FRA (II) (III) (IV) Flashcards
Income statement equation
revenues- expense = net income
Expenses are grouped together by :
Nature: depreciation expenses
Function: COGS
For nonfinancial firms, EBIT (operating profit) does not include:
financing costs
When a firm has ______ in a subsidiary, the statements of the two firms are consolidated
controlling interest
The share of a subsidiary’s income that a firm does not own is reported in the firms income statement as:
Non-controlling interest/minority owner’s interest
Revenue is recognized when:
goods are transferred to the buyer
Revenue recognition
The central principle of the converged standards for revenue recognition for IASB and FASB is?
revenue is recognized when the firm has transferred a good or service to the customer
How is revenue recognized for long term projects?
based on the firm’s progress towards completion of performance obligation (contract)
All revenues are grouped together and all expenses are grouped together in this presentation format
single step
Income Statement presentation includes subtotals like gross profit and operating profit
multi-step
Expense recognition is based on the matching principle:
accrual basis of accounting
Matching principle: expenses for producing goods and services are recognized ______
in the period in which the revenue is recognized (when the goods have been transferred)
expenses that are not directly tied to generating revenue, like administrative costs,
period costs
period costs are expensed when?
the period they occur
If a firms sells good on credit or provides warranty to the customer, the matching principle requires the firm to ______________
establish a BDE or warranty expense
The dpreciation method that is more appropriate for matching revenues & expenses:
Accelerated; DDB
Assets generate more benefit in the early year of their lives
Straight line method results in:
lower depreciation expense;
higher net income
DDB depreciation stops once:
The residual value has been reached
LIFO is popular because it results in ____ COGS, in an ____ environment, creating ____ benefits
higher
inflationary
income tax
which inventory method is not permitted under IFRS?
LIFO
If PPE is impaired, what is the impact?
Income Staement: Expense is recognized equal to the impairement, reducing NI
Balance Sheet: lower NI reduces RE
CF: no affect
PPE value: reduced
Compared to financial servcies companies:
For nonfinancial firms, operating activties do not include:
- Investing income
- Financing expenses (interest)
Non-operating income
Includes: Interest, dividends, gains/losses on disposals
Interest, dividends, gains/losses for financial firms are considered :
operating transactions
Discontinued operations must be:
physically & operationally distinct from the firm
How are discontinued operations reported on the income statement?
Reported separately after
net income from continuing operations
Unusual or infrequent items are included in:
income from continuing operations
(gains/losses)
Gains or losses from the sale of assets or part of the business is an example of?
unusual/infrequent items
Impairements, write-offs/downs, restructuring costs are examples of?
unusual/infrequent items
Any prior period financial statements presented in a firm’s current financial statements must be restated
retrospective application
Changes in accounting policies require:
retrospective application of all shown in a financial report
does not require prior period restatement, However, beginning values of affected accounts are adjusted for the cumulative effects of the change
modified retrospective application
Changes in accounting estimates are applied:
Prospectively
Prior period adjustments are applied:
retrospective
EPS is only reported for ______
shares of common stock
EPS measures:
Profitability
Simple capital structure contains:
no dilutive securities
Complex capital structure contains:
dilutive securities
stock options, warrants, convertible securities are examples of?
dilutive securities
Dilutive securities ____ EPS, resulting in:
Diluted EPS _ Basic EPS, and we report:
Decrease;
Diluted < Basic;
Report Diluted
Anti-Dilutive securities ____ EPS; resulting in
Diluted EPS _ Basic EPS, and we report:
Increase EPS;
Diluted > Basic;
Report Basic EPS that is equal to reported diluted EPS
Antidilutive securities are removed from the diluted EPS calculation, and will cause basic = diluted
Ending value of an asset; salvage value
residual value
treasury stock method assumes: that the funds received by the company from the exercise of the options would be used to:
purchase shares of CS at the average market price
Vertical common sized income statements: express each category of the income statement as a percentage of:
revenue
common size IS allows for comparison over time in:
time-series analysis
common size IS allows for comparison amongst firms in:
cross-sectional analysis
Used to measure a firm’s profitability quickly
gross profit margin
High profit margins can be achieved by?
