the investment in assets, but will flow in through cash flow from investing.

Question 2

Which financial reporting method should be used for Joint Ventures?

Answer 2

The Equity Method.

Question 3

When there are no amortisations, what is the formula for Periodic Pension Cost?

Answer 3

PPC = Service Cost + Interest Cost - Expected Return

Question 4

If the contributions in a period are greater than TPPC, how should the difference be treated, and why?

Answer 4

It should be treated as an excess principal repayment, and subtracted from CFF and added to CFO. This is because principal repayments are a financing cash flow.

Question 5

How would you calculate after-tax excess contribution?

Answer 5

Contributions - TPPC (1-T)

Question 6

Under the temporal method, what rate are monetary assets translated at?

Answer 6

The current rate.

Question 7

If a parent company is has variable interest exposure on convertible debt issued by a subsidiary, what financial reporting method should be used?

Answer 7

The consolidation method.

Question 8

What does an M-Score of greater than -1.68 indicate?

Answer 8

Potential earnings manipulation.

Question 9

What is a stronger determinant of accounting method to use, % ownership in the subsidiary or degree of influence over the subsidiary?

Answer 9

Degree of influence.

Question 10

Can trading securities be written up past previous value on the balance sheet?

Answer 10

Yes.

Question 11

What are the levels of influence and accounting methods at <20%, 20-50%, and >50%?

Answer 11

<20% - No significant influence (FV, HTM)
20-50% - Significant Influence (Equity Method)
>50% - Control (Consolidation Method)

Question 12

If company A uses the equity method to account for its investment in Company B, is net income affected if it is proportionally consolidated with Company B, and why?

Answer 12

No, as Company B’s net income would already have been included as a single line in Company A’s income state under the equity method.

Question 13

What is the test for goodwill impairment?

Answer 13

If carrying value is greater than fair value.

Question 14

If goodwill is impaired, what is the outcome?

Answer 14

A loss is recognised for Book Value Goodwill - Implied Goodwill.

Question 15

Under the acquisition method, how is Company B’s income statement accounted for?

Answer 15

Each line of Company B’s income statement is proportionally consolidated with Company A’s income statement.

Question 16

What is the formula for Periodic Pension Cost?

Answer 16

PPC = Service Cost + Interest Cost - Expected Return

Question 17

How is interest cost calculated?

Answer 17

Interest Cost = Beginning PBO x Discount Rate

Question 18

What are the two formulas for Total Period Pension Cost?

Answer 18

TPPC = Service Cost + Interest Cost - Actual Return

TPPC = Contributions - Change in FundedStatus

Question 19

What parts of PBO/ FV of Plan Assets are affected by the discount rate?

Answer 19

Service cost is the PV of future cash flows using the discount rate.
Interest cost is Beginning PBO x Discount Rate
FV of plan assets is not affected by the discount rate.

Question 20

Under IFRS, how is net interest income calculated (for pension purposes)

Answer 20

Net Interest Income = Funded Status x Discount Rate

Question 21

What is adjusted CFO?

Answer 21

Adjusted CFO is CFO after excess principal repayments have been moved from CFF or vice versa.

Question 22

What is the formula for adjusted CFO for excess contributions?

Answer 22

Adjusted CFO = CFO + (1-T)(Excess Contributions)

Question 23

What are the inputs to share-based compensation option pricing models?

Answer 23

Volatility, Share Price, Risk-Free Rate, Dividend Yield

Question 24

How is the expense recognised for share-based compensation?

Answer 24

The expense is recognised based on fair value on grant date, and allocated over employee service period.

Question 25

Under the temporal method, what rate are monetary assets translated at?

Answer 25

The current method.

Question 26

Under the temporal method, what rate are non-monetary assets translated at?

Answer 26

The historical rate.

Question 27

Under the temporal method, what rate are dividends and common stock translated at?

Answer 27

The historical rate.

Question 28

Under the temporal method, what rate are the income statement items translated at?

