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CFA Level I > FRA (II) (III) (IV) > Flashcards

FRA (II) (III) (IV) Flashcards

1
Q

Income statement equation

A

revenues- expense = net income

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2
Q

Expenses are grouped together by :

A

Nature: depreciation expenses
Function: COGS

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3
Q

For nonfinancial firms, EBIT (operating profit) does not include:

A

financing costs

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4
Q

When a firm has ______ in a subsidiary, the statements of the two firms are consolidated

A

controlling interest

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5
Q

The share of a subsidiary’s income that a firm does not own is reported in the firms income statement as:

A

Non-controlling interest/minority owner’s interest

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6
Q

Revenue is recognized when:

A

goods are transferred to the buyer

Revenue recognition

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7
Q

The central principle of the converged standards for revenue recognition for IASB and FASB is?

A

revenue is recognized when the firm has transferred a good or service to the customer

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8
Q

How is revenue recognized for long term projects?

A

based on the firm’s progress towards completion of performance obligation (contract)

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9
Q

All revenues are grouped together and all expenses are grouped together in this presentation format

A

single step

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10
Q

Income Statement presentation includes subtotals like gross profit and operating profit

A

multi-step

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11
Q

Expense recognition is based on the matching principle:

A

accrual basis of accounting

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12
Q

Matching principle: expenses for producing goods and services are recognized ______

A

in the period in which the revenue is recognized (when the goods have been transferred)

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13
Q

expenses that are not directly tied to generating revenue, like administrative costs,

A

period costs

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14
Q

period costs are expensed when?

A

the period they occur

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15
Q

If a firms sells good on credit or provides warranty to the customer, the matching principle requires the firm to ______________

A

establish a BDE or warranty expense

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16
Q

The dpreciation method that is more appropriate for matching revenues & expenses:

A

Accelerated; DDB

Assets generate more benefit in the early year of their lives

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17
Q

Straight line method results in:

A

lower depreciation expense;
higher net income

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18
Q

DDB depreciation stops once:

A

The residual value has been reached

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19
Q

LIFO is popular because it results in ____ COGS, in an ____ environment, creating ____ benefits

A

higher
inflationary
income tax

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20
Q

which inventory method is not permitted under IFRS?

A

LIFO

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21
Q

If PPE is impaired, what is the impact?

A

Income Staement: Expense is recognized equal to the impairement, reducing NI
Balance Sheet: lower NI reduces RE
CF: no affect
PPE value: reduced

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22
Q

Compared to financial servcies companies:

For nonfinancial firms, operating activties do not include:

A
  • Investing income
  • Financing expenses (interest)

Non-operating income

Includes: Interest, dividends, gains/losses on disposals

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23
Q

Interest, dividends, gains/losses for financial firms are considered :

A

operating transactions

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24
Q

Discontinued operations must be:

A

physically & operationally distinct from the firm

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25
Q

How are discontinued operations reported on the income statement?

A

Reported separately after
net income from continuing operations

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26
Q

Unusual or infrequent items are included in:

A

income from continuing operations

(gains/losses)

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27
Q

Gains or losses from the sale of assets or part of the business is an example of?

A

unusual/infrequent items

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28
Q

Impairements, write-offs/downs, restructuring costs are examples of?

A

unusual/infrequent items

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29
Q

Any prior period financial statements presented in a firm’s current financial statements must be restated

A

retrospective application

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30
Q

Changes in accounting policies require:

A

retrospective application of all shown in a financial report

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31
Q

does not require prior period restatement, However, beginning values of affected accounts are adjusted for the cumulative effects of the change

A

modified retrospective application

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32
Q

Changes in accounting estimates are applied:

A

Prospectively

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33
Q

Prior period adjustments are applied:

A

retrospective

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34
Q

EPS is only reported for ______

A

shares of common stock

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35
Q

EPS measures:

A

Profitability

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36
Q

Simple capital structure contains:

A

no dilutive securities

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37
Q

Complex capital structure contains:

A

dilutive securities

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38
Q

stock options, warrants, convertible securities are examples of?

A

dilutive securities

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39
Q

Dilutive securities ____ EPS, resulting in:
Diluted EPS _ Basic EPS, and we report:

A

Decrease;
Diluted < Basic;
Report Diluted

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40
Q

Anti-Dilutive securities ____ EPS; resulting in
Diluted EPS _ Basic EPS, and we report:

A

Increase EPS;
Diluted > Basic;
Report Basic EPS that is equal to reported diluted EPS

Antidilutive securities are removed from the diluted EPS calculation, and will cause basic = diluted

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41
Q

Ending value of an asset; salvage value

A

residual value

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42
Q

treasury stock method assumes: that the funds received by the company from the exercise of the options would be used to:

A

purchase shares of CS at the average market price

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43
Q

Vertical common sized income statements: express each category of the income statement as a percentage of:

A

revenue

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44
Q

common size IS allows for comparison over time in:

A

time-series analysis

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45
Q

common size IS allows for comparison amongst firms in:

A

cross-sectional analysis

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46
Q

Used to measure a firm’s profitability quickly

A

gross profit margin

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47
Q

High profit margins can be achieved by?

