Financial Statement Analysis Flashcards
1
Q
What are the six steps in financial statement analysis framework?
A
2
Q
What is management commentary or management discussion and analysis
A
Required to discuss significant trends such as inflation. Provides an assessment of the financial performance and condition of a company
3
Q
What is a business segment or operating segment?
A
Portion of a company that accounts for more than 10% of the company’s revenues
4
Q
What are the 3 types of audits opinion
A
Unqualified/clean
Qualified
Adverse
5
Q
What does an unqualified or clean opinion mean?
A
Free from material errors and emmissions
6
Q
What does a qualified opinion mean?
A
If the financial statements make any exceptions to the accounting principles
7
Q
What is an adverse opinion
A
Statements not presented fairly
8
Q
What is a modified opinion
A
Any opinion other than unqualified
9
Q
What is sarbanes oxley act?
A
Management is required to provide a report on a company’s internal control system
10
Q
What is a proxy statement
A
Issued to shareholders when there are matters that require a shareholder vote
11
Q
What are the inventory valuations for US GAAP
A
FIFO, LIFO, weighted average
12
Q
What are the inventory measures for IFRS?
A
FIFO & weighted average
LIFO is prohibited
13
Q
What happens to product development costs in US GAAP AND IFRS?
A
Us gaap - expensed
IFRS - may be capitalised
14
Q
What is the matching principle
A
Expenses are recognized in the period in which the revenue for the goods and services is recognized
15
Q
What is a period cost?
A
An expense that is not tied directly to generating revenue such as admin costs
16
Q
If an expense will provide future economic benefit what happens to that expense?
A
It is capitalised
17
Q
What happens under IFRS and US GAAP for R&D
A
IFRS - research costs are expensed as incurred. development costs may be capitalised
US GAAP - both R&D costs are generally expenses as incurred. Costs for creating software for sale to others are traded in a manner similar to the treatment of R&D costs under IFRS once technological feasibility has been established
18
Q
What happens when you capitalise interest?
A
Results in it being reported in the cash flow statement as an outflow from investing activities
19
Q
What must happen if there are accounting changes?
A
Retrospective application or prospective application
20
Q
What is a prior period adjustment
A
Correction of an accounting error and requires retrospective application
21
Q
A
22
Q
What is a potentially dilutive securities
A
Include stock options, warrants, convertible debt
23
Q
What is a dilutive security
A
Securities that would decrease earnings per share if exercised or converted to common stock
24
Q
What are anti dilutive securities
A
Securities that would increase EPS if excersied or converted to common stock
25
What is a simple capital structure
Capital structure that contains no potentially dilutive securities
26
What is a complex capital structure?
Capital structure that contains potentially dilutive securities
27
What is weighted average shares outstanding
Each share issue is weighted by the portion of the year it was outstanding.
Stock splits and stock dividends are applied retroactively to the beginning of the year, so old shares are converted to new shares for consistency
28
How to work out diluted EPS? If converted
29
How to work out basic EPS
30
How to determine whether a convertible security is dilutive?
31
What is treasury stock method
Assumes that the funds recover by the company from the exercise of options and warrants would be used hypothetically to purchase shares of the company’s common stock in the market
32
What is goodwill
Intangible asset created when a business is purchased for more than the value of its net assets (net liabilities)
33
What is economic goodwill
Derived from the expected performance of the firm
34
What is accounting goodwill
Result of past acquisitions
35
What happens to intangible assets?
Cost get amortised over it’s useful life
36
What is an unidentifiable intangible asset?
Cannot be purchased separately and may have an indefinite life
37
What is a ST financial liability and how is it reported?
Reported at fair value and included held for trading liability’s such as short positions
38
How are securities accounted for in both IFRS AND US GAAP
IFRS - securities measured at amortised cost, measured at fair value through OCU, securities measured at fair value through P&L
US GAAP - mostly correspond to IFRS treatment.
39
What is a common size balance sheet
Expresses each item as a % of total assets, allowing time series analysis and compare balance sheets with other firms (cross sectional analysis)
40
What are liquidity ratios?
Measure the ability to satisfy ST obligations when due
41
How to work out the current ratio?
CA/CL
42
What is the quick ratio
Excludes inventory and less liquid
43
44
What is the cash ratio?
