Financial statements Flashcards

Question 1

Q

Treasury stock

Answer

A

> cost of shares bought back by the share issuer over time
it is a contra account

Question 2

Q

change in comprehensive income

Answer

A

net income + oher comprehensive income

Question 3

Q

Cash flows from investing

Answer

A

sale of property and equipment
and the purchase of property
and equipment

Question 4

Q

fundamental characteristics of useful information

Answer

A

relevance and faithful representation

Question 5

Q

enhancing characteristics

Answer

A

comparability, verifiability, timeliness and understandability

Question 6

Q

information provided by companies in registration statements

Answer

A

> disclosures about the securities being offered for sale;
the relationship of these new securities to the issuer’s other capital securities;
the information typically provided in the annual filings;
recent audited financial statements;
and risk factors involved in the business.

Question 7

Q

The European Union (EU) agreed to adopt IFRS for EU listed companies from

Question 8

Q

The IASB and FASB

Answer

A

standard-setting bodies

Question 9

Q

fundamental principle that financial statements

Answer

A

> Materiality : free from misstatements and omissions that could influence the decisions of an investor.
Going concern : firm will continue to operate into the foreseeable future and not go into liquidation.
Consistency: presented and classified in a similar manner from one period to the next. Prior periods should be disclosed for comparative purposes.

Question 10

Q

assumption in a set of financial statements according to the IASB Conceptual Framework:

Answer

A

Going concern - the assumption that the company will continue in business for the foreseeable future
Accrual accounting - the financial statements should reflect transactions in the period when they occur

Question 11

Q

not required by IAS 1

Answer

A

director’s report

Question 12

Q

Disclaimer of Opinion

Answer

A

auditors are unable to issue an opinion

Question 13

Q

adverse opinion

Answer

A

when financial statements materially depart from accounting standards and are not fairly presented

Question 14

Q

unqualified audit report

Answer

A

when the auditors are of the opinion that the financial position and performance of the company is presented fairly

Question 15

Q

objective of financial reporting

Answer

A

> provide financial information
that is useful to:
users in making decisions about providing resources to the reporting entity,
where those decisions relate
to equity and debt instruments, or loans or other forms of credit, and in
influencing management’s actions that affect the use of the entity’s economic resources.

Question 16

Q

International Accounting Standards Board (IASB) objectives

Answer

A

Develop and promote the use and adoption of a single set of high quality financial standards
transparent, comparable, and decision-useful information while taking into account sizes and types of entities in diverse economic settings
Promote convergence of the national accounting standards and IFRS

Question 17

Q

SEC will often issue

Answer

A

bulletins to reflect their views regarding accounting practices

Question 18

Q

constraints of financial reporting

Answer

A

benefit vs cost
omission of non-quantifiable info

Question 19

Q

Alternative measurement bases

Answer

A

Historical cost
How much it cost in the past
Amortized cost
Historical cost adjusted for depreciation/amortization/depletion/impairment
Current cost
How much it would cost today
Realizable (settlement) value
How much an asset could be sold for
Present value
Present discounted value of future net cash inflows from
an asset
Fair value
Market value or present value

Question 20

Q

sum of net cash flows

Answer

A

net change in cash

Question 21

Q

IASB definition of revenue recognition

Answer

A

“Income is increases in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in
increases in equity, other than those relating to contributions from equity participants”

Question 22

Q

converged accounting standards issued by IASB and FASB in May 2014 introduce some basic changes to the principles of revenue recognition:

Answer

A

Should enhance comparability
Standards are effective from 1 January 2018 under IFRS and 15 December 2017 under US
GAAP

Question 23

Q

Core principle of the converged standard:

Answer

A

“Revenue should be recognized 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 for those goods or services”

Question 24

Q

The standard applies five steps in recognizing revenue:

Answer

A

Identify the contract(s) with a customer
Identify the separate or distinct performance obligations in the contract
Determine the transaction price
Allocate the transaction price to the performance obligations in the contract
Recognize revenue when (or as) the entity satisfies the performance obligation

Question 25

Q

Expense Recognition
IASB definition

Answer

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 (e.g. dividends)

Question 26

Q

Comprehensive Income Definition

Answer

A

“the change in equity of a business enterprise during a
period from transactions and other events and circumstances from non-owner sources. It includes all changes in equity during a period except
those resulting from investments by owners and distributions to owners.”

Question 27

Q

Comprehensive Income components

Answer

A

Net income
Other revenue and expense items excluded from net income
Foreign currency translation adjustments
Changes in the funded status of a company’s defined benefit post-retirement plan
Unrealized gains/losses on derivatives for hedging purposes
Unrealized gains/losses on available-for-sale securities
(under US GAAP)

trading securities: unrealised gains and losses go on the income statement

Question 28

Q

cash collected from customers

Answer

A

sales - increase in accounts receivable

Question 29

Q

Direct method cash flows

Answer

A

Eliminates impact of accruals
Shows only cash receipts and cash payments
Provides information on specific sources of operating cash receipts and cash payments
‒ Preferred by analysts and commercial lenders
‒ Recommended by CFA Institute
IASB/FASB encourage use of
direct method

Question 30

Q

Indirect method cash flows

Answer

A

Starts with net income
Shows only net result of operating
cash receipts and payments
Shows reasons for differences
between net income and
operating cash flows
Mirrors forecasting approach

Question 31

Q

Cost of sales

Answer

A

= Beginning inventory (BI) + Purchases (P) - Ending inventory (EI)

Question 32

Q

IFRS/U.S. GAAP
Cost of inventory

Answer

A

All costs of purchase
Purchase price, import duties, insurance, and handling costs, freight costs inwards, raw material
Costs of conversion
Direct labor, fixed, and variable overhead costs
Other costs incurred
> bringing inventories to present location and condition
Exclude:
Abnormal costs from waste of materials, labor, or
other production, location costs
Admin, overhead and selling costs
Treat as expense and recognize in income statement when incurred
Otherwise inventory is overstated, profit overstated

Question 33

Q

IFRS - Does not allow

Answer

A

LIFO to be used, due to distortion of balance sheet

Question 34

Q

Periodic vs. perpetual inventory systems

Answer

A

Periodic system
Company determines inventory levels periodically
Ending inventory is subtracted from goods available for sale to calculate cost of sales
Perpetual system
Changes in inventory are continuously updated
Purchases and sales are recorded directly as they occur
May result in different values for cost of sales and closing inventory when weighted average cost and LIFO methods are used
Same result if using FIFO

Question 35

Q

FIFO inventory

Answer

A

= LIFO inventory + LIFO reserve

Question 36

Q

Retained earnings (FIFO)

Answer

A

= Retained earnings (LIFO) + LIFO reserve x (1 - Tax rate)

Question 37

Q

FIFO cost of goods sold

Answer

A

= LIFO COGS - Change in LIFO reserve

Question 38

Q

FIFO net income

Answer

A

= LIFO net income + Change in LIFO reserve x (1 - Tax rate)

Question 39

Q

Inventory liquidation

Answer

A

Occurs when number of items sold > items purchased
E.g. a company running down its inventory levels

Question 40

Q

Inventory val method (regardless of price direction)

Answer

A

LIFO income > FIFO income
LIFO cost of sales < FIFO cost of sales
Due to ‘low cost’ LIFO items being included in cost of sales

Question 41

Q

Measurement of Inventory Value
IFRS

Answer

A

Lower of cost and net realizable value (NRV)
Estimated selling price less costs required to make the sale
Inventory write-down required
Balance sheet value > NRV
Inventory reduced to NRV
Impairment expense deducted in income statement
Assets reduced, equity (retained earnings) reduced
Impairments can be reversed

Question 42

Q

Measurement of Inventory Value
U.S. GAAP

Answer

A

Lower of cost and net realizable value (NRV)
Exceptions – Inventories under LIFO and retail inventory methods
Lower of cost and market value
Market value (fair value)
Upper limit: Cannot exceed NRV
Lower limit: NRV - Normal profit margin
Reversal of impairment not permitted

Question 43

Q

Measurement of Inventory Value
Presentation and disclosure :* IFRS requirements

Answer

A

Disclosure requirements
Accounting policies including cost formula used
Total carrying amount of inventories by classification
Raw materials, WIP, finished goods etc.
Carrying amount of inventories carried at fair value less costs to sell
Cost of sales
Amount of any write-downs of inventories recognized as an expense
Amount of any reversal of impairment
Circumstances or events leading to reversals and impairments
Carrying amount of inventories pledged as security for liabilities

Question 44

Q

Changes in inventory valuation method
* IFRS

Answer

A

Change in accounting policy
Only acceptable if company provides reliable and more relevant information
Historical information is restated for all accounting periods
Reflected in beginning balance of retained earnings
Enhances comparability of financial statements over time

Question 45

Q

Changes in inventory valuation method
* U.S. GAAP

Answer

A

Explain why new method is superior and preferable
From LIFO to another method
Restate inventory and retained earnings retrospectively
From another method to LIFO
Change on a prospective basis (don’t change opening balances)
US tax regulations may restrict changes in inventory valuation methods

Question 46

Q

Long-lived assets

Answer

A

Accounting for property, plant and equipment (PPE)
Tangible assets
Economic life longer than one year
Intended to be held for company’s own use
Recorded on balance sheet at cost
Accounting for intangible assets
Depends on how the asset was acquired