A

product differentiation

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48
Q

Comprehensive income includes all transactions that affect shareholder’s equity, except for:

A

transactions with shareholders

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49
Q

Net income + OCI =

A

Comprehensive Income

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50
Q

OCI shows changes in equity from transactions from:

A

Non-ownership sources:
* unrealized gains/losses
* foreign currency transalation

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51
Q
  • gains and losses on foreign currency translation
  • Adjustments for minimuim pension liability (remeasurement)
  • Unrealized gains and losses from cash flow of hedging derivatives
  • Unrealized gains and losses from available for sale securities
  • Unrealized gains and losses on held to maturity securities
A

OCI

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52
Q

Transactions with shareholders that are not included on the IS:

A

dividends paid
shares issued or repurchased

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53
Q

IFRS equivalent for trading securities

A

measured at fair value through P/L

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54
Q

IFRS equivalent for available for sale securities

A

Measured at fair value through OCI

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55
Q

IFRS equivalent for held to maturity securities

A

measured at amortized cost

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56
Q

Net revenue =

A

Revenue - returns/allowances

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57
Q

how do you handle stock splits when calculating the weighted average shares outstanding in EPS?

A

no matter when it was issued, you restate the beginning of the year shares with this split
(for stock dividends too)

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58
Q

What is the relationship between contracts & performance obligations?

A

The contract outlines what the performance obligation will be, which is the promise to transfer a distinct good or service

According to the Standards of Revenue Recognition

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59
Q

The owner’s residual interest in the firm, after deducting liabilities

A

Equity

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60
Q

What are the uses of the balance sheet?

A
  1. asses a firms:
    liquidity
    solvency
    ability to make distributions to shareholders
  2. measure the firm’s capital structure
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61
Q

ability to meet short term obligations

A

liquidity

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62
Q

The capital structure of the firm is the mix of:

A

Debt and Equity used to finance the firm

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63
Q

The balance sheet is limited in its ability to determine a company’s:

A

intrinsic/ market value

The balance sheet under current accounting standards is a mixed model

Some assets and liabilities are measured based on historical cost, sometimes with adjustments, whereas other assets and liabilities are measured based on current value

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64
Q

Under IFRS which BS format will be used?

A

liquidity based format or
classified

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65
Q

Under GAAP which BS format can be used?

A

Classified

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66
Q

Classified balance sheets separately report:

A

current vs noncurrent assets & liabilities seperately

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67
Q

Classified balance sheet is used to evaluate a firm’s:

A

liquidity

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68
Q

A liquidity based BS presentation presents assets & liabilites:

A

assets and liabilities in order or liquidity

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69
Q

Which BS presentation format is used by banks?

A

liquidity

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70
Q

Contra account that reduces the balance of accounts receivable:

A

Allowance for doubtful accounts

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71
Q

The carrying value of inventories under IFRS is?

A

the lower of:
historical cost or NRV

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72
Q

the carrying value of inventories under GAAP is?

A

the lower of:
historical cost or market cost

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73
Q

Expenses that have been reported but not yet paid

A

accrued expenses (liabilities)

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74
Q

arises when money has been collected for goods or services that has not been delivered

A

Deferred income/unearned revenue

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75
Q

expenses that have been recognized in the income statement, but are not yet due (paid)

A

Accrued liabilities/expenses

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76
Q

What makes current assets and current liabilities current?

A

They occur in 1 year or 1 operating cycle, whichever is longer

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77
Q

Too much or too little working capital indicates?

A

 Too much= inefficient use of assets
 Too little= liquidity issues

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78
Q

Current assets reveal:

A

operating activities of firm

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79
Q

non current asset reveal:

A

investing activities

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80
Q

Non current liabilities reveal:

A

long term financing activities

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81
Q

financial assets that are traded in a public market and whose value can be readily determined

A

marketable securities

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82
Q

financial asset, that represents amounts owed to the firm by customers for goods and services, sold on credit

A

Accounts receivable

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83
Q

Trade receivables are reported at?

A

NRV

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84
Q

Accounts receivable are reported on balance sheet at:

A

NRV, less ADA

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85
Q

Measuring inventory costs by assigning predetermined amounts of materials, labor, and overhead to goods produced

A

Standard costing

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86
Q

Measuring inventory costs by measuring inventory at retail prices and then subtract gross profit in order to determine cost

A

Retail method

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87
Q

What is reported for notes payables?

