Financial Reporting and Analysis

Question 1

What is the classification of business activities

Answer 1

■ Operating activities are those activities that are part of the day- to- day business
functioning of an entities
■ Investing activities are those activities associated with acquisition and disposal
of long- term assets.
■ Financing activities are those activities related to obtaining or repaying capital.
The two primary sources for such funds are owners (shareholders) or creditors

Question 2

Where does ideally an analyst prefers that company’s profit comes from

Answer 2

operating activities.

Question 3

What are Assets

Answer 3

assets are the

economic resources of a company

Question 4

What are Liabilities

Answer 4

liabilities are the creditors’ claims on the resources of a company

Question 5

What are owner equity

Answer 5

owners’ equity is the residual claim on those resources

Question 6

What are Revenues

Answer 6

revenues

are inflows of economic resources to the company

Question 7

What are Expenses

Answer 7

outflows of

economic resources or increases in liabilities

Question 8

What are accounts

Answer 8

Accounts are
individual records of increases and decreases in a specific asset, liability, component
of owners’ equity, revenue, or expense.

Question 9

What are allowance for bad debts

Answer 9

The estimated uncollectible amount is recorded in an account

Question 10

What is a contra accounts

Answer 10

Any account that is offset or deducted from another account

Question 11

Examples of contra accounts

Answer 11

Common contra accounts include

allowance for bad debts

accumulated depreciation

sales returns and allowances

Question 12

What are non current assets

Answer 12

Non- current assets are assets that are expected to benefit the company over an
extended period of time (usually more than one year).

Question 13

Current assets

Answer 13

are those that are expected to be consumed or converted into cash
in the near future, typically one year or less

Question 14

Examples of currents assets

Answer 14

Inventory is the unsold units of product 
on hand (sometimes referred to as inventory stock). 

Trade receivables (also referred
to as commercial receivables, or simply accounts receivable) are amounts customers
owe the company for products that have been sold as well as amounts that may be
due from suppliers (such as for returns of merchandise).

Other receivables represent
amounts owed to the company from parties other than customers.

Cash refers to cash
on hand

Cash equivalents are very liquid short- term investments, usually maturing in 90 days or
less.

Question 15

The balance sheet

Answer 15

presents a company’s financial position at a particular point
in time. It provides a listing of a company’s assets and the claims on those assets
(liabilities and equity claims)

Question 16

Formula for balance sheet

Answer 16

Assets = Liabilities + Owners’ equity

Question 17

Formulas for Owners equity

Answer 17

Assets – Liabilities = Owners’ equity

Owners’ equity = Contributed capital + Retained earnings

Question 18

income statement

Answer 18

presents the performance of a business for a specific period of time.

Revenue – Expenses = Net income (loss)

Question 19

Formula

Answer 19

Ending retained earnings = Beginning retained earnings +Net income -Dividends

Question 20

Expanded Assets Formula

Answer 20

Assets = Liabilities + Contributed capital + Ending retained earnings

or

Assets =Liabilities +Contributed capital +Beginning retained earnings
+Revenue- Expenses- Dividends

if no dividends present continue without it

Question 21

statement of retained earnings

Answer 21

shows the linkage between the balance sheet

and income statement

Question 22

Objectives Accounting System

Answer 22

■ Identify those activities requiring further action (e.g., collection of outstanding
receivable balances).
■ Assess the profitability of the operations over the month.
■ Evaluate the current financial position of the company (such as cash on hand).

Question 23

Asset Accounts

Answer 23

Cash
Investments
Prepaid rent (cash paid for rent in advance of recognizing the expense)
Rent deposit (cash deposited with the landlord, but returnable to the company)
Office equipment
Inventory
Accounts receivable

Question 24

Liability Accounts

Answer 24

Unearned fees (fees that have not been earned yet, even though cash has been received)
Accounts payable (amounts owed to suppliers)
Bank debt

Question 25

Equity Accounts

Answer 25

Contributed capital Retained earnings Dividends

Question 26

unclassified | balance sheet

Answer 26

one that does not show subtotals for current assets and current liabilities. Assets are simply listed in order of liquidity (how quickly they are expected to be converted into cash). Similarly, liabilities are listed in the order in which they are expected to be satisfied (or paid off).

Question 27

Depreciation

Answer 27

the term for the process of spreading this cost over | multiple periods

Question 28

direct format

Answer 28

The format of the statement of cash flows presented here is known as the direct format, which refers to the operating cash section appearing simply as operating cash receipts less operating cash disbursements.

Question 29

indirect format

Answer 29

An alternative format for the operating cash section, which begins with net income and shows adjustments to derive operating cash flow,

Question 30

Accrual

Answer 30

Accrual accounting requires that revenue be recorded when earned and that expenses be recorded when incurred,

Question 31

Unearned revenue (or deferred revenue)

Answer 31

arises when a company receives cash prior to earning the revenue.Liability

Question 32

Unbilled revenue (or accrued revenue)

Answer 32

arises when a company earns revenue prior to receiving cash but has not yet recognized the revenue at the end of an accounting period.Asset

Question 33

Prepaid expense

Answer 33

arises when a company makes a cash payment prior to recognizing an expense.Asset

Question 34

Accrued expenses

Answer 34

arise when a company incurs expenses that have not yet been paid as of the end of an accounting period. Accrued expenses result in liabilities that usually require future cash payments Liability

Question 35

Accounting System Flow

Answer 35

Journal entries and adjusting entries General ledger and T- account Trial balance and adjusted trial balance Financial statements

Question 36

What's the focus of financial analysis

Answer 36

a central focus of financial analysis is evaluating the company’s ability to earn a return on its capital that is at least equal to the cost of that capital, to profitably grow its operations, and to generate enough cash to meet obligations and pursue opportunities.

Question 37

Why is cash flow important

Answer 37

Cash flow is important because, ultimately, the company needs cash to pay employees, suppliers, and others in order to continue as a going concern. A company that generates positive cash flow from operations has more flexibility in funding needed for investments and taking advantage of attractive business opportunities than an otherwise comparable company without positive operating cash flow. Additionally, a company needs cash to pay returns (interest and dividends) to providers of debt and equity capital.

Question 38

Liquidity

Answer 38

The ability to meet short- term obligations

Question 39

Solvency

Answer 39

The ability to | meet long- term obligations is generally referred to as solvency.

Question 40

When does companies prepare financial reports

Answer 40

Companies prepare financial reports at regular intervals (annually, semiannually, and/or quarterly depending on the applicable regulatory requirements). Financial reports include financial statements along with supplemental disclosures necessary to assess the company’s financial position and periodic performance.

Question 41

Do financial statements are audited by an independent accountant

Answer 41

Financial statements are almost always audited by independent accountants, who provide an opinion on whether the financial statements present fairly the company’s performance and financial position, in accordance with a specified, applicable set of accounting standards and principles.

Question 42

What's the complete set of financial statements

Answer 42

A complete set of financial statements include a statement of financial position (i.e., a balance sheet), a statement of comprehensive income , a statement of changes in equity, and a statement of cash flows.

Question 43

What does IFRS requires companies

Answer 43

IFRS require companies to present balance sheets that show current and non- current assets and current and non- current liabilities as separate classifications. However, IFRS do not prescribe a particular ordering or format, and the order in which companies present their balance sheet items is largely a function of tradition.

Question 44

Comprehensive Income

Answer 44

Comprehensive income includes all items that impact owners’ equity but are not the result of transactions with shareowners. Some of these items are included in the calculation of net income, and some are included in other comprehensive income (OCI).

Question 45

Statement of Changes in Equity

Answer 45

primarily serves to report changes in the owners’ investment in the business over time. The basic components of owners’ equity are paid- in capital and retained earnings. Retained earnings include the cumulative amount of the company’s profits that have been retained in the company

Question 46

Financial flexibility

Answer 46

is the ability of the company to react and | adapt to financial adversity and opportunities

Question 47

Financial Notes and Supplementary Schedules

Answer 47

The notes (also sometimes referred to as footnotes) that accompany the four financial statements are required and are an integral part of the complete set of financial statements. The notes provide information that is essential to understanding the information provided in the primary statements. The notes disclose the basis of preparation for the financial statements. The notes also disclose information about the accounting policies, methods, and estimates used to prepare the financial statements.

Question 48

Use of comparability

Answer 48

Comparability occurs when different companies’ information is measured and reported in a similar manner over time. Comparability helps the analyst identify and analyze the real economic differences across companies, rather than differences that arise solely from different accounting choices.

Question 49

Management Commentary or Management’s Discussion and Analysis

Answer 49

Publicly held companies typically include a section in their annual reports where management discusses a variety of issues, including the nature of the business, past results, and future outlook.

Question 50

Who requires the Management Commentary

Answer 50

US Securities and Exchange | Commission (SEC) or the UK Financial Reporting Council (FRC).

Question 51

Framework of Management Commentary

Answer 51

The framework identifies five content elements of a “decision- useful management commentary:” 1) the nature of the business; 2) management’s objectives and strategies; 3) the company’s significant resources, risks, and relationships; 4) results of operations; and 5) critical performance measures

Question 52

Overall Objective of an Auditor

Answer 52

A To obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, thereby enabling the auditor to express an opinion on whether the financial statements are prepared, in all material respects, in accordance with an applicable financial reporting framework; and B To report on the financial statements, and communicate as required by the ISAs, in accordance with the auditor’s findings.

Question 53

Can auditors provide an opinion with absolute accuracy

Answer 53

No,be based on estimates and assumptions.

Question 54

How do you state an unqualified audit opinion

Answer 54

states that the financial statements give a “true and fair view” (international) or are “fairly presented” (international and US) in accordance with applicable accounting standards.

Question 55

How do you state a qualified audit opinion

Answer 55

A qualified audit opinion is one in which there is some scope limitation or exception to accounting standards

Question 56

How do you state an adverse audit opinion

Answer 56

An adverse audit opinion is issued when an auditor determines that the financial statements materially depart from accounting standards and are not fairly presented.

Question 57

How do you state an disclaimer of opinion

Answer 57

Finally, a disclaimer of opinion occurs when, for some reason, such as a scope limitation, the auditors are unable to issue an opinion.

Question 58

Sarbanes-Oxley Act

Answer 58

the auditors must also express an opinion on the company’s internal control systems. This information may be provided in a separate opinion or incorporated as a paragraph in the opinion related to the financial statements. The internal control system is the company’s internal system that is designed, among other things, to ensure that the company’s process for generating financial reports is sound.

Question 59

Other sources of information provided

Answer 59

In addition, companies also provide information on management and director compensation, company stock performance, and any potential conflicts of interest that may exist between management, the board, and shareholders.

Question 60

Interim Reports

Answer 60

Interim reports are also provided by the company either semiannually or quarterly, depending on the applicable regulatory requirements. Interim reports generally present the four primary financial statements and condensed notes but are not audited. These interim reports provide updated information on a company’s performance and financial position since the last annual period

Question 61

Other relevant current information

Answer 61

websites, in press | releases, and in conference calls with analysts and investors.

Question 62

Purpose of Financial Statements

Answer 62

■ The primary purpose of financial reports is to provide information and data about a company’s financial position and performance, including profitability and cash flows

Question 63

Balance Sheet

Answer 63

The balance sheet discloses what resources a company controls (assets) and what it owes (liabilities) at a specific point in time. Owners’ equity represents the net assets of the company; it is the owners’ residual interest in, or residual claim on, the company’s assets after deducting its liabilities.

Question 64

income statement

Answer 64

presents information on the financial results of a company’s business activities over a period of time. The income statement communicates how much revenue and other income the company generated during a period and what expenses, including losses, it incurred in connection with generating that revenue and other income.

Question 65

The financial statement analysis framework

Answer 65

● articulate the purpose and context of the analysis; ● collect input data; ● process data; ● analyze/interpret the processed data; ● develop and communicate conclusions and recommendations; and ● follow up

Question 66

What's the preferred audit Opinion

Answer 66

Qualified

Question 67

Proxy Statement

Answer 67

The proxy statement provides details about management, their experience and qualifications.

Question 68

Objective of Financial Reporting

Answer 68

the objective of financial reporting is to provide financial information that is useful to users in making decisions about providing resources to the reporting entity, where those decisions relate to equity and debt instruments, or loans or other forms of credit, and in influencing management’s actions that affect the use of the entity’s economic resources.

Question 69

Whats the two types of standards

Answer 69

some of which were quite comprehensive and complex (rules- based standards), and others that were more general (principles- based standards).

