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CFA Level One > Financial Reporting and Analysis > Flashcards

Financial Reporting and Analysis Flashcards

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1
Q

IASB

A

International Accounting Standards Board

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2
Q

Income Statement

A
  • reports over a period of time

- revenues, expenses, gains/losses

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3
Q

Balance Sheet

A
  • reports positions at a point in time

- assets, liabilities, owner’s equity

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4
Q

Accounting Equation

A

assets = liabilities + owners’ equity

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5
Q

Cash Flow Statement

A
  • reports cash receipts and payments

- operating, investing, financing cash flows

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6
Q

Statement of Changes in Owners’ Equity

A
  • reports the amount and sources of changes in equity
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7
Q

Financial Statement Footnotes

A
  • information about accounting methods, assumptions, estimates
  • ARE audited unlike other disclosures
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8
Q

Supplementary Schedule

A
  • contains additional information
  • examples:
    operating income by region
  • reserves for oil and gas
  • information about hedging
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9
Q

Management’s Discussion and Analysis

A
  • provides assessment and analysis of financial performance
  • For publicly held companies in the US, must include:
    1. results from operations and discussion of trends
    2. discussion of significant effects of currently know trends
    3. capital resources and liquidity
    4. general business overview based on known trends
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10
Q

Audit

A
  • independent review of an entity’s financial statements
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11
Q

Standard Auditor’s Opinion

A
  • contains three parts:
    1. auditor has performed independent review of the financial statements
    2. generally accepted auditing standards were followed, thus providing reasonable assurance that the financial statements contain no material errors
    3. auditor satisfied that statements were prepared in accordance with accepted accounting principles
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12
Q

Unqualified Auditor Opinion

A
  • believes the statements are free from material omissions and errors
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13
Q

Qualified Auditor Opinion

A
  • believes statements make any exceptions to accounting principles
  • explain these exceptions in report
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14
Q

Adverse Auditor Opinion

A
  • statements are not presented fairly or are materially nonconforming with accounting standards
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15
Q

Sarbanes-Oxley Act

A
  • management is required to provide a report on the company’s internal control system for ensuring proper financial statement preparation
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16
Q

SEC Form 8-K

A
  • report events such as acquisitions and disposals or major assets or changes in management or corporate governance
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17
Q

Financial Statement Analysis Framework

A
  1. State the objective and context
  2. Gather data
  3. Process the data
  4. Analyze and interpret the data
  5. Report the conclusions or recommendations
  6. Update the analysis
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18
Q

Contra Accounts

A

are used for entries that offset some part of the value of another account
- ex: depreciated equipment

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19
Q

Assets

A 
- are the firms economic resources
Examples:
1. Cash and cash equivalents
2. Accounts receivable
3. Inventory
4. Financial Assets
5. Prepaid Expenses
6. PP&E
7. Investment in affiliates
8. Deferred tax assets
9. Intangible assets
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20
Q

Cash Equivalents

A

liquid assets with maturities of 90 days or less

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21
Q

Liabilities

A 
- are creditor claims on the company's resources
Examples:
1. Accounts payable and trade payable
2. Financial liabilities
3. Unearned revenue
4. Income taxes payable
5. Long-term debt
6. Deferred tax liabilities
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22
Q

Owner’s Equity

A 
- is the owner's residual claim on a firm's resources, which the amount by which the assets exceed the liabilities
Examples:
1. Capital
2. Additional paid-in capital
3. Retained earnings
4. Other comprehensive income
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23
Q

Revenue

A
  • represents the inflows of economic resources, includes:
    1. Sales
    2. Gains
    3. Investment Income
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24
Q

Expenses

A
  • are outflows of economic resources, includes:
    1. Cost of goods sold
    2. Selling, general and admin costs
    3. Depreciation & Amortization
    4. Tax Expense
    5. Interest Expense
    6. Losses
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25
Q

Expanded Accounting Equation

A

assets = liabilities + contributed capital + beginning retained earnings + revenue - expenses - dividends

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26
Q

Double Entry Accounting

A

a transaction has to be recorded in at least two accounts

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27
Q

Accrual Accounting

A
  • requires that revenue is recorded when the firm earns it and expenses are recorded as the firm incurs them regardless of when the cash has actually been paid
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28
Q