A

principal portion of the debt due within 1 year/1operating cycle

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88
Q

PPE is reported on the balance sheet at:

A

Amortized cost/NBV/Carrying value

CV= Historical cost- Accumuated Depreciation

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89
Q

Under GAAP which reporting models for PPE are allowed?

A

cost model only

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90
Q

Under IFRS which reporting models for PPE are allowed?

A

cost model
revaluation model

Revaluation model allows the asset to be carried at fair value

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91
Q

Under GAAP, land is reported at:

A

Historical cost

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92
Q

Investment properties are recognized under which accounting principle? Reported at?

A

IFRS
Cost or Fair value

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93
Q

Under US GAAP, internally created identifiable intangible assets are ?

A

Expensed as incurred
Not reported on income statement
CFO

Internally generated goodwill

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94
Q

Goodwill is classified as:

A

long term asset/noncurrent asset

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95
Q

How is Goodwill reported on the balance sheet?

A

Purchase price - fair market value of the identifiable net assets (assets-liabilities)

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96
Q

Good will should be ____ , but not _____?

A

tested for impairment, but not amortized

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97
Q

How does the income statement flow to shareholder’s equity?

A

to shareholders’ equity as part of retained earnings.

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98
Q

Deferred tax liabilities are classified as:

A

non current liability

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99
Q

How are held for trading liabilities, derivate liabilities, non-derivative liabilities with exposures hedged by derivates measured?

A

Fair value

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100
Q

non-controlling (minority) interest in consolidated subsidiaries is presented on the balance sheet:

A

Separately, but a part of shareholder’s equity

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101
Q

The item “retained earnings” is a component of

A

Shareholder’s equity

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102
Q

Treasury stock is reported on the _, as a _:

A
  • reported on the balance sheet
  • reduction to shareholder’s equity

Issue/redemption: CFF

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103
Q

Treasury stock = ?

A

issued shares - outstanding shares

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104
Q

Shares that have been repurchased and not cancelled by the company that issued them

A

Treasury stock

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105
Q

portion in consolidated subsidiaries that is owned by others, i.e., shares in subsidiaries not owned by the parent

A

Non-controlling interest

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106
Q

cumulative amount of earnings recognized on a company’s income statements that have not been distributed as dividends to the company’s owners

A

retained earnings

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107
Q

Equity interest of of minority shareholders in subsidiaries that have been consolidated

A

non-controlling interest

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108
Q

Vertical common-size analysis involves stating each balance sheet item as a percentage of total:

A

assets

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109
Q

Common size balance sheet provides information on the company’s ______?

A

increase or decrease of financial leverage

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110
Q

An investor worried about a company’s long-term solvency would most likely examine its

A

debt to equity ratio

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111
Q

Under GAAP, Equipment is measured at?

A

Historical Cost= Historical cost - accumulated depreciation

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112
Q

Trading securities
BS:
Income Statement:
CF:

A

BS:
* fair value

Income Statement: (fair value)
* unrealized gains and losses
* realized gains and losses
* interest & dividends

CFO
* purchases & sales

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113
Q

Held to maturity securities
BS:
Income Statement:
CF:

A

BS:
-amortized cost

Income Statement:
-realized gains/losses
-interest

CFI

Unrealized gains/losses are not reported

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114
Q

Available for sale securities:
BS:
Income Statement:

A

BS:
-fair value
-unrealized gains/losses

Income Statement:
-realized gains/losses
-interest
-dividends
(OCI- part of stockholder’s equity)

CFI

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115
Q

A company that reports under IFRS has developed a new product which required research costs of $2 million and development costs of $4 million. The maximum amount the company can record as the value of the new product on its balance sheet is?

A

4 million= 6 million total - 2 million research costs incurred
_____________________________________`
6million total cost
2 million in research (must be expensed as incurred)
4 million in development (capitalized)

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116
Q

Declaring a dividend _____ shareholders’ equity

A

decreases

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Not at all
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3
4
5
Perfectly
117
Q

Under IFRS, firms may report an investment in the equity securities at fair value through?

A

IFRS: Income statement or OCI
GAAP: only income statement

118
Q

Identifiable, intangible assets are measured at?

A

amortized over their useful lives

119
Q

Comprehensive income shows:

  • Change in:
  • From:
A
  • Changes in equity
  • From transactions from non-ownership sources
120
Q

The amount the corporation receives from the issuance of common stock is equal to ?

