Financial Reporting and Analysis Flashcards
What is a Form DEF-14A?
When a company prepares a proxy statement for its shareholders
What is a Form 8-K?
It discloses material events including significant asset acquisitions/disposals, changes in management/corporate governance, matters related to its accountants, financial statements, or markets in which its securities trade
What is a Form 144?
A company can issue securities to certain qualified buyers without registering the securities with the SEC but must notify the SEC that it intends to do so
What are Forms 3,4, and 5?
They detail the beneficial ownership of securities by a company’s officers/directors.
What kind of transactions are included in Other Comprehensive Income?
- Foreign Currency translation gains/losses
- Adjustments for minimum pension liability
- Unrealized gains/losses from cash flow hedging derivatives
- Unrealized gains/losses from available-for-sale securities
How are trading securities measured under U.S. GAAP (both income statement and balance sheet)?
Unrealized gains/losses are recognized on the income statement and reported at fair value on the balance sheet
How are held-to-maturity securities measured under U.S. GAAP (both income statement and balance sheet)?
They are amortized on the balance sheet (issue price minus principal plus/minus amortized discount/premium); recognized on neither the income statement nor OCI
How are available-for-sale securities measured under U.S. GAAP (both income statement and balance sheet)?
Unrealized gains/losses are reported on OCI and reported at fair value on the balance sheet
What is the standard costing method?
Assigning predetermined amounts of materials, labor, and overhead to goods produced
What is the retail method?
Measure inventory at retail prices then subtract gross profit to get cost
What is the cost model for measuring PP&E?
PP&E is reported at amortized cost
What is impairment?
When the carrying value exceeds the recoverable amount
What is the recoverable amount under IFRS?
Greater of fair value minus selling costs, or value in use (PV of asset’s future cash flows)
What is the revaluation model for PP&E? Between U.S. GAAP and IFRS, under which one is this allowed?
Fair value minus accumulated depreciation. Only allowed under IFRS
What types of marketable securities can be measured at historical cost under U.S. GAAP?
- Unlisted equity investments
2. Loans/Notes Receivable
What is the Current Ratio?
Current Assets/Current Liabilities
What is the Quick Ratio?
(Cash + Marketable Securities + Receivables)/Current Liabilities
What is the Cash Ratio?
(Cash + Marketable Securities)/Current Liabilities
What is the Debt Ratio?
Total Debt/Total Assets
What is Financial Leverage?
Total Assets/Total Equity
What are 3 examples of cash inflows from operating activities under U.S. GAAP?
- Cash from customers
- Interest/dividends received
- Sales proceeds from trading securities
What are 4 examples of cash outflows from operating activities under U.S. GAAP?
- Cash paid to employees/suppliers
- Acquisition of trading securities
- Interest paid on debt/leases
- Taxes
What are 3 examples of cash inflows from investing activities under U.S. GAAP?
- Sale proceeds from fixed assets
- Sale proceeds from debt/equity investments
- Principal received from loans to others
What are 3 examples of cash outflows from investing activities under U.S. GAAP?
- Acquisition of fixed assets
- Acquisition of debt/equity investments
- Loans made to others
What are 3 examples of cash inflows from financing activities under U.S. GAAP?
- Principal amounts of debt issued
2. Proceeds from issuing stock
What are 3 examples of cash outflows from financing activities under U.S. GAAP?
- Principal paid on debt/leases
- Payments to reacquire stock
- Dividends paid to shareholders
How are interest/dividends received classified under IFRS?
Operating or investing activities
How are dividends paid classified under IFRS?
Operating or financing activities
How do you calculate FCFF (free cash flow to the firm) using net income?
FCFF = Net Income + Noncash charges (depreciation + amortization) + Interest paid*(1-t) - fixed capital investment (net capital expenditures) - working capital investment
How do you calculate FCFF (free cash flow to the firm) using CFO?
FCFF = CFO + Interest paid*(1-t) - fixed capital investment
How do you calculate FCFE (free cash flow to equity)?