Unearned Revenue

A

firm receives the cash before it provides a good or service to customers

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29
Q

Accrued Revenue

A

firm provides goods or services before it receives cash payment

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30
Q

Prepaid Expenses

A

firm pays cash ahead of time for anticipated expense

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31
Q

Accrued Expense

A

firm owes cash for expenses it has incurred

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32
Q

Journal Entries

A

record every transaction

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33
Q

General Ledger

A

sorts all the entries in the general ledger by account

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34
Q

Accounts Payable

Financial Statement Element

A

Liability

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35
Q

Accounts Receivable

Financial Statement Element

A

Asset

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36
Q

Accumulated Depreciation

Financial Statement Element

A

Asset

- contra to the asset being depreciated

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37
Q

Additional Paid In Capital

Financial Statement Element

A

Owners’ Equity

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38
Q

Allowance for Bad Debt

Financial Statement Element

A

Asset

- contra to accounts receivable

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39
Q

Bonds Payable

Financial Statement Element

A

Liability

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40
Q

Cash Equivalents

Financial Statement Element

A

Asset

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41
Q

Common Stock

Financial Statement Element

A

Owners’ Equity

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42
Q

Cost of Goods Sold

Financial Statement Element

A

Expense

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43
Q

Current Portion of Long-term Debt

Financial Statement Element

A

Liability

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44
Q

Deferred Tax Items

Financial Statement Element

A

A & L

- both deferred tax assets and deferred tax liabilities are recorded

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45
Q

Depreciation

Financial Statement Element

A

Expense

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46
Q

Dividends Payable

Financial Statement Element

A

Liability

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47
Q

Dividends Received

Financial Statement Element

A

Revenue

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48
Q

Gains on Sale of Assets

Financial Statement Element

A

Revenue

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49
Q

Goodwill

Financial Statement Element

A

Asset

- intangible asset

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50
Q

Inventory

Financial Statement Element

A

Asset

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51
Q

Investment Securities

Financial Statement Element

A

Asset

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52
Q

Loss of Sale of Assets

Financial Statement Element

A

Expense

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53
Q

Notes Payable

Financial Statement Element

A

Liability

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54
Q

Other Comprehensive Income

Financial Statement Element

A

Owners’ Equity

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55
Q

Prepaid Expenses

Financial Statement Element

A

Asset

- accrual account

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56
Q

Property, Plant and Equipment

Financial Statement Element

A

Asset

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57
Q

Retained Earnings

Financial Statement Element

A

Owners’ Equity

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58
Q

Sales

Financial Statement Element

A

Revenue

59
Q

Unearned Revenue

Financial Statement Element

A

Liability

- accrual account

60
Q

Standard Setting Bodies

A
  • professional organizations
  • two primary: FASB & IASB
  • in US FASB sets the Generally Accepted Accounting Principals (GAAP)
61
Q

Regulatory Authorities

A
  • government agencies that have LEGAL authority to enforce compliance
  • ex: SEC, FSA
62
Q

IASB

A
  • International Accounting Standards Board

- establishes the international financial reporting standards

63
Q

Form S-1

SEC Required Filings

A

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

64
Q

Form 10-K

SEC Required Filings

A
  • required annual filing
  • audited
  • equivalent for foreign companies 40-F, Canadian 20-F
65
Q

Form 10- Q

SEC Required Filings

A
  • filed quarterly with updated financial statements
  • does not need to be audited
  • foreign companies, semi-annually, Form 6-K
66
Q

Form DEF - 14A

SEC Required Filings

A

when a company prepares a proxy statement for its shareholders prior to the annual meeting
** to remember: this investors would DEF want to know

67
Q

Form 8-K

SEC Required Filings

A

disclose material events

68
Q

Form 144

SEC Required Filings

A

company can issues securities to certain qualified buyers without registering the securities with the SEC, but must notify that it intends to do so

69
Q

Form 3, 4, & 5

SEC Required Filings

A

involve the beneficial ownership of securities by a company’s officers and directors