Answer 28

COGS, depreciation and amortisation are translated at the historical rate. The remainder of income statement items are translated at the average rate.

Question 29

Under the current rate method, what rate are monetary assets translated at?

Answer 29

The current rate.

Question 30

Under the current rate method, what rate are non-monetary assets translated at?

Answer 30

The current rate.

Question 31

Under the current rate method, what rate are dividends and common stock translated at?

Answer 31

The historical rate.

Question 32

Under the current rate method, what rate are income statement items translated at?

Answer 32

The average rate.

Question 33

If the local currency is depreciating, do you want a net liability or net asset position under the current rate?

Answer 33

A net liability position.

Question 34

If the local currency is depreciating, do you want a net monetary liability or net non-monetary liability position?

Answer 34

A net monetary liability position, as this will be translated at the current rate, whereas a net non-monetary position will be translated at the higher historical rate.

Question 35

How do you calculate Cumulative Translation Adjustment (CTA)

Answer 35

1. Translate Assets, Liabilities and Equity using the relevant rates. 2. Find out the asset or liability plug that will make the accounting equation Assets = Liabilities + Equity balance.

Question 36

Divide the following into monetary and non-monetary assets: - Cash - Accounts Receivable - Accounts Payable - Debt - Deferred revenue - Fixed Assets - Intangible Assets

Answer 36

Monetary: - Cash - Accounts Receivable - Accounts Payable - Debt Non-Moneatary - Deferred revenue - Fixed Assets - Intangible Assets

Question 37

Will the return beta in an AR model be affected by whether earnings are cash or accruals?

Answer 37

Yes. Cash-based earnings will be more persistent and thus be assigned a higher beta coefficient.

Question 38

If a subsidiary is classed as a VIE, will the interest income be recognised on the consolidated income statement?

Answer 38

No, as the VIE’s whole income statement will be consolidated with the parent company’s.

Question 39

What are the components of the 5-stage DuPont model?

Answer 39

Tax Burden x Interest Burden x EBIT Margin x Asset Turnover x Financial Leverage

Question 40

What is the formula for Tax Burden?

Answer 40

Tax Burden = Net Income/ EBT

Question 41

What is the formula for Interest Burden?

Answer 41

Interest Burden = EBT/ EBIT

Question 42

What is the formula for EBIT Margin?

Answer 42

EBIT/ Revenue

Question 43

What are the effects on the balance sheet and income statement of capitalising an operating lease?

Answer 43

Balance Sheet: An asset and liability of equal amount are added. Income Statement: The operating expense is credited and charges for depreciation and interest are debited.

Question 44

How is unrealised and realised gain/loss of trading securities accounted for in the income statement under IFRS/ GAAP?

Answer 44

Unrealised and realised losses on trading securities are recognised on the income statement under IFRS and GAAP.

Question 45

How do you calculate funding status at the end of a period?

