FRA (II) (III) (IV) Flashcards
(292 cards)
1
Q
Income statement equation
A
revenues- expense = net income
2
Q
Expenses are grouped together by :
A
Nature: depreciation expenses
Function: COGS
3
Q
For nonfinancial firms, EBIT (operating profit) does not include:
A
financing costs
4
Q
When a firm has ______ in a subsidiary, the statements of the two firms are consolidated
A
controlling interest
5
Q
The share of a subsidiary’s income that a firm does not own is reported in the firms income statement as:
A
Non-controlling interest/minority owner’s interest
6
Q
Revenue is recognized when:
A
goods are transferred to the buyer
Revenue recognition
7
Q
The central principle of the converged standards for revenue recognition for IASB and FASB is?
A
revenue is recognized when the firm has transferred a good or service to the customer
8
Q
How is revenue recognized for long term projects?
A
based on the firm’s progress towards completion of performance obligation (contract)
9
Q
All revenues are grouped together and all expenses are grouped together in this presentation format
A
single step
10
Q
Income Statement presentation includes subtotals like gross profit and operating profit
A
multi-step
11
Q
Expense recognition is based on the matching principle:
A
accrual basis of accounting
12
Q
Matching principle: expenses for producing goods and services are recognized ______
A
in the period in which the revenue is recognized (when the goods have been transferred)
13
Q
expenses that are not directly tied to generating revenue, like administrative costs,
A
period costs
14
Q
period costs are expensed when?
A
the period they occur
15
Q
If a firms sells good on credit or provides warranty to the customer, the matching principle requires the firm to ______________
A
establish a BDE or warranty expense
16
Q
The dpreciation method that is more appropriate for matching revenues & expenses:
A
Accelerated; DDB
Assets generate more benefit in the early year of their lives
17
Q
Straight line method results in:
A
lower depreciation expense;
higher net income
18
Q
DDB depreciation stops once:
A
The residual value has been reached
19
Q
LIFO is popular because it results in ____ COGS, in an ____ environment, creating ____ benefits
A
higher
inflationary
income tax
20
Q
which inventory method is not permitted under IFRS?
A
LIFO
21
Q
If PPE is impaired, what is the impact?
A
Income Staement: Expense is recognized equal to the impairement, reducing NI
Balance Sheet: lower NI reduces RE
CF: no affect
PPE value: reduced
22
Q
Compared to financial servcies companies:
For nonfinancial firms, operating activties do not include:
A
- Investing income
- Financing expenses (interest)
Non-operating income
Includes: Interest, dividends, gains/losses on disposals
23
Q
Interest, dividends, gains/losses for financial firms are considered :
A
operating transactions
24
Q
Discontinued operations must be:
A
physically & operationally distinct from the firm
25
How are discontinued operations reported on the income statement?
Reported separately after
net income from continuing operations
26
Unusual or infrequent items are included in:
income from **continuing operations**
| (gains/losses)
27
Gains or losses from the sale of assets or part of the business is an example of?
unusual/infrequent items
28
Impairements, write-offs/downs, restructuring costs are examples of?
unusual/infrequent items
29
Any prior period financial statements presented in a firm's current financial statements must be restated
retrospective application
30
Changes in accounting policies require:
retrospective application of all shown in a financial report
31
does not require prior period restatement, However, beginning values of affected accounts are adjusted for the cumulative effects of the change
modified retrospective application
32
Changes in accounting estimates are applied:
Prospectively
33
Prior period adjustments are applied:
retrospective
34
EPS is only reported for ______
shares of common stock
35
EPS measures:
Profitability
36
Simple capital structure contains:
no dilutive securities
37
Complex capital structure contains:
dilutive securities
38
stock options, warrants, convertible securities are examples of?