Most conservative
45
What do solvency ratios measure?
Measure ability to satisfy LT obligations
46
How to work out leverage ratio
Total assets/total equity
47
Total debt ratio
Total debt/total assets
48
Using the indirect method how do you calculate operating cash flow?
49
How to work out end cash balance?
50
What are the 2 ways to present CFO? What are the differences?
Direct and indirect. The difference relates to the presentation of cash flow from operating activities
51
How are interest and dividends treated under IFRS AND US GAAP?
52
How are investing and financing cash flows calculated?
Subtracting expenditures on new assets from the proceeds of asset sales.
53
What is cash flow from financing.
Consists of in/out flows from transactions affecting a firms capital structure, such as borrowing, repaying debt.
54
What is CFF a sum of?
Net cash flows from creditors and net cash from shareholders
55
Debt coverage ratio
56
Interest coverage ratio
57
What is free cash flow
Measure of cash that is available for discretionary use. After Capex
58
What is FCFF
Cash available to all investors, both equity and debt holders
59
How to calculate FCFF from net income?
60
How to calculate FCFF from operating cash flow
61
What is FCFE?
Cash flow available for distribution to common shareholders that is after all obligations have been paid
62
What inventory method provides the highest COGS?
LIFO
63
What does LIFO result in with liquidity, activity and solvency?
Liquidity - lower inventory value, thus current ratio is lower
Activity - inventory turn over is higher as LIFO is measured much higher (inventory turn over = cogs/avg inventory)
Solvency - lifo results in lower total assets compared to FIFO because LIFO inventory balance is lower
64
Under IFRS how is inventory reported?
On the balance sheet at the lower cost or NRV (expected sales price - selling costs and completion costs
65
Inventory turnover
COGS/inventory
66
What must happen regarding the value of intangibles with infinite lives
Value Must be checked periodically for impairments
67
When can you capitalise development costs?
After technological feasibility has been established
68
When is an asset impaired
When it’s carrying value exceeds recoverable amount
69
What is the process of impairment under IFRS
Assets value is written down on the B/S to the recoverable amount. Impairment loss, equal to the excess of carrying value over the recoverable amount
70
What are the rules for impairment for IFRS and US GAAP?
IFRS - loss can be reversed but limited to the original impairment loss
US GAAP - tested for impairment only when events and circumstances indicate the firm may not be able to recover the carrying value through future use (loss recoveries are not permitted)
71
What is decrecognizing?
When a long lived asset is removed from the balance sheet as they are sold exchanged or abandoned
72
What are the 3 conditions of a lease contract?
1) refer to a specific asset
2) must give the lessee effectively all the assets economic benefits during the term of the lease
3) must give the lessee the right to determine how to use the asset during the term of the lease
73
What is a finance lease?
When both the benefits and risks of ownership are substantially transferred to the lessee
74
How are leases reported under IFRS?
Lessee reports a right of use asset and a lease liability on the balance sheet. ROU asset is amortized straight line over the term of the lease
75
How is a lease reported under US GAAP
Same as IFRS but lease payment and the amortisation of the ROU asset on the income statement as a single expense
76
For a finance lessor how is it reported?
Same for IFRS and US GAAP
Lessor removes leased asset from its balance sheet and adds a lease receivable asset equal to the PV of the expected lease payments
77
For a operating lease lessor how is it reported?
Same for IFRS AND US GAAP
lessor keeps the leased asset on its balance sheet and continues to record depreciation expense. On the income statement the lessor reports the lease payments as income and reports depreciation and other costs as an expense
78
Defined contribution plan
Investment decisions left to the employee. No future liability to report
79
Defined benefit pension plan
Firm promises to make periodic payments to employees after retirement. Employer assumes investment risk.
Can be overfunded or underfunded both creating a net pension liability or asset on the balance sheet
80
What is share based compensation
Dilutes ownership of existing shareholders and reduces eps
Requires both methods to estimate the fair value of of the stock based compensation at the grant date and expense it to the income statement
81
Formula for income tax expense
82
What is effective tax rate?
Tax expense as a % of pre tax income
83
What is the descriptor for Hugh quality financial reporting?
Decision useful
84
What must something be for it to be decision useful
Relevant
Faithful representation
85
What is smoothing earnings
Where a firm either has conservative or aggressive accounting policies
86
What are the 6 different quality of financial reports
87
What is channel stuffing?
