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CFA Level 1 DETAIL > FRA > Flashcards

FRA Flashcards

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1
Q

Activity ratios: function

A

indicate how well a firm uses its assets

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2
Q

what ratios indicate how well a firm uses its assets?

A

Activity ratios

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3
Q

What are activity ratios?

A
  • receivables turnover,
  • days of sales outstanding,
  • inventory turnover,
  • days of inventory on hand,
  • payables turnover,
  • payables payment period,
  • turnover ratios for total assets, fixed assets, and working capital.
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4
Q

what ratios indicate a firm’s ability to meet its short-term obligations

A

Liquidity ratios

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5
Q

what are liquidity ratios

A
  • current, quick,
  • cash ratios,
  • the defensive interval,
  • the cash conversion cycle.
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6
Q

Liquidity ratios - function

A

indicate a firm’s ability to meet its short-term obligations

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7
Q

Solvency ratios - function.

A

indicate a firm’s ability to meet its long-term obligations

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8
Q

what ratios indicate a firm’s ability to meet its long-term obligations

A

Solvency ratios

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9
Q

what are solvency ratios? what the two types?

A

Leverage ratios (low is good):

  • debt-to-equity = total debt / total equity,
  • debt-to-capital = total debt / (total debt + total equity),
  • debt-to-assets = total debt / total assets,
  • financial leverage, = average total assets / average total equity

Coverage ratios (higher is good)

  • interest coverage = EBIT / interest payments,
  • and fixed charge coverage ratios = (EBIT + lease payments) / (interest payments + lease payments).
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10
Q

Profitability ratios - functions

A

indicate how well a firm generates operating income and net income.

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11
Q

What ratios indicate how well a firm generates operating income and net income.

A

Profitability ratios

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12
Q

what are profitability ratios?

A
  • net, gross, and operating profit margins,
  • pretax margin,
  • return on assets,
  • operating return on assets,
  • return on total capital,
  • return on total equity,
  • and return on common equity.
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13
Q

Valuation ratios - functions?

A

used to compare the relative values of stocks.

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14
Q

What ratios are used to compare the relative values of stocks?

A

Valuation ratios

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15
Q

what are valuation ratios?

A
  • earnings per share
  • price-to-earnings,
  • price-to-sales,
  • price-to-book value,
  • price-to-cash-flow ratios.
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16
Q

Comprehensive income includes _____, unrealized gains and losses from _____, ______, and _____

A

net income
available-for-sales securities
cash flow hedging derivatives
foreign currency translation

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17
Q

____ includes all transactions that affect stockholders’ equity except transactions with shareholders.

A

Comprehensive income

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18
Q

Comprehensive income includes all transactions that affect stockholders’ equity except _____

A

transactions with shareholders.

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19
Q

Comprehensive income includes all transactions that affect _______ except transactions with shareholders.

A

stockholders’ equity

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20
Q

Current tax provision = ?

A

statutory rate × taxable income

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21
Q

statutory rate × taxable income = ?

A

Current tax provision

*If taxable income is less than pretax income and the cause of the difference is expected to reverse in future years, a DTL is created. If taxable income is greater than pretax income and the difference is expected to reverse in future years, a DTA is created.

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22
Q

Income tax expense and taxes payable are related through ______:
income tax expense = taxes payable +? - ?

A

the change in the DTA and the change in the DTL

income tax expense = taxes payable + ΔDTL - ΔDTA.

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23
Q

The balance of the DTA or DTL is equal to ____

A

the difference between the tax base and the carrying value of the asset or liability, multiplied by the tax rate.

24
Q

Compared to expensing the asset cost, capitalization results in:

  • ____ expense and ____ net income in period of acquisition
  • ____ expense (depreciation or amortization) and ____ net income in each of the remaining years of the asset’s life.
A
  • acquisition: Lower expense, higher net income

- later: Higher expense, lower netincome

25
Q

Compared to expensing the asset cost, capitalization results in:
- _____ assets and _____ equity.

A
  • higher assets and equity
26
Q

Compared to expensing the asset cost, capitalization results in:
- ____ ROE and ____ ROA in the initial period, and ____ ROE and ____ ROA in subsequent periods

A
  • initial period: higher ROE and ROA

- later: lower ROE and ROA, because net income is lower and both assets and equity are higher.

27
Q

Compared to expensing the asset cost, capitalization results in:
- ____ CFI and _____ CFO

A
  • lower CFI and higher CFO, because the cost of a capitalized asset is classified as an investing cash outflow.
28
Q

Compared to expensing the asset cost, capitalization results in:
- ____ debt-to-assets and ____ debt-to-equity ratios

A
  • lower debt to assets and debt to equity ratios, because assets and equity are higher.
29
Q

Revenues are considered earned when… (4)

A
  • revenue can be measured with reasonable accuracy,
  • transactions are not subject to revocation,
  • it is possible to measure the cost of provided goods (no significant contingent obligation), and
  • there is assurance of payment (cash) or collectability.
30
Q

Methods for accounting for long-term contracts include:

A
  1. Percentage-of-completion: recognizes revenue in proportion to costs incurred.
  2. Completed-contract: recognizes revenue only when the contract is complete.
31
Q

Percentage-of-completion: recognizes revenue in proportion to _____.