FCFE = CFO - fixed capital investment + net borrowing,
where net borrowing = debt issued - debt repaid
What is the cash flow to revenue ratio?
CFO/net revenue
What is the cash return on assets ratio?
CFO/(average total assets)
What is the cash return on equity ratio?
CFO/(average total equity)
What is the cash to income ratio?
CFO/(operating income)
How is cash flow per share calculated?
(CFO - preferred dividends)/(weighted avg. # of common shares)
What is the debt coverage ratio?
CFO/(total debt)
What is the interest coverage ratio?
(CFO + interest paid + taxes paid)/interest paid
What is the reinvestment ratio?
CFO/(cash paid for long-term assets)
What is the debt payment ratio?
CFO/(cash long-term debt repayment)
What is the dividend payment ratio?
CFO/(dividends paid)
What is the investing and financing ratio?
CFO/(cash outflow from investing and financing activities)
What is the receivables turnover ratio?
annual sales/average receivables
What is the days of sales outstanding?
365/receivables turnover
What is the inventory turnover ratio?
COGS/average inventory
What is the days of inventory on hand?
365/inventory turnover
What is the payables turnover ratio?
purchases/average trade payables
What is the number of days of payables?
365/payables turnover ratio
What is the total asset turnover ratio?
revenue/average total assets
What is the fixed assets turnover ratio?
revenue/average net fixed assets
What is the working capital turnover ratio?
revenue/average working capital
What is the defensive interval?
(cash + marketable securities + receivables)/average daily expenditures
What is the equation for the cash conversion cycle?
days of sales outstanding + days of inventory on hand - number of days of payables
What is the debt-to-capital ratio?
total debt/(total debt + total shareholders’ equity)
What is the fixed charge coverage?
(earnings before interest and tax + lease payments)/(interest payments + lease payments)
What is the original DuPont equation?
ROE = net profit margin * total asset turnover * financial leverage
What is the extended (5-way) DuPont equation?
(net income/EBT)(EBT/EBIT)(EBIT/revenue)total asset turnoverfinancial leverage
Where can an analyst find information about accounting methods, assumptions, and estimates used by management?
Financial statement notes, or footnotes
What are 4 requirements of the SEC for MD&A statements?
- Effects of inflation/changing prices if material
- Impact of off-balance-sheet obligations and contractual obligations such as purchase commitments
- Accounting policies that require significant judgment by management.
- Forward-looking expenditures and divestitures.
What are the 3 parts of a standard auditor’s opinion?
- The auditor has performed an independent review
- Generally accepted auditing standards were followed, thus providing reasonable assurance that the financial statements contain no material errors
- The auditor is satisfied that the statements were prepared in accordance with accepted accounting principles
What are the 6 steps in the financial statement analysis framework?
- State objective and context
- Gather data
- Process data - Calculate ratios. Prepare exhibits such as graphs and common-size balance sheets.
- Analyze and interpret data
- Report conclusion/recommendations
- Update analysis
What does the International Organization of Securities Commissions (IOSCO) do?
Make national regulations and enforcement more uniform around the world
According to the IASB, what 2 qualities make financial information useful?
- Relevance
2. Faithful representation
What 4 characteristics enhance the 2 qualities that make financial information useful?
- Comparability
- Verifiability
- Timeliness
- Understandability
According to International Accounting Standard No. 1, what are the 5 required financial statements?
- Balance sheet
- Statement of comprehensive income
- Cash flow statement
- Statement of changes in owners’ equity
- Explanatory notes, including a summary of accounting policies
According to International Accounting Standard No. 1, what are the 9 features of preparing financial statements?
- Fair representation
- Going concern basis
- Accrual basis of accounting
- Consistency between periods
- Materiality - free of misstatements or omissions
- Aggregation of similar items
- No offsetting of assets against liabilities or income against expenses
- Reporting frequency must be at least annually
- Comparative info for prior periods should be included
What is net revenue?