A

par value + the additional paid-in-capital (proceeds in excess of par)

121
Q

stated or nominal value assigned to the common stock

A

The par value of common stock

122
Q

measure the firm’s ability to satisfy long-term obligations

A

solvency ratios

123
Q

Measures liquidity relative to current liabilities

A

Liquidity ratios

124
Q

Securities expected to be sold in the near term

A

Held for trading (trading securities)

125
Q

How do you convert an indirect CFS to a direct CFS?

A

adjusting each income statement account for changes in associated balance sheet accounts
eliminating noncash and nonoperating items (deferred tax asset/liabilites) and income taxes payable

126
Q

Which items can be classified as either operating or investing activity for IFRS?

A

interest received
dividends received

127
Q

Which items can be classified as either operating or financing under IFRS?

A

Dividends paid
Interest paid

128
Q

What is the difference between classifying income taxes for GAAP and IFRS?

A

GAAP: operating activity
IFRS: generally an operating activity, but a portion can be allocated to investing or financing activities if it is specifically identified with those activities

129
Q

For the direct method of CF, each line item on the _______ is converted into _____ or _____.

A

income statement
cash receipts
cash payments

130
Q

Noncurrent assets are classified as?

A

Investing

131
Q

Trading securities are classified as?

A

Operating activities (for both financial and nonfinancial firms)

132
Q

Payment of dividends are classified as?

A

financing activity

133
Q

Obtaining/repaying capital & noncurrent liabilities is which CF?

A

Financing

134
Q

Current assets/liabilities is which CF?

A

Operating

135
Q

In terms of payment and receival of interest and dividends and taxes, how are they classified?

A

Interest paid/received= OCF
Dividends received= OCF
Dividends paid= Financing
Taxes paid= OCF

136
Q

The ____ method provides specific information on the sources of operating cash flows?

A

direct

137
Q

Unearned revenue will (increase or decrease) cash collections?

A

Increase
goods haven’t been transferred, but the cash has

138
Q

Prepaid expenses are (curren/non current) (assets/liabilities), that will (increase/decrease) cash expenses?

A

Prepaid expenses are a classfied as an other current asset, because they represent economic resources to be provided to the firm, but have not yet been supplied, but have been paid for resulting in cash outflow

139
Q

Cash paid to suppliers=?

A

Purchases - accounts payable

140
Q

expresses each inflow of cash as a percentage of total cash inflows and each outflow as a percentage of total cash outflows

A

common-size cash flow statement

141
Q

measures a firm’s ability to acquire long-term assets with cash flows from operations

A

The reinvestment ratio

142
Q

A more comprehensive ratio, that measures the firm’s ability to purchase assets, satisfy debts, and pay dividends.

A

the Investing and Financing ratio

143
Q

measures the ability to generate cash from a firm’s operations and is a performance ratio for cash flow analysis purposes

A

The cash-to-income ratio

144
Q

measures the firm’s ability to satisfy long-term debt with cash flow from operations but it is more of a coverage ratio than a performance ratio.

A

The debt payment ratio

145
Q

Bonds payable is categorized as a CF from?

A

financing

146
Q

Gain (losses) are _____ to CFO

A

subtracted (losses= added)

147
Q

How do we handle depreciation expenses in cash flows?

A

for the indirect method, we add it back to net income in CFO

148
Q

For financial ratio analysis, it has limited use as an analytical tool for?

A

comparing companies that use different accounting methods
The lack of consistency across companies makes comparability/interpretation difficult to analyze and limits the usefulness of ratio analysis.

149
Q

Interpreting ratios, for comparing to a benchmark (industry, comparable), we use:

A

cross sectional (comparing two company’s number at the same point in time)

150
Q

When interpreting ratios, for comparing to historical performance, we use

A

time-series (comparing one company’s numbers over a period of time)

151
Q

Which type of ratio bests measures operating performance?

A

activity ratios

152
Q

How efficiently is the company using it’s assets?

A

activity ratios

153
Q

An increase in number of days of payable, will have what effect on the cash conversion cycle?

A

shorten the cash conversion cycle
improving liquidity

154
Q

In order to assess a company’s ability to fulfill its long-term obligations

A

solvency

155
Q

Increasing debt to equity will tell us what about a company’s solvency?

A

solvency is decreasing- the company is taking on more debt, therefore having more debt to pay off in the long term

156
Q

Decline in a company’s equity could indicate that the company is:

A

incurring losses
paying dividends greater than income
repurchasing shares

157
Q

Is the book value of a company’s equity impacted by the changes in MV of it’s common stock?

A

No
* Beginning equity + New shares issuance – Shares repurchased + Comprehensive income – Dividends = Ending equity

158
Q

Creditworthiness is not evaluated based on how much a company has ______ but rather on its willingness and ability to pay its obligations

A

increased its debt

159
Q

Current ratio shows a company’s ____?