dilutive securities
39
Dilutive securities ____ EPS, resulting in:
Diluted EPS _ Basic EPS, and we report:
Decrease;
Diluted < Basic;
Report Diluted
40
Anti-Dilutive securities ____ EPS; resulting in
Diluted EPS _ Basic EPS, and we report:
Increase EPS;
Diluted > Basic;
Report Basic EPS that is equal to reported diluted EPS
## Footnote
Antidilutive securities are removed from the diluted EPS calculation, and will cause basic = diluted
41
Ending value of an asset; salvage value
residual value
42
treasury stock method assumes: that the funds received by the company from the exercise of the options would be used to:
purchase shares of CS at the average market price
43
Vertical common sized income statements: express each category of the income statement as a percentage of:
revenue
44
common size IS allows for comparison over time in:
time-series analysis
45
common size IS allows for comparison amongst firms in:
cross-sectional analysis
46
Used to measure a firm's profitability quickly
gross profit margin
47
High profit margins can be achieved by?
product differentiation
48
Comprehensive income includes all transactions that affect shareholder's equity, except for:
**transactions with shareholders**
49
Net income + OCI =
Comprehensive Income
50
OCI shows changes in **equity** from transactions from:
Non-ownership sources:
* unrealized gains/losses
* foreign currency transalation
51
* gains and losses on **foreign currency translation**
* Adjustments for minimuim pension liability (remeasurement)
* Unrealized gains and losses from cash flow of **hedging derivatives**
* Unrealized gains and losses from **available for sale securities**
* Unrealized gains and losses on **held to maturity securities**
OCI
52
Transactions with shareholders that are not included on the IS:
dividends paid
shares issued or repurchased
53
IFRS equivalent for trading securities
measured at fair value through P/L
54
IFRS equivalent for available for sale securities
Measured at fair value through OCI
55
IFRS equivalent for held to maturity securities
measured at amortized cost
56
Net revenue =
Revenue - returns/allowances
57
how do you handle stock splits when calculating the weighted average shares outstanding in EPS?
no matter when it was issued, you restate the beginning of the year shares with this split
(for stock dividends too)
58
What is the relationship between contracts & performance obligations?
The contract outlines what the performance obligation will be, which is the promise to transfer a distinct good or service
## Footnote
According to the Standards of Revenue Recognition
59
The owner's residual interest in the firm, after deducting liabilities
Equity
60
What are the uses of the balance sheet?
1. asses a firms:
liquidity
solvency
ability to make distributions to shareholders
2. measure the firm's capital structure
61
ability to meet short term obligations
liquidity
62
The capital structure of the firm is the mix of:
Debt and Equity used to finance the firm
63
The balance sheet is limited in its ability to determine a company's:
intrinsic/ market value
## Footnote
The balance sheet under current accounting standards is a mixed model
Some assets and liabilities are measured based on historical cost, sometimes with adjustments, whereas other assets and liabilities are measured based on current value
64
Under IFRS which BS format will be used?
liquidity based format or
classified
65
Under GAAP which BS format can be used?
Classified
66
Classified balance sheets separately report:
current vs noncurrent assets & liabilities seperately
67
Classified balance sheet is used to evaluate a firm's:
liquidity
68
A liquidity based BS presentation presents assets & liabilites:
assets and liabilities in order or liquidity
69
Which BS presentation format is used by banks?
liquidity
70
Contra account that reduces the balance of accounts receivable:
Allowance for doubtful accounts
71
The carrying value of inventories under IFRS is?
the lower of:
historical cost or NRV
72
the carrying value of inventories under GAAP is?
the lower of:
historical cost or market cost
73
Expenses that have been reported but not yet paid
accrued expenses (liabilities)
74
arises when money has been collected for goods or services that has not been delivered
Deferred income/unearned revenue
75
expenses that have been recognized in the income statement, but are not yet due (paid)
Accrued liabilities/expenses
76
What makes current assets and current liabilities current?
They occur in 1 year or 1 operating cycle, whichever is longer
77
Too much or too little working capital indicates?
