Financial Reporting and Analysis

Question 1

LIFO liquidation occurs when…

Answer 1

LIFO liquidation occurs when the number of units in ending inventory declines from the number of units that were present at the beginning of the year

Question 2

COGS(FIFO) =

Answer 2

COGS (FIFO) = COGS (LIFO) – increase in LIFO Reserve

Question 3

NI (FIFO) =

Answer 3

NI (FIFO) = NI (LIFO) + increase in LIFO Reserve * (1 – Tax Rate)

Question 4

Inventory Turnover Ratio =

Answer 4

Inventory Turnover Ratio = COGS / Average Inventory

Question 5

With ↑ prices, under LIFO…

Answer 5

With ↑ prices, under LIFO, ↑ COGS and ↓ inventory carrying amount, ↑ inventory turnover ratio, ↓ days inventory on hand, ↓ operating and cash conversion cycles

Question 6

Interest Coverage Ratio =

Answer 6

Interest Rate Coverage Ratio = EBIT / Interest Paid (adjusted – add back capitalized interest to both)

Question 7

Capitalizing on expenditure rather than …

Answer 7

Capitalizing on expenditure rather than expensing it results in greater amounts reported as cash from operating

Question 8

Total Asset Turnover =

Answer 8

Total Asset Turnover = Sales / Total Assets

Question 9

Estimated Remaining Life =

Answer 9

Estimated Remaining Life = Net (depreciable) PP&E (excludes land) / Annual Depreciation Expense

Question 10

Investments in associates and joint ventures …

Answer 10

Investments in associates and joint ventures are those in which the investor has significant influence, but not control; IFRS and US GAAP require the equity method of accounting

Question 11

Goodwill is …

Answer 11

Goodwill is the difference between the acquisition value and the fair value of the target’s identifiable net tangible and intangible assets

Question 12

SPEs and VIEs are required to …

Answer 12

SPEs (special purpose entities) and VIEs (variable interest entities) are required to be consolidates by the entity which is expected to absorb the majority of the expected losses or receive the majority of expected residual benefits

Question 13

Investment in Associates (Equity Method) Year End (Investment Income) =

Answer 13

Investment in Associates (Equity Method) Year End (Investment Income) = Start of Year Investment (Opening Balance or Initial Investment) + Share of Net Income – Share of Dividends Received – Amortization of Excess Amount Paid for PPE (= (Fair Value – Book Value)/Estimated Useful Life Remaining)

Question 14

Under GAAP, Impairment Loss =

Answer 14

Under GAAP, Impairment Loss = Carrying Amount (or Net Book Value) – Fair Value

Question 15

Under IFRS, the components of periodic pension costs are recognized…

Answer 15

Under IFRS, the components of periodic pension costs are recognized as follows: service cost in P&L (profit or loss), net interest income/expense in P&L, and remeasurements in OCI (other comprehensive income) and are NOT amortized to future P&L (income statement)

Question 16

Under GAAP, the components of period pension costs are recognized…

Answer 16

Under GAAP, the components of periodic pension cost recognized in P&L: current service costs, interest expense on the pension obligation, and expected returns on plan assets (which reduces the cost); OCI and amortized to future P&L: past service costs, actuarial gains and losses, and differences between expected and actual returns on plan assets

Question 17

Current Rate Method

Answer 17

Current Rate Method – all assets and liabilities are translated at the current exchange rate; I/S items translated at the average rate for the year

Question 18

The FC (foreign currency) financial statements of a foreign operation that has a FC as its FuC (functional currency) are translated using

Answer 18

The FC (foreign currency) financial statements of a foreign operation that has a FC as its FuC (functional currency) are translated using the current rate method

Question 19

The FC financial statements of a foreign operation that has the parent’s presentation currency as its FuC are translated using

Answer 19

The FC financial statements of a foreign operation that has the parent’s presentation currency as its FuC are translated using the temporal method

Question 20

Temporal Method vs. Current Rate Method… FC strengthens/weakens relative to parent’s presentation currency

Answer 20

Temporal Method: Net Monetary Liability Exposure Temporal Method: Net Monetary Asset Exposure Current Rate Method
FC strengthens relative to parent’s PC Translation: Loss Gain Positive Adjustment
FC weakens relative to parent’s PC Translation: Gain Loss Negative Adjustment

Question 21

Temporal Method, with …

Answer 21

Temporal Method, with net monetary liability exposure, foreign currency strengthens relative to parent’s presentation currency, report a translation loss in net income

Question 22

Potential problems that affect the quality of financial reports:

Answer 22

Potential problems that affect the quality of financial reports: aggressive, premature revenue recognition

Question 23

Earnings that have a significant …

Answer 23

Earnings that have a significant accrual component are less persistent (and lower quality)