SS 10. Financial Report & Analysis: Financial Reporting Quality and Financial Statement Analysis

Question 1

Inventory often requires adjustment with respect to:

Answer 1

Valuation (e.g. LIFO vs FIFO)

Question 2

Companies which have ______ accrual ratios, typically will have a _______ quality of earnings

Answer 2

High, lower

Low, higher

Question 3

The highest quality of earnings reporting features (5):

Answer 3

Completeness

Accuracy

Veracity

Reliability

Sustainable earnings

Question 4

What are the 3 points of the fraud triangle?

Answer 4

1. Incentives / pressure
2. Opportunity
3. Attitudes / rationalisation

Question 5

Evaluating how an equity screen would have performed historically is called:

Answer 5

Backtesting

Question 6

A company posts a non-GAAP financial measure in a filing to the Securities Exchange Commission. The company must:

Answer 6

Provide a reconciliation of the non-GAAP measure to the most directly comparable GAAP measure

Question 7

_______ _________ represents deliberate actions to influence reported earnings and their interpretation.

Answer 7

Earnings management

The distinction between earnings management and biased choices is subtle and, primarily, a matter of intent.

Question 8

Average inventory =

Answer 8

COGS / Inventory turnover

Question 9

Quality Earnings =

Answer 9

Earnings generated by the company’s actual economic activities

Question 10

Goodwill often requires adjustment when:

Answer 10

Comparing price to book value and one company under study does not have goodwill but has grown without making acquisitions

Question 11

Fixed charge coverage ratio is:

Answer 11

(Net Income
\+ Income tax expense
\+ Interest expense
\+ Lease payments)
/
(Interest payments + Lease payments)

Question 12

FIFO inventory =

Answer 12

LIFO inventory + LIFO reserve

Question 13

Under International Financial Reporting Standards (IFRS), the statement of comprehensive income should most appropriately begin with:

Answer 13

the profit or loss from the income statement

Question 14

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 ?

Answer 14

Top down, transitory

Question 15

The average depreciable life of fixed assets =

Answer 15

Ending gross investment
/
Depreciation expense

Question 16

An increase in the inventory turnover ratio and LIFO liquidation should alert an analyst that the company may have done what?

Answer 16

Understated expenses

Question 17

If an accounting choice is considered conservative in nature, the financial performance for the current period would most likely exhibit:

Answer 17

A downward bias

Question 18

Historical information on operating profit margins can provide a useful starting point for forecasting future operating profits except where (3):

Answer 18

1. The company is very new
2. The business is volatile
3. The business has significant fixed costs

Question 19

List 4 ways companies can manipulate their cash flow:

Answer 19

Repurchasing company stock to offset dilution of earnings from option exercise

Refinancing of payables

Delaying payments to suppliers

Securitization of receivables

Question 20

Overloading a distribution

channel with more goods than would normally be sold during a period is referred to as:

Answer 20

Channel Stuffing

Question 21

In order to calculate approximately how many years of useful life remain for a company’s overall asset base, you would:

Answer 21

Divide net PPE by depreciation expense

Question 22

____ and _____ cash flows are usually more prone to manipulation than ______ cash flows

Answer 22

Investing and financing

Operating

Question 23

List the 4 major areas where financial ratios are used:

Answer 23

1. Stock valuation
2. Identification of internal corporate variables that affect a stock’s systematic risk (beta)
3. Assigning credit quality ratings on bonds
4. Predicting insolvency (bankruptcy) of firms

Question 24

PP and E often requires adjustment with respect to:

Answer 24

Different depreciation choices

Question 25

List 5 examples of aggressive revenue recognition techniques:

Answer 25

Bill-and-hold sales arrangements

Sales-type leases

Recording revenues before fulfilling the terms of contracts

Recording revenue when a contract is signed but before delivery of the goods or services

Using swaps or barter arrangements to generate sales

Question 26

OCI stands for:

Answer 26

Other Comprehensive Income

Question 27

According to the International Accounting Standards Board’s (IASB) Conceptual Framework for Financial Reporting, the two fundamental qualitative characteristics that make financial information useful are best described as:

Answer 27

Relevance and faithful representation