product differentiation
Comprehensive income includes all transactions that affect shareholder’s equity, except for:
transactions with shareholders
Net income + OCI =
Comprehensive Income
OCI shows changes in equity from transactions from:
Non-ownership sources:
* unrealized gains/losses
* foreign currency transalation
- gains and losses on foreign currency translation
- Adjustments for minimuim pension liability (remeasurement)
- Unrealized gains and losses from cash flow of hedging derivatives
- Unrealized gains and losses from available for sale securities
- Unrealized gains and losses on held to maturity securities
OCI
Transactions with shareholders that are not included on the IS:
dividends paid
shares issued or repurchased
IFRS equivalent for trading securities
measured at fair value through P/L
IFRS equivalent for available for sale securities
Measured at fair value through OCI
IFRS equivalent for held to maturity securities
measured at amortized cost
Net revenue =
Revenue - returns/allowances
how do you handle stock splits when calculating the weighted average shares outstanding in EPS?
no matter when it was issued, you restate the beginning of the year shares with this split
(for stock dividends too)
What is the relationship between contracts & performance obligations?
The contract outlines what the performance obligation will be, which is the promise to transfer a distinct good or service
According to the Standards of Revenue Recognition
The owner’s residual interest in the firm, after deducting liabilities
Equity
What are the uses of the balance sheet?
- asses a firms:
liquidity
solvency
ability to make distributions to shareholders - measure the firm’s capital structure
ability to meet short term obligations
liquidity
The capital structure of the firm is the mix of:
Debt and Equity used to finance the firm
The balance sheet is limited in its ability to determine a company’s:
intrinsic/ market value
The balance sheet under current accounting standards is a mixed model
Some assets and liabilities are measured based on historical cost, sometimes with adjustments, whereas other assets and liabilities are measured based on current value
Under IFRS which BS format will be used?
liquidity based format or
classified
Under GAAP which BS format can be used?
Classified
Classified balance sheets separately report:
current vs noncurrent assets & liabilities seperately
Classified balance sheet is used to evaluate a firm’s:
liquidity
A liquidity based BS presentation presents assets & liabilites:
assets and liabilities in order or liquidity
Which BS presentation format is used by banks?
liquidity
Contra account that reduces the balance of accounts receivable:
Allowance for doubtful accounts
The carrying value of inventories under IFRS is?
the lower of:
historical cost or NRV
the carrying value of inventories under GAAP is?
the lower of:
historical cost or market cost
Expenses that have been reported but not yet paid
accrued expenses (liabilities)
arises when money has been collected for goods or services that has not been delivered
Deferred income/unearned revenue
expenses that have been recognized in the income statement, but are not yet due (paid)
Accrued liabilities/expenses
What makes current assets and current liabilities current?
They occur in 1 year or 1 operating cycle, whichever is longer
Too much or too little working capital indicates?
Too much= inefficient use of assets
Too little= liquidity issues
Current assets reveal:
operating activities of firm
non current asset reveal:
investing activities
Non current liabilities reveal:
long term financing activities
financial assets that are traded in a public market and whose value can be readily determined
marketable securities
financial asset, that represents amounts owed to the firm by customers for goods and services, sold on credit
Accounts receivable
Trade receivables are reported at?
NRV
Accounts receivable are reported on balance sheet at:
NRV, less ADA
Measuring inventory costs by assigning predetermined amounts of materials, labor, and overhead to goods produced
Standard costing
Measuring inventory costs by measuring inventory at retail prices and then subtract gross profit in order to determine cost
Retail method
What is reported for notes payables?
principal portion of the debt due within 1 year/1operating cycle
PPE is reported on the balance sheet at:
Amortized cost/NBV/Carrying value
CV= Historical cost- Accumuated Depreciation
Under GAAP which reporting models for PPE are allowed?
cost model only
Under IFRS which reporting models for PPE are allowed?
cost model
revaluation model
Revaluation model allows the asset to be carried at fair value
Under GAAP, land is reported at:
Historical cost
Investment properties are recognized under which accounting principle? Reported at?