Question 70

Accounting Standards Boards

Answer 70

Accounting standards boards exist in virtually every national market. These boards are typically independent, private, not- for- profit organizations. There are certain attributes that are typically common to these standard setters—the IASB and the FASB

Question 71

Regulatory Authorities

Answer 71

Regulatory authorities are governmental entities that have the legal authority to enforce financial reporting requirements and exert other controls over entities that participate in the capital markets within their jurisdiction. Regulatory authorities may require that financial reports be prepared in accordance with one specific set of accounting standards or may specify acceptable accounting standards.

Question 72

International Organization of Securities Commissions

Answer 72

the International Organization of Securities Commissions (IOSCO) regulate a significant portion of the world’s financial capital markets. This organization has established objectives and principles to guide securities and capital market regulation. Formed in 1983 consists of ordinary members, associate members, and affiliate members.

Question 73

IOSCO’s comprehensive set of Objectives and Principles of Securities Regulation

Answer 73

■ protecting investors; ■ ensuring that markets are fair, efficient, and transparent; and ■ reducing systemic risk

Question 74

IOSCO "Principle for Issuers"

Answer 74

■ There should be full, accurate, and timely disclosure of financial results, risk, and other information which is material to investors’ decisions. ■ Accounting standards used by issuers to prepare financial statements should be of a high and internationally acceptable quality

Question 75

Most significant pieces of legislation in the US

Answer 75

■ Securities Act of 1933 (The 1933 Act): This act specifies the financial and other significant information that investors must receive when securities are sold, prohibits misrepresentations, and requires initial registration of all public issuances of securities. ■ Securities Exchange Act of 1934 (The 1934 Act): This act created the SEC, gave the SEC authority over all aspects of the securities industry, and empowered the SEC to require periodic reporting by companies with publicly traded securities. ■ Sarbanes–Oxley Act of 2002: This act created the Public Company Accounting Oversight Board (PCAOB) to oversee auditors. The SEC is responsible for carrying out the requirements of the act and overseeing the PCAOB. The act addresses auditor independence (it prohibits auditors from providing certain non- audit services to the companies they audit); strengthens corporate responsibility for financial reports

Question 76

Fillings used by analysts

Answer 76

■ Securities Offerings Registration Statement: The 1933 Act requires companies offering securities to file a registration statement. New issuers as well as previously registered companies that are issuing new securities are required to file these statements. Required information and the precise form vary depending upon the size and nature of the offering. Typically, required information includes: 1) disclosures about the securities being offered for sale, 2) the relationship of these new securities to the issuer’s other capital securities, 3) the information typically provided in the annual filings, 4) recent audited financial statements, and 5) risk factors involved in the business. ■ Forms 10- K, 20- F, and 40- F: These are forms that companies are required to file annually. Form 10- K is for US registrants, Form 40- F is for certain Canadian registrants, and Form 20- F is for all other non- US registrants. These forms require a comprehensive overview, including information concerning a company’s business, financial disclosures, legal proceedings, and information related to management. The financial disclosures include a historical summary of financial data (usually 10 years), management’s discussion and analysis (MD&A) of the company’s financial condition and results of operations, and audited financial statements. ■ Annual Report: In addition to the SEC’s annual filings (e.g., Form 10- K), most companies prepare an annual report to shareholders. This is not a requirement of the SEC. The annual report is usually viewed as one of the most significant opportunities for a company to present itself to shareholders and other external parties; accordingly, it is often a highly polished marketing document with photographs, an opening letter from the chief executive officer, financial data, market segment information, research and development activities, and future corporate goals. In contrast, the Form 10- K is a more legal type of document with minimal marketing emphasis. Although the perspectives vary, there is considerable overlap between a company’s annual report and its Form 10- K. Some companies elect to prepare just the Form 10- K or a document that integrates both the 10- K and annual report. ■ Proxy Statement/Form DEF- 14A: The SEC requires that shareholders of a company receive a proxy statement prior to a shareholder meeting. A proxy is an authorization from the shareholder giving another party the right to cast its vote. Shareholder meetings are held at least once a year, but any special meetings also require a proxy statement. Proxies, especially annual meeting proxies, contain information that is often useful to financial analysts. Such information typically includes proposals that require a shareholder vote, details of security ownership by management and principal owners, biographical information on directors, and disclosure of executive compensation. Proxy statement information is filed with the SEC as Form DEF- 14A ■ Forms 10- Q and 6- K: These are forms that companies are required to submit for interim periods (quarterly for US companies on Form 10- Q, semiannually for many non- US companies on Form 6- K). The filing requires certain financial information, including unaudited financial statements and a MD&A for the interim period covered by the report. Additionally, if certain types of non- recurring events—such as the adoption of a significant accounting policy, commencement of significant litigation,

Question 77

Other Forms

Answer 77

■ Form 8- K: In addition to filing annual and interim reports, SEC registrants must report material corporate events on a more current basis. Form 8- K (6- K for non- US registrants) is the “current report” companies must file with the SEC to announce such major events as acquisitions or disposals of corporate assets, changes in securities and trading markets, matters related to accountants and financial statements, corporate governance and management changes, and Regulation FD disclosures ■ Forms 3, 4, 5 and 144: Forms 3, 4 and 5 are required to report beneficial ownership of securities. These filings are required for any director or officer of a registered company as well as beneficial owners of greater than 10 percent of a class of registered equity securities. Form 3 is the initial statement, Form 4 reports changes, and Form 5 is the annual report. Form 14 is notice of the proposed sale of restricted securities or securities held by an affiliate of the issuer. These forms can be used to examine purchases and sales of securities by officers, directors, and other affiliates of the company, who collectively are regarded as corporate insiders. ■ Form 11- K: This is the annual report of employee stock purchase, savings, and similar plans. It might be of interest to analysts for companies with significant employee benefit plans because it contains more information than that disclosed in the company’s financial statemen

Question 78

What are the two fundamental qualitative characteristics that make financial information useful

Answer 78

Relevance : Information is relevant if it would potentially affect or make a differences in users’ decisions. The information can have predictive value (useful in making forecasts), confirmatory value (useful to evaluate past decisions or forecasts), or both. In other words, relevant information helps users of financial information to evaluate past, present, and future events, or to confirm or correct their past evaluations in a decision- making context. Materiality: Information is considered to be material if omission or misstatement of the information could influence users’ decisions. Faithful representation: Information that faithfully represents an economic phenomenon that it purports to represent is ideally complete, neutral, and free from error. Complete means that all information necessary to understand the phenomenon is depicted. Neutral means that information is selected and presented without bias. In other words, the information is not presented in such a manner as to bias the users’ decisions. Free from error means that there are no errors of commission or omission in the description of the economic phenomenon, and that an appropriate process to arrive at the reported information was selected and was adhered to without error. Faithful representation maximizes the qualities of complete, neutral, and free from error to the extent possible.

Question 79

What are the four enhancing qualitative characteristics

Answer 79

1 Comparability: Comparability allows users “to identify and understand similarities and differences of items.” Information presented in a consistent manner over time and across entities enables users to make comparisons more easily than information with variations in how similar economic phenomena are represented. 2 Verifiability: Verifiability means that different knowledgeable and independent observers would agree that the information presented faithfully represents the economic phenomena it purports to represent. 3 Timeliness: Timely information is available to decision makers prior to their making a decision. 4 Understandability: Clear and concise presentation of information enhances understandability. Information should be prepared for and be understandable by users who have a reasonable knowledge of business and economic activities, and who are willing to study the information with diligence. Information that is useful should not be excluded simply because it is difficult to understand and it may be necessary for users to seek assistance to understand information about complex economic phenomena.

Question 80

What are the two Assumptions in Financial Statements

Answer 80

The use of “accrual accounting” assumes that financial statements should reflect transactions in the period when they actually occur, not necessarily when cash movements occur “Going concern” refers to the assumption that the company will continue in business for the foreseeable future

Question 81

Measurement of Financial Statement Elements

Answer 81

■ Historical cost: Historical cost is simply the amount of cash or cash equivalents paid to purchase an asset, including any costs of acquisition and/or preparation. If the asset was not bought for cash, historical cost is the fair value of whatever was given in order to buy the asset. When referring to liabilities, the historical cost basis of measurement means the amount of proceeds received in exchange for the obligation. ■ Amortized cost: Historical cost adjusted for amortization, depreciation, or depletion and/or impairment. ■ Current cost: In reference to assets, current cost is the amount of cash or cash equivalents that would have to be paid to buy the same or an equivalent asset today. In reference to liabilities, the current cost basis of measurement means the undiscounted amount of cash or cash equivalents that would be required to settle the obligation today. ■ Realizable (settlement) value: In reference to assets, realizable value is the amount of cash or cash equivalents that could currently be obtained by selling the asset in an orderly disposal. For liabilities, the equivalent to realizable value is called “settlement value”—that is, settlement value is the undiscounted amount of cash or cash equivalents expected to be paid to satisfy the liabilities in the normal course of business. ■ Present value (PV): For assets, present value is the present discounted value of the future net cash inflows that the asset is expected to generate in the normal course of business. For liabilities, present value is the present discounted value of the future net cash outflows that are expected to be required to settle the liabilities in the normal course of business. ■ Fair value: is defined as an exit price, the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. This may involve either market measures or present value measures depending on the availability of information.

Question 82

Required Financial Statements

Answer 82

• Statement of financial position (Balance sheet) • Statement of comprehensive income (Single statement or Income statement + Statement of comprehensive income) • Statement of changes in equity • Statement of cash flows • Notes, summarizing accounting policies and disclosing other items • In certain cases, Statement of financial position from earliest comparative period

Question 83

General Features

Answer 83

• Fair presentation Fair presentation requires the faithful representation of the effects of transactions, other events and conditions in accordance with the definitions and recognition criteria for assets, liabilities, income and expenses • Going concern Financial statements are prepared on a going concern basis unless management either intends to liquidate the entity or to cease trading, or has no realistic alternative but to do so. If not presented on a going concern basis, the fact and rationale should be disclosed. • Frequency of reporting Financial statements must be prepared at least annually. • Comparative information : Financial statements must include comparative information from the previous period. • Consistency of presentation The presentation and classification of items in the financial statements are usually retained from one period to the ne • Accrual basis Financial statements (except for cash flow information) are to be prepared using the accrual basis of accounting • Materiality and aggregation Omissions or misstatements of items are material if they could, individually or collectively, influence the economic decisions that users make on the basis of the financial statements • No offsetting Assets and liabilities, and income and expenses, are not offset unless required or permitted by an IFRS

Question 84

Structures and Content

Answer 84

• Classified balance sheet requires the balance sheet to distinguish between current and non- current assets, and between current and non- current liabilities unless a presentation based on liquidity provides more relevant and reliable information • Minimum specified information on face specifies the minimum line item disclosures on the face of, or in the notes to, the financial statements • Comparative information For all amounts reported in a financial statement, comparative information should be provided for the previous period unless another standard requires or permits otherwise. disclosures ■ Minimum Information in the Notes (or on the face of financial statements): specifies disclosures about information to be presented in the financial statements. This information must be provided in a systematic manner and cross-referenced from the face of the financial statements to the notes

Question 85

How do you call an income statement that shows gross profit

Answer 85

it is said to use a multi- step format rather than a single- step format. Gross profit its said to be calculated as revenue minus the cost of the goods that were sold

Question 86

operating profit

Answer 86

Operating profit results from deducting operating expenses such as selling, general, administrative, and research and development expenses from gross profit. Operating profit reflects a company’s profits on its business activities before deducting taxes, and for non- financial companies, before deducting interest expense. can be called s EBIT (earnings before interest and taxes). However, operating profit and EBIT are not necessarily the same

Question 87

Revenue Recognition

Answer 87

Accounting standards for revenue recognition became effective at the beginning of 2018 and are nearly identical under IFRS and US GAAP. The revenue recognition standards for IFRS and US GAAP (IFRS 15 and ASC Topic 606, respectively) were issued in 2014 and resulted from an effort to achieve convergence, consistency, and transparency in revenue recognition globally.

Question 88

What is income

Answer 88

Income is increases in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity, other than those relating to contributions from equity participants.

Question 89

What happens if a company receives cash in advance before delivering service

Answer 89

the company would record a liability for unearned revenue when the cash is initially received, and revenue would be recognized as being earned over time as products and services are delivered.

