Session 5 - Financial Reporting

Question 1

COGS

Answer 1

Beg. inventory + purchases - end inventory

Question 2

LIFO Reserve

Answer 2

FIFO inventory -LIFO inventory

Question 3

Convert LIFO COGS to FIFO COGS

Answer 3

LIFO COGS - (end LIFO reserve - beg. LIFO reserve)

Question 4

Inventory Turnover

Answer 4

COGS / Average Inventory

Question 5

Interest Coverage Ratio

Answer 5

EBIT / Interest expense

Measures a firm’s ability to make required interest payments on its debt

Question 6

Average Asset Age

Answer 6

accumulated depreciation / annual depreciation expense

Question 7

Average Depreciable Life

Answer 7

ending gross investment / annual depreciation expense

Question 8

Remaining Useful Life

Answer 8

ending net investment / annual depreciation expense

Question 9

Gross Investment

Answer 9

The original cost of the asset. Gross investment is before deducting accumulated depreciation.

Question 10

Net Investment

Answer 10

Equal to the original cost (gross investment) minus accumulated depreciation.

Question 11

Finance (Capital) Lease

Answer 11

Purchase of an asset that is financed w/ debt.

• recognize asset and liab. on BS at inception
• over time, recognize depreciation expense on the asset and interest expense of the liability.

Question 12

Operating Lease

Answer 12

Essentially a rental agreement.

• no asset or liability (“off BS”)
• periodic lease payments are recognized as rental expense in the IS.

Question 13

GAAP Criteria for Capital Lease

Answer 13

Any of the following…

1. title of asset transferred at end of lease
2. bargain purchase option
3. lease period is 75% or more of asset’s life
4. the PV of the lease payments is 90% or more of the fair value of the leased asset

Question 14

Current Rate

Answer 14

The FX rate on the BS date

Question 15

Average Rate

Answer 15

The average FX rate over the reporting period

Question 16

Historical Rate

Answer 16

The actual rate that was in effect when the original transaction occurred.

Question 17

Applying the Current Rate Method

Answer 17

• All IS items are translated at the average rate.
• All BS accounts are translated at the current rate except for common stock, which is translated at the historical rate that applied at issue.
• Dividends are translated @ rate when they were paid
• Translation G/L reported in SE as part of CTA.

Question 18

Applying the Temporal Method

Answer 18

• Monetary A/L at current FX rate
• Non-monetary A/L and expenses at historical rate
• Common stock translated at the historical rate that applied at issue
• Revenues & monetary expenses at average rate
• Re-measurement G/L recognized in IS. This results in more volatile NI

Question 19

Balance Sheet Accruals Ratio

Answer 19

(NOAend - NOAbegin) / [(NOAend + NOAbegin)/2]

*The lower the ratio, the higher the earnings quality

Question 20

Cash Flow Accruals Ratio

Answer 20

(NI - CFO - CFI) / [(NOAend + NOAbegin)/2]

*The lower the ratio, the higher the earnings quality

Question 21

ROE (Extended Dupont)

Answer 21

(tax burden)(interest burden)(EBIT margin)(total asset turnover)(financial leverage)

Question 22

1. Tax Burden and 2. Interest Burden

Answer 22

1. NI/EBT

2. EBT/EBIT

Question 23

EBIT Margin

Answer 23

EBIT / revenue

Question 24

Total Asset Turnover

Answer 24

Revenue / average assets

Question 25

Financial Leverage

Answer 25

Average assets / average equity

Question 26

LIFO to FIFO Impact on Equity

Answer 26

= LIFO Reserve x (1- tax rate)

Question 27

LIFO to FIFO Impact on Liabilities (deferred taxes)

Answer 27

= LIFO Reserve x (tax rate)

Question 28

LIFO to FIFO Impact on Assets (Inventory)

Answer 28

LIFO Reserve

Question 29

Net Operating Assets

Answer 29

(Total assets - Cash and short-term investments) - (liabilities - total debt)