Question 47

Q

Capitalizing

Answer

A

Year of expenditure
Increases assets, as asset is recognized on balance sheet
Reduces investing cash flow (CFI)
Subsequent years
Depreciation/amortization expense reduces profit
No impact on cash flow
Reduces value of asset in balance sheet

Question 48

Q

Expensing

Answer

A

Expensed if expenditure does not meet asset recognition criteria
Reduces net income
Reduces operating cash flow (CFO)
No asset recorded on balance sheet
Lower net income in current year
No effect on financial statements in later years

Question 49

Q

prefer asset capitalization to expensing because

Answer

A

CFO is higher

Question 50

Q

Depreciation methods
* Straight line

Answer

A

Depreciation expense = (Cost - Estimated residual salvagevalue )/ Useful life (UEL)

Question 51

Q

Accelerated methods
- Allocation of cost is greater in earlier years
- Double declining balance

Answer

A

Depreciation expense = Constant % x Undepreciated cost
Constant % = 2 / Useful life
Undepreciated cost = Cost - Accumulated depreciation

Question 52

Q

Net book value cannot

Answer

A

be reduced below residual salvage value

Question 53

Q

Units-of-production method
- Allocation of cost corresponds to actual use of an asset in a particular period

Answer

A

Depreciation expense = (Cost − Salvage value) x
(Units produced in the year/Total units to be produced)

Question 54

Q

Long-lived assets
* Alternative to cost method for accounting for long-lived assets

Answer

A

Not allowed under U.S. GAAP
Asset value is increased to fair value on balance sheet
Uses market values rather than historic cost
IFRS
Can use cost model for some assets and revaluation model for others
Must apply revaluation model to all assets within a particular class
Avoids selective revaluation
E.g. land, land and buildings, machinery, office equipment
Can be used for intangible assets
Only if an active market for the asset exists
Increase in asset value is included in revaluation surplus in equity
Gain is not recognized in income statement

Question 55

Q

Investment property

U.S. GAAP
Investment property is generally measured using the cost model

Answer

A

Defined as property that is owned for the purposes of capital appreciation and/or earning rental yield
property that is leased under a finance lease

Question 56

Q

Investment property - IFRS

Answer

A

Firms are allowed to value investment property using one of the two following methods:
Cost model: Same as the cost model used for property, plant and equipment (PP&E)
Fair value model: Different from the revaluation model used for PP&E (if chosen must be used for all property)
Under this model, all changes in the fair value of investment property affect net income

Question 57

Q

Investment property - us gaap

Answer

A

INVESTMENT PROPERTY GENRALLY MEASURED USING THE COST MODEL

Question 58

Q

Permanent differences between accounting profit and taxable income

Answer

A

Income or expenses are included in either pre-tax income or taxable income but not both
Income or expense items not allowed by tax legislation
E.g. tax-exempt municipal bond interest
Tax credits for expenditure that reduces taxes
No adjustment required to income tax expense

Question 59

Q

effective tax rate affected by

Answer

A

permanent differences and different national tax rates

income tax expense / pre-tax income

Question 60

Q

Temporary differences between accounting profit and taxable income

Answer

A

Income or expenses are included in both pre-tax income and taxable income but
in different periods
Revenues and expenses may be recognized in one period for
accounting purposes and a different period for tax purposes
E.g. warranty expense recognized on an accruals basis for
accounting purposes and cash basis for tax purposes
Carrying amount and tax base of asset and/or liabilities may differ
E.g. accounting depreciation methods vs. tax depreciation methods
Net book value vs. tax base
See Clayton example later
Deductibility of gains and losses of assets and liabilities may vary for accounting and income tax purposes
E.g. impairments are not recognized for tax purposes until asset
is disposed of
Tax losses from prior year might be used to reduce taxable income in
later years

Question 61

Q

Deferred tax liabilities (DTL)

Answer

A

Pre-tax income > Taxable income
Difference due to a temporary timing difference
E.g. tax authorities calculate a depreciation allowance using double-declining balance
with the company using straight-line depreciation in income statement

> ETR low

Question 62

Q

Deferred tax assets (DTA)

Answer

A

Pre-tax income < Taxable income
E.g. accounting expenses not being recognized for tax purposes such as warranty
expense
E.g. losses deducted from taxable income in later periods

> ETR high

Question 63

Q

Increase in rates =

Answer

A

DTL: Increase in DT expense
DTA: Decrease in DT expense

Question 64

Q

Decrease in rates =

Answer

A

DTL: Decrease in DT expense
DTA: Increase in DT expense

Answer 64

A

Recognize a deferred tax asset
Recognize a valuation allowance for the extent that the losses cannot be deducted in future
- Doubts about future profitability
DTA – valuation allowance shown in balance sheet

Answer 65

A

Different treatment to U.S. GAAP
Asset is created only to the extent that it is probable that there will be sufficient future taxable income to offset the losses

Answer 66

A

DTA
* Arise when a company makes losses
* Potentially reduce taxable income in future years
- Represent economic asset

Answer 67

A

Deductions against taxable income resulting from expenditure
E.g. research and development tax credits

Answer 68

A

Determine whether the losses were due to one-off circumstances or whether they
will recur
Contact the tax authority to discover the extent to which tax losses expire or are
transferable
Assess the recoverability of any tax losses

Answer 69

A

Asset: Carrying amount > tax base : DTL
Asset: Carrying amount < tax base : DTA
Liability: Carrying amount > tax base : DTA
Liability: Carrying amount < tax base : DTL

Answer 70

A

IFRS and U.S. GAAP require that tax be treated on same basis as underlying
asset
Deferred tax taken directly to equity
Examples:
Revaluation of PPE (IFRS only)
Long-term investments at fair value
Changes in accounting policies and prior period errors
Exchange rate differences for foreign operations

Answer 71

A

DTLs that are unlikely to reverse
E.g. quasi-permanent timing differences from tax allowances
Remove from DTL
Add back to equity

Answer 72

A

Opening book value - book value of disposal - depreciation + purchases

Answer 73

A

then the investor has no choice but to use cost as a proxy for fair value. This is true for both US GAAP and IFRS

Answer 74

A

> carrying amount - fair value

fair value is the higher of value in use and market value less costs to sell

Answer 75

A

both CFO (the interest expense) and CFF (the reduction in the lease liability)

Answer 76

A

> to be tested for impairment annually.
must be tested for impairment if there are indications of impairment such as decline in demand or obsolescence.

Answer 77

A

carrying value
or
fair value - cost to sell if its lower than carrying value

Answer 78

A

the likelihood that deferred tax assets may not be realized

Answer 79

A

Income tax expense - change in deferred tax liability

Answer 80

A

if taxable income is more than pretax income and this will reverse in future.

Answer 81

A

when taxable income is less than pretax income and this will reverse in future

Answer 82

A

with sales when economies of scale are present

Answer 83

A

Step 1 Articulate the purpose and context of analysis
Step 2 Collect all relevant data
Step 3 Process data
Step 4 Analyze results of data processing
Step 5 Conclude recommendation and communicate this
Step 6 Follow-up

Answer 84

A

Source :
Nature of analyst’s function such as issuing a credit rating
Communication with client or supervisor
Institutional guidelines for developing specific product

Output:
Statement of purpose or objective of analysis
A list of specific questions to be answered by analysis
Nature and content of report
Timetable and budget

Answer 85

A

Source:
Financial statements, other financial data, questionnaires, industry and other economic data
Discussions with management, suppliers, customers and
competitors
Company site visits

Output :
Organized financial statements
Financial data tables
Completed questionnaires

Answer 86

A

Source:
Data from previous step

Output:
Adjusted financial statements
Common-size statements
Ratios and graphs
Forecasts

Answer 87

A

Source:
Input data as well as processed data

Output:
Analytical results

Answer 88

A

Source :
Analytical results and previous reports
Institutional guidelines for published reports

Output:
Analytical report answering questions posed in phase 1
Recommendations regarding the purpose of the analysis

Answer 89

A

Source:
Information gathered by periodically repeating
above steps

Output:
Updated reports and recommendations

Answer 90

A

Provide information
* Company performance
* Financial position
* Changes in financial position
* Useful to a wide range of users in making economic decisions

Answer 91

A

Analyze financial reports and other information
* Evaluate
- Past, current and prospective performance and financial position of a company
* Purpose
- Making investment, credit, and other economic decisions

Answer 92

A

Assessment of profitability and cash flow generating ability
Profitability
Earn a profit from delivering goods and services
Cash flow
Cash is needed to pay employees, suppliers etc.
Essential to continue as a going concern
Positive cash flow leads to funding flexibility
Liquidity
Ability to meet short-term obligations
Solvency
Ability to meet long-term obligations

Answer 93

A

Requirement to prepare financial reports in accordance with specified accounting
standards is the responsibility of regulatory authorities
Regulatory authorities are governmental entities with the legal authority to enforce financial reporting requirements over entities that participate in the capital markets
within their jurisdiction

IFRS or USGAAP if multinationals

Answer 94

A

Global organization; ordinary members e.g. SEC, associate members and affiliate members regulating more than 95% of world capital markets
Three core objectives of securities regulation:
Protecting investors
Ensuring markets are fair, efficient and transparent
Reducing systemic risk
Assists in the goal of uniform regulation as well as cross-border co-operation in combating violations of securities and derivatives law