70
Q

Income Statement Equation

A

Net Income = revenues - expenses

71
Q

Gross Profit

A

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

72
Q

Operating Income/ Operating Profit

A

result from subtracting operating expenses from gross profit

73
Q

Revenue Recognition Applications_

Long Term Contracts

A
  • used for contracts that extend beyond one accounting period
  • either the percentage of completion method, or completed contract menthod
74
Q

Percentage of Completion Method

A
  • appropriate to use when project’s costs and revenue CAN be reliably estimated
  • revenue and expenses recognized as the work is performed
  • percentage completed is measured by total cost incurred to date divided by the total expected cost
    • if loss expected, must be recognized immediately
75
Q

Completed Contract Method

A
  • appropriate to use when the project’s costs and revenues CANNOT be reliably estimated or project is short term
  • revenue and expenses recognized only when contract completed
    ** if loss expected, must be recognized immediately
    IFRS: revenue recognized to the extent of contract costs, costs are expensed when incurred, profit recognized at completion
76
Q

Installment Sales

A

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

77
Q

Installment Method

A
  • used when collectibility cannot be reasonably estimated

- profit is recognized as cash is collected

78
Q

Cost Recovery Method

A
  • used when collectibility is highly uncertain

- profit is recognized only when cash collected exceeds costs incurred

79
Q

Barter Transactions

A

two parties exchange goods or services without cash payment

80
Q

Round -trip Transactions

A

involves the sale of goods to one party with the simultaneous purchase of almost identical goods from the same party
ex: late 1990 internet companies increased revenue buy “buying” equal values of advertising space on each others’ websites

81
Q

Revenue Reporting for Barter Transactions

A

GAAP: can be recognized at fair value only if the firm has historically received cash payments for such goods and services and use the historical data to determine fair value

IFRS: must be based on fair value of revenues from similar nonbarter transactions with unrelated parties

82
Q

Gross Revenue Reporting

A

the selling firm reports sales revenue and cost of goods sold separately
* sales are higher using gross than net revenue reporting

83
Q

Net Revenue Reporting

A

only the difference in sales and costs is reported

84
Q

Gross Revenue Reporting Rules under GAAP

A

following criteria must be met:

  1. be the primary obligor under the contract
  2. bear the inventory risk and credit risk
  3. be able to chose the supplier
  4. have reasonable latitude to establish price
85
Q

Matching Principal

A

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

86
Q

Period Expenses

A

expenses not directly tied to revenue generation;l expensed in the period incurred

87
Q

Straight Line Depreciation Method

A 
- recognizes an equal amount of depreciation expense each period
Equation:
=     cost - residual value
     -------------------------------
            useful life
88
Q

Accelerated Depreciation Method

A

speeds up the recognition of depreciation expense in a systematic way to recognize more depreciation expense in the early years of the asset’s life

89
Q

Declining Balance Method (DB)

A

applies a constant rate of depreciation to an assets (declining) book value each year

90
Q

Double- Declining Balance Method (DDB)

A
  • applies two times the straight line rate to the declining balance
    Equation:
    = (2/useful life)(cost - accumulated depreciation)
91
Q

First- in, First- out (FIFO)

A
  • the first item purchased is assumed to be the first item sold
  • appropriate for inventory with limited shelf life
92
Q

Last-in, First-out (LIFO)

A
  • last item purchased is assumed to be the first item sold
  • inventory that does not deteriorate with age
  • US LIFO popular for tax benefits
  • **Only allowed in US under GAAP, prohibited under IFRS
93
Q

Weighted Average Costs Method_ Inventory

A

makes no assumption about the physical flow of the inventory

94
Q

Amortization

A
  • allocation of the cost of an intangible asset over its useful life
  • expense should match the proportion of the assets economic benefit used during the period
  • most firms use straight line
95
Q

Intangible Assets

A
  • if indefinite live (e.g., goodwill), not amortized
  • must be tested for impairment at least annually
  • if impaired, expensed on income statement
96
Q

Financial Reporting_ Discontinued Operations

A
  • management has decided to dispose of, but has either yet to do so, or has disposed of in the current year after the operation had generated income or losses
  • to be accounted for as discontinued MUST be physically and operationally distinct from the rest of the firm
  • any income or loss reported separately on income statement net of tax
97
Q