Question 90

What are the five steps in recognizing revenue

Answer 90

1 Identify the contract(s) with a customer 2 Identify the separate or distinct performance obligations in the contract 3 Determine the transaction price 4 Allocate the transaction price to the performance obligations in the contract 5 Recognize revenue when (or as) the entity satisfies a performance obligation

Question 91

when should revenue be recognized

Answer 91

Revenue is recognized when the obligation- satisfying transfer is made. Revenue should only be recognized when it is highly probable that it will not be subsequently reversed. This may result in the recording of a minimal amount of revenue upon sale when an estimate of total revenue is not reliable. The balance sheet will be required to reflect the entire refund obligation as a liability and will include an asset for the “right to returned goods” based on the carrying amount of inventory less costs of recovery

Question 92

EXPENSE RECOGNITION

Answer 92

expenses are “decreases in economic benefits during the accounting period in the form of outflows or depletions of assets or incurrences of liabilities that result in decreases in equity, other than those relating to distributions to equity participants

Question 93

matching principle

Answer 93

Under matching, a company recognizes some expenses (e.g., cost of goods sold) when associated revenues are recognized and thus, expenses and revenues are matched. Associated revenues and expenses are those that result directly and jointly from the same transactions or events. Matching requires that a company recognizes cost of goods sold in the same period as revenues from the sale of the goods

Question 94

Issues in Expense Recognition

Answer 94

When a company sells its products or services on credit, it is likely that some customers will ultimately default on their obligations (i.e., fail to pay). At the time of the sale, it is not known which customer will default. (If it were known that a particular customer would ultimately default, presumably a company would not sell on credit to that customer.)

Question 95

Doubtful Accounts

Answer 95

One possible approach to recognizing credit losses on customer receivables would be for the company to wait until such time as a customer defaulted and only then recognize the loss (direct write- off method). Such an approach would usually not be consistent with generally accepted accounting principles. Under the matching principle, at the time revenue is recognized on a sale, a company is required to record an estimate of how much of the revenue will ultimately be uncollectible

Question 96

Warranties

Answer 96

At times, companies offer warranties on the products they sell. If the product proves deficient in some respect that is covered under the terms of the warranty, the company will incur an expense to repair or replace the product. At the time of sale, the company does not know the amount of future expenses it will incur in connection with its warranties. One possible approach would be for a company to wait until actual expenses are incurred under the warranty and to reflect the expense at that time. However, this would not result in a matching of the expense with the associated revenue. Under the matching principle, a company is required to estimate the amount of future expenses resulting from its warranties, to recognize an estimated warranty expense in the period of the sale, and to update the expense as indicated by experience over the life of the warranty.

Question 97

What are the two models for valuing property, plant and equipment

Answer 97

the cost model and the revaluation model.

Question 98

Implications for Financial Analysis

Answer 98

A policy that results in recognition of expenses later rather than sooner is considered less conservative.If, for example, a company shows a significant year- to- year change in its estimates of uncollectible accounts as a percentage of sales, warranty expenses as a percentage of sales, or estimated useful lives of assets, the analyst should seek to understand the underlying reasons.

Question 99

NON- RECURRING ITEMS AND NON- OPERATING | ITEMS

Answer 99

To assess a company’s future earnings, it is helpful to separate those prior years’ items of income and expense that are likely to continue in the future from those items that are less likely to continue. Both IFRS and US GAAP specify that the results of discontinued operations should be reported separately from continuing operations.

Question 100

Discontinued Operations

Answer 100

When a company disposes of or establishes a plan to dispose of one of its component operations and will have no further involvement in the operation, the income statement reports separately the effect of this disposal as a “discontinued” operation under both IFRS and US GAAP

Question 101

Unusual or Infrequent Items

Answer 101

IFRS require that items of income or expense that are material and/or relevant to the understanding of the entity’s financial performance should be disclosed separately. Under US GAAP, material items that are unusual or infrequent, and that are both as of reporting periods beginning after December 15, 2015, are shown as part of a company’s continuing operations but are presented separately

Question 102

Changes in Accounting Policies

Answer 102

At times, standard setters issue new standards that require companies to change accounting policies. Depending on the standard, companies may be permitted to adopt the standards prospectively (in the future) or retrospectively (restate financial statements as though the standard existed in the past).

Question 103

What is Retrospective Application

Answer 103

Retrospective application means that the financial statements for all fiscal years shown in a company’s financial report are presented as if the newly adopted accounting principle had been used throughout the entire period. Notes to the financial statements describe the change and explain the justification for the change. Because changes in accounting principles are retrospectively applied, the financial statements that appear within a financial report are comparable.

Question 104

Possible adjustment

Answer 104

correction of an error for a prior period (e.g., in financial statements issued for an earlier year). This cannot be handled by simply adjusting the current period income statement. Correction of an error for a prior period is handled by restating the financial statements (including the balance sheet, statement of owners’ equity, and cash flow statement) for the prior periods presented in the current financial statements

Question 105

Non- Operating Items

Answer 105

Non- operating items are typically reported separately from operating income because they are material and/or relevant to the understanding of the entity’s financial performance. Under IFRS, there is no definition of operating activities, and companies that choose to report operating income or the results of operating activities should ensure that these represent activities that are normally regarded as operating. Under US GAAP, operating activities generally involve producing and delivering goods and providing services and include all transactions and other events that are not defined as investing or financing activities.

Question 106

How can interest and dividends be shown

Answer 106

Specifically, under IFRS, interest and dividends received can be shown either as operating or as investing on the statement of cash flows, while under US GAAP interest and dividends received are shown as operating cash flows. Under IFRS, interest and dividends paid can be shown either as operating or as financing on the statement of cash flows, while under US GAAP, interest paid is shown as operating and dividends paid are shown as financing.)

Question 107

What's an ordinary share

Answer 107

Under IFRS, the type of equity for which EPS is presented is referred to as ordinary. Ordinary shares are those equity shares that are subordinate to all other types of equity. The ordinary shareholders are basically the owners of the company—the equity holders who are paid last in a liquidation of the company and who benefit the most when the company does well. Under US GAAP, this ordinary equity is referred to as common stock or common shares, reflecting US language usage

Question 108

What happens when a company issues financial instruments that are convertible to stocks

Answer 108

it is said to have a complex capital structure

Question 109

What happens when a company issues financial instruments that are not convertible to stocks

Answer 109

it is said to have a simple capital structure

Question 110

Why is it important to know between a simple vs complex capital structure

Answer 110

The distinction between simple versus complex capital structure is relevant to the calculation of EPS because financial instruments that are potentially convertible into common stock could, as a result of conversion or exercise, potentially dilute (i.e., decrease) EPS

Question 111

What's diluted EPS

Answer 111

The EPS that would result if all dilutive financial instruments were converted is called diluted EPS

Question 112

What's basic EPS

Answer 112

Basic EPS is the amount of income available to common shareholders divided by the weighted average number of common shares outstanding over a period. The amount of income available to common shareholders is the amount of net income remaining after preferred dividends (if any) have been paid

Question 113

Diluted EPS,

Answer 113

is always equal to or less than basic EPS. The sections below describe the effects of three types of potentially dilutive financial instruments on diluted EPS: convertible preferred, convertible debt, and employee stock options.

Question 114

Diluted EPS When a Company Has Convertible Preferred Stock Outstanding

Answer 114

When a company has convertible preferred stock outstanding, diluted EPS is calculated using the if- converted method. The if- converted method is based on what EPS would have been if the convertible preferred securities had been converted at the beginning of the period.

Question 115

Diluted EPS When a Company Has Convertible Debt Outstanding

Answer 115

When a company has convertible debt outstanding, the diluted EPS calculation also uses the if- converted method

Question 116

Diluted EPS When a Company Has Stock Options, Warrants, or Their Equivalents Outstanding

Answer 116

This method is called the treasury stock method under US GAAP because companies typically hold repurchased shares as treasury stock. The same method is used under IFRS but is not named

Question 117

Common- Size Analysis of the Income Statement

Answer 117

Common- size analysis of the income statement can be performed by stating each line item on the income statement as a percentage of revenue. Common- size statements facilitate comparison across time periods (time series analysis) and across companies (cross- sectional analysis) because the standardization of each line item removes the effect of size

Question 118

Vertical common- size analysis

Answer 118

Vertical common- size analysis of the income statement is particularly useful in cross- sectional analysis—comparing companies with each other for a particular time period or comparing a company with industry or sector data. The analyst could select individual peer companies for comparison, use industry data from published sources, or compile data from databases based on a selection of peer companies or broader

Question 119

Net Profit

Answer 119

Net profit margin measures the amount of income that a company was able to generate for each dollar of revenue. A higher level of net profit margin indicates higher profitability and is thus more desirable. Net profit margin can also be found directly on the common- size income statement

Question 120

gross profit margin

Answer 120

The gross profit margin measures the amount of gross profit that a company generated for each dollar of revenue. A higher level of gross profit margin indicates higher profitability and thus is generally more desirable, although differences in gross profit margins across companies reflect differences in companies’ strategies.

Question 121

” Total comprehensive income

Answer 121

is “the change in equity during a period resulting from transaction and other events, other than those changes resulting from transactions with owners in their capacity as owners.

Question 122

What includes in comprehensive income

Answer 122

Comprehensive income includes both net income and other revenue and expense items that are excluded from the net income calculation (collectively referred to as Other Comprehensive Income).

Question 123

Types of Items treated as other comprehensive income

Answer 123

■ Foreign currency translation adjustments. In consolidating the financial statements of foreign subsidiaries, the effects of translating the subsidiaries’ balance sheet assets and liabilities at current exchange rates are included as other comprehensive income. ■ Unrealized gains or losses on derivatives contracts accounted for as hedges. Changes in the fair value of derivatives are recorded each period, but certain changes in value are treated as other comprehensive income and thus bypass the income statement. ■ Unrealized holding gains and losses on a certain category of investment securities, namely, available- for- sale debt securities under US GAAP and securities designated as “fair value through other comprehensive income” under IFRS. (Note: IFRS, but not US GAAP, also includes a category of equity investments designated at fair value through other comprehensive income.) ■ Certain costs of a company’s defined benefit post- retirement plans that are not recognized in the current period.

Question 124

Under IFRS can companies reclassify other comprehensive income

Answer 124

under IFRS, companies are not permitted to reclassify certain items of other comprehensive income to profit or loss, and companies must present separately the items of other comprehensive income that will and will not be reclassified subsequently to profit or loss.

Question 125

trading securities

Answer 125

The trading securities category pertains to a debt security that is acquired with the intent of selling it rather than holding it to collect the interest and principal payments. Also, under US GAAP, unrealized gains and losses are reflected as other comprehensive income for debt securities designated as available- for- sale securities. Available- for- sale debt securities are those not designated as either held- to- maturity or trading

Question 126

Where under IFRS unrealized gains and losses are reflected in the income statement

Answer 126

Under IFRS, unrealized gains and losses are reflected in the income statement for: (a) investments in equity investments, unless the company makes an irrevocable election otherwise; and (b) debt securities, if the securities do not fall into the other measurement categories or if the company makes an irrevocable election to show gains and losses on the income statement. Referred as fair value through profit or loss

Question 127

Components of income statement

Answer 127

revenue; cost of sales; sales, general, and administrative expenses; other operating expenses; non- operating income and expenses; gains and losses; non- recurring items; net income; and EPS

Question 128

How expenses may be grouped

Answer 128

either function or nature

Question 129

Formula other comprehensive income

Answer 129

Comprehensive income – Net income = Other comprehensive income

Question 130

Consolidation

Answer 130

means that they include all of the revenues and expenses of the subsidiaries even if they own less than 100 percent

Question 131

How profitability will look under the converged standards

Answer 131

higher

Question 132

Accelerated depreciation

Answer 132

conservative accounting choice

Question 133

If company is agent report net

Answer 133

if owner report gross

Question 134

MD&A Requirements

Answer 134

US GAAP important trends/events that affect liquidity,capital resources results of operations off balance sheet obligations prospects for inflation,goals,material events critical activity polices that require subjective jugdements IFRS nature of business MGMT objectives/strategies significant resources,risk,relationships,results of operations

Question 135

Working Capital

Answer 135

The excess of current assets over current liabilities

Question 136

What is a classified balance sheet

Answer 136

A balance sheet with separately classified current and non- current assets and liabilities

Question 137

What is a liquidity based presentation

Answer 137

A liquidity- based presentation, rather than a current/non- current presentation, is used when such a presentation provides information that is reliable and more relevant. With a liquidity- based presentation, all assets and liabilities are presented broadly in order of liquidity.

Question 138

Who uses an liquidity based presentation

Answer 138

Banks

Question 139

Current Assets

Answer 139

Assets that are held primarily for the purpose of trading or that are expected to be sold, used up, or otherwise realized in cash within one year or one operating cycle of the business, whichever is greater, after the reporting period

Question 140

Current Assets 1 ( Cash and Cash Equivalents)

Answer 140

Cash equivalents are highly liquid, short- term investments that are so close to maturity, the risk is minimal that their value will change significantly with changes in interest rates. Cash and cash equivalents are financial assets. Financial assets, in general, are measured and reported at either amortised cost or fair value.