Answer 95

A

Any company involved in US capital markets subject to SEC rules and regulations
SEC is an ordinary member of IOSCO
Securities Act of 1933
Specifies financial and other information to be sent to investors when securities are sold
Requires initial registration of all public issues
Securities Exchange Act of 1934
Act that created the SEC
Sarbanes-Oxley Act of 2002
Created Public Company Accounting Oversight Board (PCAOB), Strengthens corporate responsibility for financial reports
Executive management to report on the effectiveness of the company’s internal controls over financial reporting along with an external audit of the management’s assessment

Answer 96

A

Securities Offerings Registration Statement (required by securities act of 1933)
Filed when offering securities
Information depends on size and nature of offering
Forms 10-K (US), 20-F (non-US) and 40-F (Canadian but US listed)
Required to file annually
Comprehensive information regarding the company’s business, including financial statements
Annual Report
Not required by SEC
More of a marketing document
Considerable overlap with previous forms
Proxy Statement/Form DEF-14A
Allows shareholders to appoint a proxy
Contains shareholder resolutions
Forms 10-Q (US) and 6-K (Non-US)
Interim periods

Answer 97

A

Form 8-K
Current report announcing major events
- Acquisitions or disposals of corporate assets, changes in
  securities and trading markets etc.
Form 144 (unregistered private sales)
Notice of proposed sales of restricted securities
Rule 144 permits limited sales of restricted securities without registration
Forms 3,4 and 5 (initial, changes, annual report)
Report beneficial ownership of securities by directors and
stockholders holding more than 10% of share capital
Forms 11-K
Annual report of employee stock purchase, savings and
similar plans

Answer 98

A

European Securities Committee(ESC)
European Securities and Markets Authority (ESMA)

Answer 99

A

High-level representatives of member states
Advises European Commission on securities policy issues

Answer 100

A

Independent advisory body consisting of representatives of national regulators from individual EU countries

Answer 101

A

Financial notes and supplementary schedules
* Provides explanatory information
- Business acquisitions/disposals, legal proceedings, stock option plans and related-party transactions
Footnotes
* Information about methods and assumptions used to prepare financial statements
- Aids comparability of financial statements between companies
* Required for complete presentation in conformity with US GAAP and IFRS
Management discussion and analysis (MD&A)
* Required by US GAAP for publicly held companies
* Highlight favorable or unfavorable trends
* Identify significant events and uncertainties
- Affect liquidity, capital, resources and results of operations
* Provide information about effects of inflation, changing prices or useful life, residual life and other material events
* Discuss critical accounting policies requiring subjective judgments
* Similar report required by IFRS

Answer 102

A

Examination by an independent accounting firm
Express an opinion on the truth and fairness of the financial statements
International standards
International Auditing and Assurance Standards Board (IAASB) of International Federation of Accountants (IFAC)
US standards
Public Company Accounting Oversight Board (PCAOB)
Sarbanes-Oxley Act
Audit report
Provides reasonable assurance financial statements are
fairly presented
- High degree of probability statements are free from material error, fraud, or illegal acts

Answer 103

A

Provides unqualified audit opinion (clean opinion)
True and fair view (IFRS)
Fairly presented (IFRS and US)
* Adverse opinion
- Financial statements materially depart from accounting standards
- Not fairly presented
- No point in performing any financial analysis
- Statements cannot be relied on
* Disclaimer of opinion
- Auditors are unable to have an opinion for some reason
* E.g. destruction of accounting records
* Sarbanes-Oxley
- Auditors must express an opinion on internal control system

Answer 104

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
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

Answer 105

A

Issuer sources
Earnings calls
Presentations and events
Press releases
Public third-party sources
Free industry whitepapers or analyst reports from a consultancy
Economic or industry indicators from governments and other
General news outlet, social media
Proprietary third-party sources
Analyst reports and communications, including from the
sell side or analysts and creditrating agencies
Reports and data from platforms such as Bloomberg, Wind, and FactSet
Proprietary primary research
Surveys, conversations, product comparisons, and other studies commissioned by the analyst or conducted directly.

Answer 106

A

FASB
IASB

Answer 107

A

Rules
Principles

Answer 108

A

FIFO, LIFO, weighted average method
FIFO and weighted average method

Answer 109

A

Shown below tax
Not segregated in the income statement

Answer 110

A

Treated as an expense
Capitalized if conditions are met

Answer 111

A

Prohibited
Permissible if certain conditions are met

Answer 112

A

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

Answer 113

A

Doubtful accounts
* Direct write-off method (not appropriate)
- Recognize loss when the customer defaults
- Not consistent with GAAP
* Provisions for doubtful debts are consistent with matching principle
Warranties
* Company will pay for repairs to faulty products
- May incur costs in future
* At the time of sale (expense on I/S + create liability)
- Recognize a provision for estimated warranty costs
- Consistent with matching principle
Depreciation

Answer 114

A

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

Answer 115

A

Required by both US and IFRS GAAP
Interest rate
Based on existing borrowings
Borrowing specifically incurred for constructing the asset
Interest
Capitalized during construction only and added to asset cost
Reduced for interest earned on borrowings invested (IFRS only)
Depreciated over the life of the asset

Answer 116

A

Capitalized interest is included in CFI
Normally interest payments are included in CFO (U.S. GAAP) or CFO/CFF (IFRS)
Analyst should consider adjusting cash flow for this treatment
Analyst should restate interest coverage ratios
Earnings before interest and tax/interest expense
Increase interest expense to include capitalized interest
Will result in lower interest coverage ratios
Better assessment of solvency of company

Answer 117

A

Reported separately as part of income from continuing operations
Examples:
Gains or losses on disposal of a portion of a business segment
Restructuring costs
Asset impairments
Analysts will need to form a view on recurrence of these items
Not advisable to just ignore all unusual items

Answer 118

A

Business disposes of or establishes a plan to dispose of a distinct
operation
Profits or losses should be disclosed separately on the income statement

Answer 119

A

Changes in estimates
* E.g. changes in the useful life of an asset
* Affects period of change and future accounting periods
* No prior year restatement
Changes in principles
* US GAAP and IFRS require restatement of prior periods
* Retrospective application
- Financial statements for all fiscal years shown in a company’s financial report are presented as if the newly adopted accounting principle had been
used throughout the entire period
Changes only applied to new transactions
* No adjustment required

Answer 120

A

Error in prior period
Report adjustment in period new information available
Restate prior year’s numbers reported in this year’s accounts
No special recognition on income statement/balance sheet

Answer 121

A

Interest income and expense, dividend receipts tend to be disclosed separately (for non-financial services companies) as non-operating items
Gains and losses on asset disposals will be shown separately as non-operating items

Answer 122

A

IASB and FASB require presentation on face of income statement
Simple capital structure
Basic EPS presented for ordinary shares (IFRS) or common stock (US)
(net income - preference div ) / weighted average number of common shares

Answer 123

A

Not necessarily the number of shares outstanding at year end
Stock issues/stock repurchases
Weighting of shares based on date of purchase/repurchase
Stock splits/stock dividends
Treasury stock method
Weighting is based on the shares already in existence
Date of stock split/stock dividend is irrelevant
Restatement of prior year EPS
Required for stock splits/stock dividends

Answer 124

A

Complex capital structure
* Company has securities potentially convertible into common stock
- Convertible bonds
- Convertible preferred stock
- Employee stock options
- Warrants
* Convertible securities could dilute, i.e. decrease, EPS
Diluted EPS = Adj income available for common shares / (Weighted no of common + potential common shares)
* Each potentially dilutive issue treated separately
- ‘Anti-dilutive’ issues are ignored in the calculation
- Issue is dilutive, if dilutive EPS < basic EPS

Answer 125

A

‘If-converted’ method
What would EPS have been if the convertible debt had been converted at the beginning of the period
Company would have saved interest (post tax)
Number of shares in issue would have increased
Earnings
= Net Income - Preference dividends
+ Convertible debt post tax interest SAVED
Shares
= Weighted average number of shares
+ Shares on conversion of debt

Answer 126

A

‘If-converted’ method
What would EPS have been if the convertible preference stock had been converted at the beginning of the period
Company would have saved preference dividend
No tax effect
Number of shares in issue would have increased
Earnings
= Net income / Weighted average number of shares
+ Shares on conversion of preference stock

Answer 127

A

Treasury stock method
What would EPS have been if the options has been exercised and the company had used the proceeds to repurchase common stock?
Company would have received cash (exercise price)
Number of shares in issue due to exercise of options
or warrants
Company would have repurchased shares in the market
Earnings
= Net income - Preference dividends
Shares
Weighted average number of shares
+ Net increase in shares on exercise of options/warrants

Answer 128

A

Inclusion of antidilutive securities results in an increased EPS figure
Antidilutive securities are not included in the EPS calculation
Diluted EPS will be stated as same as basic EPS
Only dilutive securities are included in the EPS calculation
Reflects maximum potential dilution
Antidilutive securities are not to be used to offset dilutive securities

Answer 129

A

Historic cost
* Reliable and objectively determined measurement base
Fair value
* Users may prefer to know what the asset can be sold for
* May be difficult to estimate a current value
Current model
* Mixed model using both historic and fair values
* Balance sheet is not a statement of corporate value

Answer 130

A

Debt securities that are to be held to maturity
Loans and notes receivable
Unquoted equity instruments
Note: Known as ‘Held-to-maturity’ under US GAAP

Answer 131

A

‘Available-for-sale’ debt securities (US GAAP)
Debt where the business model involves both collecting interest and principal and selling the security (IFRS only) (not held to maturity otherwise measured at amortized cost)
Equity investments for which the company
irrevocably elects this measurement at acquisition (IFRS only)

