FR&A

Question 1

Effective tax rate =

Answer 1

tax expense / pretax income

Question 2

Treasury stock method: Number of shares in denominator =

Answer 2

(AMP - EP)/AMP X N Where: AMP = Average market price EP = exercise price N = Number of shares can be converted

Question 3

Two fundamental qualitative characteristics of financial statements

Answer 3

Relevance and faithful representation

Question 4

The enhancing characteristics of financial statements

Answer 4

Include comparability, verifiability, timeliness, and understandability.

Question 5

The two primary assumptions that underlie the preparation of financial statements

Answer 5

Accrual basis and the going concern assumption.

Question 6

Revaluation of Long-Lived Assets

Answer 6

IFRS: Revaluation gain recognized in net income only to the extent it reverses previously recognized impairment loss; further ains recognized in equity as revaluation surplus. (For investment property, all gains and losses from marking to FV are recognized as income) GAAP: revaluation is not permitted.

Question 7

Two requirements of revenue recognition

Answer 7

1. completion of earnings process
2. reasonable assurance of payment

Question 8

Methods for accounting for long-term contracts include:

Answer 8

• Percentage-of-completion—recognizes revenue in proportion to costs incurred.
• Completed-contract—recognizes revenue only when the contract is complete.

Question 9

Revenue recognition methods for installment sales are:

Answer 9

• Normal revenue recognition at time of sale if collectibility is reasonably assured.
• Installment sales method if collectibility cannot be reasonably estimated.
• Cost recovery method if collectibility is highly uncertain.

Question 10

Free Cash Flow to Firm (FCFF)

Answer 10

FCFF is available to all investors.

FCFF = CFO + [Int. exp. x (1 - tax)] - fixed capital investment

Question 11

Free cash flow to equity (FCFE)

Answer 11

FCFE is available to shareholders.

FCFE = CFO - FCInv + (Debt issued - Debt borrowed)

Question 12

Defensive interval (number of days of average cash expenditures the firm could pay with its current liquid assets)

Answer 12

Question 13

Receivable Turnover

Answer 13

Receivable Turnover = Sales / Avg Receivables

Question 14

Inventory Turnover

Answer 14

Inventory Turnover = COGS / Avg Inventory

Question 15

Payable Turnover

Answer 15

Payable Turnover = Purchases / Avg Payables

Question 16

Return on Asset ( Return on Total Capital)

Answer 16

RoA = EBIT / Avg Total Capital

Question 17

Interest Coverage

Answer 17

Interest Coverage = EBIT / Interest

Question 18

Fixed Charge Coverage

Answer 18

Fixed Charge Coverage = (EBIT + Lease Payment) / (Interest + Lease Payment)

Question 19

Traditional Dupont Equation

Answer 19

Question 20

Extended Dupont Equation

Answer 20

Question 21

(IFRS) Components of the Change in a Net Pension Asset or Liability

Answer 21

Question 22

(GAAP) Components of the Change in a Net Pension Asset or Liability

Answer 22

Question 23

Average Asset

Answer 23

Average asset = Accumulated depreciation / annual depreciation expense

Question 24

Remaining useful life

Answer 24

Remaining useful life = Net PP&E / annaul depreciation expense

Question 25

Deferred tax asset

Answer 25

Taxable income > pretax income

Must recognize valuation allowance if more likely than not that DTA will not be realized

Question 26

Deferred tax liability

Answer 26

Taxable Income < Pretax Income

Treat DTL as equity if not expected to reverse.

Question 27

Adjust LIFO to FIFO

Answer 27

• FIFO Inv. = LIFO Inv. + LIFO Reserve
• FIFO COGS = LIFO COGS - Change in LIFO Reserve
• FIFO RE = LIFO RE + LIFO Reserve x (1 - Tax Rate)
• FIFO Cash = LIFO Cash - LIFO Reserve x Tax Rate