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Financial Statement Analysis Flashcards

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1
Q

Where is unrealised gains from securities available for sale are classified under IFRS and US GAAP?

A

US GAAP - OCI
IFRS - P/L

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2
Q

Which security i.e. equity or debt in investment under financial assets are allowed to be reclassified?

A

Debt only
If business model has changed.
Prospective

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3
Q

At what amount is reclassification from -
a) FV P/L to amortised
b) Amortised at FV P/L
made?

A

a) The FV will be considered as the new carrying value and revised interest rate will be computed to record interest.
b) FV will be considered as the new carrying value and difference between FV and amortised cost will be recognised immediately through P/L.

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4
Q

What are the conditions to use debt as amortised cost?

A

a) CF Characteristic test - Contractual agreement to collect CF
b) Bond model test - Bond should be held till maturity

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5
Q

What are the conditions for impairment of debt security under investment in financial asset?

A

If performing - Expected 12 m
If NPA - Full

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6
Q

What happens when Investment value becomes 0 under equity method?

A

We discontinue using equity method and no further loss is recorded, it is resumed when company starts earning profit where first losses are set off.

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7
Q

can investment be shown at FV in equity method?

A

Yes, but the decision is irrevocable, and change in value is shown under IS along with dividend.
IFRS - Mutual fund or similar companies
US GAAP - All companies

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8
Q

Is impairment of investment allowed under equity method?

A

Yes,
IFRS- If any potential event signifying FV going down, no reversal.
US GAAP - CV>FV, impairment allowed, no reversal, provided decline is other than temporary

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9
Q

Is impairment and amortisation of goodwill under consolidation method allowed?

A

Impairment is allowed, amortisation is not.

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10
Q

Under which method will the ROE and ROA lower-
a) Full Goodwill
b) Partial Goodwill

A

Full Goodwill since assets and equity are higher as per full goodwill.

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11
Q

What are the rules for impairment of goodwill under consolidation method as per IFRS and US GAAP?

A

IFRS - If CV>FV, difference between CV and FV is impairment.
US GAAP - If CV>FV then,
Impairment amount is - Goodwill in books - Implied Goodwill.
Implied Goodwill = FV of business - FV of assets.

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12
Q

What happens when impairment loss of goodwill amount is more than value of goodwill under -
a) IFRS
b) US GAAP

A

a) The excess amount is adjusted from non cash generating items on proportionate basis.
b) No adjustment, only goodwill becomes 0.

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13
Q

When are contingent liabilities recognised under consolidation method?

A

a) IFRS - record at FV if it can be measured
b) US GAAP - Record at FV only those who has 50% or more probability.

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14
Q

What is the treatment of restructuring cost and In process R&D?

A

Restructuring cost are expensed
In process R&D is capitalised and successfully amoritsed or impaired as the case maybe under both IFRS and US GAAP.

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15
Q

What is pooling method?

A

Consolidation is allowed but only on historical costs and not FV.

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16
Q

Where are derivatives shown if not used for hedging-
a) FV OCI
b) FV PL

A

FV PL

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17
Q

How are contingent assets shown under IFRS and US GAAP?

A

IFRS- not shown
US GAAP - contingent assets are recognized at the lower of the initial value and the best estimate of the future settlement amount.

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18
Q

What is the treatment of P/L from fluctuations of forex while comparing two companies?

A

Since IFRS and US GAAP are both silent as to whether to record them in operating or non operating, Thus, these transactions are excluded from P/L while comparing two companies.

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19
Q

What are the relevant rates under current method for -
a) Current Assets
b) Current Liabilities
c) Equity and dividend
d) IS

A

a) Current Rate
b) Current Rate
c) Historical Rate
d) Average Rate

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20
Q

When to use
a) Current method
b) Temporal Method

A

a) LC = FC =/ PC, subsidiary is independent firm
b) LC =/ FC = PC

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21
Q

What are the relevant rates under temporal method for -
a) Monetary Assets and Liabilities
b) Non Monetary Assets and Liabilities
c) Equity and dividend
d) COGS
e) Depreciation
f) Other items of IS
g) Non monetary assets carried at fair value

A

a) Current rate (like Cash, receivables, debt)
b) Historical Rate (like fixed assets, inventory, deferred revenue, unearned revenue)
c) Historical Rate
d) Historical Rate, opening inventory + Purchases - Closing inventory
e) Historical rate
f) Average Rate
g) Current rate

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22
Q

How is net exposure calculated in -
a) Current method
b) Temporal method

A

a) Net assets - Net liabilities
Eliminating exposure under the current rate method is more difficult because it is necessary to balance total assets and total liabilities.
b) Monetary assets - Monetary Liabilities

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23
Q

At what net exposure position a person profit if local currency is depreciating?