Answer 132

A

All equity securities unless investment gives the
investor significant influence (US GAAP only)
Trading debt securities (US GAAP only)
Securities not assigned to either of the other two
categories, or investments for which the company
irrevocably elects this measurement at acquisition (IFRS only)

Answer 133

A

Calculation of cash flows from operations (CFO)
Cash collections
- Cash inputs
- Other cash outflows
= Cash flows from operations (CFO)

Answer 134

A

sales - increase in Accounts receivable

Answer 135

A

Gains and losses on disposal of assets
Included in net income in income statement
Gain = proceeds > Net book value
Loss = proceeds < Net book value
- Remove from net income to calculate CFO
Deduct a gain
Add back a loss
Proceeds
Include in CFI
- Proceeds from sale = Inflow (+ CFI)
- Purchase = Outflow (- CFI)

Answer 136

A

Opening assets + purchase - depreciation - disposals at NB

Answer 137

A

Step 1 : Disaggregate all net income into revenue and expenses
Step 2 : Remove all non-cash items from aggregated revenues and expenses and break out all remaining items into relevant cash-flow items
Step 3 : Convert accrual amounts to cash flow amounts by adjusting for working capital changes

=== CASH COLLECTED = REV. - INCR IN ACCOUNTS RECEIV

Answer 138

A

Express each cash flow line item as % of total inflows (outflows)
Express each cash flow line item as % of net revenue

Answer 139

A

Excess of operating cash flow over capital expenditure

Answer 140

A

Cash available to the company’s suppliers of debt and equity capital
FCFF = NI + NCC + Int(1 - Tax rate) - FCInv - WCInv
Where:
NI = Net income
NCC = Non-cash charges
Int = Interest expense / PAID
FCInv = Capital expenditures
WCInv = Working capital expenditures
FCFF = CFO + Int(1 - Tax rate) - FCInv

Answer 141

A

> NOT FOR PREFERENCE STOCKHOLDERS

FCFE = CFO - FCInv - Net debt repayment

or

FCFE = CFO - FCInv + Net borrowing

Answer 142

A

Debt repayments > receipts of borrowed funds

Answer 143

A

Periodic system
Company determines inventory levels periodically
Ending inventory is subtracted from goods available for sale to calculate cost of sales
Perpetual system
Changes in inventory are continuously updated
Purchases and sales are recorded directly as they occur
May result in different values for cost of sales and closing inventory when weighted average cost and LIFO methods are used
Same result if using FIFO

Answer 144

A

LIFO inventory < FIFO inventory
LIFO cost of sales > FIFO cost of sales
LIFO income < FIFO income

Answer 145

A

Stable prices
Little difference between the methods
Prices are rising, or there are more mature businesses
Analysts will need to take more care:
Balance sheet
- FIFO inventory values resemble current cost or market value
- LIFO inventory values resemble out-of-date costs
Income statement:
- LIFO profit measured using current cost (understated)
- FIFO profit measure using old costs (overstated)

Answer 146

A

IFRS
* Lower of cost and net realizable value (NRV)
- Estimated selling price less costs required to make the sale
* Inventory write-down required
- Balance sheet value > NRV
- Inventory reduced to NRV
- Impairment expense deducted in income statement
* Assets reduced, equity (retained earnings) reduced
* Impairments can be reversed

Answer 147

A

U.S. GAAP
* Lower of cost and net realizable value (NRV)
* Exceptions – Inventories under LIFO and retail inventory methods
- Lower of cost and market value
* Market value (fair value)
- Upper limit: Cannot exceed NRV
- Lower limit: NRV - Normal profit margin
* Reversal of impairment not permitted

Answer 148

A

Disclosure requirements
* Accounting policies including cost formula used
* Total carrying amount of inventories by classification
- Raw materials, WIP, finished goods etc.
* Carrying amount of inventories carried at fair value less costs to sell
* Cost of sales
* Amount of any write-downs of inventories recognized as an expense
* Amount of any reversal of impairment
* Circumstances or events leading to reversals and impairments
* Carrying amount of inventories pledged as security for liabilities

Answer 149

A

Identifiable
Capable of being separated from the entity or
Arising from legal or contractual rights
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 reliably measured

Answer 150

A

Only arises when one company purchases another
Acquisition price > fair value of net identifiable assets acquired

Answer 151

A

Expensing development costs (US GAAP)
Results in lower net income in current period
If current period development expenses > amortization
- Will continue to result in lower net income
- Typically happens when development costs are increasing
Organic growth vs. acquisition
Companies that have developed intangibles internally will have a smaller balance sheet
Differences in strategy can affect financial ratios (ROA, Asset Turn)
Cash flow statement
Costs expensed will be included in CFO
Capitalized costs will be included in CFI

Answer 152

A

E.g. buying a patent
Treated like acquiring long-lived tangible assets
Recorded at fair value (purchase price) when acquired
Analyst should focus on understanding the type of asset acquired
Valuation is often a very subjective process

Answer 153

A

Generally expensed when incurred
E.g. research costs (IFRS), R&D (U.S. GAAP)
Exceptions
Development costs under IFRS if certain criteria are met (will be capitalized given that a feasibility study is conducted)
Software costs (U.S. GAAP)
- Software for sale
- Software intended to be used internally

Answer 154

A

One company acquires another
Accounted for using acquisition method
Allocate purchase price to each asset acquired
Excess of purchase price over fair value of assets acquired
Goodwill
Cannot be identified separately from business as a whole

Answer 155

A

Disclosed in income statement
Component of other gains and losses or
Separate line item if material
Further detail in MD&A or footnotes

Answer 156

A

Proceeds (not gain or loss) included in CFI

Answer 157

A

Abandonment or exchange for another asset
- Classified as ‘held for use’ until disposal
- Depreciation and amortization is still charged
Exchange
Derecognize old asset and recognize new asset
Through I/S :
Fair value of new asset > Net book value of asset given up = Gain
Fair value of new asset < Net book value of asset given up = Loss

Answer 158

A

Upward revaluations will increase assets and equity
Improve leverage ratios such as debt/equity
Reduce return measures such as ROA or ROE

Answer 159

A

Reflect an unanticipated decline in the value of the asset (NON-CASH CHARGE)
Impairment of property, plant, and equipment
No annual impairment review required
Company needs to assess whether there are indications of impairment
E.g. evidence of obsolescence, decline in demand for products, or technological advancements
Impairment reduces asset value on balance sheet
Reduces net income in income statement (impairment expense)
No effect on cash flow statement

Answer 160

A

Required by both U.S. GAAP and IFRS
Generally this means that the:
Carrying amount in balance sheet > Recoverable amount
U.S. GAAP – Impairment if:
Carrying amount in balance sheet > Undiscounted expected future cash flows
If impaired write down to: Fair value
IFRS – Impairment if:
Carrying amount in balance sheet > Higher of fair value less costs to sell and value in use (PV of expected future cash flows)
If impaired write down to: Recoverable amount

Answer 161

A

As for PPE, not tested annually for impairment
Indication of possible impairment
Significant decrease in market price or significant adverse change in legal or economic factors
Calculation of loss is the same as for PPE

Answer 162

A

No amortization charged during life of asset
Annual impairment review
Impairment
Carrying amount > Fair value
Can’t reverse impairment

Answer 163

A

test for impairment when held for use changes to held for sale
Assets management intend to sell or distribute to existing shareholders
Not depreciated or amortized
Tested for impairment when assets are reclassified

Answer 164

A

Asset’s recoverable amount could increase in later years
IFRS allows reversal of impairment
U.S. GAAP
- Assets held for use
  - Reversals not permitted
- Assets held for sale
  - Reversals permitted

Answer 165

A

Not allowed
Not allowed
Permitted
Not allowed
Not allowed
Not allowed
Not allowed

Answer 166

A

Permitted
Permitted
Permitted
Permitted
Not allowed
Permitted
Not allowed

Answer 167

A

A lease is a contract between the owner of an asset (lessor) and another party who wishes to use the asset (lessee)
In exchange for use of the asset, the lessee makes payments to the lessor
Strictly, for a contract to be a lease, it must
Identify a specific underlying asset
Give the customer the right to obtain largely all of the economic benefits from the asset
over the contract term
Give the customer, not the supplier, the ability to direct how and for what objective the
underlying asset is used
Form of financing provided by lessor allowing lessee to purchase the use of the
asset

Answer 168

A

Can provide less costly financing with little, if any, cash required upfront
Reduces lessee’s exposure to obsolescence, residual value and disposal

Answer 169

A

A lease is a finance lease under both IFRS and US GAAP if any of the below criteria are met:
The lease transfers ownership of the underlying asset to the lessee
The lessee has an option to purchase the underlying asset and is reasonably certain it will do so
The lease term is the major part of the asset’s useful life
The present value of the sum of the lease payments equals or exceeds substantially all of the fair value of the asset
The underlying asset has no alternative use to the lessor

Answer 170

A

Most leases are recognized on balance sheet *
* At inception recognize a lease asset (right-of-use asset) and a lease liability *
- Lease asset = Lease liability = PV of fixed lease payments
* After inception
- IFRS – report amortization expense on the ‘right-of-use’ asset, interest expense (CFO) and reduce lease liability (CFF)
- US GAAP – categorize as a finance lease or operating lease
* Finance lease – report amortization expense on the ‘right-of-use’ asset, interest expense (CFO) and reduce lease liability (CFF)
* Operating lease – recognize a single lease expense and, in any given year, reduce lease asset and lease liability by the same amount (but diff amounts every year)
* Not required for short term leases (under a year) for IFRS and US GAAP or where the leased asset is low in value which means up to $5,000 (IFRS only) – record lease payment as an expense when paid on a straight line basis.
Note: These exceptions are not allowed for lessors.

