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CFA 1 EXAM > Carprete Issues > Flashcards

Carprete Issues Flashcards

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1
Q

Under IFRS, Income includes increases in economic benefits from:

A

Enhancements of assets. Not related to owners’ contributions.

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2
Q

Under IFRS, a loss from destruction of property in a fire would most likely be classified as:

A

continuing operations

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3
Q

A Company chooses to change an accounting policy. this change an accounting policy. This change requires that, if practical, the company restate it’s financial statements for:

A

Prior periods shown in a report.

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4
Q

IFRS vs US GAAP

A

Inventory (Valuation & Methods)
IFRS:
✅ Allows FIFO and Weighted Average
❌ LIFO is NOT allowed
✅ Inventory write-downs can be reversed

US GAAP:
✅ Allows FIFO, Weighted Average, and LIFO
❌ No reversal of inventory write-downs

  1. Development Costs
    IFRS:
    ✅ Can capitalize development costs (if certain criteria are met)

US GAAP:
❌ Must expense development costs

  1. Revaluation of Assets
    IFRS:
    ✅ PPE and Intangible Assets can be revalued up or down

US GAAP:
❌ Revaluation is not allowed

  1. Impairment of Assets
    IFRS:

One-step test

Can reverse impairment (except goodwill)

US GAAP:

Two-step test

❌ No reversal allowed

  1. Leases (Lessee Accounting)
    IFRS (IFRS 16):
    ✅ All leases treated as finance leases

US GAAP:
✅ Distinguishes between finance and operating leases

  1. Presentation of Financial Statements
    IFRS:

Requires statement of changes in equity

Does not require a specific format

US GAAP:

More prescriptive formats

No requirement for a statement of changes in equity

  1. Extra Info to Know
    Both are accrual-based accounting systems.

IFRS is more principles-based, while US GAAP is more rules-based.

CFA exam may ask about which method provides higher income, assets, or cash flows depending on assumptions.

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5
Q

Ratios are an input into which step in the financial statement analysis framework?

A

Analyze/interpret the processed data

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6
Q

The Primary role of financial statement ANALYSIS is best described as?

A

Evaluation a company for the purpose of making economic decisions?

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7
Q

International Financial Reporting Standards (IFRS) are currently developed by which entity?

A

International Accounting Standards Board

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8
Q

US GAAP are currently developed by which entity?

A

Financial Accounting Standards Board (FASB)

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9
Q

what are the 3 types of audit opinion when analyzing financial statements?

A

Adverse: all a lie or all false

Qualified: are a few exceptions

Unqualified: preferred and all true

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10
Q

Carrying inventory at a value above it’s historical cost would most likely be permitted if:

A

the Inventory was held by a producer of agricultural products

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11
Q

A write-down of the value of inventory to it’s realizable value will have a positive effect on the:

A

Inventory turnover Ratio

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12
Q

Net Realizable Value (NRV)

A

Is the total amount a company should expect to receive once it’s assets are sold or disposed of minus costs that come from it’s disposal or sale

  1. MV of the asset
  2. Cost
  3. NRV= MV of the asset - Selling cost of the asset
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13
Q

Inventory turnover Ratio

A

COSGS / AVG INVENTORY

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14
Q

LIFO

A

Newis inventory gets sold first
- Gross profit margin best reflects current cost

Rising Prices
COGS: higher
Profit: lower
lNV: Lower
OLD - Cheap

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15
Q

FIFO

A

Oldest inventory gets sold first
- Could be Inflationary

Rising Prices
COGS: Lower
Profit: Higher
COGS - OLDEST - CHEAPEST
INV - NEWEST - EXPENSIVE
lNV: Higher

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16
Q

Current Ratio

A

Current Assets / Current Liabilities

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17
Q

Inventory Turnover

A

COGS / Average Inventory

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18
Q

Financial Leverage

A

AVG Total Assets / Avg total equity

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19
Q

Net Margin

A

Net Income / Revenue

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20
Q

ROE

A

Net Income / Average total equity

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21
Q

Receivable Turnover

A

= Revenue / receivable (avg) - 365/ Receivable turnover = Days sales outstanding (DSO)

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22
Q

Payable Turnover

A

= Purchases / Payables (AVG) - 365/ Payable Turnover = days of payable

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23
Q

US GAAP

A
  • Allows LIFO and FIFO
  • Does not allow reversals
  • Does not allow fair values used to value inventory
  • the specific identification method is permitted to value inventory
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24
Q

