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CFA Level II 2020 COPY (552) > Financial Reporting & Analysis > Flashcards

Financial Reporting & Analysis Flashcards

1
Q

Under IFRS and GAAP Purchasing Power Gain/Losses are

A

Recognized on the income statement

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2
Q

Accruals Ratio CF

A

NI - CFO - CFI

(NOAend + NOAbeg) / 2

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3
Q

Accruals Ratio BS

A

NOAend - NOAbeg

(NOAend + NOAbeg) / 2

NOA = (Total assets - cash) - (total liabilities - total debt)

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4
Q

NI FIFO Formula

A

NI FIFO = NI LIFO + [∆ in reserve * (1 - t)]

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5
Q

Analyzing the B/S

A
  1. Put assets as a % of total assets
  2. Then compare

Note: Can do the same for capital structure

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6
Q

Beneish Model

Altman Model

A

Beneish

Purpose: Determine probability of earnings manipulation

Analysis: Lower the better. Should be below -1.78

Altman

Purpose: Probability to file bankruptcy

Analysis: Higher the better

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7
Q

Warnings Signs of Overstated Operating Cash Flows

A
  1. Increase in payables with decrease in inventory/receivables
  2. Capitalized expenditures
  3. Sale and leaseback of assets
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8
Q

Warning Signs of Misstated Earnings

A
  1. CFO lower than earnings
  2. Revenue growth higher than peers
  3. Receivables growth higher than revenue growth
  4. High customer returns
  5. Boost in operating income
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9
Q

Measuring Earnings Quality

A

Aggregate Accruals = Accrual based earnings - cash earnings

Cash = quality

Accrual = not quality

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10
Q

Reporting and Earning Quality

A

Reporting: need to be accurate and relevant, decision useful

Earnings: Adequate (meets required return) Sustainable

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11
Q

Hyperinflation G/L under IFRS are treated how?

A

Hyper inflation is 100% over 3 years

GAAP: Use the temporal method

IFRS: Restate monetary assets/liabilites. Use current rate method

Take monetary assets - monetary liabilities

a. depreciating currency and net liability = gain
b. appreciating currency and net liability = loss

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12
Q

Passive Investments are:

A

Security Reported as G/L

  1. Marketable securities fair value R and UR on I/S
  2. Trading securities fair value R and UR on I/S
  3. Available-for-sale fair value R on I/S, UR in OCI
  4. Held-to-maturity amoritized cost R and UR on I/S
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13
Q

Available for Sale Securities vs. Trading Securities

A

AFS: Only realized G/L are reported on the I/S

Trading Securities: Realized and uncrealized G/L are reported

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14
Q

Monetary Assets/Liabilities are:

A
  1. Cash
  2. AR
  3. AP
  4. STD
  5. LTD
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15
Q

When do you use the current rate method? Temporal method?

A

Current Method: 1. functional currency NOT same as parent

  1. local is functional

Temporal Method: 1. Functional currency same as parent

  1. Local is NOT functional
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16
Q

Temporal Method Affects….. Current Rate Method Affects….

A

Temporal: I/S - this means G/L go there

Current Rate: B/S - G/L goes to OCI equity on the B/S

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17
Q

Temporal Method I/S Rates

A

Revenues & Expenses: Average Rate

Rest at historical (this includes COGS, Dep, and Amortization)

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18
Q

Current Rate Method B/S Rates Current Rate Method I/S Rates

A

Use: when functional currency NOT same as parent

B/S:

Retained earnings - average rate

Capital Stock - historical rate

Everything else - current rate

I/S: All average rates

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19
Q

Temporal Method BS Rates

A

Monetary Assets/Liabilities at Current Rate

Everything else at historical

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20
Q

PBO Balance Sheet

A

Funded Status = plan assets - PBO

Will be an asset or liability or the B/S

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21
Q

PBO Total Periodic Pension Cost for GAAP and IFRS

A

GAAP

service costs + interest costs + actuarial loss - actual return on plan assets

Recognized on OCI

IFRS

Service cost + interest costs + past service costs

Both GAAP and IFRS:

Plan contributions - ∆ in funded status

Note: Interest cost = discount rate * beg funded stats

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22
Q

PBO Ending Value of Plan Assets

A

Beg value + actual return + contributions - benefits paid

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23
Q

PBO What happens if we raise or lower the discount rate?