Financial Reporting_ Unusual or Infrequent Items

A
  • included in income from continuing operations and reported before tax
98
Q

Financial Reporting_ Extraordinary Items

A
  • Under GAAP, defined as: is a material transaction or event that is BOTH unusual AND infrequent in occurence
  • reported separately on income statement, net of tax, after income from continuing operations
  • **IFRS DOES NOT allow items to be separate
99
Q

Simple Capital Structure

A
  • contains no potentially dilutive securities

- only common stock, nonconvertible debt, and nonconvertible preferred stock

100
Q

Complex Capital Structure

A
  • contains potentially dilutive securities

- such as options, warrents, or convertible securities

101
Q

Basic EPS

A

= net income - preferred dividends
————————————————–
weighted average number of common shares outstanding

102
Q

Diluted EPS Numerator Adjustments

A
  • if convertible preferred stock is DILUTIVE, convertible preferred dividends must be ADDED to earning available to common shareholders
  • if convertible bond is DILUTIVE, interest expense multipled by (1- tax rate) must be added to numerator
103
Q

Diluted EPS Denominator Adjustments

A
  • denominator is the basic EPS denominator adjusted for the equivalent number of common shares that would be created by the conversion of all dilutive securities outstanding, with each considered separately to determine if it is dilutive
104
Q

Treasury Stock Method

A
  • assumes funds received by company from exercise used to purchase shares of the company at AVERAGE market price
  • net increase in shares equals the difference between shares created and hypothetical number of share purchased with proceeds
105
Q

Dilutive

A

when exercise prices are less than the average market price of the stock over the year

106
Q

Diluted EPS

A

weighted average common and potential common shares outstanding

107
Q

Comprehensive Income

A
  • is a measure than includes all changes to equity other than owners contributions and distributions
  • aggregates net income
    1. foreign currency translation gains and losses
    2. minimum pension liability adjustments
    3. unrealized gains and losses on cash flow hedging derivatives
    4. available for sale securities
108
Q

Retained Earnings

A

net income + stockholder’s equity

109
Q

Available for Sale Securities

A
  • investment securities that are not expected to be held to maturity or sold in the near term
  • unrealized gains/losses reported directly in stockholder’s equity
110
Q

Account Format for Balance Sheet

A

layout in which assets are presented on right, and liabilities and owners’ equity is presented on left

111
Q

Report Format for Balance Sheet

A

all presented in one column

112
Q

Classified Balance Sheet

A

groups together similar items to arrive at significant subtotals
ex: current assets are grouped together

113
Q

Accrual Method of Accounting:

Cash Received in Advance of Revenue Recognition

A

-increase assets (cash), increase in liabilities (unearned revenue)

Once revenue earned:
- decrease liabilities (unearned revenue), increase equity (retained earning)

114
Q

Accrual Method of Accounting:

Revenue Recognized before Cash

A
  • increase in assets (accounts receivable), increase in equity (retained earning)

Once cash collected:
-increase assets (cash), decrease asset (accounts receivable)

115
Q

Accrual Method of Accounting:

Cash Paid in Advance of Recognizing Expense

A
  • decrease in asset (cash), increase in asset (prepaid expense)

Once expense is recognized:
- decrease asset (prepaid expense), decrease equity (retained earnings)

116
Q

Accrual Method of Accounting:

Recognizing Expense before Cash

A
  • increase in liabilities (accrued expenses), decrease equity (retained earnings)

Once expense is paid:
- decrease asset (cash), decrease liabilities (accrued expenses)

117
Q

Current Assets

A
  • cash and cash equivalents that will likely be converted into cash or used up within one year or one operating cycle
  • usually listed in order of liquidity
118
Q

Current Liabilities

A
  • obligations that will be satisfied within one year
  • criteria:
    1. settlement expected during normal operating cycle
    2. settlement is expected within one year
    3. not unconditional right to defer settlement for more than one year
119
Q

Assets/Liabilities: Financial Statement Footnotes

A

Should include:

  1. Basis for measurement
  2. Carry value of inventory by category
  3. Amount of inventory carried at fair value less costs to sell
  4. Write downs and reversals, with discussion
  5. Inventories pledged as collateral
  6. Inventories recognized as an expense
120
Q