A

If liabilities are more

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24
Q

How is hyperinflation treated as per US GAAP and IFRS?

A

a) US GAAP - Use temporal method, if over 100% in 3 years
b) IFRS- restate for inflation and then use current method, where, Everything except monetary assets and liabilities are restated and Retained Earning are computed as BF.

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25
Q

If local currency is a) depreciating b) appreciating, which method of inventory will give the highest Gross Profit?

A

a) Current rate FIFO method
b) Temporal rate FIFO method

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26
Q

Is sales growth due to change in currency rate deemed sustainable?

A

No

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27
Q

True or False
Temporal method ignored unrealised gains and losses on non monetary assets and liabilities but current rate method does not.

A

True

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28
Q

What is contagion effect?

A

A loss in one bank can destroy the whole econonmy.

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29
Q

How to test liquidity as per Basel 3 guideline?

A

30 day stress scenario

30
Q

Which deposits as per basel 3 guideline are more stable-
a) Longer term vs short term
b) Consumer deposit vs interbank market funds
c) Retail deposit vs corporate deposit

A

a) Longer term
b) Consumer deposits
c) Retail Deposit

31
Q

What are the % of risk weighted assets as per basel 3 guideline for -
a) Capital tier 1
b) Capital tier 1 + Other tier 1
c) Capital tier 1 + Other tier 1 + Capital tier 2

A

a) 4.5%
b) 6%
c) 8%

32
Q

What is meant by provision to loss asset?

A

Against 1 rs. of loss asset (written off) how much loss booked in P/L.

33
Q

What is meant by Allowance to NPA?

A

Against 1 rs. of NPA how much provision is there in total.

34
Q

Which earning income is found to be volatile?
a) Interest Income
b) Service Income
c) Trading Income

A

Trading Income

35
Q

Which amongst property and casualty or life and health insurance companies have-
a) Lumpsum premium
b) Short policy duration
c) Lumpier claims
d) Less liquid

A

a) Life and Health
b) Property and Casualty
c) Property and Casualty
d) Life and Health

36
Q

Which ratio underwriting expense ratio or underwriting loss ratio evaluates-
a) Better Underwriting
b) Efficiency of operations

A

a) Underwriting loss ratio
b) Underwriting expense ratio

37
Q

Which ratio is best to measure quality of earning?

A

Lowest contribution to total revenue ratio

38
Q

True or False
High quality earning assumes high quality reporting and vice versa.

A

False,
High quality earning assumes high quality reporting but vice versa is not true.

39
Q

What is M score test model?

A

If M score > -1.78 then there is a possibility of earning manipulation. Takes into account 8 factors in which, SG&A and leverage have negative coefficients. Is DSR>1, it is a problem.

40
Q

What is Altman Z score model?

A

Takes into account 8 factors, higher score tells the higher probability of company filing for bankruptcy.

41
Q

True or False,
CF should always be more than accruals.

A

True,
Higher the accruals faster the mean reverting process.

42
Q

In which stage of financial statement analysis does ratios and forecasting occurs?
a) process the data
b) Analyse the data

A

Processing the data

43
Q

Which segment should take an exit-
a) % of capital expenditure to % of total assets > 1
b) % of capital expenditure to % of total assets < 1

A

% of capital expenditure to % of total assets > 1

44
Q

What is the adjustment of lease liability if occurred as off balance sheet item in IS and BS?

A

a) IS should be adjusted as -
NI + Rent - Dep - Interest on lease liab.
b) BS - Increase assets and liab by PV of remaining lease payments

45
Q

Which ratio is used to evaluate if firm is investing its capital in its most profitable segment?

A

By comparing the EBIT margin contributed by each segment to its ratio of capital expenditure proportion to asset proportion

46
Q

True or False
In order to make comparisons based on accruals, it is necessary to scale the accrual measure for differences in size.

A

True

47
Q

Which of the following ratios are computed pre tax?
a) ROCE
b) ROIC

A

ROCE

48
Q

True or False
If replacement market is bigger than new sales market then companies margin are stable.

A

False, companies margin are volatile

49
Q

How much is the explicit period for cyclical firms?