IFRS
Cost or Fair value
Under US GAAP, internally created identifiable intangible assets are ?
Expensed as incurred
Not reported on income statement
CFO
Internally generated goodwill
Goodwill is classified as:
long term asset/noncurrent asset
How is Goodwill reported on the balance sheet?
Purchase price - fair market value of the identifiable net assets (assets-liabilities)
Good will should be ____ , but not _____?
tested for impairment, but not amortized
How does the income statement flow to shareholder’s equity?
to shareholders’ equity as part of retained earnings.
Deferred tax liabilities are classified as:
non current liability
How are held for trading liabilities, derivate liabilities, non-derivative liabilities with exposures hedged by derivates measured?
Fair value
non-controlling (minority) interest in consolidated subsidiaries is presented on the balance sheet:
Separately, but a part of shareholder’s equity
The item “retained earnings” is a component of
Shareholder’s equity
Treasury stock is reported on the _, as a _:
- reported on the balance sheet
- reduction to shareholder’s equity
Issue/redemption: CFF
Treasury stock = ?
issued shares - outstanding shares
Shares that have been repurchased and not cancelled by the company that issued them
Treasury stock
portion in consolidated subsidiaries that is owned by others, i.e., shares in subsidiaries not owned by the parent
Non-controlling interest
cumulative amount of earnings recognized on a company’s income statements that have not been distributed as dividends to the company’s owners
retained earnings
Equity interest of of minority shareholders in subsidiaries that have been consolidated
non-controlling interest
Vertical common-size analysis involves stating each balance sheet item as a percentage of total:
assets
Common size balance sheet provides information on the company’s ______?
increase or decrease of financial leverage
An investor worried about a company’s long-term solvency would most likely examine its
debt to equity ratio
Under GAAP, Equipment is measured at?
Historical Cost= Historical cost - accumulated depreciation
Trading securities
BS:
Income Statement:
CF:
BS:
* fair value
Income Statement: (fair value)
* unrealized gains and losses
* realized gains and losses
* interest & dividends
CFO
* purchases & sales
Held to maturity securities
BS:
Income Statement:
CF:
BS:
-amortized cost
Income Statement:
-realized gains/losses
-interest
CFI
Unrealized gains/losses are not reported
Available for sale securities:
BS:
Income Statement:
BS:
-fair value
-unrealized gains/losses
Income Statement:
-realized gains/losses
-interest
-dividends
(OCI- part of stockholder’s equity)
CFI
A company that reports under IFRS has developed a new product which required research costs of $2 million and development costs of $4 million. The maximum amount the company can record as the value of the new product on its balance sheet is?
4 million= 6 million total - 2 million research costs incurred
_____________________________________`
6million total cost
2 million in research (must be expensed as incurred)
4 million in development (capitalized)
Declaring a dividend _____ shareholders’ equity
decreases
Under IFRS, firms may report an investment in the equity securities at fair value through?
IFRS: Income statement or OCI
GAAP: only income statement
Identifiable, intangible assets are measured at?
amortized over their useful lives
Comprehensive income shows:
- Change in:
- From:
- Changes in equity
- From transactions from non-ownership sources
The amount the corporation receives from the issuance of common stock is equal to ?
par value + the additional paid-in-capital (proceeds in excess of par)
stated or nominal value assigned to the common stock
The par value of common stock
measure the firm’s ability to satisfy long-term obligations
solvency ratios
Measures liquidity relative to current liabilities
Liquidity ratios
Securities expected to be sold in the near term
Held for trading (trading securities)
How do you convert an indirect CFS to a direct CFS?
adjusting each income statement account for changes in associated balance sheet accounts
eliminating noncash and nonoperating items (deferred tax asset/liabilites) and income taxes payable
Which items can be classified as either operating or investing activity for IFRS?
interest received
dividends received
Which items can be classified as either operating or financing under IFRS?