Too much= inefficient use of assets
Too little= liquidity issues
78
Current assets reveal:
operating activities of firm
79
non current asset reveal:
investing activities
80
Non current liabilities reveal:
long term financing activities
81
financial assets that are traded in a public market and whose value can be readily determined
marketable securities
82
financial asset, that represents amounts owed to the firm by customers for goods and services, sold on credit
Accounts receivable
83
Trade receivables are reported at?
NRV
84
Accounts receivable are reported on balance sheet at:
NRV, less ADA
85
Measuring inventory costs by assigning predetermined amounts of materials, labor, and overhead to goods produced
Standard costing
86
Measuring inventory costs by measuring inventory at retail prices and then subtract gross profit in order to determine cost
Retail method
87
What is reported for notes payables?
principal portion of the debt due within 1 year/1operating cycle
88
PPE is reported on the balance sheet at:
Amortized cost/NBV/Carrying value
| CV= Historical cost- Accumuated Depreciation
89
Under GAAP which reporting models for PPE are allowed?
cost model only
90
Under IFRS which reporting models for PPE are allowed?
cost model
revaluation model
## Footnote
Revaluation model allows the asset to be carried at fair value
91
Under GAAP, land is reported at:
Historical cost
92
Investment properties are recognized under which accounting principle? Reported at?
IFRS
Cost or Fair value
93
Under US GAAP, internally created identifiable intangible assets are ?
Expensed as incurred
Not reported on income statement
CFO
| Internally generated goodwill
94
Goodwill is classified as:
long term asset/noncurrent asset
95
How is Goodwill reported on the balance sheet?
Purchase price - fair market value of the identifiable net assets (assets-liabilities)
96
Good will should be ____ , but not _____?
tested for impairment, but not amortized
97
How does the income statement flow to shareholder's equity?
to shareholders’ equity as part of retained earnings.
98
Deferred tax liabilities are classified as:
non current liability
99
How are held for trading liabilities, derivate liabilities, non-derivative liabilities with exposures hedged by derivates measured?
Fair value
100
non-controlling (minority) interest in **consolidated** subsidiaries is presented on the balance sheet:
Separately, but a part of shareholder's equity
101
The item “retained earnings” is a component of
Shareholder's equity
102
Treasury stock is reported on the _, as a _:
* reported on the balance sheet
* reduction to shareholder's equity
| Issue/redemption: CFF
103
Treasury stock = ?
issued shares - outstanding shares
104
Shares that have been repurchased and not cancelled by the company that issued them
Treasury stock
105
portion in consolidated subsidiaries that is owned by others, i.e., shares in subsidiaries not owned by the parent
Non-controlling interest
106
cumulative amount of earnings recognized on a company’s income statements that have not been distributed as dividends to the company’s owners
retained earnings
107
Equity interest of of minority shareholders in subsidiaries that have been consolidated
non-controlling interest
108
Vertical common-size analysis involves stating each balance sheet item as a percentage of total:
assets
109
Common size balance sheet provides information on the company's ______?
increase or decrease of financial leverage
110
An investor worried about a company’s long-term solvency would most likely examine its
debt to equity ratio
111
Under GAAP, Equipment is measured at?
Historical Cost= Historical cost - accumulated depreciation
112
Trading securities
BS:
Income Statement:
CF:
BS:
* fair value
Income Statement: (fair value)
* unrealized gains and losses
* realized gains and losses
* interest & dividends
CFO
* purchases & sales
113
Held to maturity securities
BS:
Income Statement:
CF:
BS:
-amortized cost
Income Statement:
-realized gains/losses
-interest
CFI
## Footnote
Unrealized gains/losses are not reported
114
Available for sale securities:
BS:
Income Statement:
BS:
-fair value
-unrealized gains/losses
Income Statement:
-realized gains/losses
-interest
-dividends
(**OCI**- part of stockholder's equity)
**CFI**
115
A company that reports under IFRS has developed a new product which required research costs of $2 million and development costs of $4 million. The maximum amount the company can record as the value of the new product on its balance sheet is?
