Financial Reporting: Evaluating Financial Reporting Quality

Question 1

Balance Sheet Accrual Ratio

Answer 1

YoY + in Net operating assets / Average net operating assets

*- *

Question 2

Steps to convert operating lease into capitalized lease

Answer 2

1. Add operating lease payments back into EBIT
2. Calculate NPV of lease payments (=cost of equipment)
3. Divide (NPV - salvage value) by depreciation period/method to get depreciation expense
4. NPV X Discount rate = Interest expense

Question 3

Cash Flow Acrual Ratio

Answer 3

Net Income

• Cash from operations

- Cash from financing

= Accruals

Accruals/ Average net operating assets = cash flow accrual ratio