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1 CFA > Financial, Reporting and Analysis > Flashcards

Financial, Reporting and Analysis Flashcards

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1
Q

Revenue recognition principle (converged 2014)

A

“Revenue should be recognised to depict the transfer of promised goods or services to customers in an amount that reflects consideration to which entity expects to be entitled in an exchange of goods or services”

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2
Q

5 steps of recognising revenue

A
  1. Identify the contracts 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 the entity satisfies the performance obligation
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3
Q

IASB definition of expense recognition

A

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

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4
Q

Matching priniciples

A

Matching of costs wiht revenues

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5
Q

Period costs

A

If expenses cannot be directly matched with revenues then recognize in the period they are incurred

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6
Q

Treatment of dilution

A

Each potentially dilutive issue treated separately. Anti-dilutive issues are ignored in the calculation

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7
Q

Interest received (GAAP)

A

CFO

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8
Q

Interest received (IFRS)

A

CFO or CFI

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9
Q

Interest paid (GAAP)

A

CFO

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10
Q

Interest paid (IFRS)

A

CFO or CFF

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11
Q

Dividends received (GAAP)

A

CFO

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12
Q

Dividends received (IFRS)

A

CFO or CFI

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13
Q

Dividends Paid (GAAP)

A

CFF

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14
Q

Dividends Paid (IFRS)

A

CFO or CFF

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15
Q

Taxes paid (IFRS)

A

CFO but some can be allocated to CFI/CFF if appropriate

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16
Q

Direct method

A

Cash collection

(-) Cash inputs

(-) Other cash outflows

(=) Cash flows from operations (CFO)

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17
Q

Indirect method

A

Net income

(+) Non-cash expenses

(-) Non-cash revenues

(+) Decreases in accounts receivables & inventories

(-) Increases in AR & Inv

(+) Increase in AP/Tax payables/interest payable

(-) Decrease in AP/Tax payables/interest payable

(-) Gain on disposal of an asset

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18
Q

Gains and losses on disposal of assets

A

Included in net income

Gain = proceeds > net book value

Remove from net income to calculate CFO

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19
Q

Free cash flow to the firm (FCFF)

A
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20
Q

Activity ratios

A
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21
Q

Activity Ratios Days

A
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22
Q

Operational activity ratios

A
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23
Q

Liquidity ratios

A
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24
Q

Solvency ratios

A
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25
Q

Coverage ratios

A
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26
Q

Profitability ratios

A
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27
Q

Return ratios

A
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28
Q

Basic DuPont decomposition of ROE

A
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29
Q

Medium DuPont decomposition

A
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30
Q

Advanced DuPont

A
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31
Q

Cost of inventory

A
  • All costs of purchase
  • Costs of conversion
  • Other costs incurred bring inventories to present location and condition
  • Exclude: abnormal costs from waste of materials, labor, or other production. Admin, treat as expense
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32
Q

Inventory when prices are rising

A

LIFO inventory < FIFO inventory

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33
Q

COGS when prices are rising

A

LIFO COGS > FIFO COGS

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34
Q

Balance sheet inventory valuation

A

FIFO inventory values resemble current cost or market value

LIFO inventory values resemble out-of-date costs

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35
Q

LIFO reserve

A
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36
Q

Inventory lidation

A

When number of items sold is greater than that purchased.

LIFO income > FIFO income

due to low cost LIFO items being included in cost of sales

37
Q

Inventory value (IFRS)

A

Lower of cost and net realizable value

Inventory write-down if carrying value > NRV

Impairment expense deducted in income statement

38
Q

Inventory value (GAAP)

A

Lower of cost and net realizable value

Exceptions - inventories under LIFO and retail inventory methods. Lower of cost and fair value, but cannot exceed NRV, lower limit is NRV - normal profit margin, reversal of impairment not permitted

39
Q

Inventory ratios

A
40
Q

Companies constructing their own assets

A

All costs incurred in bringing the asset to its present location and condition are capitalized. The cost of asset and the freight costs borne by the purchaser. Includes capitalization of interest expense associated with construction of assets

41
Q

Long-lived assets issues for analyst

A

Capitalized interest is included in CFO. Normally interest payments are included in CFO (GAAP) or CFO/CFF (IFRS)

Analyst should consider adjusting cash flow for this treatment

Analyst should restate interest coverage ratios. Increase interest expense to include capitalized interest

42
Q

IFRS criteria for recognition on balance sheet

A
  • Identifiable
  • Under the control of the company
  • Expected to generate future economic benefits
  • Probable that future economic benefits will flow to the company
  • Cost of the asset can be reliable measured
43
Q

Exception to R&D expense

A

Capitalized under IFRS if certain criteria are met

Under GAAP software capitalized if for sale or fintended to be used internally, if technical feasibility demonstrated

44
Q

Double declining balance

A
45
Q

Units of production method

A
46
Q

Depreciation choices on key financial ratios

A
47
Q

Impairment treatments

A

Carrying amount in balance sheet > recoverable amount

In US GAAP impaired value = fair value (higher of fair value less costs to sell and value in use (PV of expected future cash flows)

In IFRS impaired value = recoverable amount

48
Q

Intangible with indefinite lives

A

No amortization charged during life of asset. Annual impairment review, carrying amount > fair value

49
Q

Impairment of assets

A
50
Q

Accounting profit

A

Based on accounting standards. Pre-tax income or income beforre taxes

51
Q

Taxable income

A

Income subject to income taxes under tax law of jurisdiction. Basis for income tax payable taxable income x statutory income tax rate.

