FSA Flashcards
What is an 8-K Filing?
SEC-required filings include Form 8-K, which a company must file to report events, such as acquisitions and disposals of major assets or changes in its management or corporate governance.
What’s the difference between a Form 10-K and a Form 10-Q?
Companies’ annual and quarterly financial statements are also filed with the SEC (Form 10-K and Form 10-Q, respectively).
Compare a qualified opinion vs an unqualified opinion?
An unqualified opinion (also known as an unmodified opinion or clean opinion) indicates that the auditor believes the statements are free from material omissions and errors. If the statements make any exceptions to the accounting principles, the auditor may issue a qualified opinion and explain these exceptions in the audit report
What’s an adverse opinion?
The auditor can issue an adverse opinion if the statements are not presented fairly or are materially nonconforming with accounting standards.
What does the Sarbanes-Oxley Act require?
Management is required to provide a report on the company’s internal control system.
US GAAP and IFSR were developed by…
US GAAP- FASB
IFRS- IASB
US GAAP and IFSR are based on rules or principles?
US GAAP- Rules
IFRS - Principles
Which inventory valuation styles are permitted under IFRS vs US GAAP?
US GAAP- FIFO, LIFO and Weighted Average permitted
IFRS- LIFO prohibited
Do product development costs get expensed or capitalised under US GAAP & IFRS? How about research?
US GAAP - Expensed
IFRS - May be capitalised
Both expense research as incurred
Is interest paid CFO CFI or CFF under US GAAP and IFRS?
US GAAP - CFO
IFRS - CFO or CFF (but dividends received can be CFO or CFI)
Are reversals of inventory write-downs permitted under US GAAP and IFRS?
US GAAP- Prohibited
IFRS- Allowed
When should a firm recognise revenue under US GAAP vs IFRS?
When the good/service has been transferred to the customer
When should expenses be recognised under US GAAP and IFRS?
Expense recognition is based on the matching principle, whereby expenses for producing goods and services are recognized in the period in which the revenue for the goods and services is recognized.
When do non-revenue costs (ie admin) get recognised?
Expenses that are not tied directly to generating revenue, such as administrative costs, are called period costs and are expensed in the period incurred.
What’s the difference between retrospective and prospective application of accounting changes?
With retrospective application, any prior-period financial statements presented in a firm’s current financial statements must be restated, applying the new policy to those statements as well as future statements. Retrospective application enhances the comparability of the financial statements over time. With prospective application, prior statements are not restated, and the new policies are applied only to future financial statements.
Do changes in accounting policy require retrospective or prospective application?
Retrospective unless impractical
What is the usual cause of a change in accounting estimate? Are these usually applied retrospectively or propspectively?
A result in the change of manager’s judgement, usually due to new information (ie length of product life). these are usually applied propospectively
What’s a prior period adjustment, and does it require retrospective or prospective application?
A change from an incorrect accounting method to one that is acceptable under GAAP or IFRS is required. A correction of an accounting error is reported as a prior-period adjustment and requires retrospective application
Common size income statements express each category on the income statement as a % of…. What are these good for?
Revenue and this format is useful for time-series and cross-sectional analysis and facilitates the comparison of firms of different sizes.
Gross Profit Margin =?
Gross Profit Margin = Gross Profit/ Revenue
Net Profit Margin =?
Net Profit Margin = Net Income/Revenue
Operating Profit Margin =?
Operating Profit Margin = Operating Profit/Revenue
Pretax Margin =?
Pretax Margin = Pretax Accounting Profit/Revenue
What do Margin Ratios examine?
Margin ratios examine how well management has done at generating profits from sales. The different ratios are designed to isolate specific costs. Generally, higher margin ratios are desirable.
What is Goodwill? Does it get amortised? Why is this significant?
- Goodwill is an unidentifiable intangible asset created when a business is purchased for more than the fair value of its assets, net of liabilities.
- Goodwill is not amortized, but it must be tested for impairment (a decrease in its fair value) at least annually.
- Because goodwill is not amortized, firms can manipulate net income upward by allocating more of the acquisition price to goodwill and less to the identifiable assets. The result is less depreciation and amortization expense—and thus, higher net income.
What’s the difference between economic and accounting goodwill?
Economic goodwill derives from the expected future performance of the firm, while accounting goodwill is the result of past acquisitions.
How are debt securities for which fair value be reliably determined measured under IFRS and US GAAP?
At (amortised) historical cost under both
Under IFRS and US GAAP how are debt securities for which a firm intends to collect interest payments but may sell before maturity measured?
IFRS - Fair Value through OCI (other comprehensive income)
US GAAP - Classified as available for sale
Under IFRS and US GAAP how are equity securities, derivatives, and other financial assets that do not fit either of the other two classifications measured?