Overloading a distribution channel with more goods than would normally be sold during a period
88
What is bill and hold
Customer buys goods and receives an invoice but requests that the firm hold the goods at their location for a period
89
What is accelerated depreciation method
Increases and decreases net income in the early years of an assets life compared to straight line depreciation
90
What does capitalising expenses do?
Creates an asset on the balance sheet
91
Under IFRS what are the two components of the change in the net pension asset or liability that are recognized as pension expense
Employees service costs
Net interest expense or income accrued on the beginning net pension asset or liability
92
What are the formulas to remember regarding DTA and DTL
93
B as some of the inventory was purchased at a no longer available lower price
94
95
Formula for impairment?
Impairment Loss = Net Carrying Amount – Recoverable Amount
Where:
Recoverable Amount = Higher of:
• Fair Value – Costs to Sell, or
• Value in Use
96
To calculate Diluted EPS with convertible debt and convertible preferred what must I do
1) calculate basic eps
2) subtract dividends from NI. Calculate diluted EPS is bond is converted add tax cost savings back to next income. So bond coupon x amount x 1-t.
3) calculate diluted EPS for preferred shares when converted
97
Are dividends paid to preferred shareholders when calculating diluted EPS?
No
98
Can diluted EPS be higher than basic EPS?
No we have to exclude anti dilutive securities
99
Are preferred dividends tax adjusted?
No
100
How can FCFF be calculated
Operating cash flows plus after-tax interest expense
101
Cash to income ratio formula
CFO/revenues
102
How to work out total capex?
Maintenance capex + growth capex
103
How to work out maintenance capex
Depreciation expense/beginning of year PPE x net PPE end of year
104
How to work out cash provided by operating activities
Net income - increase in inventory +decrease in accounts receivable + increase in accounts payable
105
What accounts are used for reporting intangible assets
Cost model or revaluation model
106
Under US gaap how are dividends paid to stockholders classified
Financing activity on the statement of cash flows
107
How to work out carrying value?
Cost at most recent year - accumulated losses and amortization
108
How to work out diluted EPS if converted method with convertible debt?
109
Where might an analyst look for details covering the full extent of a company’s capital resources
Management discussion and analysis
110
Where is managements compensation found in?
Proxy statement
111
When is revenue recognised
When the risks and rewards transfer
112
Under the may 2014 converged accounting standards what happens to certain costs incurred to fulfil a contract
They must be capitalised
113
Is profitability higher in the converged standards prior of after the convergence?
After convergence as costs are now capitalised making profitability higher
114
How to work out basic EPS
NI/WA number of shares
115
When working out diluted eps do you still include preferred dividends
No because the shares are converted
116
When looking at weighted number of shares and there is a stock split what do you do?
Stock split is treated retroactively to the start of the year
117
How to work out EPS with options what are the assumptions
Assumptions are that the stocks are bought with the proceeds of conversion at the market price
118
When shares are bought by the company what happens to shares outstanding
It decreases
119
For financial assets classified as trading securities how are unrealised gains and losses reflected in shareholders equity?
Flow through income into retained earnings
120
For financial assets classified as available for sale how are unrealised gains and losses reflected in SE?
Component of accumulated other comprehensive income
121
For financial assets classified as held to maturity how are unrealised gains and losses reflected in SE?
They are not, gains and losses are recognised only when realised
122
How to work out cash collected from customers
Revenues - increase in accounts receivable
123
How do you know whether a company is using the direct method of cash flow or indirect?
If they are using the description of operating activities they are using the direct method
124
Why might a firm include more of an acquisition price to goodwill and not identifiable assets?
Because good will is not amortised thus the result is less depreciation and amortisation expense and thus higher income
125
For financial assets classified as trading securities how are unrealised gains and losses reflected in shareholders equity
They flow through income into retained earnings
126
For financial assets classified as available for sale how are unrealized gains and losses reflected in shareholders equity?
They are a component of accumulated other comprehensive income
127
For financial assets classified as help to maturity how are unrealised gains and losses reflected in shareholders equity
They are not realised
128
How to work out ending cash balance
Change in cash balance + beginning cash balance
129
What does direct method of cash flow statement presentation show?
Specific cash inflows and outflows