Income taxes owed or payable

52
Q

Income tax expense

A

Income taxes payable. Changes in deferred tax assets/liabilities (deferred tax expense)

53
Q

Income tax paid

A

Actual amount paid for income taxes

Reduces income tax liability in balance sheet

54
Q

Effective tax rate (ETR)

A

ETR = Income tax expenses / Pre-tax income

55
Q

Temporary differences between accounting profit and taxable income

A

Carrying amount and tax base of asset may differ (e.g. due to depreciation methods)

Deductibility of gains and losses of assets and liabilities may vary for accounting and income tax purposes

56
Q

Deferred tax liabilities

A

Pre-tax income > Taxable income

57
Q

Deferred tax assets

A

Pre-tax income < Taxable income

Decrease in deferred tax expense

58
Q

Tax losses (GAAP)

A

Recognize a deferred tax asset

Recognize a valuation allowance for the extent that the losses cannot be deducted in future (doubts of profitability)

= DTA - valuation allowance

59
Q

Tax losses (IFRS)

A

Asset is created only to the extent that it is probable that there will be sufficient future taxable income to offset the losses

60
Q

Deferred tax asset treatment

A
61
Q

Characteristics of long-term debt

A
62
Q

Interest expense

A

Reflects the true cost of the bond, calculated based on yield at date of issue

Coupon + discount/premium

63
Q

Amortized cost method

A

Issue proceeds or opening liability

(+) interest expense (opening liability x yield at issue

(-) coupons paid in period

= closing liability in balance sheet

64
Q

Lease advanntage

A

Contract between owner of an asset and another party who wishes to use the asset

In exchange for use of the asset, lessee makes payments to lessor

Form of financing provided by lessor allowing lessee to purchase the use of the asset

Can provide less costly financing (often little down-payments)

Lease contract may contain less restrictive provisions than other forms of borrowing

65
Q

Leases at inception

A

Recognize a lease asset (right-of-use asset) and a lease liability

Lease asset = lease liability = PV of fixed lease payments

66
Q

Lease after inception

A

Not needed for short term leases

IFRS - report depreciation expense on ‘right-of-use’ asset, interest expense and reduce lease liability

GAAP:

Finance lease - accounting same as above for IFRS

OPerating lease - recognize a single lease expense

67
Q

Accounting for a finance lease

A

Cash flow statement: Interest portion of lease payment = CFO (GAAP) or CFO/CFF (IFRS)

Principal payment = CFF

68
Q

Accounting for an operating lease

A

Income statement lease expense

Cash flow statement: lease payment = CFO, CFO lower with operating lease

69
Q

US GAAP accounting for leases

A
70
Q

IFRS accounting for leases

A
71
Q

Unqualified audit opinion

A

True and fair (IFRS)

Fairly presented (IFRS and US)

72
Q

Adverse opinion

A

Financial statements materially depart from accounting standards

Not fairly presented

No point in performing fianncial analysis

73
Q

Disclaimer of opinion

A

Auditors unable to have an opinion (e.g. records destroyed)

74
Q

IFRS Audit Matters

A

Key Audit Matters

issues that the auditor considers to be most important, such as those that have a higher risk of misstatement, involve significant management judgment, or report the effects of significant transactions during the period

75
Q

GAAP Audit Matters

A

Critical audit matters

issues that involve “especially challenging, subjective, or complex auditor judgment” and similarly include areas with higher risk of misstatement or involving significant management judgment and estimates

76
Q

Step 1 of Financial Analysis Framework

A
  • Source: analyst’s function, communication with client, institutional guidelines
  • Output: statement of purpose, list of specific questions, nature and content of report, timetable and budget
77
Q

Step 2 of Financial Analysis Framework

A

Collect Data

Input: Financial statements, financial data, questionnaires, discussions with management, customers, suppliers and competitors, company site visits

Output: Organised financial statements, financial data tables, completed questionnaires

78
Q

Step 3 of Financial Analysis Framework

A

Process Data

  • Input: collected data
  • Output: adjusted financial statements, common size statements, ratios and graphs, forecasts
79
Q

Step 4 of Financial Statements Framework

A

Analyze results of data processing

  • Input: input and processed data
  • Output: analytical results
80
Q

Step 5 of Financial Statements Framework

A

Conclude recommendation and communicate

  • Input: analytical results and previous reports
  • Output: Analytical report answering questions from step 1, recommendations
81
Q

Monopoly Supply Demand

A

Intersects in elastic portion, because marginal revenue intersects cost in elastic portion

82
Q

Investment proporties

A

Elect to use cost model or a fair value model

Must apply same method to all class of asset

Fair value changes recognised in P&L

83
Q

IFRS measurement of intangible assets

A

Either cost or revaluation model.

Revaluation only allowed if there is an active market

84
Q

Treatment of Land

A

Not depreciated

85
Q

Revaluation of long-lived assets IFRS

A

Any increase that reverses a revaluation recognised in P&L

Increase in excess of this is carried in equity

86
Q

IFRS Impairment

A

Carrying Value > Recoverable amount

Recoverable amount = Max(Fair value - costs to sell; PV future cash flows)

Write down to recoverable amount

87
Q

GAAP Impairment

A

Carrying amount > Recoverable amount

Recoverable amount = undiscounted CF

Writedown to fair value

88
Q

Accounting for long-term debt

A

Opening liability (funds received) x original YTM = Interest expense

  • Closing liability

=opening liability

(+)Interest expense

(-)coupon paid

1 CFA (26 decks)

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