Inventory_ Standard Costing

A
  • assigning predetermined costs to goods produced

- used by manufacturing

121
Q

Inventory_ Retail Method

A
  • measures inventory at retail prices and then subtracts gross profit in order to reflect cost
122
Q

Goodwill

A

excess of purchase price over the fair value of the identifiable assets and liabilities acquired in a business acquisition

123
Q

Financial Assets

A

investment securities (stocks and bonds), derivatives, loans, receivables

124
Q

Financial Liabilities

A

derivatives, notes payable, bonds payable

125
Q

Marking- to- Market

A

Reporting assets and liabilities at fair value

126
Q

Held to Maturity

A
  • acquired with intent to hold to maturity
  • reported on balance sheet at amortized cost
  • subsequent changes in market value ignored
127
Q

Trading Securities

A
  • intent to profit in near term
  • reported on balance sheet at fair value
  • unrealized gains/losses reported on income statement
128
Q

Available for Sale Securities

A
  • not expected to be held to maturity
  • reported on balance sheet at fair value
  • unrealized gains/losses reported in other comprehensive income as part of stockholders’ equity
129
Q

Contributed Capital

A

total amount paid in by the common and preferred shareholders

130
Q

Authorized Shares

A

number of shares that may be sold under the firms articles of incorporation

131
Q

Issued Shares

A

number of shares that have actually been sold to shareholders

132
Q

Outstanding Shares

A

issued shares - reacquired by the firm

133
Q

Noncontrolling Interest

A

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

134
Q

Retained Earnings

A

undistributed earnings of the firm since inception, cumulative earnings that have not been paid out as dividends

135
Q

Treasury Stock

A
  • is stock that has been reacquired by the issuing firm that has not yet been retired
  • reduces stockholders’ equity
136
Q

Accumulated Other Comprehensive Income

A

-includes all changes in stockholders’ equity except for transactions recognized on the income statement
- does NOT include net income, but component of stockholders’ equity at a point in time
GAAP: report in income statement (below net income), in separate statement of comprehensive income , or in statement of stockholders’ equity
IFRS: can include all revenues/expenses in the statement of comprehensive income, or present in separate income statement as a statement of comprehensive income

137
Q

Operating Activities

US Cash Flow Classifications

A

Inflows:

  • cash collected from customers
  • interest and dividends received
  • sale proceeds from trading activities

Outflows:

  • cash paid to employees and suppliers
  • cash paid for other expenses
  • acquisition of trading securities
  • interest paid
  • taxes paid
138
Q

Investing Activities

US Cash Flow Classifications

A

Inflows:

  • sale proceeds from fixed assets
  • sale proceeds from debt and equity investments
  • principal received from loans made to others

Outflows:

  • acquisition of fixed assets
  • acquisition of debt and equity investments
  • loans made to others
139
Q

Financing Activities

US Cash Flow Classifications

A

Inflows:

  • principal amounts of debt issued
  • proceeds from issuing stock

Outflow:

  • principal paid on debt
  • payments to reacquire stock
  • dividends paid to shareholders
140
Q

IFRS Classification of Cash Flows

A
  • interest and dividends received may be classified as either operating or Investing activities
  • dividends paid and interest paid on debt my be classified as either operating or FINANCING activities
  • taxes are reported operating unless the expense is associated with an investing or financing activity
141
Q

Direct Method for Cash Flow Statement

A

-each line item of the accrual based income statement is converted to cash receipts or cash payments

142
Q

Indirect Method for Cash Flow Statement

A
  • net income is converted to operating cash flows by making adjustments for transactions that affect net income but are not cash transactions
143
Q

Discussion Direct vs. Indirect Method

A

Direct Method-
primary advantage that it presents the firms operating cash receipts and payments, while indirect presents only the net results
- provides more information
- useful for estimating future operating cash flows

Indirect Method:

  • main advantage that is focuses on the differences between net income and operating cash flow
  • useful for forecasting future operating cash flows
144
Q

Disclosure Requirements for Direct/Indirect Method for Cash Flows

A
  • GAAP: direct method must also disclose adjustments to reconcile net income; not for IFRS
  • IFRS: payments for interest and taxes must be disclosed separately under either method; under GAAP, can be reported in cash flow statement or disclosed in the footnotes

CFA Level One (12 decks)

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