Question 141

What's fair value

Answer 141

Under IFRS and US GAAP, fair value is based on an exit price, the price received to sell an asset or paid to transfer a liability in an orderly transaction between two market participants at the measurement date.

Question 142

Current Assets 2 Marketable Securities

Answer 142

Marketable securities are also financial assets and include investments in debt or equity securities that are traded in a public market, and whose value can be determined from price information in a public market. Examples of marketable securities include treasury bills, notes, bonds, and equity securities, such as common stocks and mutual fund shares

Question 143

Trade Receivables

Answer 143

Trade receivables, also referred to as accounts receivable, are another type of financial asset. These are amounts owed to a company by its customers for products and services already delivered. They are typically reported at net realizable value, an approximation of fair value, based on estimates of collectability.

Question 144

Current Assets 3 ( Inventories)

Answer 144

are physical products that will eventually be sold to the company’s customers, either in their current form (finished goods) or as inputs into a process to manufacture a final product (raw materials and work- in- process).

Question 145

How are inventories measured under IFRS

Answer 145

the lower of cost and net realizable value (NRV) under | IFRS.

Question 146

What comprises the cost of inventories

Answer 146

The cost of inventories comprises all costs of purchase, costs of conversion, and other costs incurred in bringing the inventories to their present location and condition.

Question 147

How is net realizable value calculated

Answer 147

is the estimated selling price less the estimated costs of completion and costs necessary to complete the sale

Question 148

How are inventories measured under US GAAP

Answer 148

inventories are also measured at the lower of cost and NRV unless they are measured using the last- in, first- out (LIFO) or retail inventory methods. When using LIFO or the retail inventory methods, inventories are measured at the lower of cost or market value

Question 149

What methods IFRS uses to calculate inventories

Answer 149

IFRS allows only the first- in, first- out (FIFO), weighted | average cost, and specific identification methods.The LIFO method is not allowed under IFRS

Question 150

Other currents Assets ( Prepaid Expenses)

Answer 150

reflect items that are individually not material enough to require a separate line item on the balance sheet and so are aggregated into a single amount. Companies usually disclose the components of other assets in a note to the financial statements.

Question 151

Prepaid Expenses

Answer 151

Prepaid expenses are normal operating expenses that have been paid in advance. Because expenses are recognized in the period in which they are incurred—and not necessarily the period in which the payment is made—the advance payment of a future expense creates an asset

Question 152

How to put prepaid expenses in the balance sheet

Answer 152

Asset and liability

Question 153

Current Liabilities

Answer 153

Current liabilities are those liabilities that are expected to be settled in the entity’s normal operating cycle, held primarily for trading, or due to be settled within 12 months after the balance sheet date

Question 154

Current Liabilities ( Trade Payables)

Answer 154

Trade payables, also called accounts payable, are amounts that a company owes its vendors for purchases of goods and services.

Question 155

Current Liabilities ( Accrued Expenses)

Answer 155

are expenses that have been recognized on a company’s income statement but not yet been paid as of the balance sheet date.common examples of accrued expenses are accrued interest payable, accrued warranty costs, and accrued employee compensation

Question 156

Current Liabilities ( Deferred Income)

Answer 156

arises when a company receives payment in advance of delivery of the goods and services associated with the payment. The company has an obligation either to provide the goods or services or to return the cash received

Question 157

Non-Current Assets ( Property,Plant,Equipment)

Answer 157

are tangible assets that are used in company operations and expected to be used (provide economic benefits) over more than one fiscal period.

Question 158

How IFRS permits companies to report PPE

Answer 158

a cost model or a revaluation model

Question 159

How US GAAP permits companies to report PPE

Answer 159

US GAAP permits only the cost model for reporting PPE

Question 160

How a cost model works

Answer 160

Under the cost model, PPE is carried at amortised cost (historical cost less any accumulated depreciation or accumulated depletion, and less any impairment losses).

Question 161

How a historical model works

Answer 161

accumulated depreciation or accumulated depletion, and less any impairment losses). Historical cost generally consists of an asset’s purchase price, plus its delivery cost, and any other additional costs incurred to make the asset operable (such as costs to install a machine).

Question 162

Recoverable amount

Answer 162

The higher of an asset’s fair value less cost to sell, and its value in use

Question 163

Fair value less cost to sell:

Answer 163

The amount obtainable in a sale of the asset in an arms- length transaction between knowledgeable willing parties, less the costs of the sale.

Question 164

Value in use

Answer 164

The present value of the future cash flows expected to be derived from the asset.

Question 165

Non current assets (Investment Property)

Answer 165

used to earn rental income or capital appreciation (or both).

Question 166

How IFRS reports investment property

Answer 166

cost model or a fair | value model.

Question 167

Non Current Assets (Intangible assets)

Answer 167

are identifiable non- monetary assets without physical substance. An identifiable asset can be acquired singly (can be separated from the entity) or is the result of specific contractual or legal rights or privileges. Examples include patents, licenses, and trademarks.

Question 168

How IFRS reports intangible assets

Answer 168

report intangible assets using either a cost model or a revaluation model.The revaluation model can only be selected when there is an active market for an intangible asset

Question 169

How US GAAP reports intangible assets

Answer 169

US GAAP permits only the cost model

Question 170

Is it advisable to report a zero value to intangibles

Answer 170

not advisable; instead, an analyst should examine each listed intangible and assess whether an adjustment should be made.

Question 171

Examples of intangible assets that cant be recognized

Answer 171

These assets might include management skill, name recognition, a good reputation,

Question 172

Identifiable Intangible assets

Answer 172

Under IFRS, identifiable intangible assets are recognized on the balance sheet if it is probable that future economic benefits will flow to the company and the cost of the asset can be measured reliably

Question 173

Non current Assets (Goodwill)

Answer 173

When one company acquires another, the purchase price is allocated to all the identifiable assets (tangible and intangible) and liabilities acquired, based on fair value. If the purchase price is greater than the acquirer’s interest in the fair value of the identifiable assets and liabilities acquired, the excess amount is recognized as an asset,

Question 174

Economic Goodwill

Answer 174

Economic goodwill is based on the economic performance of the entity. Economic goodwill is important to analysts and investors, and it is not necessarily reflected on the balance sheet. Instead, economic goodwill is reflected in the stock price (at least in theory). Some financial statement users believe that goodwill should not be listed on the balance sheet, because it cannot be sold separately from the entity

Question 175

Accounting Goodwill

Answer 175

accounting goodwill is based on accounting standards and is reported only in the case of acquisitions.

Question 176

How is account good will capitalized

Answer 176

Goodwill is not amortised but is tested for impairment annually. If goodwill is deemed to be impaired, an impairment loss is charged against income in the current period. An impairment loss reduces current earnings. An impairment loss also reduces total assets, so some performance measures, such as return on assets (net income divided by average total assets), may actually increase in future periods. An impairment loss is a non- cash item.

Question 177

Accounting standards for recognizing goodwill

Answer 177

A The total cost to purchase the target company (the acquiree) is determined. B The acquiree’s identifiable assets are measured at fair value. The acquiree’s liabilities and contingent liabilities are measured at fair value. The difference between the fair value of identifiable assets and the fair value of the liabilities and contingent liabilities equals the net identifiable assets acquired. C Goodwill arising from the purchase is the excess of a) the cost to purchase the target company over b) the net identifiable assets acquired. Occasionally, a transaction will involve the purchase of net identifiable assets with a value greater than the cost to purchase. Such a transaction is called a “bargain purchase.”

Question 178

Can recognition of goodwill affect companies financial ratios

Answer 178

■ excluding goodwill from balance sheet data used to compute financial ratios, and ■ excluding goodwill impairment losses from income data used to examine operating trends.

Question 179

Non current Assets (Financial Assets)

Answer 179

IFRS define a financial instrument as a contract that gives rise to a financial asset of one entity, and a financial liability or equity instrument of another entity.

Question 180

How financial instruments recognized

Answer 180

fair value or amortised cost

Question 181

under US GAAP "Held to Maturity"

Answer 181

financial assets are subsequently measured at amortised cost if the asset’s cash flows occur on specified dates and consist solely of principal and interest, and if the business model is to hold the asset to maturity

Question 182

What happens when an financial asset is sold

Answer 182

any realized gain or loss is reported on the income statement

Question 183

under US GAAP "available- for- sale"

Answer 183

assets are measured at fair value, with any unrealized holding gains or losses recognized in other comprehensive income. However, unlike IFRS, the US GAAP category available- for- sale applies only to debt securities a

Question 184

under US GAAP"Trading debt securities"

Answer 184

, debt securities designated as trading securities are also measured at fair value with unrealized holding gains or losses recognized in the income statement. The trading securities category pertains to a debt security that is acquired with the intent of selling it rather than holding it to collect the interest and principal payments.

Question 185

Non current Assets ( Deferred Tax Assets)

Answer 185

Deferred tax assets may result when the actual income tax payable based on income for tax purposes in a period exceeds the amount of income tax expense based on the reported financial statement income due to temporary timing differences.Deferred tax assets may also result from carrying forward unused tax losses and credits (these are not temporary timing differences). Deferred tax assets are only to be recognized if there is an expectation that there will be taxable income in the future, against which the temporary difference or carried forward tax losses or credits can be applied to reduce taxes payable.

Question 186

Non Current Liabilities(Long Term Financial Liabilities)

Answer 186

Typical long- term financial liabilities include loans (i.e., borrowings from banks) and notes or bonds payable (i.e., fixed- income securities issued to investors). Liabilities such as loans payable and bonds payable are usually reported at amortised cost on the balance sheet

Question 187

Non Current Liabilities ( Deferred Tax Liabilities)

Answer 187

Deferred tax liabilities result from temporary timing differences between a company’s income as reported for tax purposes (taxable income) and income as reported for financial statement purposes (reported income). Deferred tax liabilities result when taxable income and the actual income tax payable in a period based on it is less than the reported financial statement income before taxes and the income tax expense based on it.

Question 188

What is deferred tax liabilities

Answer 188

Deferred tax liabilities are defined as the amounts of income taxes payable in future periods in respect of taxable temporary differences

Question 189

Equity

Answer 189

Equity is the owners’ residual claim on a company’s assets after subtracting its liabilities.It represents the claim of the owner against the company. Equity includes funds directly invested in the company by the owners, as well as earnings that have been reinvested over time. Equity can also include items of gain or loss that are not recognized on the company’s income statemen

Question 190

Components of Equity

Answer 190

1 Capital contributed by owners (or common stock, or issued capital). The amount contributed to the company by owners. Ownership of a corporation is evidenced through the issuance of common shares 2 Preferred shares. Classified as equity or financial liabilities based upon their characteristics rather than legal form. In contrast, preferred shares with mandatory redemption at a fixed amount at a future date are classified as financial liabilities. Preferred shares have rights that take precedence over the rights of common shareholders—rights that generally pertain to receipt of dividends and receipt of assets if the company is liquidated.. 3 Treasury shares (or treasury stock or own shares repurchased). Shares in the company that have been repurchased by the company and are held as treasury shares, rather than being cancelled. The company is able to sell (reissue) these shares. 4 Retained earnings. The cumulative amount of earnings recognized in the company’s income statements which have not been paid to the owners of the company as dividends. 5 Accumulated other comprehensive income (or other reserves). The cumulative amount of other comprehensive income or loss. The term comprehensive income includes both a) net income, which is recognized on the income statement and is reflected in retained earnings, and b) other comprehensive income which is not recognized as part of net income and is reflected in accumulated other comprehensive income 6 Noncontrolling interest (or minority interest). The equity interests of minority shareholders in the subsidiary companies that have been consolidated by the parent (controlling) company but that are not wholly owned by the parent company

Question 191

Statement of Changes in Equity

Answer 191

The statement of changes in equity (or statement of shareholders’ equity) presents information about the increases or decreases in a company’s equity over a period. I

Question 192

What information IFRS requires in the statement of changes of equity

Answer 192

■ total comprehensive income for the period; ■ the effects of any accounting changes that have been retrospectively applied to previous periods; ■ capital transactions with owners and distributions to owners; and ■ reconciliation of the carrying amounts of each component of equity at the beginning and end of the year

Question 193

Liquidity Ratios

Answer 193

Current,Quick,Cash

Question 194

Solvency Ratios

Answer 194

Long term debt to equity Debt to equity Total Debt Financial Leverage

Question 195

Vertical common size analysis

Answer 195

states the items as percentages

Question 196

financial assets classified as trading securities

Answer 196

Income statements

Question 197

financial assets classified as available for sale

Answer 197

part of | other comprehensive income

Question 198

What do repurchases of shares do

Answer 198

Share repurchases reduce the company’s cash (an asset). Shareholders’ equity is reduced because there are fewer shares outstanding and treasury stock is an offset to owners’ equity.