A

liquidity; ability to make its short term obligations

160
Q

Dupont analysis=?

A

ROA * leverage
net profit margin * asset turnover * leverage ratio

161
Q

5 point dupont analysis=?

A

= tax burden * interest burden * EBIT margin* asset turnover (efficiency) * leverage

162
Q

Common size income statement divides all accounts by?

A

Total sales

163
Q

Common size balance sheet divides all account by?

A

Total assets

164
Q

A higher quick ratio indicates:

A

the firm has higher liquidity

165
Q

When inventory is purchased, what happens to the quick ratio?

A

Inventory is not included in the quick ratio as an asset, but the cash used to fund the purchase would decrease, thus decreasing the numerator & decreasing the quick ratio

166
Q

If Current Ratio is > 1, and if CA and CL both fall, the overall ratio will _____.

A

increase; the numerator decreases by less percentages than the denominator

167
Q

Diluted EPS is calculated to be the ______ EPS that could have been reported if all dilutive securities were converted.

A

Lowest possible EPS

168
Q

Per share valuation ratio?

A

Earnings per share (EPS)

169
Q

Per share measures are not comparable amongst firms because why?

A

the number of shares outstanding (the denominator) differ amongst firms

170
Q

Dividends are declared on a _____ basis

A

per common share basis

171
Q

RE is the earning that are used to _____, rather than ______

A

grow the firm, rather than be distributed to equity shareholders

172
Q

The proportion of earnings reinvested

A

retention rate

173
Q

Measures how fast a company can grow without additional external equity issues, while holding leverage constant

A

Sustainable growth rate

174
Q

Growth in shareholders’ equity, in isolation, will indicate what about profitability?

A

Nothing; does not provide enough information to assess profitability

175
Q

Measures the “multiple” that the stock market places on a company’s EPS

A

P/E ratio

176
Q

A company must disclose separate information about any operating segment that constitutes 10% or more of the combined operating segments’ _____, _____, _____.

A

revenue, assets, or operating profit/loss

177
Q

Forecasts should involve _______. The results of financial analysis are integral to this process, along with ______

A

a range of possibilities
judgment of the analysts

178
Q

Shows the range of possible outcomes as specific assumptions are changed

A

Sensitivity analysis; “what if” analysis

179
Q

Shows changes in key financial quantities that result from given economic events

A

Scenario analysis

180
Q

Computer-generated sensitivity or scenario analysis based on probability models for the factors that drive outcomes

A

Simulation

181
Q

Profitability ratios include:

A

dividing by revenue
return on ratios

182
Q

Accounting standards require segment for a distinguishable part of a firm that compromises at least:

A

10%

183
Q

The dead costs included included in inventories on the balance

A

product costs

184
Q

Product costs are _______ in the inventories (asset) account on the _______.

A

Capitalized
Balance sheet

185
Q

Absorption costing, which includes costs including labor and overhead are _____ costs, a type of ____ cost.

A

conversion/manufacturing
product costs (capitalized on balance sheet)

186
Q

Inventories hit the income statement as ____ when ______.

A

COGS (expense)
they are sold

187
Q

Costs that are expensed when they are incurred:
-abnormal waste
-finished goods storage costs
-admin overhead
-selling costs (freight-out)

A

period costs

costs that do not contribute to getting the good to its final state, ready for sale

188
Q

Trade discounts are _______ inventory costs (product costs).

A

subtract from inventory expense

189
Q

Inventory valuation method that best matches the physical flow of the inventory items because it tracks the actual units that are sold

A

Specific identification

190
Q

Which inventory valuation method is best used for inventory items are not interchangeable?

A

specific identification

191
Q

Inventory values and COGS are updated continuously

A

perpetual inventory system

192
Q

How does the perpetual inventory stem impact the inventory valuation methods?

A

No Change: FIFO and specific identification
Change: LIFO and weighted average costs
LIFO & FIFO relationships remain

193
Q

When calculating that current ratio, what impact will the inventory have on the numerator and denominator?

A

Impacts Numerator: Assets- includes inventory
No impact denominator: accounts payable is to suppliers, not based on inventory accounting

194
Q

In a period of rising price, LIFO will result in _____ inventory and ____ cost of sales

A

lower inventory, cheaper inventory is still held
higher COGS because of more expensive current inventory prices

195
Q

Inventory valuation methods relate to the debt-to-equity ratio through?

A

Equity: net income and inventory

196
Q

LIFO liquidation occurs when a firm’s inventories:

A

Decline

197
Q

In a period of rising prices, LIFO liquidation results in

A

Higher earnings
Since older layers of inventory that are liquidated were purchased at lower prices, the cost of goods sold will be lower and earnings will be higher.