Revenue less adjustments for estimated returns and allowances
What is noncontrolling interest?
The share (proportion) of the subsidiary’s income not owned by the parent
What are the 5 steps to recognizing revenue according to the converged standards?
- Identify the contract with the customer
- Identify the distinct performance obligations in the contract
- Determine the transaction price
- Allocate transaction price to performance obligations
- Recognize revenue as performance obligations are satisfied
How are costs treated under the converged standards for long-term contracts? What is the effect of the treatment?
Costs are capitalized, which reduces expenses during the contract period
How is income/loss from discontinued operations treated?
Reported separately in the income statement, net of tax after income from continuing operations
How is income/loss from unusual or infrequent items treated?
Included in income from continuing operations; reported net of tax
If a firm changes an accounting policy, does it apply it retrospectively or prospectively?
Retrospectively
If a firm changes an accounting estimate, does it apply it retrospectively or prospectively?
Prospectively
What is a prior-period adjustment?
A restatement of a prior financial statement due to accounting errors
What is a simple capital structure? What is a complex capital structure?
Simple: no potentially dilutive securities
Complex: has potentially dilutive securities
What is the equation for basic EPS?
EPS = net income - preferred dividends / weighted # of common shares
What is a stock dividend?
Distribution of additional shares in proportion to current number of shares i.e. a 10% stock dividend means each shareholder gets 1.1x their # of shares
What is Comprehensive Income?
Comprehensive Income = Net Income + Other Comprehensive Income. Includes all changes in owners’ equity except for transactions with owners
What are trading securities?
Securities the firm own but intend to sell
What is a classified balance sheet?
One that differentiates current v.s. non-current
What is liquidity-based format?
A balance sheet that presents assets and liabilities in order of liquidity
What is the measurement base for Accounts Receivable?
Reported at net realizable value, which is based on estimated bad debt expense. Bad debt expense increases the allowance for doubtful accounts (contra account)
What is the equation for net realizable value of Accounts Receivable?
NRV = gross receivables - allowance for doubtful accounts
How are prepaid expenses classified?
As an asset
How is the cost of inventory reported under IFRS?
Lower of historical cost or net realizable value
How is inventory cost reported under U.S. GAAP for methods other than LIFO or retail?
Lower of historical cost or net realizable value
How is inventory cost reported under U.S. GAAP for LIFO or retail methods?
Lower of historical cost or market
What are the upper and lower bounds for market value for inventory cost (under U.S. GAAP)?
Lower bound: NRV - normal profit margin
Upper bound: NRV
What happens if inventory’s carrying value is greater than NRV (IFRS) or market value (U.S. GAAP)?
Inventory is written-down; loss recognized on income statement. Under IFRS, inventory can be written-up later, but not under U.S. GAAP
How is PP&E reported under IFRS?
Using cost model or revaluation model
What is an asset’s value in use?
The present value of the asset’s future cash flow streams
How can purchased intangible assets be reported under IFRS?
Cost model or revaluation model
How can purchased intangible assets be reported under U.S. GAAP?
Only cost model
How are internally generated intangible assets reported under IFRS (i.e. research and development)?
Costs are expensed at the research stage, but can be capitalized at the development stage
How are internally generated intangible assets reported under U.S. GAAP (i.e. research and development)?
Both research and development costs are expensed
What is goodwill?
Excess of purchase price over fair value of identifiable net assets (assets - liabilities)
How is internally generated goodwill treated? How is goodwill in a business combination treated?
Internally generated: expensed as incurred
Business combination: capitalized
How is goodwill amortized and treated on the income statement?
Goodwill is not amortized, but tested for impairment at least annually. Impairment is recognized as a loss on the income statement
How can a firm operating under IFRS classify an equity security? Is this allowed under U.S. GAAP?
They can make the one-time choice of measuring it at fair value through OCI (like available-for-sale securities). Equity securities cannot be available-for-sale under U.S. GAAP
How can a firm operating under IFRS classify any financial asset? Is this allowed under U.S. GAAP?