Question 199

What ratio determines company's near term obligation

Answer 199

Cash ratio

Question 200

Cash Flow statement provides

Answer 200

information about a company’s cash receipts and | cash payments during an accounting period.

Question 201

Operating Activities

Answer 201

include the company’s day- to- day activities that create revenues, such as selling inventory and providing services, and other activities .Additionally, operating activities include cash receipts and payments related to dealing securities or trading securities

Question 202

Investing Activities

Answer 202

include purchasing and selling long- term assets and other investments. These long- term assets and other investments include property, plant, and equipment; intangible assets; other long- term assets; and both long-term and short- term investments in the equity and debt

Question 203

Financing Activities

Answer 203

include obtaining or repaying capital, such as equity | and long- term debt

Question 204

Can companies engage in non cash transactions

Answer 204

Yes

Question 205

IFRS Cash Flow Statements

Answer 205

■ Interest received: Operating or investing ■ Interest paid Operating or financing ■ Dividends received Operating or investing ■ Dividends paid Operating or financing

Question 206

US GAAP Cash Flow Statements

Answer 206

■ Interest received : Operating ■ Interest paid Operating ■ Dividends received Operating ■ Dividends paid Financing

Question 207

What are the two methods to report cash flow statements

Answer 207

Direct and Indirect

Question 208

Direct Method

Answer 208

The direct method shows the specific cash inflows and outflows that result in reported cash flow from operating activities. It shows each cash inflow and outflow related to a company’s cash receipts and disbursements. In other words, the direct method eliminates any impact of accruals and shows only cash receipts and cash payments.

Question 209

Indirect Method

Answer 209

The indirect method shows how cash flow from operations can be obtained from reported net income as the result of a series of adjustments. Another argument for the indirect method is that it mirrors a forecasting approach that begins by forecasting future income and then derives cash flows by adjusting for changes in balance sheet accounts that occur because of the timing differences between accrual and cash accounting

Question 210

How income and expenses are presented in an common size analysis

Answer 210

In common- size analysis of a company’s income statement, each income and expense line item is expressed as a percentage of net revenues (net sales).

Question 211

How assets,liabilities and equity are presented in an common size analysis

Answer 211

For the common- size balance sheet, each asset, liability, and equity line item is expressed as a percentage of total assets.

Question 212

How cash flow is presented in an common size analysis

Answer 212

The first approach is to express each line item of cash inflow (outflow) as a percentage of total inflows (outflows) of cash, and the second approach is to express each line item as a percentage of net revenue

Question 213

Perfomance Ratios

Answer 213

``` Cash flow to revenue Cash return on assets Cash return on equity Cash to income Cash flow per share ```

Question 214

Coverage Ratios

Answer 214

``` Debt coverage Interest coverage Reinvestment Debt payment Dividend payment Investing and financing ```

Question 215

What includes in an evaluation of a cash flow statement

Answer 215

An evaluation of a cash flow statement should involve an assessment of the sources and uses of cash and the main drivers of cash flow within each category of activities.

Question 216

What does a report might present

Answer 216

■ the purpose of the report, unless it is readily apparent; ■ relevant aspects of the business context: ● economic environment (country/region, macro economy, sector); ● financial and other infrastructure (accounting, auditing, rating agencies) ● legal and regulatory environment (and any other material limitations on the company being analyzed); ■ evaluation of corporate governance and assessment of management strategy, including the company’s competitive advantage(s); ■ assessment of financial and operational data, including key assumptions in the analysis; and ■ conclusions and recommendations, including limitations of the analysis and risks.

Question 217

Limitations to ratio analysis

Answer 217

■ The heterogeneity or homogeneity of a company’s operating activities. Companies may have divisions operating in many different industries. This can make it difficult to find comparable industry ratios to use for comparison purposes. ■ The need to determine whether the results of the ratio analysis are consistent. One set of ratios may indicate a problem, whereas another set may indicate that the potential problem is only short term in nature. ■ The need to use judgment. A key issue is whether a ratio for a company is within a reasonable range. Although financial ratios are used to help assess the growth potential and risk of a company, they cannot be used alone to directly value a company or its securities, or to determine its creditworthiness. The entire ■ The use of alternative accounting methods. Companies frequently have latitude when choosing certain accounting methods. Ratios taken from financial statements that employ different accounting choices may not be comparable unless adjustments are made. Some important accounting considerations include the following:

Question 218

what is vertical analysis

Answer 218

used to denote a common- size analysis using only one reporting period or one base financial statement,

Question 219

What is horizontal analysis

Answer 219

s refers to an analysis comparing a specific financial | statement with prior or future time periods or to a cross- sectional analysis of one company with another.

Question 220

What does a graph provides to an analyst

Answer 220

facilitate comparison of performance and financial structure over time, highlighting changes in significant aspects of business operations. Provide the analyst (and management) with a visual overview of risk trends in a business.

Question 221

Line graphs

Answer 221

Line graphs are useful when the focus is on the change in amount for a limited number of items over a relatively longer time period.

Question 222

Pie graphs

Answer 222

In general, pie graphs are most useful to communicate the composition of a total value (e.g., assets over a limited amount of time, say one or two periods).

Question 223

Stacked column graph

Answer 223

When the composition | and amounts, as well as their change over time, are all important,

Question 224

Regression Analysis

Answer 224

help identify relationships (or correlation) between variables.

Question 225

How to evaluate financial ratios

Answer 225

1 Company goals and strategy. Actual ratios can be compared with company objectives to determine whether objectives are being attained and whether the results are consistent with the company’s strategy 2 Industry norms (cross- sectional analysis). A company can be compared with others in its industry by relating its financial ratios to industry norms or to a subset of the companies in an industry. When industry norms are used to make judgments, care must be taken because: ● Many ratios are industry specific, and not all ratios are important to all industries. ● Companies may have several different lines of business. This will cause aggregate financial ratios to be distorted. It is better to examine industryspecific ratios by lines of business. ● Differences in accounting methods used by companies can distort financial ratios. ● Differences in corporate strategies can affect certain financial ratios. 3 Economic conditions. For cyclical companies, financial ratios tend to improve when the economy is strong and weaken during recessions. Therefore, financial ratios should be examined in light of the current phase of the business cycle..

Question 226

Activity Ratios

Answer 226

Activity ratios are also known as asset utilization ratios or operating efficiency ratios. This category is intended to measure how well a company manages various activities, particularly how efficiently it manages its various assets. Activity ratios are analyzed as indicators of ongoing operational performance—how effectively assets are used by a company.

Question 227

Inventory Turnover and DOH

Answer 227

Inventory turnover lies at the heart of operations for many entities. It indicates the resources tied up in inventory (i.e., the carrying costs) and can, therefore, be used to indicate inventory management effectiveness. High IT =effective management.High IT and Low DOH bad.LOW IT and high DOH = slow moving inventory

Question 228

Receivables and DSO

Answer 228

The number of DSO represents the elapsed time between a sale and cash collection, reflecting how fast the company collects cash from customers to whom it offers credit High receivables and low DSO = highly efficient credit and collectibles

Question 229

Payables Turnover and the Number of days of payables

Answer 229

The number of days of payables reflects the average number of days the company takes to pay its suppliers, and the payables turnover ratio measures how many times per year the company theoretically pays off all its creditors.High payables and low days payables not making full use of available credit

Question 230

Working Capital Turnover

Answer 230

Working capital turnover indicates how efficiently the company generates revenue with its working capital.High = good, can be zero or negative depending companies

Question 231

Fixed Asset Turnover

Answer 231

This ratio measures how efficiently the company generates | revenues from its investments in fixed assets.High ratio = good.Low ratio =bad.

Question 232

Total Asset Turnover

Answer 232

The total asset turnover ratio measures the company’s overall ability to generate revenues with a given level of assets.High ratio is good

Question 233

Current Ratio

Answer 233

This ratio expresses current assets in relation to current liabilities. A higher ratio indicates a higher level of liquidity

Question 234

Quick Ratio

Answer 234

The quick ratio reflects the fact that certain current assets.represent costs of the current period that have been paid in advance and cannot usually be converted back into cash. a higher quick ratio indicates greater liquidity

Question 235

Cash Ratio

Answer 235

The cash ratio normally represents a reliable measure of an entity’s liquidity in a crisis situation.

Question 236

Defensive Interval Ratio

Answer 236

This ratio measures how long the company can continue to pay its expenses from its existing liquid assets without receiving any additional cash inflow.A higher defensive interval ratio indicates greater liquidity.

Question 237

Cash Conversion Cycle (Net Operating Cycle)

Answer 237

This metric indicates the amount of time that elapses from the point when a company invests in working capital until the point at which the company collects cash.Shorter = better

Question 238

Solvency Ratios

Answer 238

Ability to meet long term obligations

Question 239

Debt- to- Assets Ratio

Answer 239

This ratio measures the percentage of total assets financed with debt . Generally, higher debt means higher financial risk and thus weaker solvency

Question 240

Debt- to- Capital Ratio

Answer 240

The debt- to- capital ratio measures the percentage of a company’s capital (debt plus equity) represented by debt. As with the previous ratio, a higher ratio generally means higher financial risk and thus indicates weaker solvency.

Question 241

Debt- to- Equity Ratio

Answer 241

The debt- to- equity ratio measures the amount of debt capital relative to equity capital. Interpretation is similar to the preceding two ratios (i.e., a higher ratio indicates weaker solvency)

Question 242

Financial Leverage Ratio

Answer 242

measures the amount of total assets supported for each one money unit of equity.The higher the financial leverage ratio, the more leveraged the company is in the sense of using debt and other liabilities to finance assets.

Question 243

Debt- to- EBITDA Ratio

Answer 243

This ratio estimates how many years it would take to repay | total debt based on earnings before income taxes, depreciation and amortization

Question 244

Interest Coverage

Answer 244

This ratio measures the number of times a company’s EBIT could cover its interest payments. Thus, it is sometimes referred to as “times interest earned.” A higher interest coverage ratio indicates stronger solvency, offering greater assurance that the company can service its debt

Question 245

Fixed Charge Coverage

Answer 245

This ratio relates fixed charges, or obligations, to the cash flow generated by the company. It measures the number of times a company’s earnings (before interest, taxes, and lease payments) can cover the company’s interest and lease payments.Similar to the interest coverage ratio, a higher fixed charge coverage ratio implies stronger solvency, offering greater assurance that the company can service its debt

Question 246

Profitability Ratios

Answer 246

measure the return earned by the company during a period.

Question 247

Gross Profit Margin

Answer 247

Gross profit margin indicates the percentage of revenue available to cover operating and other expenses and to generate profit. Higher gross profit margin indicates some combination of higher product pricing and lower product costs

Question 248

Operating Profit Margin

Answer 248

an operating profit margin increasing faster than the gross profit margin can indicate improvements in controlling operating costs

Question 249

Pretax Margin

Answer 249

The pretax margin reflects the effects on profitability of leverage and other (non- operating) income and expenses. If a company’s pretax margin is increasing primarily as a result of increasing amounts of non- operating incom

Question 250

Net Profit Margin

Answer 250

Generally, the net income used in calculating the net profit margin is adjusted for non- recurring items to offer a better view of a company’s potential future profitability.

Question 251

ROA

Answer 251

ROA measures the return earned by a company on its assets. The higher the ratio, the more income is generated by a given level of assets

Question 252

Return on Total Capital

Answer 252

Return on total capital measures the profits a company earns on all of the capital that it employs

Question 253

ROE

Answer 253

ROE measures the return earned by a company on its equity capital, including minority equity, preferred equity, and common equity

Question 254

Decomposition of ROE

Answer 254

referred to as DuPont analysis.The information gained can also be used by management to determine which areas they should focus on to improve ROE. This decomposition will also show why a company’s overall profitability, measured by ROE, is a function of its efficiency, operating profitability, taxes, and use of financial leverage. DuPont analysis shows the relationship between the various categories of ratios discussed in this reading and how they all influence the return to the investment of the owners.