Answer 171

A

Amortized cost method
Same method as accounting for bonds (but value has to be 0)
Recognize asset and liability on balance sheet
- Present value of lease payments
Income statement expense
Amortization of asset
Interest expense = Opening Liability x Effective Interest rate
Balance sheet
Assuming payments made at the end of the year

+ PV of lease payments or opening liability
+ Add interest expense (Opening liability x Interest rate)
- Less lease payments paid in period -X
= closing lease liability in balance sheet

Answer 172

A

Cash flow statement
Interest portion of lease payment = -CFO (US) or -CFO / CFF (IFRS)
Principal payment = -CFF (reduction of lease liability - payment - interest expense)

Answer 173

A

Income statement
Lease expense
Cash flow statement
Lease payment = CFO
Note: CFO is lower when using operating leases

Answer 174

A

Balance sheet
* Retains asset on
balance sheet

Income statement
* Reports lease income
* Reports depreciation expense on leased asset

Statement of cash flows
* Lease payments received CFO

Answer 175

A

Balance sheet
* Removes asset from balance sheet
* Recognize lease receivable (PV of payments)

Income statement
* Reports interest revenue on lease receivable
* Report revenue, COGS and profit at inception

Statement of cash flows
* Lease payments received CFO

Answer 176

A

Balance sheet
* Removes asset from balance sheet
* Recognize lease asset

Income statement
* Reports interest revenue on lease receivable

Statement of cash flows
* Lease payments received CFO

Answer 177

A

Employee Compensation
The salary component of compensation provides for the liquidity needs of an employee
Bonuses, generally in the form of cash, motivate and reward employees for short- or long-term performance or goal achievement by linking pay to performance
Non-monetary benefits, such as health and life insurance premiums, housing, and vehicles, may be provided to facilitate employees performing their jobs
Salary, bonuses, and non-monetary benefits tend to vest (i.e., employee earns the right to the consideration) immediately or shortly after their grant date
Companies report a compensation expense on the income statement in the period in which compensation vests, and a cash outflow or accrued compensation liability (a current liability) is recognised in the balance sheet

Answer 178

A

Vests over time and can provide valuable retirement savings and financial upside to
employees and often serve as an effective retention and stakeholder alignment tool for
employers

Answer 179

A

Company contributes an agreed defined amount into the plan

Income statement - Pension expense
Cash flow statement - Operating cash flow
Balance sheet - No impact

Answer 180

A

Company promises to pay future benefits to employee during retirement
Balance sheet (net pension position)
Recognize asset/liability representing surplus/deficit of pension scheme

Surplus / (Deficit) = Plan assets (fair market value) - PV of pension obligations

Answer 181

A

Reported pension expense:

+ Employees’ Current Service Costs (PV of another year of work)
+/- Employees’ Past service costs
+/- Net Interest Expense/Income
= Pension expense

Net Interest Expense = Opening Net Pension Liability x Discount rate

OCI impact:
* Actuarial gains/losses are not recognized in the income statement but instead are
shown within OCI in the balance sheet
* The actual return on plan assets less any return included in the net interest
expense or income is also shown within OCI in the balance sheet
* IFRS refers to this OCI account as ‘remeasurements’
+ Employees’ Current Service Costs
+/- Employees’ Past service costs
+/- Net Interest Expense/Income
= Pension expense

Answer 182

A

Reported pension expense

+ Employees’ Current Service Costs (PV of another year of work)
+ Interest cost [ open oblig. liabi * DR - open plan assets * exp return]
- Expected return on plan assets
+/- Amortization of actuarial losses/gains
+/- Amortization of past/prior service cost
= Pension expense

Answer 183

A

Advantages
* Aligns managers’ interests with those of the shareholders
* Motivates employees
* No initial cash outlay required

Disadvantages
* Managers may have limited influence over the company’s stock price, so it may not provide the desired incentive
* Increased stock ownership may lead managers to take on low-risk projects for fear of a stock price decline
* Alternatively, it may lead to excessive risks, as stock options only pay out if stock prices rise above the strike
* If granted to employees, existing shareholders’ ownership is diluted

Answer 184

A

Reported at fair value under US GAAP and IFRS
Disclosures required (US GAAP and IFRS)
* Nature and extent of share-based compensation arrangements
* How fair value was determined
* Effect on income and financial position
Two common forms of share-based compensation:
1. Stock grants
2. Stock options

Answer 185

A

A company can grant stock to employees:
Outright (no restriction)
With restrictions, e.g. employees must stay with the company for a certain time period
Contingent upon performance
The compensation expense is equal to the fair value (usually market value) of the shares issued at the grant date
The compensation expense is allocated over the employee service period (vesting period)

Answer 186

A

Both US GAAP and IFRS require the compensation expense to be reported at fair value using a suitable option pricing model that is:
Consistent with fair value measurement
Based on established principles of financial economic theory
Reflective of all substantive characteristics of the award

Grant date: Date that options are granted to the employee
Vesting date: Date that employees can first exercise stock options
Exercise date: Date that employees exercise the options
Service period: Period between grant date and vesting date

The compensation expense is usually measured on the grant date, if both the number of shares and option price are known
If the value of options depends on events after the grant date, then the compensation expense is measured on the exercise date

Answer 187

A

Can compensate employees on changes in share value without requiring
employees to hold the shares
These are accounted for in a similar fashion to other share-based compensation –
valued at fair value and the compensation expense is allocated over the service
period of employees:
Stock Appreciation Rights (SARs)
Employee compensation based on increases in stock price
Phantom stock
Differ from SARs in that compensation is based on hypothetical stock, e.g. a business unit within a
company that is not publicly traded

Answer 188

A

Advantages
* Motivates employees
* Aligns with shareholders’ interests
* Limited downside risk, but unlimited upside potential, like stock options
* Shareholder ownership is not diluted

Disadvantages
* Requires current period cash outflows

Answer 189

A

is to provide the user of the financial statement with information to
assess the amount,
timing
and uncertainty of cash flows associated with leases

Answer 190

A

The carrying amount of right of use assets and the end of the reporting period by class of
underlying asset;
Total cash outflow for leases;
Interest expense on lease liabilities;
Depreciation charges for right-of-use assets by class of underlying asset; and
Additions to right of use assets

Answer 191

A

For finance leases: (capitalised)
The amount of selling profit or loss; and
Finance income on the net investment in the lease; and income relating to variable lease payments not included in the measurement of the lease;
For operating leases, lease income with separate disclosure for income relating to variable lease payments not based on an index or rate

Answer 192

A

Explain the characteristics of its defined benefit plans and risks associated with them;
Identify and explain the amounts in its financial statements arising from its defined benefit plans (i.e., the net pension asset or liability); and
Describe how its defined benefit plans may affect the amount, timing and uncertainty of the entity’s future cash flows (e.g. increase employers contribution to reduce plan deficit)

Answer 193

A

Nature of benefits provided, the regulatory framework in which the plan operates, governance of the plan, and risks to which the plan exposes the entity;
Reconciliation from the opening balance to the closing balance of the net pension asset or liability, with separate reconciliations for plan assets and the present value of the
defined benefit obligation, showing service costs, interest income or expense, remeasurements, past service costs, contributions to the plan, and other components of
the change;
Sensitivity analysis showing how changes in significant assumptions (such as the discount rate used to measure the defined benefit pension obligation) would affect the
amounts reported on the financial statements;
Composition of plan assets by category, such as equity securities, fixed-income securities, and real estate; and
Indications of the effect of the defined benefit pension plans on the entity’s future cash flows.

Answer 194

A

A description of each type of share-based payment arrangement, including its general terms and conditions, such as vesting requirements, the maximum term of options
granted and the method of settlement (i.e., cash or equity)
Details about the number and weighted average exercises price of options, including:
The number outstanding at the beginning of the period,
Granted during the period,
Forfeited during the period,
Exercised during the period,
Expired during the period,
Outstanding at the end of the period, and
Exercisable at the end of the period.
For other equity instruments granted during the period (i.e., other than share options), the number and weighted average fair value of those equity instruments at the measurement date, and information on how that fair value was measured

Answer 195

A

Pre-tax income from income statement
Add non tax-deductible expenditure, i.e. depreciation
Less tax exempt income
Less tax allowances
Taxable income
Income tax payable: Taxable income x Statutory rate

Answer 196

A

Income tax expense= Income taxes payable + Deferred tax liability ending - Deferred tax liability beginning

Income tax expense= Income taxes owed - Deferred tax asset ending + Deferred tax asset beginning

Answer 197

A

Income tax expense in the income statement comprises of two elements
Income taxes owed
Based on taxable income
Current tax payable
Deferred tax expense
Based on temporary timing differences
Tax due on temporary timing differences at some point in the future

Answer 198

A

Recognition of DTL/increase in DTL
Increase in deferred tax expense
Decrease in net income
Recognition of DTA/increase in DTA
Decrease in deferred tax expense
Increase in net income

Answer 199

A

Some expenses do not immediately qualify for a tax deduction
Warranty expense
Provision created and expense deducted in year of sale (accruals basis)
Tax deduction given when warranty expenses paid (cash basis)

