Financial Reporting And Analysis Flashcards
Net Periodic Pension Cost (Formula)
Net periodic pension cost = ending funded status - employer contributions - beginning funded status
Presentation Currency
The currency in which a company presents its financial statements. Usually, the currency of the country where it is located.
Functional Currency
The currency of the primary economic environment in which an entity operates (the country where an entity primarily expends cash).
Transaction Exposure
When the importer is obligated to pay in a foreign currency and is allowed to defer payment until sometime after the purchase date.
Net Liability Balance Sheet Exposure
Exists when liabilities translated at the current exchange rate are greater than assets translated at the current exchange rate.
Cumulative Translation Adjustment
The sum of the translation adjustments that arise over successive accounting periods. After the initial period, is required to keep the translated balance sheet in balance.
The two approaches to translating foreign currency financial statements
1) The current rate method - all assets and liabilities are translated at the current exchange rate
2) The monetary/nonmonetary method - where only monetary assets and liabilities are translated at the current exchange rate
Temporal Method of Foreign Currency Translation
A variation of the monetary/nonmonetary method. Assets and liabilities should be translated in such a way that the measurement basis (current or historical cost) in foreign currency is preserved after translating to the parents’ presentation currency.
Highly Inflationary Economy
SFAS 51 defines a highly inflationary economy as one in which the cumulative three-year inflation rate exceeds 100 percent. Also known as hyperinflation.
Adjusting Balance Sheet Items for Inflation
When adjusting balance sheet items for inflation, increase the items balance sheet cost by inflation percentage and then translate the currency amount by current foreign exchange rate.
Foreign Currency Types and When to Use Them
If the functional currency is the local currency, use the current rate method. If the functional currency is the parent’s presentation currency, use the temporal method.
Disclosures Required Relating to Foreign Currency
1) the amount of exchange differences recognized in net income
2) the amount of cumulative translation adjustment classified in a separate component of equity, along with a reconciliation of the amount of cumulative translation adjustment at the beginning and end of period.
Clean-Surplus Accounting
All nonowner changes in stockholders’ equity should be included in the determination of net income.
Dirty-Surplus Accounting
Some income items being reported as part of stockholders’ equity rather than as gains and losses on the income statement.
Financial Reporting Quality
Relates to the accuracy with which a company’s reported financials reflect its operating performance and to their usefulness for forecasting future cash flows. Companies exercising more discretion can usually be classified as having weaker financial reporting quality and vice versa.
Aggregate Accruals (formula)
Aggregate Accruals = accrual-basis earnings - cash earnings
Net Operating Assets
The difference between operating assets and operating liabilities
NOA = [(total assets - cash)] - [(total liabilities - total debt)]
Balance Sheet Based Aggregate Accruals
Aggregate Accruals (balance sheet) = NOA (t) - NOA (t-1)
For aggregate accruals ratio, you must scale the measure by dividing the number by the average of the NOA (t) and NOA (t-1). Otherwise it will distort the number for companies with high growth.
Aggregate Accruals (cash flow)
Aggregate Accruals (cash flow) = NI - (CFO + CFI)
For aggregate accruals ratio, you must divide by the average of NOA.
Warning Signs of Reporting Quality
To detect quality issues with reported revenues, it is best to focus on the balance sheet accounts associated with revenue (accounts receivable and unearned revenue). Large changes in these accounts should be viewed as ‘red flag’ indicators or revenue quality issues.
Core Operating Margin
Core Operating Margin = (Sales - COGS - SG&A)/Sales
Represents the ratio of pretax return on a money unit of sales resulting from the company’s operating activities.
Agency Costs
The costs associated with the fact that all public companies and the larger private companies are managed by non-owners. The incremental costs arising from conflicts of interest when an agent makes decisions for a principal.
Components of Net Agency Costs
1) Monitoring costs - borne by owners to monitor the management
2) Bonding costs - borne by management to assure owners that they are working in the owners’ best interest
3) Residual loss - the costs that are incurred even when there is sufficient monitoring and bonding
Pecking Order Theory
Developed by Myers and Majluf (1984) suggests that managers choose methods of financing according to a hierarchy that gives first preference to methods with the least potential information content and lowest preference to the form with the greatest potential information content.
