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Flashcards in Financial Reporting And Analysis Deck (61):
1

Net Periodic Pension Cost (Formula)

Net periodic pension cost = ending funded status - employer contributions - beginning funded status

2

Presentation Currency

The currency in which a company presents its financial statements. Usually, the currency of the country where it is located.

3

Functional Currency

The currency of the primary economic environment in which an entity operates (the country where an entity primarily expends cash).

4

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.

5

Net Liability Balance Sheet Exposure

Exists when liabilities translated at the current exchange rate are greater than assets translated at the current exchange rate.

6

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.

7

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

8

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.

9

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.

10

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.

11

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.

12

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.

13

Clean-Surplus Accounting

All nonowner changes in stockholders' equity should be included in the determination of net income.

14

Dirty-Surplus Accounting

Some income items being reported as part of stockholders' equity rather than as gains and losses on the income statement.

15

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.

16

Aggregate Accruals (formula)

Aggregate Accruals = accrual-basis earnings - cash earnings

17

Net Operating Assets

The difference between operating assets and operating liabilities

NOA = [(total assets - cash)] - [(total liabilities - total debt)]

18

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.

19

Aggregate Accruals (cash flow)

Aggregate Accruals (cash flow) = NI - (CFO + CFI)

For aggregate accruals ratio, you must divide by the average of NOA.

20

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.

21

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.

22

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.

23

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

24

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.

25

Static Trade-off Theory of Capital Structure

V-Levered = Value-Unlevered + tD - PV(costs of financial distress)

Based on balancing the expected costs from financial distress against tax benefits of debt service payments.

26

Periodic Inventory System

Inventory values and costs of sales are determined at the end of the accounting period.

27

Perpetual Inventory Period

Inventory values and cost of sales are continuously updated to reflect purchases and sales.

28

Net Realisable Value

The estimated selling price in the ordinary course of business less the estimated costs necessary to make the sale and estimated costs to get the inventory in condition for sale.

29

Value in Use

The expected discounted measure of an asset's expected future cash flows (IFRS). In discounted cash flows for US GAAP.

30

Synthetic Lease

A lease that is structured to provide a company with the tax benefits of ownership while not requiring the asset to be reflected on the company's financial statements.

31

Finance Lease

Equivalent to the purchase of some asset by the lessee, that is directly financed by the lessor. Under IFRS, if substantially all the risks and rewards incidental to ownership are transferred to the lessee, the lease is classified as a finance lease and the lessee reports a lease obligation on the balance sheet.

32

Direct Financing Lease

A direct financing lease results when the present value of the lease payments equals the carrying amount of the leased asset.

33

Sales-Type Lease

Results when the present value of lease payments exceeds the carrying value of the leased asset. Lessor shows profit on the sale in the year of the transaction and interest revenue over the life of the lease.

34

Merger

The distinctive feature of a merger is that only one of the entities remains in existence. One hundred percent of the target is absorbed into the acquiring company.

35

Acquisition

Each entity continues operations but is connected through a parent-subsidiary relationship. Each entity is an individual that maintains separate financial records, but the parent provides consolidated financial statements.

36

Consolidation

A new legal entity is formed and none of the predecessor entities exist.

37

Pension Obligation

The present value of future benefits earned by employees for service provided to date.

38

Pension Service Costs

The amount by which a company's pension obligation increases as a result of employees' service in the current period.

39

Pension Net Interest Expense/Income

Calculated by multiplying the net pension liability/asset by the discount rate used in determining the present value of the pension liability. Represents the financing cost of deferring payments to the plan.

40

Pension Remeasurement

Includes actuarial gains and losses and any differences between the actual return on plan assets and the amount included in the net interest expense/income calculation. Recognized in OCI.

41

Merger

The distinctive feature of a merger is that only one of the entities remains in existence. One hundred percent of the target is absorbed into the acquiring company.

42

Acquisition

Each entity continues operations but is connected through a parent-subsidiary relationship. Each entity is an individual that maintains separate financial records, but the parent provides consolidated financial statements.

43

Consolidation

A new legal entity is formed and none of the predecessor entities exist.

44

Pension Obligation

The present value of future benefits earned by employees for service provided to date.

45

Pension Service Costs

The amount by which a company's pension obligation increases as a result of employees' service in the current period.

46

Pension Net Interest Expense/Income

Calculated by multiplying the net pension liability/asset by the discount rate used in determining the present value of the pension liability. Represents the financing cost of deferring payments to the plan.

47

Pension Remeasurement

Includes actuarial gains and losses and any differences between the actual return on plan assets and the amount included in the net interest expense/income calculation. Recognized in OCI.

48

Merger

The distinctive feature of a merger is that only one of the entities remains in existence. One hundred percent of the target is absorbed into the acquiring company.

49

Acquisition

Each entity continues operations but is connected through a parent-subsidiary relationship. Each entity is an individual that maintains separate financial records, but the parent provides consolidated financial statements.

50

Consolidation

A new legal entity is formed and none of the predecessor entities exist.

51

Pension Obligation

The present value of future benefits earned by employees for service provided to date.

52

Pension Service Costs

The amount by which a company's pension obligation increases as a result of employees' service in the current period.

53

Pension Net Interest Expense/Income

Calculated by multiplying the net pension liability/asset by the discount rate used in determining the present value of the pension liability. Represents the financing cost of deferring payments to the plan.

54

Pension Remeasurement

Includes actuarial gains and losses and any differences between the actual return on plan assets and the amount included in the net interest expense/income calculation. Recognized in OCI.

55

Merger

The distinctive feature of a merger is that only one of the entities remains in existence. One hundred percent of the target is absorbed into the acquiring company.

56

Acquisition

Each entity continues operations but is connected through a parent-subsidiary relationship. Each entity is an individual that maintains separate financial records, but the parent provides consolidated financial statements.

57

Consolidation

A new legal entity is formed and none of the predecessor entities exist.

58

Pension Obligation

The present value of future benefits earned by employees for service provided to date.

59

Pension Service Costs

The amount by which a company's pension obligation increases as a result of employees' service in the current period.

60

Pension Net Interest Expense/Income

Calculated by multiplying the net pension liability/asset by the discount rate used in determining the present value of the pension liability. Represents the financing cost of deferring payments to the plan.

61

Pension Remeasurement

Includes actuarial gains and losses and any differences between the actual return on plan assets and the amount included in the net interest expense/income calculation. Recognized in OCI.