Dividends paid
Interest paid
What is the difference between classifying income taxes for GAAP and IFRS?
GAAP: operating activity
IFRS: generally an operating activity, but a portion can be allocated to investing or financing activities if it is specifically identified with those activities
For the direct method of CF, each line item on the _______ is converted into _____ or _____.
income statement
cash receipts
cash payments
Noncurrent assets are classified as?
Investing
Trading securities are classified as?
Operating activities (for both financial and nonfinancial firms)
Payment of dividends are classified as?
financing activity
Obtaining/repaying capital & noncurrent liabilities is which CF?
Financing
Current assets/liabilities is which CF?
Operating
In terms of payment and receival of interest and dividends and taxes, how are they classified?
Interest paid/received= OCF
Dividends received= OCF
Dividends paid= Financing
Taxes paid= OCF
The ____ method provides specific information on the sources of operating cash flows?
direct
Unearned revenue will (increase or decrease) cash collections?
Increase
goods haven’t been transferred, but the cash has
Prepaid expenses are (curren/non current) (assets/liabilities), that will (increase/decrease) cash expenses?
Prepaid expenses are a classfied as an other current asset, because they represent economic resources to be provided to the firm, but have not yet been supplied, but have been paid for resulting in cash outflow
Cash paid to suppliers=?
Purchases - accounts payable
expresses each inflow of cash as a percentage of total cash inflows and each outflow as a percentage of total cash outflows
common-size cash flow statement
measures a firm’s ability to acquire long-term assets with cash flows from operations
The reinvestment ratio
A more comprehensive ratio, that measures the firm’s ability to purchase assets, satisfy debts, and pay dividends.
the Investing and Financing ratio
measures the ability to generate cash from a firm’s operations and is a performance ratio for cash flow analysis purposes
The cash-to-income ratio
measures the firm’s ability to satisfy long-term debt with cash flow from operations but it is more of a coverage ratio than a performance ratio.
The debt payment ratio
Bonds payable is categorized as a CF from?
financing
Gain (losses) are _____ to CFO
subtracted (losses= added)
How do we handle depreciation expenses in cash flows?
for the indirect method, we add it back to net income in CFO
For financial ratio analysis, it has limited use as an analytical tool for?
comparing companies that use different accounting methods
The lack of consistency across companies makes comparability/interpretation difficult to analyze and limits the usefulness of ratio analysis.
Interpreting ratios, for comparing to a benchmark (industry, comparable), we use:
cross sectional (comparing two company’s number at the same point in time)
When interpreting ratios, for comparing to historical performance, we use
time-series (comparing one company’s numbers over a period of time)
Which type of ratio bests measures operating performance?
activity ratios
How efficiently is the company using it’s assets?
activity ratios
An increase in number of days of payable, will have what effect on the cash conversion cycle?
shorten the cash conversion cycle
improving liquidity
In order to assess a company’s ability to fulfill its long-term obligations
solvency
Increasing debt to equity will tell us what about a company’s solvency?
solvency is decreasing- the company is taking on more debt, therefore having more debt to pay off in the long term
Decline in a company’s equity could indicate that the company is:
incurring losses
paying dividends greater than income
repurchasing shares
Is the book value of a company’s equity impacted by the changes in MV of it’s common stock?
No
* Beginning equity + New shares issuance – Shares repurchased + Comprehensive income – Dividends = Ending equity
Creditworthiness is not evaluated based on how much a company has ______ but rather on its willingness and ability to pay its obligations
increased its debt
Current ratio shows a company’s ____?
liquidity; ability to make its short term obligations
Dupont analysis=?
ROA * leverage
net profit margin * asset turnover * leverage ratio
5 point dupont analysis=?
= tax burden * interest burden * EBIT margin* asset turnover (efficiency) * leverage
Common size income statement divides all accounts by?
Total sales
Common size balance sheet divides all account by?