198
Q

Write-downs occur when:

& recorded how

A
  • When: NRV < Inventory value on BS
  • Income statement: Reports a Loss (@ NRV) on income statement
  • Balance sheet: NRV
199
Q

Write ups affect the income statement how?

A

Gain is recognized by reducing the COGS by the recovery amount

Recovery amount= NRV- inventory value

200
Q

Lower of cost or market methods are used for which inventory valuation methods?

A

LIFO (GAAP) or retail

201
Q

The market value can be used when it is in a range of:

A

NRV - profit margin < Market value < NRV

202
Q

The effect of an inventory writedown on a firm’s return on assets (ROA) is:

A

lower ROA; Writing down inventory to net realizable value decreases both net income and total assets in the period of the write-down. Because net income is most likely less than assets, the result in the period is a decrease in ROA.

203
Q

Using the lower of cost or market principle under U.S. GAAP, if the market value of inventory falls below its historical cost, the minimum value at which the inventory can be reported in the financial statements is the:

A

When inventory is written down to market, the replacement cost of the inventory is its market value

204
Q

A U.S. GAAP reporting firm changes its inventory cost flow assumption from average cost to LIFO. The firm must apply this change

A

prospectively, with the carrying value as the first LIFO layer.
Changing the inventory cost flow assumption to LIFO is an exception to the retrospective application of changes in accounting principle. This change is applied prospectively, with the carrying value of inventory on the date of the change as the first LIFO layer.

205
Q

When a company wrote down their inventory to NRV in year 1 and then in year 2 inventory increased above NRV, how would firms report under IFRS and GAAP

A
  • IFRS: a firm that has written down inventory to net realizable value may record any subsequent reversal (limited to the original writedown amount) as a gain on the income statement
  • U.S. GAAP: reversals of inventory writedowns are not permitted
206
Q

When the sales growth rate exceeds the finished goods inventory growth rate it indicates that:

A

effective inventory management
the company is managing to service its increased sales level with a relatively lower level of inventory, indicating effective inventory management

207
Q

A high inventory turnover ratio is usually:

A

Desireable; unless the firm is also losing sales which signifies insufficient inventory levels compares to sales growth

Higher inventory turnover = lower days of inventory on hand

208
Q

Low inventory turnover (high number of days in inventory) may be a sign of:

A

slow-moving or obsolete inventory

209
Q

No _____ account is needed for a perpetual system

A

purchases

210
Q

Companies can covert _ to _ , but not the other way around.

Which creates the:

A

LIFO to FIFO
LIFO reserve

211
Q

Arises when the number of units sold exceeds the number of units purchased or manufactured, so a portion of the older inventory is thus sold off

A

LIFO Liquidation

older inventory is liquidated; the statement means that units manufactured (or purchased) equaled or exceeded unit sales for each year.

212
Q

Inventory write downs are permitted under:

A

IFRS & GAAP, at NRV

213
Q

When finished goods are increasing faster than both raw materials and work in progress goods, this suggests:

A

That there is a decline in demand, and a strong likelihood of future write-downs

214
Q

When a company constructs an asset, borrowing costs incurred directly related to the construction are:

A

generally capitalized

215
Q

When a company constructs an asset for sale, the borrowing costs are classified as:

A

inventory

216
Q

Borrowing costs can be capitalized under IFRS until the tangible asset:

A

is ready for use

217
Q

Capitalizing an asset will have what effect on ROA?

A

Lower ROA because the denominator (total asset) to be higher to account for the non-current asset on the balance sheet

218
Q

Firms that capitalize costs can be expected to report: _____ asset levels and _____ equity levels in the early years of the asset’s life

A

higher
lower
The capitalized cost is recorded as an asset, which is then expensed in the form of depreciation over future years. Spreading the depreciation out over future years causes net income to increase along with retained earnings and equity in the early years of the asset’s life

219
Q

Research & development are reported on the balance sheet as:

A

Longlived, intangibles

Expensed:
* GAAP: R&D both expensed (except for software which can be capitalized)
* IFRS: R expensed, D can be capitalized

CFO

220
Q

Purchased intangible assets, compared to internally created, can be beneficial for financial reporting purposes, due to it’s impact on BS and CF by:

A

non-current asset
investing cash outflow (instead of OCF which is used in many valuation ratios)

Internally created (R&D) is reported as a OCF outflow, where as if it’s externally generated, it can be Classified as CFI

221
Q

Balance sheet account that is created when an acquisition’s purchase price exceeds the value of acquired net identifiable assets

A

Goodwill

Under IFRS & GAAP, if an item is acquired in a business combination and cannot be recognized as a tangible asset or identifiable intangible asset it is:

222
Q

Income tax expense is recorded on?