Answer 45

``` Opening Funding Status - Costs +/- any actuarial gains/losses + actual return + contributions ``` *Benefits paid is not included as it is recognised in both the FV of plan assets and PBO, so net off to 0.

Question 46

What are the steps to adjust an income statement for operating and non-operating items?

Answer 46

1. Add back PPC to op profit. 2. Subtract service cost from op profit. 3. Subtract interest cost from interest expense. 4. Add actual return to other income.

Question 47

For options that are fully vested on grant date, when is the expense recognised?

Answer 47

The full expense is recognised on the grant date.

Question 48

When calculating value of debt immediately after an acquisition, do you use book value or fair value?

Answer 48

Fair value.

Question 49

Under the equity method, how is a new investment accounted for if purchased with cash?

Answer 49

The initial investment is reported at cost in non-current assets and the cash amount is removed from current assets.

Question 50

Under the equity method, do you report full goodwill or partial goodwill?

Answer 50

Partial goodwill.

Question 51

Which accounting method is used for investment in associates?

Answer 51

The equity method.

Question 52

Which accounting method is used for investment in subsidiaries?

Answer 52

The acquisition method.

Question 53

Will revenue be higher or lower under the equity method as compared to the acquisition method?

Answer 53

Lower. Under the acquisition method revenue will be proportionately included in the parent's revenue line, whereas under the equity method the associate's revenue will be rolled up in the net income line.

Question 54

Where are remeasurement gains/ losses recorded under the current rate method and temporal method.

Answer 54

Current Rate Method - Cumulative Translation Adjustment on the balance sheet. Temporal Method - Remeasurement g/l in the income statement.

Question 55

What is the formula for EBI?

Answer 55

EBI = EBIT(1-T)

Question 56

Is capitalising R&D a sign of aggressive or conservative financial reporting?

Answer 56

Aggressive, because you are deferring the expense until later.

Question 57

Is reducing expected return on pension assets a sign of aggressive or conservative financial reporting?

Answer 57

Conservative, because it increases the pension expense.

Question 58

Are total assets higher under the acquisition method or the equity method?

Answer 58

The acquisition method, because the equity method only shows net assets of the affiliate.

Question 59

What is the formula for interest coverage?

Answer 59

Interest Coverage = EBIT / Interest Expense

Question 60

Is net income higher under the equity method, acquisition method, or proportion consolidation?

Answer 60

It is the same under any method.

Question 61

Is equity higher under the equity method, acquisition method, or proportionate consolidation?

Answer 61

Equity is always highest under the acquisition method, as it includes minority interest.

Question 62

What is bill and hold?

Answer 62

Recording revenue whilst inventory is still held.

Question 63

How do you calculate return on equity from the financial statements?

Answer 63

AVERAGE Net Income / AVERAGE Equity

Question 64

Is choosing LIFO inventory aggressive or conservative?

Answer 64

Conservative, because during inflationary periods COGS will be higher.

Question 65

Under the acquisition method, what is the formula for Company A assets just after the acquisition?

Answer 65

Total Assets = Total Assets - Cash + Company B Assets

Question 66

Does a self-contained subsidiary use the current method or the temporal method?

Answer 66

The current method.

Question 67

Under GAAP, what is the effect of hyperinflation on accounting treatment of subsidiaries?

Answer 67

The subsidiary's functional currency becomes the parent's presentation currency.

Question 68

Do IFRS/ GAAP permit partial goodwill?

Answer 68

IFRS permits partial or full goodwill. GAAP requires full goodwill

Question 69

Is the test for impairment different under IFRS and GAAP?

Answer 69

Yes.

Question 70

Is debt a monetary or non-monetary liability?

Answer 70

Monetary.

Question 71

How are a subsidiaries foreign payables/ receivables accounted for? i.e. What translation method and where are FX g/l recognised?

Answer 71

They are translated at the current and g/l go on the income statement.

Question 72

What is the formula for period pension expense under US GAAP?

Answer 72

PPE = Service Cost + Int. Cost - Expected Return + Amortised Loss - Amortised Gain

Question 73

When is amortisation required?

Answer 73

When actuarial losses are greater than 10% of opening PBO.

Question 74

How are share options accounted for on the balance sheet/ income statement?

Answer 74

Net income is reduced but paid-in capital is increased (No change to total equity).

Question 75

What is the formula for ending assets?

Answer 75

Ending Assets = Beginning Assets + Contributions - Benefits Paid + Actual Return

Question 76

Under IFRS, what is the effect of hyperinflation on accounting treatment of subsidiaries?

Answer 76

The parent can translate inflation-adjusted nonmonetary assets and liabilites at the current rate, removing most of the inflation effect.

Question 77

What is the accounting treatment under the pooling of interests method?

Answer 77

The pooling of interests method acts as if neither firm acquired the other, but that their interests were joined equally. - Book values are combined. - Prior operating periods are restated. - Fair value/ price paid is not recorded on financial statements.