Total assets
A higher quick ratio indicates:
the firm has higher liquidity
When inventory is purchased, what happens to the quick ratio?
Inventory is not included in the quick ratio as an asset, but the cash used to fund the purchase would decrease, thus decreasing the numerator & decreasing the quick ratio
If Current Ratio is > 1, and if CA and CL both fall, the overall ratio will _____.
increase; the numerator decreases by less percentages than the denominator
Diluted EPS is calculated to be the ______ EPS that could have been reported if all dilutive securities were converted.
Lowest possible EPS
Per share valuation ratio?
Earnings per share (EPS)
Per share measures are not comparable amongst firms because why?
the number of shares outstanding (the denominator) differ amongst firms
Dividends are declared on a _____ basis
per common share basis
RE is the earning that are used to _____, rather than ______
grow the firm, rather than be distributed to equity shareholders
The proportion of earnings reinvested
retention rate
Measures how fast a company can grow without additional external equity issues, while holding leverage constant
Sustainable growth rate
Growth in shareholders’ equity, in isolation, will indicate what about profitability?
Nothing; does not provide enough information to assess profitability
Measures the “multiple” that the stock market places on a company’s EPS
P/E ratio
A company must disclose separate information about any operating segment that constitutes 10% or more of the combined operating segments’ _____, _____, _____.
revenue, assets, or operating profit/loss
Forecasts should involve _______. The results of financial analysis are integral to this process, along with ______
a range of possibilities
judgment of the analysts
Shows the range of possible outcomes as specific assumptions are changed
Sensitivity analysis; “what if” analysis
Shows changes in key financial quantities that result from given economic events
Scenario analysis
Computer-generated sensitivity or scenario analysis based on probability models for the factors that drive outcomes
Simulation
Profitability ratios include:
dividing by revenue
return on ratios
Accounting standards require segment for a distinguishable part of a firm that compromises at least:
10%
The dead costs included included in inventories on the balance
product costs
Product costs are _______ in the inventories (asset) account on the _______.
Capitalized
Balance sheet
Absorption costing, which includes costs including labor and overhead are _____ costs, a type of ____ cost.
conversion/manufacturing
product costs (capitalized on balance sheet)
Inventories hit the income statement as ____ when ______.
COGS (expense)
they are sold
Costs that are expensed when they are incurred:
-abnormal waste
-finished goods storage costs
-admin overhead
-selling costs (freight-out)
period costs
costs that do not contribute to getting the good to its final state, ready for sale
Trade discounts are _______ inventory costs (product costs).
subtract from inventory expense
Inventory valuation method that best matches the physical flow of the inventory items because it tracks the actual units that are sold
Specific identification
Which inventory valuation method is best used for inventory items are not interchangeable?
specific identification
Inventory values and COGS are updated continuously
perpetual inventory system
How does the perpetual inventory stem impact the inventory valuation methods?
No Change: FIFO and specific identification
Change: LIFO and weighted average costs
LIFO & FIFO relationships remain
When calculating that current ratio, what impact will the inventory have on the numerator and denominator?
Impacts Numerator: Assets- includes inventory
No impact denominator: accounts payable is to suppliers, not based on inventory accounting
In a period of rising price, LIFO will result in _____ inventory and ____ cost of sales
lower inventory, cheaper inventory is still held
higher COGS because of more expensive current inventory prices
Inventory valuation methods relate to the debt-to-equity ratio through?
Equity: net income and inventory
LIFO liquidation occurs when a firm’s inventories:
Decline
In a period of rising prices, LIFO liquidation results in
Higher earnings
Since older layers of inventory that are liquidated were purchased at lower prices, the cost of goods sold will be lower and earnings will be higher.
Write-downs occur when:
& recorded how
- When: NRV < Inventory value on BS
- Income statement: Reports a Loss (@ NRV) on income statement
- Balance sheet: NRV
Write ups affect the income statement how?
Gain is recognized by reducing the COGS by the recovery amount
Recovery amount= NRV- inventory value
Lower of cost or market methods are used for which inventory valuation methods?