Answer 200

A

Decrease
Increase

Answer 201

A

Increase
Decrease

Answer 202

A

Lower forecast profits in future
Higher forecast profits in future

Answer 203

A

> Recognition of tax charged directly to equity
IFRS and US GAAP require that tax be treated on same basis as underlying asset
Deferred tax taken directly to equity
Examples:
Reval of PPE (IFRS only)
Long-term investments at fair value (AFS)
Change in accounting policies and prior period errors
Exchange rate differences for foreign operations
Reversal of DTLs
DTLs that are unlikely to reverse ( temp becoming perm)
E.g. quasi-permanent timing differences from tax
allowances
remove from DTL
add back to equity

Answer 204

A

> Reporting Quality means the financial reports are decision-useful. They are transparent and accurately reflect economic reality.
- being GAAP compliant is a necessary but not a sufficient condition
* Earnings Quality means the profits and cash generated by the actual economic activities are sustainable and provide a level of return sufficient to cover the firm’s cost of capital.
* It is possible to have one but not the other
* In reality there is a spectrum relating to quality, ranging from being fully GAAP compliant and decision-useful with sustainable earnings all the way down to nonGAAP compliant with fraudulent and fictitious transactions designed to hide a
non-sustainable situation

Answer 205

A

GAAP, decision-useful, sustainable, and adequate returns
GAAP, decision-useful, but sustainable?
− Low “earnings quality”
Within GAAP, but biased choices
Within GAAP, but “Earnings Management”
− Real earnings management
− Accounting earnings management
Departures from GAAP
Fictitious transactions

Answer 206

A

High-quality financial reports
Conform to the GAAP of the jurisdiction, e.g. IFRS, US GAAP, or other home-country GAAP
Also, embody the characteristics of decision-useful information as defined in the Conceptual Framework
Relevance and faithful representation
High-quality earnings
Adequate level of return on investment from sustainable company activities that exceed the cost of investment
Sustainable earnings with high returns contribute to higher valuation of a company and its securities

Answer 207

A

High-quality financial reports
Conform to the GAAP of the jurisdiction, e.g. IFRS, US GAAP, or other home-country GAAP
Also, embody the characteristics of decision-useful information as defined in the Conceptual Framework
Relevance and faithful representation
Low-quality earnings
Loss making company or earnings don’t provide adequate returns on investment
Possibly earnings generated from non-recurring activities

Answer 208

A

Biased choices result in financial reports that lack faithful economic representation and hence weakens the financial reporting quality

“Aggressive” choices
Increase current period’s performance and financial position
May decrease the reported financial performance and position in later periods
“Conservative” choices
Decrease current period’s performance and financial position
May increase the reported financial performance and position in later periods
Earnings smoothing
Understatement of earnings volatility
Can result from conservative choices to understate earnings when performing well and aggressive choices when performing poorly
Bias in the context of how information is reported, e.g. disclose information in a way that obscures unfavorable information and/or emphasizes favorable information

Answer 209

A

Earnings management (EM) is the process of making intentional choices in order to create biased financial reports
A blurred line exists between being bias and EM is primarily based upon intent
The discussion on EM is the same as being bias identified on the previous slide

Departures from GAAP
* Considered to be low-quality
* Earnings quality is difficult or impossible to assess

Fabricated reports
* Portraying fictitious events

Aggressive choices
* Increase current period’s performance and financial position
* May decrease the reported financial performance and position in later periods therefore raising a sustainability issue

Conservative choices
* Decrease current period’s performance and financial position
* May not be a sustainability issue because conservative choices may increase the reported financial performance and position in later periods

Conservatism in accounting
* Revenues are recognized once verifiable and legally enforceable receivable has been granted and that losses need not be recognized until it becomes “probable” that an actual loss will be incurred
* The Conceptual Framework supports neutrality of information. The asymmetric nature of conservatism conflicts directly with neutrality
* Despite the above, many conservative accounting standards remain

Answer 210

A

To mask poor performance, such as sub-standard profitability or loss of market
share
To exceed analyst or management forecast expectations
Career concerns and incentive compensation may motivate accounting choices

Answer 211

A

Typically three conditions exist when low-quality financial reports are issued:
* Opportunity:
- Internal conditions: poor internal controls, ineffective board members
- External conditions: Accounting standards providing scope for divergent choices, minimal
consequences for inappropriate choices
* Motivation – to meet criteria for personal reasons such as a bonus
* Rationalization – concern about the choices made is often alleviated by
rationalization

Answer 212

A

companies and nations compete for capital. The cost of this capital is dependent on the perceived level of risk (e.g. the risk of low-quality accounts being produced). There is an incentive to produce high-quality accounts to keep the long-term cost of capital low

Answer 213

A

regulations and regulators that establish and enforce rules play a key role in high-quality financial reporting.
The International Organization of Securities Commissions (IOSCO) is the global standard setter for the securities sector. IOSCO’s membership includes around:
120 securities regulators (e.g. Securities Exchange Commission in the US) and
80 other securities market participants such as stock exchanges.
- Typical features of a regulatory regime affecting the quality of financial reporting quality include:
* Registration requirements
* Disclosure requirements
* Auditing requirements
* Management commentaries
* Responsibility statements
* Regulatory review of filings
* Enforcement mechanisms

Answer 214

A

audit opinions provide users of the financial statements with some assurance that the accounts meet the relevant set of accounting standards, and present the company’s information fairly
- Limitations of the audit process:
* The audit opinion is based on a review of information prepared by the company. A review of information will not definitively uncover misstatements.
* The audit is based on sampling and might not reveal misstatements.
* An “expectations gap” may exist between the auditor’s role and the public expectations of auditors.
An audit has the primary object to ensure financial statements are fairly presented, not to detect fraud.
* The company being audited pays the audit fees, often established through a competitive process. There is a chance an auditor may show leniency in the audit process.

Answer 215

A

loan agreements or investment contracts can serve as
mechanisms to discipline financial reporting quality
- Loan covenants are often in place on such contracts. Parties with the contractual arrangement have an incentive to make sure the financial reporting is of high-quality.
- However, avoidance of debt covenant violation is a potential motivation for managers to inflate earning hence contributing to low-quality financial reporting.

Answer 216

A

Market
Market Regulatory authorities
Auditors
Private contracting

Answer 217

A

Non-GAAP earnings measures, such as earnings before interest, taxes, depreciation and amortization (EBITDA) are often used by investors to try to make inter-company comparisons on a consistent basis
EBITDA is widely viewed as eliminating ‘noisy’ reporting signals introduced by different accounting methods used by companies for depreciation, amortization of intangible assets, and restructuring charges
Some companies may construct and report their own versions of EBITDA, often referred to as “Adjusted EBITDA”
If a company uses a non-GAAP financial measure several caveats are often required by regulation e.g. SEC and IFRS. These include:
Display the most directly comparable GAAP measure along with a reconciliation of one measure to the other
Explanation by management why the non-GAAP measure is relevant to the user of the financial reports

Answer 218

A

How is revenue recognised? Upon shipment or delivery?
Growth in revenues out of sync with economy, industry, or peer companies and with growth in receivables
Unusual allowances for sales returns relative to history?
Do the sales outstanding indicate any potential collection
issues?
Does the company engage in any “bill-and-hold” transactions
Does the company separate its revenue arrangements? E.g. use of deferred revenue

Answer 219

A

Depreciation policies
* Are estimates of useful life reasonable?
* Straight-line vs. accelerated methods
* Do recent asset write-downs suggest that asset lives may need to be reconsidered?

Answer 220

A

What expenditure on intangibles has been capitalised?
What are the company’s capitalization policies in comparison to peers?
Are the policies for amortization used by the company reasonable?

Answer 221

A

What is the recent trend on such allowances? Have there been any significant changes?
Are they being lowered to meet earning expectations or are they justified?

Answer 222

A

How does the company’s costing methods compare with the rest of the industry?
Are reserves being used for obsolescence in inventory valuation? Is there an indication that they are being used to manipulate earnings?
FIFO vs. LIFO fundamentally impacts reported profits and inventory values
Is LIFO liquidation occurring?

Answer 223

A

Tax assets should be recorded at an amount the management feel they should be able to realize them. A valuation allowance must be used to re-state the tax asset to a level expected to be converted into cash. This can be a very subjective process?
Look for changes in the valuation allowance. Lowering of the reserve will reduce expenses and boost net income. Are they justified?

Answer 224

A

It would be wise for an analyst to review the annual impairment test process used by the company. The process of measuring the fair value of reporting units (US GAAP) or cash-generating units (IFRS) are based on subjective estimates

Answer 225

A

Have the reserve amounts for warranties changed recently?
Are they justifiable? Do the costs charged against the reserve
suggest issues in the quality of the product being sold?