Question 255

Equity Analysis

Answer 255

The valuation process has several steps, including: 1 understanding the business and the existing financial profile 2 forecasting company performance 3 selecting the appropriate valuation model 4 converting forecasts to a valuation 5 making the investment decision

Question 256

Valuation Ratio

Answer 256

Price to cash flow where earnings quality may be an issue Price to sales is used when a company does not have a positive net income Price to book value is a relationship between a companys required rate of return and its actual rate of return

Question 257

Basic EPS

Answer 257

The difference in EPS does not reflect a difference in profitability—the companies have identical profits and profitability. The difference reflects only a different number of common shares outstanding

Question 258

Dividend Related Quantities

Answer 258

Dividend Payout Ratio measures the percentage of earnings that the company pays out as dividends to shareholder.It fluctuates with earnings

Question 259

Retention Rate

Answer 259

retention rate is the percentage of earnings that a company retains.

Question 260

Sustainable Growth Rate

Answer 260

``` is viewed as a function of its profitability (measured as ROE) and its ability to finance itself from internally generated funds (measured as the retention rate). ```

Question 261

Model building and Forecasting Techniques

Answer 261

■ Sensitivity analysis: Also known as “what if” analysis, sensitivity analysis shows the range of possible outcomes as specific assumptions are changed; this could, in turn, influence financing needs or investment in fixed assets ■ Scenario analysis: This type of analysis shows the changes in key financial quantities that result from given (economic) events, such as the loss of customers, the loss of a supply source, or a catastrophic event. If the list of events is mutually exclusive and exhaustive and the events can be assigned probabilities, the analyst can evaluate not only the range of outcomes but also standard statistical measures such as the mean and median value for various quantities of interest. ■ Simulation: This is computer- generated sensitivity or scenario analysis based on probability models for the factors that drive outcomes. Each event or possible outcome is assigned a probability. Multiple scenarios are then run using the probability factors assigned to the possible values of a variable.

Question 262

What costs do the IFRS and US GAAP exclude

Answer 262

abnormal costs incurred as a result of waste of materials, labor or other production conversion inputs, any storage costs (unless required as part of the production process), and all administrative overhead and selling costs.

Question 263

Inventory Valuation Methods under IFRS

Answer 263

specific identification; first- in, first- out (FIFO); and weighted average cost.

Question 264

Inventory Valuation Methods under US GAAP

Answer 264

specific identification; first- in, first- out (FIFO); and weighted average cost; last in last out ( LIFO)

Question 265

Specific Identification

Answer 265

The specific identification method is used for inventory items that are not ordinarily interchangeable and for goods that have been produced and segregated for specific projects. This method is also commonly used for expensive goods that are uniquely identifiable. Under this method, the cost of sales and the cost of ending inventory reflect the actual costs incurred to purchase (or manufacture) the items specifically identified as sold and the items specifically identified as remaining in inventory

Question 266

First- In, First- Out (FIFO)

Answer 266

the first units included in inventory are assumed to be the first units sold from inventory. Therefore, cost of sales reflects the cost of goods in beginning inventory plus the cost of items purchased (or manufactured) earliest in the accounting period, and the value of ending inventory reflects the costs of goods purchased (or manufactured) more recently. In periods of rising prices, the costs assigned to the units in ending inventory are higher than the costs assigned to the units sold. Conversely, in periods of declining prices, the costs assigned to the units in ending inventory are lower than the costs assigned to the units sold.LOWER COGS AND HIGHER INVENTORY

Question 267

Weighted Average Cost

Answer 267

Weighted average cost assigns the average cost of the goods available for sale (beginning inventory plus purchase, conversion, and other costs) during the accounting period to the units that are sold as well as to the units in ending inventory

Question 268

Last- In, First- Out (LIFO)

Answer 268

the last units included in inventory are assumed to be the first units sold from inventory. Therefore, cost of sales reflects the cost of goods purchased (or manufactured) more recently, and the value of ending inventory reflects the cost of older goods. In periods of rising prices, the costs assigned to the units in ending inventory are lower than the costs assigned to the units sold. Conversely, in periods of declining prices, the costs assigned to the units in ending inventory are higher than the costs assigned to the units sold.HIGHER COGS AND LOWER INVENTORY

Question 269

Periodic Inventory System

Answer 269

Inventory on hand calculated periodiocally

Question 270

Perpetual Inventory System

Answer 270

Inventory account updated continously

Question 271

If prices are rising

Answer 271

COGS : LIFO>AVCO>FIFO EI:FIFO>AVCO>LIFO LIFO & AVCO understate EI FIFO & AVCO understate COGS and profits

Question 272

if prices are falling

Answer 272

COGS : FIFO>AVCO>LIFO EI: LIFO>AVCO>FIFO LIFO & AVCO overestimate EI FIFO & AVCO overstate COGS and profits

Question 273

LIFO Reserve

Answer 273

differences between internal inventory and LIFO

Question 274

Why companies use LIFO

Answer 274

for tax purposes and external reporting

Question 275

How companies use FIFO and AVCO

Answer 275

for internal reporting

Question 276

US GAAP that use LIFO

Answer 276

must disclose beginning and ending balances for LIFO Reserves

Question 277

LIFO liquidation

Answer 277

Increase in gross profit as a result of LIFO liquidation is phantom profit

Question 278

Measurement of Inventory under IFRS

Answer 278

Lower of cost or net realizable value

Question 279

IF NRV < Cost under IFRS

Answer 279

Inventory must be written down loss recognized on Income Statement : COGS and expense Inventory valuation allowance account may be used Subsequent increase in NRV limited to amount in Allowance account if NRV increases requires reversal

Question 280

Measurement of Inventory under US GAAP

Answer 280

lower of cost or market(replacement value)

Question 281

IF MARKET < COST

Answer 281

Inventory must be written down Companies that uses Specific ID , FIFO or AVCO are more likely to incur write downs reversals are prohibited

Question 282

How is agriculture, forest products and mining measured

Answer 282

at NRV regardless of costs

Question 283

If an active market exists for the product

Answer 283

the quoted price > NRV or most recent market transaction

Question 284

How are inventory gains/losses recognized

Answer 284

Profit/loss in the period of change

Question 285

Effects of inventory write down

Answer 285

- Profit | - Amount of inventory

Question 286

Which ratios have a negative effect from inventory write down

Answer 286

profitability liquidity solvency

Question 287

Which ratio has a positive effect from inventory write down

Answer 287

Activity

Question 288

IFRS disclosures

Answer 288

``` activity policies used cost formulas used total carrying value value of inventories COGS for the period amount of any write downs amounts of any reversals description of why reversal carrying amount of inventory pledged as collateral for liabilities ```

Question 289

US GAAP disclosures

Answer 289

activity policies used cost formulas used total carrying value value of inventories COGS for the period carrying amount of inventory pledged as collateral for liabilities any material income from LIFO liquidation

Question 290

IFRS changes in valuation methods

Answer 290

Permitted if the changes enhances reliability of financial data accounted for retrospectively

Question 291

US GAAP changes in valuation methods

Answer 291

changing from LIFO :retrospective restatement of Income and Retained Earnings changing to LIFO: prospective basis