A

Discount rate lower

  1. Higher PBO
  2. Higher Pension cost
  3. Lower stockholders equity

Discount rate higher

  1. Lower PBO
  2. Lower Pension cost
  3. Lower service cost
  4. Higher funded status
  5. Higher stockholders equity
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24
Q

PBO Expected Return

A

a. Does not affect PBO
b. Does affect PBO expenses

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25
Q

PBO Prior service cost is treated by GAAP and IFRS

A

GAAP: amortized from OCI over years

IFRS: Expensed immediately

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26
Q

PBO Funded Stats equals

A

Fair value of plan assets - PBO

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27
Q

PBO Change in Funded Status

A

Company contributions - total periodic pension cost

28
Q

PBO Cash Flow Adjustments

A

If TPPC < Firm contributions: reclassify the differences from CFF to CFO —> Make to to multiply by (1 - T)

If TPPC > Firm Contributions: CFO to CFF after-tax –> Make to to multiply by (1 - T)

29
Q

SPE

A

Special Purpose Entity

Purpose: Isolate certain assets and liabilities

Must be consolidated

Also Variable Interest Entity (VIE) if:

  1. Insufficient at risk equity
  2. lack of decision rights
  3. Shareholders do not absorb losses
  4. Does not have to be managed by the parent
30
Q

Goodwill Formula

A

Formula: Purchase price - FMV of new assets

IFRS: Allows partial or full

GAAP: Only full

31
Q

Equity vs Acquisition Method

A

Both report same NI

Equity; Only reports what you own

Formula: FV + % of earnings - % of dividends - amort.

Loss is recognized on the IS

Has higher NPM, ROE, and ROA

Acquisition: consolidates everything.

The % not owned goes to a minority interest account

Any Goodwill goes on the B/S

32
Q

Reclassification of Investments

A

IFRS:

a. Does not all the FV to be reclassified
b. AFS and HtM can switch

GAAP:

a. Does allow FV to be reclassified

33
Q

Business Combinations

A

Merger: acquiring firm absorbs all assets & liabilities

Acquisition: Both entities continue to exist

Consolidation: a new entity is formed

34
Q

Take Over Methods

A

Cost or market/Financial assets (IFRS/GAAP same)

investment in securities
Own < 20%

Equity Method (IFRS/GAAP same)

Significant influcent, NOT control

Own 20-50%

Used for Joint Venture

Consolidation/Acquisition Method

Controlling interest

Own 50%+

Same NI as equity but higher shareholders equity

35
Q

Operating Lease vs Finance Lease

A

Operating Lease

Is a rental agreement

  1. Current Ratio increase
  2. Asset turnover decrease
  3. Debt/Equity Ratio decrease

Finance lease

Increases assets, liabilities, levered ratios, operating cash flow, operating income

36
Q

Different types of Depreciation Analysis

A

Purpose: Identify old assets that make firms less competitive

Average age (in years): accumulated depreciation / annual depreciation expense

Average Depreciable Life: Ending gross investment / annual depreciation expense

Remaining useful life: Ending net investments / annual depreciation expense

a. Net means to subtract off land

37
Q

Depreciable Life

A

Ending Gross Investment / Depreciation expense

38
Q

Capitalizing Expenses

A
  1. Reduces expenses in the current period
  2. Also added to assets
  3. Increases equity by increasing net income and retained earnings
39
Q

Impairments Result In…

A

Means: past earnings were overstated

  1. Lower assets
  2. Lower equity
  3. Lower ROE and ROA first year
  4. No impact on earnings
40
Q

Impairments IFRS vs GAAP

A

IFRS:

Impaired down to recoverable amount

This does include selling costs

Impairment is recognized on the IS (can b reversed)

GAAP:

Impaired down to the fair value

DOES not include selling cost

GAAP Example:

Cost: 2,800 Dep: 13% per year Future CF: 1,350

Step one: Test impairment: 2,800 x (1 - .13)4 = 1,604. Means BV is higher than MV so impairment exists

41
Q

Capitalizing vs Expensing Effects

A

Capitalizing Expensing

Net income (first year) Increase Decrease

Assets and equity Increase Decrease

ROA and ROE (first year) Increase Decrease

CFO Increase Decrease

CFI Decrease Increase

Debt-to-equity Decrease Increase

42
Q

Research & Development

A

R&D is always expense

However the development costs:

IFRS: Development costs are capitalized

GAAP: Development costs are expensed

43
Q

ROE

A

NI / Shareholders Equity

44
Q

ROA

A

NI / Total Assets

45
Q

Net Profit Margin

A

NI / Sales

46
Q

Current Ratio

A

current assets / current liabilities

47
Q

Days on Hand

A

365 / Inventory Turnover

48
Q

Inventory Turnover

A

COGS / Average Inventory

49
Q

Quick Ratio

A

(Cash + s/t investments + receivables) / current liabilites

50
Q

Total Asset Turnover

A

Sales/ Total Assets

51
Q

Cash Ratio

A

(Cash + s/t securities) / current liabilities

52
Q

Gross Margin

A

(Sales - COGS) / Sales

53
Q

Operating Profit Margin

A

Operating Income / Revenue

54
Q

LIFO to FIFO COGS

LIFO ro FIFO Taxes

A

FIFO COGS = LIFO COGS - (∆ LIFO Reserve)

Taxes FIFO = Taxes LIFO + (∆LIFO Reserve * Tax rate)

55
Q

LIFO to FIFO Steps

A

Income Statement

FIFO COGS = LIFO COGS - ∆ Reserve

FIFO Taxes = LIFO Taxes + (∆ Reserve * Tax Rate)

NIFO FIFO = NI LIFO + (∆ Reserve * 1 - T)

Total Assets

FIFO Inventory = LIFO Inventory + Reserve

FIFO Cash = LIFO Cash - (Reserve * Tax Rate)

FIFO Equity = LIFO Equity + (Reserve * 1 - T)

56
Q

LIFO Liquidation Means….

A

Reduction in inventory levels

This means we eat up old inventory

Results in:

  1. Decrease COGS
  2. Increase NPM
  3. Increase inventory turnover
  4. No impact on sales
57
Q

Inflation affect on FIFO/LIFO

A

FIFO LIFO

Inflationary Ending Inventory Higher Lower

Inflationary COGS Lower Higher

Deflationary Ending Inventory Lower Higher

Deflationary COGS Higher Lower

58
Q

LIFO Results In

A
  1. Lower WC THINK: Lower WINNTC
  2. Lower Inventory balances taxes
  3. Lower NI
  4. Lower Net and gross margins
  5. Lower Taxes
  6. Lower Current Ratio
  7. Higher debt-to-equity THINK: HIGHER DICC
  8. Higher inventory turnover
  9. Higher COGS
  10. Higher cash flows (b/c of less taxes)
59
Q

COGS

A

Formula: beg inventory + purchases - ending inventory

GAAP is the only one that allows LIFO

60
Q

After-Tax Operating Cash Flow

A

Step One: operating income:

sales - cash operating expenses - dep

Step Two: operating income x (1 - T) + dep

61
Q

PBO: Adjusted Operating Profit

A

reported operating profit + reported pension expense − service cost

62
Q

Interest Coverage Ratio

A

EBIT / Total Interest Paid

63
Q

Finance vs Operating Lease Effects

A

Finance Operating

CFO Increase Decrease

Assets and equity Increase Decrease

Debt/Assets Increase Decrease

Debt-to-Equity Increase Decrease

NI (first year) Increase Increase

CFI Decrease Increase

Asset Turnover Decrease Increase

ROA Decrease Increase

ROE Decrease Increase

64
Q

Extended DuPont Analysis

A

ROE = NIadj EBT__EBIT__Revenue Avg Assets
EBT EBIT Revenue Avg Assetsadj Avg Equity

Think: TIE A FAG
T: Tax burden
I: Interest burden
E: EBIT margin
A: Asset turnover
F: Financial leverage

Adjustments:

  • *NI:** subtract off earnings from equity investment
  • *Avg Assets:** Subtract off carrying value of equity investment
65
Q

How to treat an operating lease like a finance lease

A

Step 1: Increase assets and liabilities by the PV of remaining payments

Step 2: Remove payment from the income statement and replace

with depreciation expense and interest expense

Example: PV of payments: 30M, discount rate: 10%
Lease term: 6 years, lease payment: 6.9M

  • *Total debt:** increases by 30M
  • *EBIT:** increases $1.9M: 6.9M - (30/6 years)
  • *Interest expense:** increases $3M: ($30M * .10)

CFA Level II 2020 COPY (552) (13 decks)

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