Answer 226

A

Are there any company transactions that disproportionately
benefit members of management? Does one company exert
control other another’s destiny through supply contracts?
Are dealings with non-public companies taking place? It’s
possible the non-public company could absorb losses to make
the public company look better

Answer 227

A

An analysis of the composition of cash flows from operations (CFO) is important
− E.g. stretching out accounts payable is a source of cash. But, did a payment of cash to suppliers occur the day after the year-end balance sheet and hence flatter the CFO for the period? An analyst may conclude that economically the accounts payable did not increase by the reported amount
Analysing the composition of CFO in comparison to industry norms will be useful in picking up red flags
Reconcile the net income of the company to CFO. Is there
a fundamental departure that would question earnings quality?
Are there misclassifications of operating cash out flows to areas like cash flows from investing (CFI) or cash flows from financing (CFF)? This would artificially boost CFO
− E.g. capitalisation of interest costs on borrowings used to construct assets held for use (such as property, plant and equipment). This process directs cash paid in interest on loans used to finance construction as CFI rather than CFO

Answer 228

A

Examine the footnotes to identify the company’s revenue recognition policies, e.g. barter transactions, bill-and-hold, evidence of rebate programs
Look at revenue relationships:
− Is revenue growth out of line with peers/economy?
− Compare accounts receivables with revenues over time, e.g. changes in days sales outstanding (DSO) or receivables turnover
Examine asset turnover. Enables an analysis of managers’ asset allocation choices. If it is persistently declining it may be a sign of future asset write-downs particularly in areas such as goodwill

Answer 229

A

Identify inventory relationships:
− Compare growth of inventory with benchmarks. Is a growth in
inventory linked to growth in sales? If not, is it a result of poor
inventory management? Possibly a sign of obsolescence signalling an impending inventory write-down
− Calculate inventory turnover ratio. A declining ratio could indicate obsolescence issues that should be recognized
− Are there signs of LIFO liquidation for US GAAP companies using LIFO? This could artificially boost gross, operating and net profits

Answer 230

A

Examine the relevant accounting footnotes for policies used
− If one company in an industry is capitalizing a particular cost whilst the others are expensing, this outlier company may identify a possible red flag

Answer 231

A

If current NI is higher then CFO this could indicate aggressive accrual accounting policies have shifted current expenses to later periods
Construct a time series of cash generated by operations divided by NI. If the ratio consistently drops below one this could be identified as a possible red flag

Answer 232

A

Depreciation methods and useful lives. Compare policies used to peers
Fourth-quarter surprises
Presence of related-party transactions
Non-operating income or one-time sales included in revenue
Classification of expenses as “non-recurring”
Gross/operating margins out of industry norms

Answer 233

A

Young companies with an untainted record of meeting growth projections
How long can the projection continue as a company matures? Management may seek to use unconventional means to continue the trend
Management have adopted a minimalist approach to disclosure
Management fixation on the earnings report in detriment to other key drivers of value such as cash flows. Could also be identified by a fixation of non-GAAP measures of performance, e.g. adjusted EBITDA

Answer 234

A

Before starting financial analysis clarify:
Purpose of the analysis
Level of detail required
Available data
Factors or relationships which will influence analysis
Analytical limitations that could impair analysis
Next stage:
Select techniques (ratios)
Use framework
Effective analysis
Includes both computations and interpretations

Answer 235

A

Purpose
* Useful means of expressing relationships in financial accounts
* Indicator of an aspect of a company’s performance
Aspects
* Reduce the effect of size, enhancing comparison between companies
* Differences in accounting policies can distort ratios
- Meaningful comparison may involve adjustment
* Not all ratios are relevant to a particular type of analysis
* Interpretation of the ratio is as important as computation

Answer 236

A

Value
Provides insights into:
Microeconomic relationships within a firm
Firm’s financial flexibility
Management’s ability
Limitations
Homogeneity of a company’s operating activities
Need to determine if the results of the analysis are consistent
Need to use judgment
Use of alternative accounting methods
First-in, first-out (FIFO) vs. last-in, first-out (LIFO)
Straight line or accelerated methods of depreciation
Capital or operating leases (not applicable under IFRS)

Answer 237

A

Common-size balance sheet
- Highlights composition of the balance sheet
- Comparison between time periods highlights change in composition
* Common-size income statement
- Revenue can be analyzed between different sources
* Shows change in business mix
* Highlights changes in the cost structure

Answer 238

A

Compare a specific ratio with the same ratio for another company
or group of companies
Can be done on a common-size basis

Answer 239

A

Analyst should review trends in ratios as well as absolute and relative levels
E.g., balance sheet data over a five-year period
Provides information about historical performance and growth
Helps as a planning and forecasting tool

Answer 240

A

Facilitate comparisons of performance and financial structure over time
Highlight changes in significant aspects of the business
Provide visual overviews of risk trends in a business
Can also be used to communicate an analyst’s conclusions

Answer 241

A

Measures how efficiently a company performs day-to-day tasks
Measures the company’s ability to pay shortterm obligations
Measures the company’s ability to pay longterm obligations
Measures the company’s ability to generate
profitable sales from its resources
Measures the quantity of an asset or earnings
associated with ownership of a share

Answer 242

A

Inventory turnover (COGs/ Avg Inventory)
Receivables turnover (Net sales / Avg receivables)
Payables turnover (Purchases / Avg payables)

Answer 243

A

Fixed asset turnover (Rev/ Avg net fixed assets)
Total asset turnover (Rev / Avg assets)
Working capital turnover (Rev / Avg working capital)

Answer 244

A

Current ratio = Current assets / current liabilities
Quick ratio = Cash + Marketable securities + Receivable / current liabilities
Cash ratio = Cash + Marketable securities / current liabilities
Defensive interval ratio = Cash + Marketable securities + Receivable / daily cash expenditure
Cash conversion cycle= DOH + DSO − days Payable

Answer 245

A

Analysis of use of debt by a company
Useful in assessing a company’s risk and return characteristics
E.g. financial leverage
Financial leverage
Debt is a fixed cost
% change in EBT > % change in EBIT
Increase returns to equity holders
Higher level of debt
Increased risk of default
Higher borrowing costs
Company’s relative solvency
Fundamental to valuation of debt securities and credit-worthiness
Provide insight about company’s future business prospects
Signals management’s beliefs about company’s future

Answer 246

A

Debt-to-assets = Total interest - Bearing debt / total assets
Debt-to-capital = Total interest - Bearing debt / Total interest - Bearing debt + Total equity
Debt-to-equity= Total interest - Bearing debt / Equity
Financial leverage ratio = Avg total assets / Avg total equity
Debt-to-EBITDA = Total debt / EBITDA
Interest cover = EBIT / Interest payments
Fixed charge overhead = EBIT + lease payments / Interest payments + Lease payments

Answer 247

A

Gross profit margin = Gross profit / Rev
Operating profit margin = Operating income / Rev
Pretax margin = EBT / Rev
Net profit margin = NI / Rev
Operational ROA = operating income / avg total assets
ROA = NI / avg total assets
Return on total capital = EBIT / short term and long term debt-to-equity
Return on equity = NI / avg total equity
Return on common equity = NI - preferred div / avg total equity

Answer 248

A

ROE = EAT / Rev * Rev / Assets * Assets / Equity
ROE = net profit margin * asset turnover * financial lev

Answer 249

A

ROE = (EAT/EBT)* (EBT/ EBIT) * (EBIT/ Rev) *(Rev / Assets) * (Assets / Equity)
ROE = tax burden * interest burden * EBIT margin * asset turnover * financial lev

Answer 250

A

Analysts often need to forecast future financial performance
Include data from industry, economy, company, common-size and ratio analysis
Judgment is integral to this process
Analyst can create an ‘earnings model’ to forecast future performance

Answer 251

A

Sensitivity analysis
Shows range of outcomes if specific assumptions are changed
Scenario analysis
Shows key changes in financial results from economic events
Simulation
Computer-generated sensitivity or scenario analysis based on
probability

Answer 252

A

Growth relative to GDP approach
1. First, forecast the nominal GDP growth rate.
2. Next, assess how a company growth rate will compare with nominal GDP growth.
3. Analysts can use real GDP forecast to project volumes and inflation forecast to project prices .
Market growth and market share approach
1. First, forecast the growth of a given market.
2. Next, assess current market share of a company and how it is projected to change.
3. If there is a predictable relationship between market revenue and GDP, regression
analysis can be used.

Answer 253

A

Time series forecasts using historical growth rates or time series analysis
Returns based measures using balance sheet values (for example, bank interest
revenue ≈ loan value x average interest rate)
Capacity based measures (for example, using existing store sales growth vs new store sales growth)

Answer 254

A

Combines elements of top-down and bottom-up approaches

Answer 255

A

Consider macroeconomic factors first – for example, inflation or industry specific
costs – then make assumptions about how these would impact the company

Answer 256

A

Consider company level factors first – for example, segment level margins,
historical growth rate of costs and margin levels or cost of delivering specific
products

Answer 257

A

Variable costs can be modelled as a percentage of revenue
Analysts pay particular attention to fixed costs (sg&a) – high fixed costs can indicate
possible economies of scale
If operating margins correlate positively with sales, this gives evidence of
economies of scale in an industry

Answer 258

A

if cogs increases more relative to sales then margin falls more
so cogs hedged from price input rises

Answer 259

A

There is less of a direct relationship between SG&A (periodic cost) and sales than between COGS (matched cost) and sales
- Some expenses within SG&A will be more closely correlated with sales than others
* Selling & distribution expenses are variable and may vary with sales
* Overheads and R&D may not vary much with sales but may vary slowly over time (HR cost, IT support, Head office)

Answer 260

A

Financing costs refer to:
- Interest income (BS cash + investments) (most significant for financial companies such as banks); and
- Interest expenses (depends on the level of debt (BS) and interest rates) – commonly
presented net of interest income
Important factors for an analyst to consider include:
- The capital structure of the company (debt level)
- Interest rates

Answer 261

A

Driven by the level of debt and interest rates
Disclosure about the debt maturity profile will help forecast to what extent new
debt will be required

Answer 262

A

Geographic location
Business type

Answer 263

A

Statutory tax rate – corporate tax rate in a country where company is domiciled
Differences between statutory tax rate and the effective tax rate can arise due to tax credits, withholding tax on dividends or adjustments to previous years or expenses not deductible for tax purposes
Effective tax rate
– calculated as reported income tax expense/pre-tax income
Difference between cash tax rand reported tax - function of difference between financial accounting standards and tax laws
Difference between cash tax and reported tax – reflected as tax asset or deferred tax liability
Cash tax rate
– calculated as: tax actually paid/pre-tax income

If a company operates in various countries, the effective tax rate is a blend of tax
rates in relation to profit generated in each country.
A special purpose entity (SPE) can reduce the effective tax rate, but risk may
increase (tax laws might change).