LIFO (GAAP) or retail
The market value can be used when it is in a range of:
NRV - profit margin < Market value < NRV
The effect of an inventory writedown on a firm’s return on assets (ROA) is:
lower ROA; Writing down inventory to net realizable value decreases both net income and total assets in the period of the write-down. Because net income is most likely less than assets, the result in the period is a decrease in ROA.
Using the lower of cost or market principle under U.S. GAAP, if the market value of inventory falls below its historical cost, the minimum value at which the inventory can be reported in the financial statements is the:
When inventory is written down to market, the replacement cost of the inventory is its market value
A U.S. GAAP reporting firm changes its inventory cost flow assumption from average cost to LIFO. The firm must apply this change
prospectively, with the carrying value as the first LIFO layer.
Changing the inventory cost flow assumption to LIFO is an exception to the retrospective application of changes in accounting principle. This change is applied prospectively, with the carrying value of inventory on the date of the change as the first LIFO layer.
When a company wrote down their inventory to NRV in year 1 and then in year 2 inventory increased above NRV, how would firms report under IFRS and GAAP
- IFRS: a firm that has written down inventory to net realizable value may record any subsequent reversal (limited to the original writedown amount) as a gain on the income statement
- U.S. GAAP: reversals of inventory writedowns are not permitted
When the sales growth rate exceeds the finished goods inventory growth rate it indicates that:
effective inventory management
the company is managing to service its increased sales level with a relatively lower level of inventory, indicating effective inventory management
A high inventory turnover ratio is usually:
Desireable; unless the firm is also losing sales which signifies insufficient inventory levels compares to sales growth
Higher inventory turnover = lower days of inventory on hand
Low inventory turnover (high number of days in inventory) may be a sign of:
slow-moving or obsolete inventory
No _____ account is needed for a perpetual system
purchases
Companies can covert _ to _ , but not the other way around.
Which creates the:
LIFO to FIFO
LIFO reserve
Arises when the number of units sold exceeds the number of units purchased or manufactured, so a portion of the older inventory is thus sold off
LIFO Liquidation
older inventory is liquidated; the statement means that units manufactured (or purchased) equaled or exceeded unit sales for each year.
Inventory write downs are permitted under:
IFRS & GAAP, at NRV
When finished goods are increasing faster than both raw materials and work in progress goods, this suggests:
That there is a decline in demand, and a strong likelihood of future write-downs
When a company constructs an asset, borrowing costs incurred directly related to the construction are:
generally capitalized
When a company constructs an asset for sale, the borrowing costs are classified as:
inventory
Borrowing costs can be capitalized under IFRS until the tangible asset:
is ready for use
Capitalizing an asset will have what effect on ROA?
Lower ROA because the denominator (total asset) to be higher to account for the non-current asset on the balance sheet
Firms that capitalize costs can be expected to report: _____ asset levels and _____ equity levels in the early years of the asset’s life
higher
lower
The capitalized cost is recorded as an asset, which is then expensed in the form of depreciation over future years. Spreading the depreciation out over future years causes net income to increase along with retained earnings and equity in the early years of the asset’s life
Research & development are reported on the balance sheet as:
Longlived, intangibles
Expensed:
* GAAP: R&D both expensed (except for software which can be capitalized)
* IFRS: R expensed, D can be capitalized
CFO
Purchased intangible assets, compared to internally created, can be beneficial for financial reporting purposes, due to it’s impact on BS and CF by:
non-current asset
investing cash outflow (instead of OCF which is used in many valuation ratios)
Internally created (R&D) is reported as a OCF outflow, where as if it’s externally generated, it can be Classified as CFI
Balance sheet account that is created when an acquisition’s purchase price exceeds the value of acquired net identifiable assets
Goodwill
Under IFRS & GAAP, if an item is acquired in a business combination and cannot be recognized as a tangible asset or identifiable intangible asset it is:
Income tax expense is recorded on?