Question 292

Critical ratios for inventory management evaluation

Answer 292

Inventory Turnover Days of inventory on hand Gross profit margin

Question 293

Lower under LIFO

Answer 293

gross margin | Current assets

Question 294

Higher undo LIFO

Answer 294

Debt to equity Quick ratio Inventory turnover Total asset turnover

Question 295

Long Lived Assets

Answer 295

provides economic benefits over a future period of time > 1 year

Question 296

Issues in Long Lived Assets

Answer 296

``` cost at acquisition allocation to expense over time subsequent costs incurred cost vs revaluation model unexpected declines in value classification with respect in tent derecognition ```

Question 297

Capitalize

Answer 297

if the asset is expected to provide benefits for more than 1 year

Question 298

What happens when you capitalize

Answer 298

- non current assets increase | - cash flow from investing activities decreases

Question 299

What happens when you depreciate

Answer 299

- non current assets decrease - net income decreases - retained earnings decrease - equity decreases

Question 300

Expense

Answer 300

provides economic benefits in the current period only

Question 301

What happens when expensed

Answer 301

- net income decreases by the entire after tax amount - affects income statement - no related assets recorded - operating cash flow decreases - no future periods effects

Question 302

Effects of Expenses

Answer 302

-Lower net income in period of expensing but higher subsequent periods

Question 303

Acquiring assets through an exchange

Answer 303

the amount to be capitalized is the fair value of asset capitalized

Question 304

How this exchange affects Balance Sheet

Answer 304

carrying value of asset given up removed from assets and the fair value of asset is added if FV > BV gain on Income Statement FV< BV loss on Income Statement FV unknown then FV = BV no gain or loss or no difference assets

Question 305

Acquiring assets through purchase

Answer 305

You capitalize purchase cost + all expenditures necessary to get asset ready for its intended use

Question 306

Subsequent expenditures related to Long lived assets are capitalized if

Answer 306

- they are expected to provide economic benefits beyond one year - extends an asset useful life

Question 307

Borrowing Costs

Answer 307

- Generally Capitalized | - Investing Cash Flow

Question 308

IFRS Interest

Answer 308

- Capitalize Interest Expense | - Capitalize Earned Interest

Question 309

US GAAP Interest

Answer 309

- Interest are expensed | - Interest Income

Question 310

Intangible Assets

Answer 310

- finite life amortized over useful life | - indefinite life not amortized

Question 311

Identifiable Assets under IFRS

Answer 311

- must be separable from the entity or arise from legal rights - must be under the companies control - must be expected to earn economic future benefits

Question 312

Recognition criteria from Identifiable Assets

Answer 312

- probable that future benefits flow to the entity | - cost of asset can be reliably measured

Question 313

Unidentifiable Assets

Answer 313

cannot be purchased separately and may have indefinite life

Question 314

1 How to account for Intangible Assets by purchase

Answer 314

- Same as tangible asset - recorded as fair value - costs of acquisition are investing cash outflow - if acquired as group purchase price is allocated to each asset

Question 315

2 How to account for Intangible assets developed Internally

Answer 315

-costs generally expensed when incurred

Question 316

Intangible Assets IFRS Developed Internally

Answer 316

- expense research | - may capitalize development costs but have to show technically feasibility and intend to use

Question 317

Intangible Assets US GAAP Developed Internally

Answer 317

-expense both research and development -except software can be for sale once technical feasibility is established then capitalize can be used for internal use

Question 318

3.How to account Intangible assets acquired in a business

Answer 318

-using the accounting method Purchase Price - Fair Value of net assets = Goodwill IFRS if the acquired asset meet criteria then recorded as intangible else add to goodwill US GAAP if asset can be separated from company or asset arises from contractual legal rights

Question 319

Ratios affected by Capitalization

Answer 319

- Net Income present Higher - Net present future yrs lower - fixed asset turnover lower - Total Assets higher - Shareholders Equity Higher - CFO higher - CFI lower - Income Variability Lower - Debt/Equity lower

Question 320

Ratios affected by Expensing

Answer 320

- Net Income present lower - Net present future yrs higher - Total Assets lower - Shareholders Equity lower - CFO lower - CFI higher - Income Variability higher - Debt/Equity higher

Question 321

Depreciation

Answer 321

Cost Model and Revaluation Model

Question 322

Cost Model ( IFRS/GAAP)

Answer 322

- Capitalized costs allocated to future periods | - carrying cost = historical cost- accumulated dep/amort

Question 323

Cost Model ( Straight Line Depreciation)

Answer 323

Cost of asset allocated evenly over estimated useful life

Question 324

Cost Model(Accelerated Depreciation) or Declining Balance

Answer 324

-Depreciate expense greater in earlier years

Question 325

Cost Model ( Units of Production)

Answer 325

-Depreciation based on proportion of production during a period vs productive capacity over useful life

Question 326

Component Depreciation

Answer 326

IFRS requirement GAAP optional

Question 327

Amortization

Answer 327

- same as tangible assets | - intangibles with finite life only

Question 328

Revaluation Model

Answer 328

- allowed under IFRS only - used only if fair vale can be measured reliably - carrying amount increases

Question 329

Devaluation

Answer 329

- Difference in price is counted as a loss in Income Statement - Subsequent revaluation up to difference in price counted as a gain on Income Statement. - Excess in equity goes to revaluation surplus account

Question 330

Increase in Value

Answer 330

- Revaluation Surplus - Devaluation surplus - excess in equity goes to loss on Income Statement

Question 331

Impairment

Answer 331

- an unanticipated decline in the value of an asset - write down required IFRS/GAAP - reversals allowed IFRS - carrying value of assets decrease - impairments charge reduces net income - no effect on cash flows

Question 332

IFRS Impairment

Answer 332

carrying amount > recoverable amount - higher of FV-SC - Value in use

Question 333

US GAAP Impairment

Answer 333

carrying amount > Fair Value | -Carrying amount deemed unrecoverable

Question 334

PPE Impairment IFRS

Answer 334

- Check for impairment - Recoverable amount is to take the carrying amount vs the higher of FV-SC or PV of expected cash flows or recoverable amount Then the higher amount of those you subtract by the carrying amount then the difference is the loss and the higher amount is used as the recoverable amount

Question 335

PPE Impairment US GAAP

Answer 335

- Check for impairment - if the Carrying amount is less than the undiscounted expected future cash flows then use the amount of the carrying amount and no loss reported - but if the carrying amount > undiscounted expected future cash flows then fair value would be written down and the loss is the FV-SC

Question 336

Intangible Assets with Finite Life Impairment

Answer 336

-Only tested for impairment upon occurrence of significant adverse events

Question 337

Intangible Assets with indefinite Life Impairment

Answer 337

-tested at least annually for impairment

Question 338

Long Lived Assets Held For Sale

Answer 338

- transferred from PPE---> held for sale - no longer in use ---->intended for sale - tested for impairment on reclassification

Question 339

US GAAP Reversals

Answer 339

- assets held for use no reversals | - assets held for sale allowed

Question 340

IFRS Reversals

Answer 340

- reversals allowed | - only to the extent of the original impairment loss

Question 341

Derecognition

Answer 341

-When assets is disposed or not expected to provide future benefits

Question 342

Derecognition Sale

Answer 342

gain/loss on disposal = sales proceeds - carrying cost

Question 343

Derecognition other than sale

Answer 343

(abandoned,exchange,spun off) - reclassified as held for use until disposal - continue to depreciate

Question 344

Retired/Abandoned

Answer 344

- assets reduced by carrying amount | - loss recorded on I.S

Question 345

Exchanged

Answer 345

-the amount to be capitalized is the fair value of asset capitalized

Question 346

Spun off

Answer 346

- separated into new entity - parent shareholders receive proportional shares - all assets of new entity are removed from the balance sheet of parent

Question 347

Revaluation Increase in carrying value

Answer 347

- Total Assets and Shareholders Higher | - Financial Leverage ratio decreases

Question 348

Revaluation decrease in Carrying value

Answer 348

- Total Assets and Net Income Lower | - ROA,ROE in yr 1 decrease but increase subsequent years

Question 349

Impairment

Answer 349

- subjective judgements - projecting future cash flows - assessing fair values

Question 350

Derecognition

Answer 350

- Loss = Total Assets, NI lower but CFI higher | - Gain = Total Assets ,NI and CFI higher

Question 351

Disclosures Tangible IFRS

Answer 351

- measurement bases - depreciation method used - useful life - accumulated depreciation - amount of disposals - restrictions, pledges of property - contractual agreements - if revaluation model used

Question 352

Disclosures Tangibles US GAAP

Answer 352

- depreciation expense - balances of major classes of depreciable assets - accumulated depreciation by major classes - depreciation method for major classes

Question 353

Disclosures Intangibles IFRS

Answer 353

Finite - useful life - amortization method - gross carrying amount - accumulated amortization - location on I.S - Reconciliation of carrying amount Indefinite Why indefinite -restrictions,plegdes,contractual agreements -if revaluation model used

Question 354

Disclosures Intangibles US GAAP

Answer 354

- Gross carrying amount in total and by major class - accumulated amortisation by major classes - aggregate amortisation for the period - estimate amort expense for next 5 years

Question 355

Disclosures Impairment IFRS

Answer 355

- amortisation of loss & reversal of loss in the period - where are the losses and reversals are on the financial statements - main classes of assets affected - events/conditions that led to losses or reversals

Question 356

Disclosures US GAAP

Answer 356

- description of the impaired asset - events/conditions that led to the impairment - method of fair value - amount of loss - where the loss is recognized

Question 357

Disclosures Balance Sheet

Answer 357

reports the carrying value of the asset

Question 358

Disclosures Income Statement

Answer 358

-depreciation expense may or may not appear separate ``` IFRS -to disclose depreciation expense depends if companies use nature or function of expense Under Nature(depreciation, purchases) Under Function(COGS,SG&A) ```

Question 359

Disclosures Cash Flow Statement

Answer 359

- acquisition/disposal > CFI | - Indirect Method > adjustment of net income

Question 360

Evaluation

Answer 360

Asset Age Ratio Gross Fixed Assets/Dep expense = Accum Dep/Dep Expense + Net fixed Assets/Dep Expense Avg remaining useful life = NET PPE/Dep expense Gross fixed assets/Dep Expense = estimated useful life Accum Dep/Dep exp = Average age of assets Net fixed Assets/Dep Expense = Remaining useful life

Question 361

Annual Capex/Dep Expense

Answer 361

if <100% - replacing fixed assets at a rate slower than dep rate - might indicate needed catch up investment

Question 362

Investment Property

Answer 362

Property that is owned for leased under a finance for the purpose of earing rent or capital appreciation or both - not owner occupied - doesn't provided goods and services

Question 363

How Investment Property is valued

Answer 363

-Cost Model -Fair Value Model may use fair value if reliable estimates of FV are attainable must use one model for all investment properties

Question 364

How to use Fair Value

Answer 364

must be used until disposition or reclassification

Question 365

Investment property to owner occupied or inventory

Answer 365

- Valued at cost then no change in carrying amount | - Valued at FV then FV new carrying amount

Question 366

Owner Occupied to Investment Property

Answer 366

-Valued at FV then FV-C treated like revaluation

Question 367

Inventory to Investment Property

Answer 367

-Valued at FV the FV-C recognized as profit/loss

Question 368

How investment property is reported

Answer 368

As a separate line item on Balance Sheet disclose whether FV or cost model GAAP - doesn't specifies Investment property - uses historical cost model

Question 369

Financial Statements Taxes

Answer 369

- Income before Taxes | - Income Tax Expense

Question 370

Tax Returns

Answer 370

-Taxable payable Taxes a company must pay in the immediate future -Income Tax Payable

Question 371

Remember

Answer 371

IF reported > taxes creates an asset | IF reported < taxes creates a liability

Question 372

How taxes are not the same

Answer 372

- Temporary differences in the recognition of expense and revenue - permanent differences

Question 373

When R

Answer 373

- creates Deterred Tax Asset - creates Valuation Allowance thats reflects the probability of non use - examples carryforwards expire - changes in tax laws that restict future use of deductible temporary differences

Question 374

What are Deferred Taxes

Answer 374

-Result from temporary differences in the recognition of expense and revenue for tax purposes versus reporting purposes

Question 375

How IFRS classifies Deterred Taxes

Answer 375

Non-Current

Question 376

How US GAAP classifies Deterred Taxes

Answer 376

Current or Non Current

Question 377

Tax Base

Answer 377

the carrying value of an asset on the Balance Sheet created as if the tax return was our real income statement

Question 378

Asset Tax Base

Answer 378

amount that will be expensed on future tax returns

Question 379

Deferred Tax Liabilities Arises

Answer 379

- higher tax expenses + lower tax revenue = lower taxable income - increase/decrease in DTL increases/decreases total liabilities - NI lower and higher,retained earnings lower and higher and Shareholders Equity lower and higher

Question 380

Deferred Tax Assets

Answer 380

- lower tax expenses +higher tax revenue = higher taxable income - increase/decrease in DTA increases/decreases Total Assets

Question 381

Change in Tax rates

Answer 381

- when income taxes rates change,balance in deferred tax accounts must be ajusted - when tax rates rise balances in DT rise - when tax rates fall balances in DT fall

Question 382

gain in net DTL

Answer 382

reduction tax rates Liabilities drop ,ITE drop ,equity rises

Question 383

gain in net DTA

Answer 383

reduction in tax rates assets drop,ITE increases,equity drops

Question 384

loss in net DTL

Answer 384

increment in tax rates Liabilities rise,ITE rise,equity drops

Question 385

loss in net DTA

Answer 385

increment in tax rates assets rise,ITE drops,equity rises

Question 386

Temporary Difference

Answer 386

Difference between Carrying Amount and Tax Base

Question 387

Permanent Difference

Answer 387

income/expense items that can be recognized on one statement and not the other

Question 388

examples temporary

Answer 388

- Non taxable revenue - Non tax deductible expenses - Tax Credits

Question 389

Example Permanent

Answer 389

No Deferred Taxes

Question 390

Types of Temporary Differences

Answer 390

- Taxable Temporary Differences | - Deductible Temporary Differences

Question 391

Tree Diagram

Answer 391

Assets if C>TB then DTL if TB>C then DTA | Liabilities if C>TB then DTA if TB>C then DTL

Question 392

Temporary difference at recognition

Answer 392

company cant recognized DTA/DTL unless initial recognition was a business combination

Question 393

Unused tax Losses/Credits IFRS

Answer 393

may only be recognized to the extent of probable future taxable income

Question 394

Unused tax Losses/Credits GAAP

Answer 394

recognized in full and reduced through a valuation allowance if unlikely to be realized

Question 395

Valuation Allowance

Answer 395

DTA must be evaluated at each balance sheet that will be recovered carrying value=expected recoverable amount GAAP DTA reduced by contra account that is valuation allowance

Question 396

Increase in valuation allowance

Answer 396

- reduces DTA - Increases ITE - lowers NI,Retained Earnings,Shareholderes Equity

Question 397

Current Taxes

Answer 397

-based on tax rates applicable at the balance sheet date

Question 398

Deferred taxes

Answer 398

measured at the rate that is expected to apply when they realized

Question 399

Revaluation of property

Answer 399

goes to equity (revaluation surplus)

Question 400

If expected to reverse

Answer 400

-liabiliities else equity

Question 401

Bonds

Answer 401

Par Coupon = Market Value Premium Coupon > Market Rate Discount Coupon < Market Rate

Question 402

Market Rate or effective rate

Answer 402

- at the time of issuance | - cant be changed

Question 403

Sales Proceeds of a bond Face Value

Answer 403

- on the calculator put the years,interest as PMT ,bond value as FV,put interest per year and compute PV - Calculate the interest payments - Calculate the PV of each interest payments with its correspondent year,then add the PV of the interest payments - Calculate the PV of the Face Value Payment of the bond - Add the NPV of Interest and NPV of FV of bond to get the sales proceeds

Question 404

Sales Proceeds Bond at a Discount and at a Premium

Answer 404

- Calculate the interest payments - Calculate the PV of each interest payments with its correspondent year,then add the PV of the interest payments - Calculate the PV of the Face Value Payment of the bond - Add the NPV of Interest and NPV of FV of bond to get the sales proceeds - Calculate the difference between the Face Value and total sales proceeds

Question 405

How are issued bonds at a coupon rate of zero

Answer 405

At a discount to face value | -debt to equity rise

Question 406

How IFRS and US GAAP include bond issuance costs

Answer 406

-included in the financing section netted against bond proceeds US GAAP expenses incurred when issuing bonds are assetsand amortised

Question 407

Initial Recognition of Bonds

Answer 407

Bonds Proceeds at issuance

Question 408

Contract of Bonds

Answer 408

Indenture

Question 409

Measurement of Bonds IFRS

Answer 409

-all debt issuance costs are included in the measurement of the liability, bonds payable -

Question 410

Measurement of Bonds US GAAP

Answer 410

-show these debt issuance costs as an asset (a deferred charge), which was amortized on a straight- line basis to the relevant expense (e.g., legal fees) over the life of the bonds. -debt issuance costs are deducted from the related debt liability. Companies reporting under US GAAP may still report debt issuance costs for lines of credit as an asset because the SEC indicated that it would not object to this treatment.

Question 411

Methods of accounting for bonds

Answer 411

- Effective Interest Method | - Straight Line Method

Question 412

Effective Interest Method

Answer 412

- Calculate Sales Proceedings - Calculate Interest Payments - Multiply Sales Proceedings and Interest rate to get Interest Expense - Calculate Difference between Interest Expense and Interest Payment to get Amortization - If Positive add to sales if negative substract - With Carrying amount repeat process

Question 413

Straight Line Method only for US GAAP

Answer 413

DIvide Amortization of Bond with years | then Interest payment less amortization to get annual interest expense

Question 414

Current Market Reporting

Answer 414

Reporting bonds at amortised historical costs (reflects the market rate at the time the bonds were issued .As market interest rates change, the bonds’ carrying amount diverges from the bonds’ fair market value. Market rates decrease bond prices increase market rates increase bond prices decrease Can overestimate or understate leverage levels

Question 415

Fair Value Reporting

Answer 415

Few Companies do it i.e. Financial Institutions Rates Increase,report gains since Liabilities Drop Rates Drop Report losses since Liabilities Increase -disclose the fair value under IFRS and US GAAP

Question 416

Derecognition at maturity

Answer 416

Pay the Face Value

Question 417

Derecognition prior to maturity

Answer 417

-the bonds payable account is reduced by the carrying amount of the redeemed bonds. The difference between the cash required to redeem the bonds and the carrying amount of the bonds is a gain or loss on the extinguishment of debt.

Question 418

Derecognition of Debt IFRS

Answer 418

. Under IFRS, debt issuance costs are included in the measurement of the liability and are thus part of its carrying amount.

Question 419

Derecognition US GAAP

Answer 419

Under US GAAP, debt issuance costs are accounted for separately from bonds payable and are amortized over the life of the bonds. Any unamortized debt issuance costs must be written off at the time of redemption and included in the gain or loss on debt extinguishment.

Question 420

Covenants

Answer 420

-protect bondholders -maintenance of pledged collateral -restrictions on dividends -meet certain working capital levels -maximum levels of leverage -protect benefit borrowers -reduce default risk -reduce borrowing costs An affirmative covenant, also referred to as a positive covenant, is a promise that requires a party to adhere to specific terms of the agreement. It is the opposite of a negative covenant, which requires a party to avoid doing something.

Question 421

Presentation/Disclosures

Answer 421

- stated effective interest rates - maturity dates - restrictions imposed by creditors - pledged collateral - scheduled repayments over next 5 years

Question 422

Leasing

Answer 422

Contract between lessor and lessee

Question 423

Advantages of Leasing

Answer 423

- Conserve Cash - hedge against obsolescence - fewer restrictions than borrowing - tax advantages

Question 424

Lessee Perspective US GAAP

Answer 424

- Classified as Financial Lease if - ownership transfers to lessee at end of term - bargain purchase option exists - term>75% useful life - PV or PMT at inception > 90% of FV

Question 425

All IFRS leases, and US | GAAP finance leases Lessee

Answer 425

-On Balance Sheet must recognise a right of use asset and liability -On Income Statement report Depreciation on ROU asset and Interest expense on ROU liability -On Statement of Cash Flows a reduction of lease liability is a financing cash outlflow Interest Portion is an operating or financing CF in IFRS on US GAAP is operating

Question 426

US GAAP operating leases Lessee

Answer 426

-On Balance Sheet Recognise “right- of- use” (ROU) asset and lease liability -On Income Statement Report single lease expense (a straight- line allocation of lease cost) -On Statement of Cash Flows Entire cash payment is an operating cash outflow

Question 427

short- term leases and, under IFRS, leases where leased asset is low value Lessee

Answer 427

- On Balance Sheet No effect - On Income Statement Report rent expense - On Statement of Cash Flows Rent payment is operating cash outflow

Question 428

IFRS and US GAAP operating lease Lessor

Answer 428

-On Balance Sheet Retain asset on balance sheet -On Income Statement Report lease income and Report depreciation expense on leased asset -On Statement of Cash Flows Lease payments received are an operating cash inflow

Question 429

IFRS finance leases and US | GAAP sales- type leases Lessor

Answer 429

-On Balance Sheet Remove leased asset from balance sheet and Recognise lease asset (lease receivable and residual) -On Income Statement Report interest revenue on lease receivable -On Statement of Cash Flows nterest portion of lease payment received is either an operating or investing cash inflow under IFRS and an operating cash inflow under US GAAP.

Question 430

US GAAP direct financing | leases Lessor

Answer 430

-On Balance Sheet Remove leased asset from balance sheet Recognize lease receivable -On Income Statement Report interest revenue on lease receivable -On Statement of Cash Flows Interest portion of lease payment received is an operating cash inflow under US GAAP

Question 431

Types of Pensions Plans

Answer 431

-defined contribution pension plans -defined benefit pension plans

Question 432

Destined Contribution

Answer 432

- along with employee company contributes a destined amount into the plan - company makes no commitment regarding future value of the plan - investment decisions left to employees - Employees bear all investment risk IS Pension Expense BS Cash loss CFO loss

Question 433

Defined Benefit

Answer 433

- company makes promises to pay future benefits - 2% per years of service x avg of last 5 years gross salary - After Retirement it becomes an annuity of future cash flows,find discount rate to take PV of benefits in the day of retirement - Then take the PV of benefits as a FV to get PV of pension obligation present day - Companies will know the amount of money to save for the retirement can comply with the annuity - Assumptions of salary,day of death,discount rate - Funded by separate legal entity - Company assumes investment performance risk

Question 434

Balance Sheet Defined Benefit

Answer 434

If FV > Pension Obligation ,surplus net pension asset | else net pension liability

Question 435

Income Statement Defined Benefit

Answer 435

Net Pension Asset/Liability=Profit or loss or OCI

Question 436

Pension Expense IFRS Components

Answer 436

- Employee service costs PV of increase in benefits as a result of one more year of service - Net Interest Expense/Income Net pension asset/Liability X Discount rate - Remeasurements actuarial gains/losses,actual reurn on plan assets

Question 437

Pension Expense US GAAP Components

Answer 437

- Employee service costs IS - Interest expense accrued IS - Expected return on plan assets IS - Past service costs OCI - Actuarial Gains/losses OCI

Question 438

Whats an underfunded defined benefit pension plan

Answer 438

Non current liability | If the fair value of the plan assets is less than the benefit obligation, there is a pension shortfall.

Question 439

Financial reporting quality

Answer 439

refers to the usefulness of information contained in the report(relevant and faitful representation)

Question 440

Earnings Quality

Answer 440

- pertains to the earnings and cash generated by the companys assets - resulting financial condition - sustainable earnings - adequate ROI - without reporting quality,earnings quality results questionable

Question 441

1 GAAP, Decision-useful, sustainable, adequate returns

Answer 441

- high quality reporting - conform to accounting standards - adhere to characteristics of decision useful info such as relevant and faithful representation - meet enhancing characteristics such as comparability, verifiability, timeliness, understandability - adequate returns - increase company value

Question 442

2 GAAP ,Decision-useful ,sustainable ?

Answer 442

- high quality reporting but low earnings quality - company not expected to earn ROI - negative economic profit

Question 443

3 Within GAAP but biased accounting choices

Answer 443

- low reporting quality ,unable to assess earnings quality - biased presentation - obscure unfavourable information - highlights favourable information - emphasizing NON GAAP measure

Question 444

Biased : Aggressive

Answer 444

- increase reported financial performance and financial position in the current period - increase reported revenues,earnings,CFO - decrease reported expenses and debt

Question 445

Biased : Conservative

Answer 445

- Decrease reported financial performance and position in the current period - decrease reported revenues,earnings,CFO - increase reported expenses and debt - leads to improved performance in later periods

Question 446

Biased : Earnings Smoothing

Answer 446

- understatement of earnings volatility - Use conservative when co. is doing well - Use Aggressive when doing bad

Question 447

4 Within GAAP but Earnings Management

Answer 447

- making intentional choices or deliberate action to influence reported earnings - deter expenses - change estimates

Question 448

Conservatism

Answer 448

-The Conceptual Framework supports neutrality of information -application of any standard requires judgement even if its inherently neutral -Research Costs Because the future benefit of research costs is uncertain at the time the costs are incurred -Litigation Losses When it becomes “probable” that a cost will be incurred, both US GAAP and IFRS require expense recognition -Insurance Recoverable Generally, a company that receives payment on an insurance claim may not recognize a receivable until the insurance company acknowledges the validity of the claimed amount.

Question 449

Benefits of Conservatism

Answer 449

-Given asymmetrical information, conservatism may protect the contracting parties with less information and greater risk -Conservatism reduces the possibility of litigation and, by extension, litigation costs -reducing the possibility that fault will be found with them if companies overstate earnings or assets -e, companies can reduce the present value of their tax payments by electing conservative accounting policies for certain types of events.

Question 450

Bias disguised as conservatism

Answer 450

- Big Bath Behavior | - Cookie Jar Reserves

Question 451

Contexts for Low Quality Reporting

Answer 451

- Motivations - Mask poor performance - meet or beat analyst forecasts or mgmt forecasts - MGMT career repuation - avoid debt covenants - MGMT financial interest

Question 452

Conditions conducive to issuing low quality reports

Answer 452