Answer 264

A

Working capital projections
- analysts can use historical efficiency ratios and project recent performance or historical average to persist (change in WC)
- or analysts may have a specific view on future working capital (top down or bottom up approach)

Net PP&E and intangible assets (open NBV - Dep - Disposals + Purchase = Net Book Value)
- net PP&E and intangible assets mainly change due to depreciation / amortisation and capital expenditures

Depreciation and amortisation forecasts
- forecasts generally based on historical depreciation, management disclosures and levels of long term assets

Capital expenditure – comprises:
- Maintenance capital expenditure: sustains the current business (generally higher than depreciation due to inflation)
- Growth capital expenditure: grows the business
- forecasts are driven by analyst views of revenue growth and business model

Leverage ratios
- Debt to capital, debt to equity & debt to EBITDA can be used to project future debt and equity levels

Answer 265

A

Net Operating Profit less adjusted tax (NOPLAT) / Invested capital
> invested capital is usually defined as operating assets less operating
liabilities
> A better measure of performance than ROE since it is unaffected by the degree of
financial leverage.
> A similar measure is return on capital employed (ROCE) which is essentially
ROIC before tax. Useful when comparing the difference companies in different tax
jurisdictions.

Answer 266

A

Overconfidence bias in analyst forecasts
* Analysts are more confident when making contrarian predictions.

To mitigate overconfidence bias:
* Analysts should record, share and review their forecasts regularly.
* Analysts should identify both correct and incorrect forecasts made
- goal is to recognise high forecast error rates
* Scenario analysis can generate different forecast scenarios by asking: “Where
could I have been wrong & by how much?”

Answer 267

A

Illusion of control bias in analyst forecasts
* Analysts may overestimate their ability to increase forecast accuracy by:
- Acquiring more information and opinions from experts; and by
- Creating more granular and complex models
Although additional information, opinions and more granular and complex models
can improve forecasting accuracy there are diminishing marginal returns

To mitigate illusion of control bias:
* Analysts can restrict model variables to those regularly disclosed by the company
- Models should focus on the most important and impactful variables
- Analysts should only speak to people with unique or significant perspectives

Answer 268

A

Conservatism bias can lead an analyst to maintain their prior forecasts by
inadequately incorporating new information
- Analysts with this bias most often fail to update forecast after receiving negative
information
- Analysts may also fail to sufficiently incorporate positive information

“Anchoring and adjustment” is another name for conservatism bias – adjustments
made in the light of new information tend to be too small
To mitigate conservatism bias:
- Analyst forecasts and models can be regularly reviewed by an investment team
- Flexible models with fewer variables can be developed to allow easier changes of
assumptions

Answer 269

A

A tendency to classify information based on past events.
An analyst may see new information as being representative of something they
have already experienced, even if it is very different.

Base rate neglect
* Base rate neglect is a common representativeness bias for analysts, where the
incidence of an event occurring in the larger population (the “outside view”) is
ignored, in favour of the situation specific incidence of the occurrence (the “inside
view”).

Answer 270

A

An analyst suffering from confirmation bias will tend to look for information which
confirms their prior beliefs (such as forecasts already made) and undervalue or
ignore information that contradicts their prior beliefs (such as evidence that their
forecast was inaccurate).
Confirmation bias is closely related to overconfidence and representativeness
biases
Confirmation bias can be mitigated by:
Looking at research from analysts with a different opinion on the stock being analysed
Seeking perspectives of colleagues who have no emotional or economic stake in the
security being analysed

Answer 271

A

Threat of new entrants: Ease of entry and exit
> Economies of scale, capital requirements, regulation, brand
identity, high switching costs, government policy, retaliation,
absolute cost advantages
Rivalry among existing
competitors
>Number of competitors, strength of competition, industry growth,
brand identity, exit barriers

3.Threat of substitutes
> Buyer’s propensity to switch, switching costs

Bargaining power of buyers
> Bargaining leverage and price sensitivity
Bargaining power of suppliers
> Number of suppliers, size of suppliers, ability to increase costs of inputs

Answer 272

A

Changing price levels can significantly affect the accuracy of forecasts.
The impact of inflation on future company performance will vary from company to
company due to difference in competitive advantage and industry structure.
If the product’s demand is relatively price inelastic, then its revenues will benefit
from inflation.
Cost inflation will depend upon the scope for substituting alternative inputs.
Analysing international companies means adjusting for the geographic mix of its
operations when incorporating inflation predictions.
Foreign exchange rate movements can also be a source of price changes.

Answer 273

A

Assumptions need to be made about the impact of such developments
Will this just cannibalize existing products or will it create a new segment in the market?
It is important to analyse such developments using scenario and sensitivity
analysis.

Answer 274

A

The choice of forecast time horizon depends upon:
Investment strategy for which the stock is being considered.
Cyclicality of the industry – horizon needs to be long enough to allow the company to
reach a level of sales and profitability that is consistent with mid-cycle, i.e. normalized
earnings.
Analyst’s own preferences.
Company specific factors – might be necessary to extend the horizon period to allow
temporary/unusual factors to be adjusted for so that we have a better idea of the level of normalized earnings.
Terminal value
Take care when using historical valuation guidelines. Past multiples may not always be consistent with future multiples.
Long term growth rate is always difficult to estimate.
Regulations and technological change can dramatically impact terminal values.

Answer 275

A

Start with forecasting sales: Top-down vs. bottom-up vs. hybrid
Revenue will be a function of price changes, volume and foreign exchange estimates
May apply different assumptions to different segments of revenue
Once we have forecasted the income statement, we can move onto the balance
sheet and then finally the cash flow statement.

Answer 276

A

A surplus in the capital account and a surplus in the financial account

The sum of the three accounts (current account, capital account and financial account) must be zero.

Answer 277

A

P/E = Div payout / (required rate of return - growth rate)

P/E = Div payout / [(RR + IP + RP) - (ROE)(retention rate)] where RR is real return; IP is inflation premium and RP is market risk premium

Answer 278

A

are short term (less than one year) under IFRS and US GAAP or low in value under IFRS only

Answer 279

A

this tends to be real GDP (inflation removed), as opposed to nominal GDP (not adjusted for inflation)

Answer 280

A

The undiscounted value of the expected future cash flows.

Answer 281

A

The carrying amount of right of use assets.
Total cash outflow for leases

Answer 282

A

adding the estimates of the average remaining useful life and the average age of the assets
average age of the assets : accumulated depreciation / depreciation expense
average remaining useful life of the asset base : net property, plant, and equipment/ annual depreciation expense.

Answer 283

A

the estimated amortization expense for the next five fiscal years

Answer 284

A

treated as an expense, even when no cash is exchanged based on the fair value of the grant.

Answer 285

A

a right-of-use asset and a lease liability for all leases longer than one year.
An exception under IFRS exists for leases when the underlying asset is of low value

Answer 286

A

Over the lease term, the lessor recognizes lease receipts as income and recognizes related costs, including depreciation of the leased asset, as expenses. Under IFRS, at inception of a finance lease—not an operating lease—the lessor derecognizes the underlying leased asset and recognizes a lease asset comprising the lease receivable and relevant residual value. Further, an IFRS-reporting lessor will recognize selling profit at the beginning of all leases that are not classified as operating leases. In contrast, a US GAAP–reporting lessor will recognize selling profit only on sales-type leases at the beginning of the lease term.

Answer 287

A

enacted
> IFRS in contrast allows for the possibility that further approvals are needed to enact the laws.

Answer 288

A

recognized as a reduction in cost of sales

Answer 289

A

price stability

Answer 290

A

is defined as original and planned investigation undertaken with the prospect of gaining new scientific or technical knowledge and understanding. The research phase of an internal project refers to the period during which a company cannot demonstrate that an intangible asset is being created—for example, the search for alternative materials or systems to use in a production process.

Answer 291

A

A high ROA is a good indicator that a company may be using operating leases, this would artificially lower leverage and assets, and therefore inflate performance ratios.

Answer 292

A

The plans are unfunded and employees pay pensions to retired employees from their own financial resources.

Answer 293

A

favors FIFO as inventory will represent up to date costs.
favors LIFO as cost of sales will reflect current costs.

Answer 294

A

Start-of-year capital contributed + additional shares issued + initial retained earnings + net income - dividend paid

Answer 295

A

should be written off within 20 years but subject to an impairment review.

Answer 296

A

What the estimated amortization expense for the next five fiscal years will be

Answer 297

A

why it is considered to have an indefinite life must be disclosed.
a company must disclose where amortization is included on the income statement.

Answer 298

A

= Cost of goods sold + Increase in inventory – Increase in accounts payable

Answer 299

A

Beginning interest payable + Interest expense – Cash paid for interest.

Brainscape's Knowledge GenomeTM

Financial statements Flashcards

Brainscape's Knowledge Genome^TM