Financial reports
Taxes payable is records the value from the?
Tax returns
The taxes a company must pay in the immediate future are
taxes payable
Using the straight-line method of depreciation for reporting purposes and accelerated depreciation for tax purposes would most likely result in a
temporary difference
When accounting standards require an asset to be expensed immediately but tax rules require the item to be capitalized and amortized, the company will most likely record
deferred tax asset
A company incurs a capital expenditure that may be amortized over five years for accounting purposes, but over four years for tax purposes. The company will most likely record
deferred tax liability
the income based upon IRS rules that determines taxes due and is used for tax reporting
taxable income
income tax payable
A temporary difference between pretax income reported in a firm’s financial statements and taxable income the firm reports to the tax authorities results in
deferred tax item
The net taxable loss that can be used to reduce taxable income in the future
tax loss carryforward
Reserve against deferred tax assets based on the likelihood that those assets will not be realized
Valuation allowance
Reflect the difference in tax expense (reporting) and taxes payable (tax return) that are expected to be recovered from future operations
Deferred tax assets
If timing differences that give rise to a deferred tax liability are not expected to reverse, then the deferred tax:
should be considered an increase in equity
US GAAP prohibits the revaluation of _____, which is the source of differences in income tax expense for GAAP and IFRS
PPE
The deferred tax liability should be excluded from both debt and equity when both _____ and _____ resulting from the reversals of temporary differences are uncertain
the amounts and timing of tax payments
Temporary difference between income tax payable & taxes payable:
DTL
Income tax payable > Taxes payable
When DTA > DTL, and the tax rate increases, what happens to income tax expense?
An increase in tax rate will increase both DTAs and DTLs, but since the DTA > DTL the net effect for an increase in tax rate will decrease tax expense
Covenants benefit a bond issuer by:
agreeing to restrict their actions protects the bondholder, and issuer reduces default risk and borrowing costs
Innovative Inventions, Inc. needs to raise €10 million. If the company chooses to issue zero-coupon bonds, its debt-to-equity ratio will most likely
rise as the maturity date approaches
The value of the liability for zero-coupon bonds increases as the discount is amortised over time. Furthermore, the amortised interest will reduce earnings at an increasing rate over time as the value of the liability increases.
A company selecting the fair value option for a liability with a fixed coupon rate will report a _____ when market interest rates decrease
loss
What is the balance sheet value of a bond?
The PV of the bond
Under US GAAP, any unamortized debt issuance costs must be:
Written off at the time of redemption and included in the gain or loss on debt extinguishment
High-quality financial reporting is:
decision useful: relevant, faithful representation
unbiased
quality of reported results are:
sustainable over time
adequate returns
Pertains to the quality of information in the financial reports
quality financial reporting
Low-quality earnings are likely not _____ over time
sustainable
because the company does not expect to generate the same level of earnings in the future or because earnings will not generate sufficient return on investment to sustain the company
Combining the results from two segments is an example of :
biased reporting
Earnings that result from non-recurring activities are _____, which are an example of :
unsustainable
lower-quality earnings
Depreciating equipment over the shortest estimated period of its useful life is a ______ accounting choice.
conservative
that reduces earnings in the early years and increases them in the future, creating a positive trajectory
Deferring research and development (R&D) investments into the next reporting period is an example of _________ by taking a _____ action
earnings management
real
Choices tend to decrease the company’s reported earnings and financial position for the current period
Conservative bias
choices tend to increase reported earnings or improve the financial position for the current period
Aggressive
Earnings smoothing is the understatement of earnings _____
volatility
Earnings smoothing: using _____ bias when company is doing well, and using _____ bias when company is not
conservative
aggressive
making intentional choices or deliberate actions to influence reported earnings and their interpretation
earnings management
The possibility of bond covenant violations may provide __________ to inflate earnings in the reporting period
motivation to managers
An audit is intended to provide assurance that the company’s financial reports are presented:
fairly, thus providing discipline regarding financial reporting quality.