``` -Opportunity poor internal control ineffective BOD -Motivation personal/corporate reasons -Rationalization get through a tough time -protect stock price ```

Question 453

Quality Mechanisms ; Markets

Answer 453

-better pricing qualtity reporting,lower perceived risk

Question 454

Quality Mechanisms : Market Regulatory Authorities

Answer 454

- Registration Requirement - Disclosure Requirements - Auditory Requirements - Management Commentaries - Responsibility Statements - Regulatory review of filings - Enforcement mechanisms

Question 455

Quality Mechanisms : Auditors

Answer 455

- Express reasonable assurance - If company public audit is required - if Private may be a condition of financing

Question 456

Limitations of Auditors

Answer 456

- Opinion is based on info prepared by company - audits are based on samples - Expectations gap auditors verify fair presentation , not look for fraud - auditor is an customer

Question 457

Quality Mechanisms : Private Contracting

Answer 457

-Covenants motivate manipulation which motivates greater monitoring

Question 458

Proforma Presentation

Answer 458

-company uses discretion in calculating proforma earnings -universal guidelines -not fraudulent or dishonest -excluded items are still reported but just not included in earnings -differ from company to company -excluded items are dep/amort ,restructuring/merger costs ,one time charges

Question 459

Adjusted EBITDA

Answer 459

- excludes more items - operating leases -->EBITDAR - equity based compensation ,acquisition related charges ,impairment charges for long lived assets

Question 460

GAAP and IFRS EBITDA

Answer 460

- if a non GAAP financial measure is used - must display most directly comparable GAAP measure with equal prominence - provide a reconciliation of the non gaap measure with GAAP - explain why non GAAP measure is more useful

Question 461

Methods : Revenue Recognition

Answer 461

- FOB source or Destination - Source is revenue and profit recognized sooner - channel stuffing - Destination revenue and profit recognized later - earnings smoothing

Question 462

Bill and Hold Transactions

Answer 462

- holding the inventoy sold to a client - changes in estimates of rebates fulfillment - allocation across multiple deliverables

Question 463

Methods Depreciation policies

Answer 463

-Changes in useful life ,salvage value

Question 464

Methods Capitalization Policies

Answer 464

- goodwill not acknowledging impairment - using low FV to value assets - Lower Depreciation

Question 465

Methods Inventory Cost Methods

Answer 465

- reserves for obsolescence | - LIFO liquidation

Question 466

Methods Deferred Tax Assets & Valuation Accounts

Answer 466

-must be reasonable expectation of recovery

Question 467

Choices that affect Cash Flow Statement

Answer 467

- stretching out payables - misclassifying cash flows - taking full advantage of allowable flexibility

Question 468

Warnings Signs Revenue

Answer 468

- Allowing FOB source and Bill and Hold Transactions - significant barter transactions - low rebate estimates - shifts in proportions related to multiple deliverables - out of line revenue growth - increasing AR as age of sales - unusual changes in the trend of AR turnover - insufficient provision for Doubtful account

Question 469

Warnings Sings inventories

Answer 469

- Higher growth rate vs sales - LIFO liquidations - capitalizing when other expense

Question 470

Warning Signs Other

Answer 470

- Net Income persistently higher than CFO(aggressive accrual policies) - estimates for dep/amort out of line - fourth quarter surprises - related party transactions - non operating income/one time sales - inflating operating income - gross/op margins out of line - long records of meeting growth projections - minimal disclosure - fixation on reported earnings

Question 471

Warning Signs Intangible

Answer 471

``` -Culture CEO on BOD weak/unqualified audit committee -Restructuring/impairment charges spring load future results -M&A orientation opportunity to revalue assets and liabilities ```

Question 472

Top Down Approach

Answer 472

-Forecast Sales -Begin with economys GDP forecast -Company growth rate based on market share analysis -Estimate income/cash flow by historical trends in ratios -separate forecasts for expense items based with sales or stated company strategy -forecast cash flows CAPEX

Question 473

4 C of Credit

Answer 473

``` -Character quality of mgmt. -Capacity ability to pay -Collateral Assets pledged -Covenants Limitations/Restrictions ```

Question 474

Sources of Lower Risk

Answer 474

- More Revenue Sources | - Sustainable Sources

Question 475

Screening

Answer 475

-Filtering a set of potential investments into a smaller set that meet certain criteria