A

Forecast till sales are normalised

50
Q

Which component of SG&A is greater
a) Fixed Component
b) Variable Component

A

Fixed Component

51
Q

Overconfidence bias

A

Having too much faith in one’s own work. Analysts should evaluate the efficacy of past forecasts and learn from their own forecasting errors, which should lead to a widening their confidence intervals. Scenario analysis may help to identify any shortcomings.

52
Q

Illusion of control bias

A

A false sense of security in one’s forecasts. There are two ways this bias is manifested: seeking ‘expert’ opinions to justify a forecast, and making a model more complex and granular

53
Q

Conservatism bias

A

Also called anchoring. In this behavioral bias, the analyst makes only small adjustments to their prior forecasts when new information becomes available. Mitigation requires periodic evaluation of forecasting errors, and using flexible models with few independent variables.

54
Q

Representativeness bias

A

This bias occurs due to a tendency to classify data based on past information and known classifications.

55
Q

Confirmation bias

A

Confirmation bias causes an analyst to seek out (or pay attention to) data that affirms their earlier convictions, and to disregard or underestimate information that disputes those opinions.

56
Q

What is the difference between defined contribution plan and defined benefit plan?

A

Defined contribution plan -
Reinvestment risk is of Employee
Pension expense = Employer Contribution
Eg. Health care plan

Defined Benefit Plan-
Reinvestment risk is of Employer
Pay x amount after retirement
Eg. Retirement Plans

57
Q

If the defined benefit plan is unfunded, what impact will be there on CF of employer?

A

No impact, only expense is booked.

58
Q

What are the components that lead to increase in pension benefit obligation?

A

a) Interest cost
b) Current Service cost

59
Q

What are the components of total pension cost to be reported in P/L under IFRS and US GAAP?

A

IFRS- PSC+CSC+Interest-Expected Interest using discounted rate on plan assets
US GAAP - CSC+Interest-Expected interest using expected rate on plan assets

60
Q

What are the components of total pension cost to be reported in OCI under IFRS and US GAAP?

A

IFRS- Change in actuarial assumptions + (difference in expected - actual return)
US GAAP - Change in actuarial assumptions + PSC + (difference in expected - actual return)

61
Q

What is the treatment of PSC and other components in OCI under US GAAP?

A

PSC - It is shown under OCI and is amortised to P/L over the remaining service life of impacted employees
Other Components are amoritsed to P/L under corridor method.

62
Q

What is Corridor method?

A

If Other components of OCI (i.e. except PSC) in US GAAP is more than 10% of opening PBO or plan assets (whichever higher) then the excess value will be amortised in P/L over remaining service life of employer.

63
Q

What are the impacts of Increase in discount rate on-
a) Liability
b) Pension cost
c) Pension cost reported in P/L
d) What if the plan is matured plan?

A

a) Decrease
b) Decrease
c) Decrease
d) If it is matured plan then increase in interest cost is more than decrease in CSC, thus pension cost will increase.

64
Q

What are the adjustments in CFS if-
a) Contribution>Pension Cost
b) Contribution<Pension Cost

A

a) Considered as repayment of debt, Add in CFOA and deduct in CFFF.
b) Considered as liability, add in CFFF and deduct in CFOA.
How much, (Contribution - Cost)*(1-tax)

65
Q

What is the treatment of compensation expense under stock grants?

A

It is allocated over the service period of employee. i.e. difference between the grant date and vesting date.
Recognistion of compensation will reduce NI followed but increase in equity due to which there is no change in equity.

66
Q

What is stock appreciation right?

A

The right to receive compensation If stock values increases over ‘x’ amount. No issue of share but payment of actual cash.
Employees have limited downside risk but unlimited upside potential.

67
Q

Phantom Stock?

A

Similar to stock appreciation right but over a hypothetical stock due to illiquidity of company shares.

68
Q

Which expense is considered as operating expense?
a) CSC
b) Interest
c) Both

A

a) CSC

69
Q

What is the appropriate discount rate to use to calculate PV of future benefit?

A

Yield on high quality corporate bonds

70
Q

What happens when the pension plan may have a provision for employees to share in the service cost?

A

Current service cost in that case would only represent the employer’s share of the cost. Employee contributions would be added to both beginning PBO and beginning plan assets in PBO.

71
Q

True or False
Under U.S. GAAP, the amortization of actuarial gains and losses and the amortization of past service costs reduces the volatility of periodic pension cost in P&L. Thus, the amortization process results in periodic pension cost in P&L that is “smoothed.”

A

True

72
Q

True or False
IFRS permits either the full goodwill or partial goodwill method but US GAAP permits only full goodwill method.

A

True.

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