One-time choice can be made to classify any financial asset at fair value through profit and loss. Not allowed under U.S. GAAP
What is the equation to calculate ending dividends payable?
ending dividends payable = beginning dividends payable + dividends declared - dividends paid
What is the equation to calculate dividends declared (assuming it hasn’t been provided)?
ending retained earnings = beginning retained earnings + net income - dividends declared
What are the 5 main components of CFO under the direct method?
- Cash from customers
- Cash paid to suppliers
- Cash operating expenses (i.e. wages)
- Cash paid for interest
- Cash paid for taxes
What is the ROA (return on assets) equation, including interest?
ROA = (net income + interest expense*(1-t))/ average total assets
What is the return on total capital equation?
EBIT/average total capital
What is total capital?
Short- and long-term debt, preferred equity, and common equity
What is the ROE (return on equity) equation?
ROE = net income/average total equity
What is the equation for RR (retention rate)?
RR = 1 - dividend payout ratio
What is the dividend payout ratio?
dividend payout ratio = dividends declared/net income available to common
What is the sustainable growth rate, g, for equity?
g = retention rate * return on equity
What is a business segment?
A distinguishable portion of a company that is greater than 10% of the broader company’s revenues, assets, or income.
What are 3 types of product costs? How are they treated in the financial statements?
- Purchase cost less trade discounts/rebates
- Conversion (manufacturing) costs including labor and overhead
- Costs necessary to bring inventory to its present location and condition
Product costs are capitalized in the inventories account
What are 4 types of period costs? How are they treated in the financial statements?
- Abnormal waste of materials, labor, or overhead.
- Storage costs (unless required as part of production).
- Administrative overhead.
- Selling costs.
Period costs are expensed as incurred
Which inventory cost flow method is not allowed under IFRS?
LIFO
What is the equation for LIFO reserve?
LIFO reserve = FIFO inv. - LIFO inv.
To convert from LIFO to FIFO, what 3 calculation steps are needed?
- add the LIFO reserve to inv. to get FIFO inv.
- decrease cash by LIFO reserve * t
- increase retained earnings by LIFO reserve * (1 - t)
What is the equation to convert LIFO COGS to FIFO COGS?
FIFO COGS = LIFO COGS - (ending LIFO reserve - beginning LIFO reserve)
What is a LIFO liquidation? What is its effect on the income statement?
When a firm’s inventory quantities decline, a LIFO liquidation occurs. Since older, lower costs are included in COGS, income appears higher.
What is the net realizable value (NRV) for inventory?
NRV = expected sales price - estimated selling and completion costs
In the “lower of cost or market” method of measuring inventory cost, what is market usually?
Market usually is equal to replacement cost
What are the 7 inventory disclosures required under U.S. GAAP and IFRS?
- The cost flow method (LIFO, FIFO, etc.) used.
- Total carrying value of inventory, with carrying value by classification (raw materials, work-in-process, and finished goods) if appropriate.
- Carrying value of inventories reported at fair value less selling costs.
- The cost of inventory recognized as an expense (COGS) during the period.
- Amount of inventory write-downs during the period.
- Reversals of inventory write-downs during the period, including a discussion of the circumstances of reversal (IFRS only because U.S. GAAP does not allow reversals).
- Carrying value of inventories pledged as collateral.
How is a change in inventory cost flow method reported?
Retrospectively (prior financial statements are restated with new method). The exception is when a company changes to LIFO
Which part of the cash flow statement (CFO, CFI, CFF) does capitalized interest appear?
Cash outflow from investing
How is capitalized interest cost allocated in the income statement for a held for sale asset? Held for use asset?
For held for sale: COGS
For held for use: Depreciation expense
How are software costs treated under U.S. GAAP?
Similar to IFRS; research costs are expensed, but development costs are capitalized
How are purchased intangible assets treated?
They are capitalized at acquisition fair value
What is the equation for units-of-production depreciation expense?
depreciation = (original cost - salvage value) * (output units in the period / life in output units)
What is a revaluation surplus?
