FR&A Flashcards
Effective tax rate =
tax expense / pretax income
Treasury stock method: Number of shares in denominator =
(AMP - EP)/AMP X N Where: AMP = Average market price EP = exercise price N = Number of shares can be converted
Two fundamental qualitative characteristics of financial statements
Relevance and faithful representation
The enhancing characteristics of financial statements
Include comparability, verifiability, timeliness, and understandability.
The two primary assumptions that underlie the preparation of financial statements
Accrual basis and the going concern assumption.
Revaluation of Long-Lived Assets
IFRS: Revaluation gain recognized in net income only to the extent it reverses previously recognized impairment loss; further ains recognized in equity as revaluation surplus. (For investment property, all gains and losses from marking to FV are recognized as income) GAAP: revaluation is not permitted.
Two requirements of revenue recognition
- completion of earnings process
- reasonable assurance of payment
Methods for accounting for long-term contracts include:
- Percentage-of-completion—recognizes revenue in proportion to costs incurred.
- Completed-contract—recognizes revenue only when the contract is complete.
Revenue recognition methods for installment sales are:
- Normal revenue recognition at time of sale if collectibility is reasonably assured.
- Installment sales method if collectibility cannot be reasonably estimated.
- Cost recovery method if collectibility is highly uncertain.
Free Cash Flow to Firm (FCFF)
FCFF is available to all investors.
FCFF = CFO + [Int. exp. x (1 - tax)] - fixed capital investment
Free cash flow to equity (FCFE)
FCFE is available to shareholders.
FCFE = CFO - FCInv + (Debt issued - Debt borrowed)
Defensive interval (number of days of average cash expenditures the firm could pay with its current liquid assets)
Receivable Turnover
Receivable Turnover = Sales / Avg Receivables
Inventory Turnover
Inventory Turnover = COGS / Avg Inventory
Payable Turnover
Payable Turnover = Purchases / Avg Payables
Return on Asset ( Return on Total Capital)
RoA = EBIT / Avg Total Capital
Interest Coverage
Interest Coverage = EBIT / Interest
Fixed Charge Coverage
Fixed Charge Coverage = (EBIT + Lease Payment) / (Interest + Lease Payment)
Traditional Dupont Equation
Extended Dupont Equation
(IFRS) Components of the Change in a Net Pension Asset or Liability
(GAAP) Components of the Change in a Net Pension Asset or Liability
Average Asset
Average asset = Accumulated depreciation / annual depreciation expense
Remaining useful life
Remaining useful life = Net PP&E / annaul depreciation expense
Deferred tax asset
Taxable income > pretax income
Must recognize valuation allowance if more likely than not that DTA will not be realized
Deferred tax liability
Taxable Income < Pretax Income
Treat DTL as equity if not expected to reverse.
Adjust LIFO to FIFO
- FIFO Inv. = LIFO Inv. + LIFO Reserve
- FIFO COGS = LIFO COGS - Change in LIFO Reserve
- FIFO RE = LIFO RE + LIFO Reserve x (1 - Tax Rate)
- FIFO Cash = LIFO Cash - LIFO Reserve x Tax Rate
