SS 10. Financial Report & Analysis: Financial Reporting Quality and Financial Statement Analysis Flashcards
Inventory often requires adjustment with respect to:
Valuation (e.g. LIFO vs FIFO)
Companies which have ______ accrual ratios, typically will have a _______ quality of earnings
High, lower
Low, higher
The highest quality of earnings reporting features (5):
Completeness
Accuracy
Veracity
Reliability
Sustainable earnings
What are the 3 points of the fraud triangle?
- Incentives / pressure
- Opportunity
- Attitudes / rationalisation
Evaluating how an equity screen would have performed historically is called:
Backtesting
A company posts a non-GAAP financial measure in a filing to the Securities Exchange Commission. The company must:
Provide a reconciliation of the non-GAAP measure to the most directly comparable GAAP measure
_______ _________ represents deliberate actions to influence reported earnings and their interpretation.
Earnings management
The distinction between earnings management and biased choices is subtle and, primarily, a matter of intent.
Average inventory =
COGS / Inventory turnover
Quality Earnings =
Earnings generated by the company’s actual economic activities
Goodwill often requires adjustment when:
Comparing price to book value and one company under study does not have goodwill but has grown without making acquisitions
Fixed charge coverage ratio is:
(Net Income \+ Income tax expense \+ Interest expense \+ Lease payments) / (Interest payments + Lease payments)
FIFO inventory =
LIFO inventory + LIFO reserve
Under International Financial Reporting Standards (IFRS), the statement of comprehensive income should most appropriately begin with:
the profit or loss from the income statement
Different methods may be used to project different accounting metrics. Projections of sales are often done on which basis, and projections of profits try to remove which items ?
Top down, transitory
The average depreciable life of fixed assets =
Ending gross investment
/
Depreciation expense
An increase in the inventory turnover ratio and LIFO liquidation should alert an analyst that the company may have done what?
Understated expenses
If an accounting choice is considered conservative in nature, the financial performance for the current period would most likely exhibit:
A downward bias
Historical information on operating profit margins can provide a useful starting point for forecasting future operating profits except where (3):
- The company is very new
- The business is volatile
- The business has significant fixed costs
List 4 ways companies can manipulate their cash flow:
Repurchasing company stock to offset dilution of earnings from option exercise
Refinancing of payables
Delaying payments to suppliers
Securitization of receivables
Overloading a distribution
channel with more goods than would normally be sold during a period is referred to as:
Channel Stuffing
In order to calculate approximately how many years of useful life remain for a company’s overall asset base, you would:
Divide net PPE by depreciation expense
____ and _____ cash flows are usually more prone to manipulation than ______ cash flows
Investing and financing
Operating
List the 4 major areas where financial ratios are used:
- Stock valuation
- Identification of internal corporate variables that affect a stock’s systematic risk (beta)
- Assigning credit quality ratings on bonds
- Predicting insolvency (bankruptcy) of firms
PP and E often requires adjustment with respect to:
Different depreciation choices