An increase in equity which happens when the fair value of a long-lived asset is greater than the carrying value at the first revaluation date
What are the 2 steps for treating impairment under U.S. GAAP?
- Recoverability test - impaired if carrying value exceeds undiscounted future cash flows
- Loss measurement - if impaired, asset is written down to fair value (or present value of discounted cash flows if fair value isn’t known). Loss is recognized in income statement
What happens to depreciation/amortization for held for sale (instead of held for use) long-lived assets under both IFRS and U.S. GAAP?
Asset is no longer depreciated/amortized
What is the impairment treatment for held for sale assets under both IFRS and U.S. GAAP?
Impaired if carrying value exceeds net realizable value (fair value - selling costs). Loss can be reversed but not exceed the original impairment loss
What is derecognition of long-lived assets?
When the asset is sold, exchanged, or abandoned
How is a sold asset treated on the balance sheet? On the income statement?
Balance sheet: Asset is removed
Income statement: Difference between sale proceeds and carrying value is reported as part of other gains/losses
How is an abandoned asset treated on the balance sheet? On the income statement?
Balance sheet: Asset is removed
Income statement: Loss equal to carrying value is recognized
How is an exchanged asset treated on the balance sheet? On the income statement?
Balance sheet: Old asset is removed. Fair value of new asset is recorded
Income statement: gain/loss from comparing carrying value of old asset with fair value of old asset (or fair value of new asset is more evident)
For each class of PP and E, what 4 things must a firm disclose under IFRS?
- Basis for measurement (usually historical cost).
- Useful lives or depreciation rate.
- Gross carrying value and accumulated depreciation.
- Reconciliation of carrying amounts from the beginning of the period to the end of the period.
If the revaluation model is used, what 3 things must a firm disclose?
- Revaluation date
- How fair value was determined
- Carrying value using the historical cost model
For impaired assets under IFRS, what 3 things must a firm disclose?
- Amounts of impairment losses and reversals by asset class
- Where the loss/loss reversals are recognized in the income statement
- Circumstances that caused the impairment loss/reversal
For each class of PP and E, what 4 things must a firm disclose under U.S. GAAP?
- Depreciation expense by period
- Balances of major classes of assets by nature and function, such as land, improvements, buildings, machinery, and furniture.
- Accumulated depreciation by major asset classes or total
- General description of depreciation methods used
For impaired assets under U.S. GAAP, what 5 things must a firm disclose?
- Description of impaired asset
- Circumstances that caused impairment
- How fair value was determined
- Amount of loss
- Where the loss is recognized in the income statement
What is the equation to calculate average age of a depreciating asset?
average age = accumulated depreciation/annual depreciation expense
What is the equation to calculate total useful life of a depreciating asset?
total useful life = historical cost/annual depreciation expense
What is the equation to calculate remaining useful life of a depreciating asset?
remaining useful life = ending net PP&E / annual depreciation expense
For an investment property, how is it treated differently in the income statement v.s. regular PP and E under IFRS if the fair value model is used?
Regular PP and E gains increase the revaluation surplus account (unless it reverses a loss). For investment property, gains are recognized in the income statement
How is investment property treated under U.S. GAAP compared to regular PP and E?
It is treated the same
For a firm using the fair value model under IFRS, how is a transfer of an asset from owner-occupied to investment property treated in the financial statements?
Treated as revaluation; gains reverse prior losses
For a firm using the fair value model under IFRS, how is a transfer of an asset from inventory to investment property treated in the financial statements?
Gain/loss is recognized if fair value differs from carrying value
For a firm using the fair value model under IFRS, how is a transfer of an asset from investment to owner-occupied/inventory treated in the financial statements?
Fair value of asset at date of transfer will be its cost under new classification
What is the equation to calculate income tax expense?
income tax expense = taxes payable + change in DTL - change in DTA
What is the valuation allowance account?
Reduction of deferred tax assets based on the likelihood the assets will not be realized.
