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Financial Statements > Test 1 > Flashcards

Test 1 Flashcards

1
Q

True or False

A change in accounting estimate must be disclosed as a separate line item, net of tax on the I/S

A

False

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2
Q

True or False

A qualified audit report states that financial statements comply with GAAP

A

False

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3
Q

True or False

Restructuring charges are to be disclosed before income from continuing operations

A

True

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4
Q

True or False

Under GAAP, advertising should be reported as expense when the payment is made

A

False

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5
Q

True or False

Auditors are required to measure and report on quality of earnings

A

False

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6
Q

True or False

Economics recognizes all holding gains and losses, while accounting recognizes only some unrealized and all realized

A

True

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7
Q

True or False
For valuing inventory, “market” under the “lower of cost or market” rule, means replacement cost at the balance sheet due date

A

True

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8
Q

True or False

Accountants compute prior service costs related to a pension plan

A

False

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9
Q

True or False

A credit balance in deferred taxes payable means that the firm has had less GAAP income than taxable income

A

False

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10
Q

True or False

A firm with low earnings quality could report high earnings

A

True

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11
Q

True or False

Morningstar likes to invest in companies with narrow economic moats

A

False

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12
Q

True or False

Goodwill is recognized when a firm pays more than the book value of another company

A

False

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13
Q 
Investor or Creditor
Emphasize earnings and the long term
Emphasizes ST liquidity
Emphasizes quality of earnings
Emphasizes current value of assets
A

Investor
Creditor
Investor
Creditor

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14
Q 
Fundamental or Technical Analysis
Evaluates quality of earnings
Includes use of traditional ratios
Follows price behavior of stock
Used to measure intrinsic value of stock
A

Fundamental
Fundamental
Technical
Fundamental

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15
Q

Pension benefits earned by company employees during the year

A

Service cost

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16
Q

Stefan issues an audit report that states Oakes Co. financial statements do not fairly present the financial position and results of operations. What is this type of opinion?

A

Adverse

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17
Q

Terry is getting his own measure of the current per share value of a company stock. What is the term for that stock

A

Intrinsic value

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18
Q

This type of financial statement analysis allows the comparison of firms of different sizes

A

Common size

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19
Q

This concept related to deferral of taxes believes that only items (difference between tax and GAAP) that will reverse within the near future should be deferred

A

Partial allocation

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20
Q

Positive or Negative effect on EQ
Zhang receive going concern qualification on Wang
Zhang has a restructuring
Isken Co. changes an accounting principle
Diaz and Mrotek Co. uses conservative accounting methods

A

Negative
Negative
Negative
Positive

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21
Q

Myth or Truth
Cash flows are more reliable than accruals
Accrual accounting income is more relevant than cash flow
All accruals accounting adjustments are value irrelevant
Cash flows cannot be manipulated

A

Truth
Truth
Myth
Myth

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22
Q

Event risk for a bank

A

Natural disasters and litigation

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23
Q

What type of trend is longer in duration?

A

Secular

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24
Q

Rolls Royce correlates negatively with

A

Terrorism or terrorist attacks

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25
Q

Biotech or Utility
Higher growth rate
Lower dividend yield

A

Biotech

Biotech

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26
Q

Early, Mid, or Late
Affected least by overall economy
Capital intensive with volatile EPS and CF’s
Manufacturing, industrial and consumer discretionary companies

A

Mid
Early
Early

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27
Q

Depreciation

A

Charges costs to accounting periods

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28
Q

Firm can manage earnings through:

A

Pensions- increase amortization of prior service costs

Leases- financing a lease like a structured lease, when its characteristics are more in line with a capital lease

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29
Q

What is the intrinsic value of a stock and how is it measured?

A

The intrinsic value of a stock is found by taking into account the economy, industry and earnings quality of a company without believing in the current stock price. Measured by adjusting reported earnings, converting them to cash and discounting the cash

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30
Q

Describe how intrinsic value is used in equity analysis

A

Intrinsic value is used to compare to market price of the stock. If intrinsic value is greater than market price, buy. If it is lower than market price, sell

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31
Q

True or False

The purpose of depreciation is to show the current value of tangible assets

A

False

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32
Q

Extraordinary transactions are to be disclosed after “income from continuing operations”

A

True

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33
Q

True or False

Comprehensive income is the accounting’s proxy for economic income

A

True

34
Q

True or False

Cash flows are less relevant than accruals

A

True

35
Q

True or False

Analysts’ forecasts are less relevant than accruals

A

True

36
Q

True or False
The equity method of accounting for investments is to be used when the investing firm has between 20 and 50 percent of the voting stock in the investee company

A

True

37
Q

True or False

A credit balance in deferred taxes payable means that the firm has a liability to the IRS to pay taxes in the future

A

False

38
Q

True or False

Service cost is the pension expense for a given year

A

False

39
Q

Pension benefits earned before pension plan adoption

A

Prior service costs

40
Q

This income figure is a proxy for economic income and includes unrealized gains and losses