A

Financial reports

223
Q

Taxes payable is records the value from the?

A

Tax returns

224
Q

The taxes a company must pay in the immediate future are

A

taxes payable

225
Q

Using the straight-line method of depreciation for reporting purposes and accelerated depreciation for tax purposes would most likely result in a

A

temporary difference

226
Q

When accounting standards require an asset to be expensed immediately but tax rules require the item to be capitalized and amortized, the company will most likely record

A

deferred tax asset

227
Q

A company incurs a capital expenditure that may be amortized over five years for accounting purposes, but over four years for tax purposes. The company will most likely record

A

deferred tax liability

228
Q

the income based upon IRS rules that determines taxes due and is used for tax reporting

A

taxable income
income tax payable

229
Q

A temporary difference between pretax income reported in a firm’s financial statements and taxable income the firm reports to the tax authorities results in

A

deferred tax item

230
Q

The net taxable loss that can be used to reduce taxable income in the future

A

tax loss carryforward

231
Q

Reserve against deferred tax assets based on the likelihood that those assets will not be realized

A

Valuation allowance

232
Q

Reflect the difference in tax expense (reporting) and taxes payable (tax return) that are expected to be recovered from future operations

A

Deferred tax assets

233
Q

If timing differences that give rise to a deferred tax liability are not expected to reverse, then the deferred tax:

A

should be considered an increase in equity

234
Q

US GAAP prohibits the revaluation of _____, which is the source of differences in income tax expense for GAAP and IFRS

A

PPE

235
Q

The deferred tax liability should be excluded from both debt and equity when both _____ and _____ resulting from the reversals of temporary differences are uncertain

A

the amounts and timing of tax payments

236
Q

Temporary difference between income tax payable & taxes payable:

A

DTL

Income tax payable > Taxes payable

237
Q

When DTA > DTL, and the tax rate increases, what happens to income tax expense?

A

An increase in tax rate will increase both DTAs and DTLs, but since the DTA > DTL the net effect for an increase in tax rate will decrease tax expense

238
Q

Covenants benefit a bond issuer by:

A

agreeing to restrict their actions protects the bondholder, and issuer reduces default risk and borrowing costs

239
Q

Innovative Inventions, Inc. needs to raise €10 million. If the company chooses to issue zero-coupon bonds, its debt-to-equity ratio will most likely

A

rise as the maturity date approaches
The value of the liability for zero-coupon bonds increases as the discount is amortised over time. Furthermore, the amortised interest will reduce earnings at an increasing rate over time as the value of the liability increases.

240
Q

A company selecting the fair value option for a liability with a fixed coupon rate will report a _____ when market interest rates decrease

A

loss

241
Q

What is the balance sheet value of a bond?

A

The PV of the bond

242
Q

Under US GAAP, any unamortized debt issuance costs must be:

A

Written off at the time of redemption and included in the gain or loss on debt extinguishment

243
Q

High-quality financial reporting is:

A

decision useful: relevant, faithful representation
unbiased

244
Q

quality of reported results are:

A

sustainable over time
adequate returns

245
Q

Pertains to the quality of information in the financial reports

A

quality financial reporting

246
Q

Low-quality earnings are likely not _____ over time

A

sustainable
because the company does not expect to generate the same level of earnings in the future or because earnings will not generate sufficient return on investment to sustain the company

247
Q

Combining the results from two segments is an example of :

A

biased reporting

248
Q

Earnings that result from non-recurring activities are _____, which are an example of :

A

unsustainable
lower-quality earnings

249
Q

Depreciating equipment over the shortest estimated period of its useful life is a ______ accounting choice.

A

conservative
that reduces earnings in the early years and increases them in the future, creating a positive trajectory

250
Q

Deferring research and development (R&D) investments into the next reporting period is an example of _________ by taking a _____ action

A

earnings management
real

251
Q

Choices tend to decrease the company’s reported earnings and financial position for the current period

A

Conservative bias

252
Q

choices tend to increase reported earnings or improve the financial position for the current period

A

Aggressive

253
Q

Earnings smoothing is the understatement of earnings _____

A

volatility

254
Q

Earnings smoothing: using _____ bias when company is doing well, and using _____ bias when company is not

A

conservative
aggressive

255
Q

making intentional choices or deliberate actions to influence reported earnings and their interpretation

A

earnings management

256
Q

The possibility of bond covenant violations may provide __________ to inflate earnings in the reporting period

A

motivation to managers

257
Q

An audit is intended to provide assurance that the company’s financial reports are presented:

A

fairly, thus providing discipline regarding financial reporting quality.