Under GAAP, an impairment loss on inventory that has become obsolete would be considered an:
operating item on the income statement
To assist investors in evaluating operating performance, companies often report non-GAAP earnings by excluding ______.
asset impairment; charges either for long-lived assets, goodwill, or other intangible assets
The SEC prohibits the exclusion of charges or liabilities requiring cash settlement from any non-GAAP liquidity measures other than:
EBIT and EBITDA
If a company uses non-GAAP in SEC, the firm must provide comparable GAAP measure
EBITDA is a _____ financial measure
non-GAAP
The __________ of payments is an example of how choices affect both the balance sheet and income statement.
capitalization
Capitalizing a payment changes the benefit from only the current period—making it an expense—to a benefit in future periods as an asset. The creation of an asset results in a comparable increase in stockholder’s equity
Bias choices must occur _____
in the current period in review
______ accounting, typically avoids a sustainability issue.
Conservative
Meeting or exceeding its own earnings guidance is a possible:
Motivation; for managers to issue low-quality financial reports
If diluted EPS = basic EPS, a firm must report:
Both
If a firm contains any potentially dilutive securities outstanding, they must report both even if equal
Inventories based on FIFO are preferable to those based on LIFO on the:
Balance sheet;
ending inventory reflects current costs
Asset with subsequent depreciation through the income statement:
Capitalization
Capitalizing an asset (vs Expensing) will initially result in:
Higher profitability (Less expenses, increased profits)
After time expensing will show more profit (asset was already expensed)
The cash outflow from capitalizing, is a CFI…. expensing is a cash outflow of CFO
The temporary difference between accounting profit being less than taxable income
DTA
Accounting expense > tax deduction
Deferred tax assets represent taxes that:
- have been paid (because of the higher taxable income)
- but have not yet been recognized on the income statement (because of the lower accounting profit)
What causes a difference in effective tax rate vs statutory?
Permanent differences (not DTA/DTL)
Sources of differences:
different rates for international subsidaries
permanent timing differences
tax rate changes
tax holidays (period where you don’t pay taxes)
deferred tax on overseas and unconsolidated domestic associates
When reporting is not compliant with GAAP, the sustainability and adequacy of reported earnings:
cannot be determined
(not one of the combos of quality of financial reporting and quality of reported earnings, on the spectrum of financial reporting quality
A significant increase in days payables above historical levels is most likely associated with:
Payables being stretched; low quality of the cash flow statement
Payables are not paid or paid more slowly, which increases cash flow in an unsustainable manner
Decreases net working capital
When a bond is issued:
CFF:
* inflow
Balance Sheet:
* Assets: increase by PV of bond
* Liabilities: Bond payable of PV of bond
Capitalized interest costs are reported as:
CFI
Treated as part of the capital asset
Trading securities for investment purposes are recognized in cash flow from:
CFI
Purchase of 30% of the shares of an affiliated company, would be recognized on the cash flow statements as:
CFI outflow
Lower asset turnover signifies:
Better efficiency of a company
Acquiring (external purchase) of intangible assets is classified as:
CFI outflow
Patents
Principal payments on debt or leases are considered:
CFF
(Interest paid/received are CFO)
Available for sale securities are acquired with the intent to:
Collect interest, but sell before maturity
Marketable securities include:
Available for sale
Held to maturity
Horizantal common size statement show each line relative to:
Base year
Long lived assets are reported on the balance sheet at:
NBV (historic cost - accumulated depreciation)
The amount that will be deducted on the tax return in future periods:
Tax Base
When income tax expense > taxes payable:
DTL
When income tax expense < taxes payable
DTA
A decrease in the tax rates decreases:
decreaases both DTA &DTL
When retiring debt, how are the financial reports impacted:
Income statement: Loss
* Bonds payable - retired value
* Issuance costs
Issuance costs are a prepaid asset on BS
GAAP recognizes a long lived asset as impaired when:
Carrying value > Expected Future Cash flows
Under GAAP how is an impairement loss recorded?
Carrying value - Fair Value = Loss