A

Permanent

41
Q

This concept of income recognizes all realized and unrealized gains and losses

A

Economic

42
Q

This type of analysis follows stock price behavior to help make decisions on stock investments

A

Technical

43
Q

This type of financial statement examines one firm’s performance over a number of years

A

Trend

44
Q

Four pressures to manage EPS:

A

Hot stock market
Analyst forecast
Management promotion

45
Q

Audit report can be:

A

Clean (fair)
Qualified (except for)
Disclaimer (no opinion)

46
Q

Truth or Myth
Since company value depends on future cash flows, only current cash flows are relevant for valuation
Accrual accounting income is more relevant than cash flow
Cash flows are more reliable than accruals
All cash flows are value relevant
All accrual accounting adjustments are value irrelevant

A 
Myth
Truth
Truth
Myth
Myth
47
Q

Cash flows cannot be manipulated
All income is manipulated
Accrual accounting numbers are subject to accounting distortions
Company value can be determined by using accrual accounting numbers
It is impossible to consistently manage income upward in the long rain

A 
Myth
Myth
Truth
Truth
Myth
48
Q

Economic Income (permanent and operating income)

A

cash flows + present value of expected future cash flows

49
Q

Accounting income

A

Revenue recognition and expense matching

50
Q

Capital Lease Accounting

A

transfer substantially all benefits and risks of ownership

Asset acquisition and a liability incurrence by the lessee and a sale and financing transaction by the lessor

51
Q

Operating Lease Accounting

A

for leases other than capital leases

Lessee (lessor) accounts for the minimum lease payment as a rental expense (income)

52
Q

Off-Balance-Sheet Financing

A

lessee structures a lease so it is accounted for as an operating lease when the economic characteristics of the lease are more in line with a capital lease
(neither the leased asset nor its corresponding liability are recorded on the balance sheet)

53
Q

Effects of Lease Accounting

A

Operating lease understates liabilities, understates assets, delays expense recognition, understates current liabilities by ignoring current portion of lease principal payment, and includes interest with lease rental

54
Q

Example of off-balance-sheet financing

A

Operating leases that are indistinguishable from capital leases

55
Q

Service cost

A

actuarial present value of pension benefit earned by employees

56
Q

Interest cost

A

increase in projected benefit obligation arising when pension payments are one period close to being made

57
Q

Actuarial Gain or Loss

A

change in Pension Benefit Obligation (PBO) that occurs when one or more actuarial assumption are revised in estimating PBO

58
Q

Prior Service Cost

A

effect of changes in pension plan rules on PBO

59
Q

Allocation

A

process of periodically expensing a deferred cost to one or more future expected benefit periods

60
Q

True or False

Recording deferred taxes payable is not an example of off-balance-sheet financing

A

True

61
Q

True or False

Under GAAP, R&D should be recorded as expense when R&D is conducted

A

True

62
Q

True or False

Goodwill is the excess of purchase price over the fair value of assets purchased

A

True

63
Q

True or False

Off-balance-sheet financing and earnings management are against GAAP

A

False

64
Q

True or False

In recent years, improper revenue recognition has been one of the most frequent reasons for restatements of earnings

A

True

65
Q

Valuation of Assets (ACCO vs. ECON)

A

Book value

Fair Value

66
Q

Measurement of Earnings (ACCO vs. ECON)

A

Revenue recognition and expense matching

Cash flows + change in present value of expected future CF’s

67
Q

Utility or Biotech
Higher P/E Ratio
Smaller Growth rate

A

Biotech

Utility

68
Q

Regarding social awareness, Mr. Schwei said this is the most important

A

Empathy

69
Q

He suggested taking more courses in

A

Psychology

70
Q

Repo 105

A

An accounting trick in which a company classifies a short-term loan as a sale and subsequently uses the cash proceeds from said sale to reduce its liabilities.

71
Q

Two causes of stock run up for early dot-com companies

A

New internet technology and people finally understanding how to use it. Also, people being able to create websites at will and people investing in them (Greed)

72
Q

Two causes of the stock crash for dot-com companies

A

Grew too fast and didn’t have capital. There wasn’t a market for these companies

73
Q

Describe the managers of the early dot-com companies

A

Young and very energetic. They believed that they would continue to grow and grow

74
Q

Comprehensive income

A

includes most changes to equity that result from non-owner sources; it is the accountant’s proxy for economic income

75
Q

Solvency

A

the ability to pay liabilities when they mature

76
Q

Earnings quality process (2 steps)

A

Reports “true” EPS

Help predict EPS

77
Q

What are the two largest non-interest expenses of banks?

A

Operational and Capital

78
Q

Two criteria when deciding substance vs. form of a lease agreement

A

Whether there is a transfer of ownership to lessee after the lease has ended
If more than 25% of the economic life of the lease property is in the hands of the lessee

79
Q

Intrinsic Value

A

value of a company determined through fundamental analysis without reference to its market value

80
Q

Measuring Intrinsic Value

A

Report Earnings
Adjust earnings
Convert earnings to Cash
Discount Cash back to present value

Financial Statements (2 decks)

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