IFRS- Fair Value through Profit and Loss or Fair Value through OCI (but this is an irrecovable choice)
US GAAP - Classified as Trading Securities
What does a common-size vertical balance sheet each item as a % of? how is this useful?
A vertical common-size balance sheet expresses each item of the balance sheet as a percentage of total assets and allows the analyst to evaluate the balance sheet changes over time (time-series analysis) as well as to compare the balance sheets with other firms, industry, and sector data (cross-sectional analysis).
What’s the difference between a liquidity and a solvency ratio?
- Liquidity ratios measure the firm’s ability to satisfy short-term obligations when due.
- Solvency ratios measure a firm’s ability to satisfy long-term obligations
Current Ratio = ?
Current Ratio = Current Assets/Current Liabilities
Quick Ratio =
Quick Ratio = (Cash + Marketable Securities + Receivables)/Current Liabilities
Cash Ratio = ?
Cash Ratio = (Cash + Marketable Securities)/Current Liabilities
Long term debt-to-equity ratio =?
Long-term debt-to-equity = Total Long-Term Debt/Total Equity
Debt-to-equity ratio =
Total Debt/Total Equity
Total Debt Ratio =?
Total Debt/Total Assets
Financial Leverage Ratio =?
Total Assets/Total Equity
Using the indirect method, how is operating cash flow calculated?
- Begin with Net Income
- Add back all non cash charges (depreciation and amortisation)
- Subtract all non cash components of revenue
- Subtract gains or add losses from CFI and CFF (ie gains of land sales)
- Adjust for working capital by adding or subtracting changes to balance sheet operating accounts
How is FCFF calculated from net income?
FCFF = NI + Non-Cash Charges + (Cash Interest Paid x (1-Tax rate)) - Fixed Capital Investment - Working Capital Investment
How is FCFF calculated from operating cash flow?
FCFF = CFO + [cash interest paid × (1 − tax rate)] − fixed capital investment
FCFE =?
FCFE = CFO – fixed capital investment + net borrowing
Cash flow to Revenue = ?
CFO/Net Revenue
Cash Return on Assets = ?
CFO/ Average Total Assets
Debt Coverage Ratio =?
CFO/Total Debt
Interest Coverage Ratio = ?
What does it measure?
(CFO + Interest Paid + Taxes Paid)/Interest Paid
The interest coverage ratio measures the firm’s ability to meet its interest obligations.
Under IFRS, how is inventory reported on the balance sheet? Are inventory write ups allowed
Under IFRS, inventory is reported on the balance sheet at the lower of cost or net realizable value, which is expected sales price less selling costs and completion costs. Inventory write-ups are allowed
Under U.S. GAAP, companies that use LIFO or the retail method value inventories how?
At the lower of cost or market
What’s a LIFO liquidation/
When firms using LIFO begin to run out of inventory, so use older stuff (with lower COGS) making net income seem higher than it should be- ie this is unsustainable
Give the two ways in which developing costs are capitalised under US GAAP?
Software for sale to others
Software for internal use
When is an asset impaired?
An asset is impaired when its carrying value (original cost less accumulated depreciation) exceeds the recoverable amount. The recoverable amount is the greater of its fair value less any selling costs and its value in use. The value in use is the present value of its future cash flow stream from continued use and disposal.
Where is an impairment loss recognised?
In the income statement
Avaergae age =?
Average Age = Accumulated Depreciation/Annual Depreciation Expense
Total Useful Life =?
Total Useful Life = Historical Cost (gross cost)/Annual Depreciation Expense
Remaining Useful Life =?
Remaining Useful Life = Ending net PP&E/Annual Depreciation Expense
Income Tax Expense = ?
Income tax expense = taxes payable + ΔDTL – ΔDTA
Receivables Turnover =?
Receivables Turnover = Annual sales/Average Receivables
Inventory Turnover =?
Inventory Turnover = COGS/Average Inventory
Payables Turnover Ratio =
Payables Turnover Ratio = COGS/Average Trade Payables
Days of Sales Outstanding =?
Days of Sales Outstanding =365/Receivables Turnover
Days of Inventory on Hand = ?
Days of Inventory on Hand = 365/Inventory Turnover
Number of Days of Payables =?
Number of Days of Payables = 365/Payables Turnover Ratio
Cash Conversion Cycle =?
CCC= DSO + DOH - Number Days Payables
Total Asset Turnover =?
Total Asset Turnover = Revenue /Average Total Assets
Fixed Asset Turnover = ?
Fixed Asset Turnover = Revenue / Average Net Fixed Assets
Working Capital Turnover =?
Working Capital Turnover = Revenue/Average Working Capital
Return on Invested Capital =?
Return on Invested Capital = EBIT/Average Total Capital