IFRS

A
  • Allow reversals
  • No LIFO
  • YES to FIFO
  • the specific identification method is permitted to value inventory
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25
Gross Margain
Gross Proft / Sales
26
How do you measure efficiency?
INV Turnover= COGS/ AVG INV
27
What happens with a Inventory Write down?
Inventory: Down Assets: Down COGS: UP Profit: Down
28
All the following are current assets except? A: cash B: Goodwill C: Inventories
Goodwill - this a long-term asset
29
The Measurment of goodwill is affected by? - acquisitions' purchase price -acquired comply book value - fair value of acquirers assets and labiates? -
- Acquisitions of purchase price Mease of Goodwill: comes up on porches of an entity. Compare Purches price -> FAIR VALUE target assets and liabilities
30
Definition of Unrealized gains
Changes in Value
31
For Finacial assets classified as trading securities, how are unrealized gains and losses reflected in shareholders' equity? - They are not recognized - They flow through income into retained earnings - They are component of accumulated other comprehensive income
They flow through income into retained earnings - US GAAP : Trading - IFRS: Fair value through Profit and Loss
32
For Finacial assets classified as AVAILABLE FOR SAIE, how UNREALIZED GAINS and losses reflected in shareholders' equity? - They are not recognized - they flow through retuned earnings - They are component of accumulated other comprehensive income
- They are component of accumulated other comprehensive income US GAAP : Available for sale - IFRS: Fair value through O.C.I.
33
For financial assets classified as HELD TO MATURITY, how are unrealized gains and losses reflected in shareholders' equity? - they are not recognized - they flow through retained earnings - They are a component of accumulated other comprehensive income.
- they are not recognized The difference in wording: US GAAP : Held to maturity - IFRS: Amortized Cost / Ignoring Fair value
34
A company has total liabilities of 35 million and total stockholders' equity of 55 million. Total liabilities are represented on a VERTICAL COMMON-SIZE BALANCE SHEET by a % closest to: - 35% 39% 64%
Assets = Liability's + equity Line Item: % of total assets A= 34 mil + 55 mil= 90 mil 35mil / 90 mil= 39 A= 39%
35
Witch of the following would an analyst most likely be able to determine from a common-size analysis of a company's BALANCE Sheet over several periods - an increase or decrease in sales - an increase or decrease in Finacial leverage - a more efficient or less efficient use of assets
A= an increase or decrease in Finacial leverage - an increase or decrease in Finacial leverage. *This is debit / Equity / Assets - a more efficient or less efficient use of assets *This has Revenue and Profit which is not on the balance sheet.
36
Balance Sheet
Each line item as a % of total assets
37
Total asset turnover equation?
Rev / Ave total assets
38
* Defining total assets turnover as revenue / Ave total assets. All else equal, IMPAIRMENT WRITE-DOWN OF LONG - LIVED ASSETS owned by a company will most likely result in a INCREASE for that company in? - the debit- to equity ratio but not the total asset ternover - the total asset ternover but not the debit - to - equity ratio. - both the debit -to - equity ratio and total asset turnover.
( REV/ AVG TOTAL ASSETS ) - ( DEBIT / EQUITY ) Assets: go down * Because Assets are dropping you will have an impairment expense on the income statement Impairment Expense (Income Statement) Net income: go's down Retuned earnings: go's down Equity; go's down (ASSETS (down) - Labits = Equity (down)) ( REV/ AVG TOTAL ASSETS (goes up)) - ( DEBIT / EQUITY (goes down) ) A: both the debit -to - equity ratio and total asset turnover.
39
An Investor Concerned about a company's ability to meet its NEAR - TERM OBLIGATIONS is most likely to calculate the : - Current Ratio -Return on Total Capital - Financial Leverage Ratio
Current Ratio
40
Current Ratio:
Current Ratio = Current Assets / Current Liabilities *Higher current ratio generally indicates a stronger ability to pay off short-term debts. * Short-term obligations or Liquidity
41
Return on Total Capital:
ROTC: Measurs the profitability of a company *ROTC is typically calculated by dividing earnings before interest and taxes (EBIT) by total capital. EBIT represents the company's operating income before deducting interest and tax expenses.
42
Financial Leverage Ratio:
expresses the degree to which a company's operations are funded by debt (borrowed capital) rather than equity (owner's investment). It essentially measures how much a company relies on borrowing to finance its activities. *Measures the solvency of a company (Long -Term)
43
The most Stringent test of a company's Liquidity is it's: - Cash ratio - Quick ratio - Current Ratio
- Cash ratio
44
Quick Ratio:
Quick Ratio = Current Assets - Inventory Current Liabilities * measures a company's ability to convert liquid assets into cash to pay for short-term expenses and weather emergencies * Remove INV or anything else that is not (cash, Mark security's, Receivables)
45
Cash Ratio:
indicates to creditors, analysts, and investors the percentage of a company's current liabilities that cash and cash equivalents will cover Cash Ratio = only incudes Cash and markable securities.
46
Debit- to- equity Ratio
Long term Solvency
47
An investor worried about a company's LONG TERM SOLVENCY would most likely examine it's - current ratio - return on equity - Debit to equity ratio
- Debit to equity ratio This is Long- term solvency
48
When computing net cash flow from operating activities using the INDIRECT METHOD, an Addition to net income is most likely to occur when there is a : - Gain on the sale of an asset - Loss on the retirement of Debit - Decrease in a deferred tax liability
A: - Loss on the retirement of Debit Non Cash - Add back
49
One appropriate method of preparing a common-size cash flow statement is to show each line item: - of Revenue and expense as a % of net revenue - on the cash flow statement as a % of net revenue - on the cash flow statement as a % of total cash outflows
on the cash flow statement as a % of net revenue
50
Inventory Write up:
IFRS: Allowed US GAAP: Not allowed
51
Development Costs:
IFRS : Capitalized if criteria met US GAAP: Expensed
52
Revaluation Model
IFRS: Allowed for PP&E and intangibles US GAAP: Not allowed
53
FASB
Sets US GAAP
54
IASB:
Sets IFRS
55
Revenue Recognition
IFRS: Recognize when control transfers US GAAP: Based on 5-step model
56
Gross Profit
Gross Profit=Revenue−Cost of Goods Sold
57
Operating Profit (EBIT)
EBIT=Gross Profit−Operating Expenses
58
Net Income
Net Income=Revenue−Expenses+Gains−Losses
59
Earnings Per Share (EPS)
Basic EPS= Net Income−Preferred Dividends ​ / Weighted Average Shares Outstanding ​
60
Balance Sheet Terms Assets:
Current Assets: Expected to be used within 1 year (e.g., cash, inventory) Non-Current Assets: Long-term (e.g., PPE, intangible assets)
61
Balance Sheet Terms Liabilities:
Current Liabilities: Obligations due in < 1 year (e.g., accounts payable) Non-Current Liabilities: Long-term debts
62
Equity
Equity=Assets−Liabilities
63
Common Equity Components
Common Stock Retained Earnings Treasury Stock Other Comprehensive Income (OCI)
64
Cash Flow Statement Three Sections:
Operating: Day-to-day core business Investing: Long-term assets (e.g., purchase of equipment) Financing: Debt, equity transactions (e.g., issuing stock)
65
Cash Flow Statement Direct vs. Indirect Method:
Direct: Lists actual cash inflows/outflows Indirect: Starts with net income and adjusts for non-cash items
66
Current Ratio:
(Cash + Marketable Securities + Receivables) / Current Liabilities ​
67
Debt-to-Equity:
Total Debt / Total Equity
68
Interest Coverage
EBIT / Interest Expense
69
Net Profit Margin
Net Income / Revenue
70
Return on Assets (ROA)
Net Income / Total Assets
71
Return on Equity (ROE)
Net Income / Equity
72
Inventory Turnover
COGS / Average Inventory
73
Days Inventory Outstanding (DIO)
365 / Inventory Turnover
74
Depreciation Methods -Straight-Line: -Declining Balance / Accelerated
straight-Line: Equal amount each year (Cost − Residual Value) / Useful Life ​ Declining Balance / Accelerated: More in early years
75
Leases - IFRS (Post 2019) -US GAAP:
IFRS (Post-2019): -All leases → Finance leases (Right-of-use asset + liability) US GAAP: -Operating Lease: Expense on income statement only -Finance Lease: Asset + liability recognized
76
DuPont Analysis (3 - STEP)
ROE= Net Profit Margin× Asset Turnover × Leverage Ratio
77
DuPont Analysis (5 - STEP)
ROE= (Net income / EBT) * (EBT / EBIT) * (EBIT / Revenue) * (Revenue / Assets) * (Assets / Equity)
78
Accruals:
Revenue/expense recorded before cash received/paid
79
Deferred Tax Assets (DTA)
Pay more tax now → benefit later
80
Deferred Tax Liabilities (DTL):
Pay less tax now → obligation later
81

CFA 1 EXAM (3 decks)

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