258
Q

Under GAAP, an impairment loss on inventory that has become obsolete would be considered an:

A

operating item on the income statement

259
Q

To assist investors in evaluating operating performance, companies often report non-GAAP earnings by excluding ______.

A

asset impairment; charges either for long-lived assets, goodwill, or other intangible assets

260
Q

The SEC prohibits the exclusion of charges or liabilities requiring cash settlement from any non-GAAP liquidity measures other than:

A

EBIT and EBITDA

If a company uses non-GAAP in SEC, the firm must provide comparable GAAP measure

261
Q

EBITDA is a _____ financial measure

A

non-GAAP

262
Q

The __________ of payments is an example of how choices affect both the balance sheet and income statement.

A

capitalization
Capitalizing a payment changes the benefit from only the current period—making it an expense—to a benefit in future periods as an asset. The creation of an asset results in a comparable increase in stockholder’s equity

263
Q

Bias choices must occur _____

A

in the current period in review

264
Q

______ accounting, typically avoids a sustainability issue.

A

Conservative

265
Q

Meeting or exceeding its own earnings guidance is a possible:

A

Motivation; for managers to issue low-quality financial reports

266
Q

If diluted EPS = basic EPS, a firm must report:

A

Both

If a firm contains any potentially dilutive securities outstanding, they must report both even if equal

267
Q

Inventories based on FIFO are preferable to those based on LIFO on the:

A

Balance sheet;
ending inventory reflects current costs

268
Q

Asset with subsequent depreciation through the income statement:

A

Capitalization

269
Q

Capitalizing an asset (vs Expensing) will initially result in:

A

Higher profitability (Less expenses, increased profits)

After time expensing will show more profit (asset was already expensed)

The cash outflow from capitalizing, is a CFI…. expensing is a cash outflow of CFO

270
Q

The temporary difference between accounting profit being less than taxable income

A

DTA

Accounting expense > tax deduction

271
Q

Deferred tax assets represent taxes that:

A
  • have been paid (because of the higher taxable income)
  • but have not yet been recognized on the income statement (because of the lower accounting profit)
272
Q

What causes a difference in effective tax rate vs statutory?

A

Permanent differences (not DTA/DTL)

Sources of differences:
different rates for international subsidaries
permanent timing differences
tax rate changes
tax holidays (period where you don’t pay taxes)
deferred tax on overseas and unconsolidated domestic associates

273
Q

When reporting is not compliant with GAAP, the sustainability and adequacy of reported earnings:

A

cannot be determined

(not one of the combos of quality of financial reporting and quality of reported earnings, on the spectrum of financial reporting quality

274
Q

A significant increase in days payables above historical levels is most likely associated with:

A

Payables being stretched; low quality of the cash flow statement

Payables are not paid or paid more slowly, which increases cash flow in an unsustainable manner
Decreases net working capital

275
Q

When a bond is issued:

A

CFF:
* inflow

Balance Sheet:
* Assets: increase by PV of bond
* Liabilities: Bond payable of PV of bond

276
Q

Capitalized interest costs are reported as:

A

CFI

Treated as part of the capital asset

277
Q

Trading securities for investment purposes are recognized in cash flow from:

A

CFI

278
Q

Purchase of 30% of the shares of an affiliated company, would be recognized on the cash flow statements as:

A

CFI outflow

279
Q

Lower asset turnover signifies:

A

Better efficiency of a company

280
Q

Acquiring (external purchase) of intangible assets is classified as:

A

CFI outflow

Patents

281
Q

Principal payments on debt or leases are considered:

A

CFF

(Interest paid/received are CFO)

282
Q

Available for sale securities are acquired with the intent to:

A

Collect interest, but sell before maturity

283
Q

Marketable securities include:

A

Available for sale
Held to maturity

284
Q

Horizantal common size statement show each line relative to:

A

Base year

285
Q

Long lived assets are reported on the balance sheet at:

A

NBV (historic cost - accumulated depreciation)

286
Q

The amount that will be deducted on the tax return in future periods:

A

Tax Base

287
Q

When income tax expense > taxes payable:

A

DTL

288
Q

When income tax expense < taxes payable

A

DTA

289
Q

A decrease in the tax rates decreases:

A

decreaases both DTA &DTL

290
Q

When retiring debt, how are the financial reports impacted:

A

Income statement: Loss
* Bonds payable - retired value
* Issuance costs

Issuance costs are a prepaid asset on BS

291
Q

GAAP recognizes a long lived asset as impaired when:

A

Carrying value > Expected Future Cash flows

292
Q

Under GAAP how is an impairement loss recorded?

A

Carrying value - Fair Value = Loss

CFA Level I (45 decks)

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