A

costs incurred

32
Q

Completed-contract: recognizes revenue only when ____

A

the contract is complete.

33
Q

Revenue recognition methods for installment sales are: (in order of collectability)

A
  1. Normal revenue recognition at time of sale if collectibility is reasonably assured.
  2. Installment sales method if collectibility cannot be reasonably estimated.
  3. Cost recovery method if collectibility is highly uncertain.(or when cost is unknown)
34
Q

A common-size cash flow statement shows each item as a percentage of ____ or ____

A

revenue; shows each cash inflow as a percentage of total inflows and each outflow as a percentage of total outflows.

35
Q

Expressing each line item of the cash flow statement as a percentage of ___ is useful in forecasting future cash flows since ____ usually drives the forecast.

A

revenue; revenue

36
Q

two ways to calculate cash paid to supplier?

A

1 : beginning AP + purchase - Cash paid = ending AP

2: COGS + Increase of inventory + decrease of AP = cash paid to supplier

37
Q

Inventories are reported at the lower of
____ or ____ (IFRS)
____ or ____ (U.S. GAAP).

A

IFRS: lower of cost or net realized value
GAAP: lower of cost or market

38
Q

which standard allows cost model, which standard allows revaluation model

A

IFRS allows both, GAAP only allows cost model.

39
Q

PP&E is impaired if its carrying value exceeds the recoverable amount. Recoveries of impairment losses are allowed under _____

A

IFRS but not U.S. GAAP.

40
Q

Intangible assets created internally are ______ . Purchased intangibles are _____

A

expensed as incurred; reported similar to PP&E

41
Q

Under IFRS, research costs are _____ and development costs are _____. Under US GAAP, research costs are _____ and development costs are _____

A
  • expensed as incurred; capitalized

- expense as incurred except in the case of software created for sale to others.

42
Q

____ is expensed as incurred under GAAP

A

research and development costs, with the except in the case of software created for sale to others. Expense are expensed until technological feasibility is established

43
Q

____ is expensed as incurred under IFRS

A

research costs

44
Q

____ is capitalized under GAAP

A

neither research nor development costs except in the case of software created for sale to others. development costs are capitalized after technological feasibility is established

45
Q

____ is capitalized under IFRS

A

Development costs

46
Q

For trading securities and derivatives, unrealized gains and losses are recognized _____. Unrealized gains and losses for available-for-sale securities are _____

A

in the income statement; reported in equity (other comprehensive income).

47
Q

For_______, unrealized gains and losses are recognized in the income statement. Unrealized gains and losses for _____ are reported in equity (other comprehensive income).

A

trading securities and derivatives; available-for-sale securities

48
Q

Financial liabilities not issued at face value, like bonds payable, are _____. Held-for-trading liabilities and derivative liabilities are _____.

A

reported at amortized cost; reported at fair value

49
Q

______ are reported at amortized cost. _____ are reported at fair value.

A

Financial liabilities not issued at face value, like bonds payable
Held-for-trading liabilities and derivative liabilities

50
Q

____ record every transaction, showing which accounts are changed by what amounts.

A

Journal entries

51
Q

A listing of all the journal entries in order by date is called the ____

A

General journal

52
Q

_____ sorts the entries in the general journal by account.

A

The general ledger

53
Q

At the end of the accounting period, ____ is prepared that shows the balances in each account. If any adjusting entries are needed, they will be recorded and reflected in an _____.

A

an initial trial balance

adjusted trial balance

54
Q

The account balances from the adjusted trial balance are presented in the _______.

A

financial statements

55
Q

If the initial revaluation resulted in a gain (increase in carrying value), the initial gain would reported as a ____ in _____. Later revaluation losses would ____

A

revaluation surplus
equity
first reduce the revaluation surplus

56
Q

If the initial revaluation resulted in a loss (decrease in carrying value), the initial loss would be recognized in _____ and any subsequent gain would be recognized in _______. Revaluation gains beyond the initial loss are recognized in ______ as a ______

A

the income statement
the income statement only to the extent of the previously reported loss
shareholders’ equity
revaluation surplus.

57
Q

To adjust a LIFO firm’s financial statements to a FIFO basis including tax effects, an analyst should

  • ___ inventory by _____,
  • ___ cash by ____
  • ____ retained earnings by _____
  • ____ COGS by_____
A
  • increase inventory by the LIFO reserve
  • decrease cash by (LIFO reserve × tax rate)
  • increase RE by [LIFO reserve × (1 - tax rate)].
  • increase COGS by change of reserve

CFA Level 1 DETAIL (16 decks)

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