4 million= 6 million total - 2 million research costs incurred
_____________________________________`
6million total cost
2 million in research (must be expensed as incurred)
4 million in development (capitalized)
116
Declaring a dividend _____ shareholders' equity
decreases
117
Under IFRS, firms may report an investment in the equity securities at fair value through?
IFRS: Income statement or OCI
GAAP: only income statement
118
Identifiable, intangible assets are measured at?
amortized over their useful lives
119
# Comprehensive income shows:
* Change in:
* From:
* Changes in **equity**
* From transactions from **non-ownership sources**
120
The amount the corporation receives from the issuance of common stock is equal to ?
par value + the additional paid-in-capital (proceeds in excess of par)
121
stated or nominal value assigned to the common stock
The par value of common stock
122
measure the firm’s ability to satisfy long-term obligations
solvency ratios
123
Measures liquidity relative to current liabilities
Liquidity ratios
124
Securities expected to be sold in the near term
Held for trading (trading securities)
125
How do you convert an indirect CFS to a direct CFS?
adjusting each income statement account for changes in associated balance sheet accounts
eliminating noncash and nonoperating items (deferred tax asset/liabilites) and income taxes payable
126
Which items can be classified as either operating or investing activity for IFRS?
interest received
dividends received
127
Which items can be classified as either operating or financing under IFRS?
Dividends paid
Interest paid
128
What is the difference between classifying income taxes for GAAP and IFRS?
GAAP: operating activity
IFRS: generally an operating activity, but a portion can be allocated to investing or financing activities if it is specifically identified with those activities
129
For the direct method of CF, each line item on the _______ is converted into _____ or _____.
income statement
cash receipts
cash payments
130
Noncurrent assets are classified as?
Investing
131
Trading securities are classified as?
Operating activities (for both financial and nonfinancial firms)
132
Payment of dividends are classified as?
financing activity
133
Obtaining/repaying capital & noncurrent liabilities is which CF?
Financing
134
Current assets/liabilities is which CF?
Operating
135
In terms of payment and receival of interest and dividends and taxes, how are they classified?
Interest paid/received= OCF
Dividends received= OCF
Dividends paid= Financing
Taxes paid= OCF
136
The ____ method provides specific information on the sources of operating cash flows?
direct
137
Unearned revenue will (increase or decrease) cash collections?
Increase
goods haven't been transferred, but the cash has
138
Prepaid expenses are (curren/non current) (assets/liabilities), that will (increase/decrease) cash expenses?
Prepaid expenses are a classfied as an **other current asset,** because they represent economic resources to be provided to the firm, but have not yet been supplied, but have been paid for resulting in **cash outflow**
139
Cash paid to suppliers=?
Purchases - accounts payable
140
expresses each inflow of cash as a percentage of total cash inflows and each outflow as a percentage of total cash outflows
common-size cash flow statement
141
measures a firm's ability to acquire long-term assets with cash flows from operations
The reinvestment ratio
142
A more comprehensive ratio, that measures the firm's ability to purchase assets, satisfy debts, and pay dividends.
the Investing and Financing ratio
143
measures the ability to generate cash from a firm's operations and is a performance ratio for cash flow analysis purposes
The cash-to-income ratio
144
measures the firm's ability to satisfy long-term debt with cash flow from operations but it is more of a coverage ratio than a performance ratio.
The debt payment ratio
145
Bonds payable is categorized as a CF from?
financing
146
Gain (losses) are _____ to CFO
subtracted (losses= added)
147
How do we handle depreciation expenses in cash flows?
for the indirect method, we add it back to net income in CFO
148
For financial ratio analysis, it has limited use as an analytical tool for?
comparing companies that use different accounting methods
The lack of consistency across companies makes comparability/interpretation difficult to analyze and limits the usefulness of ratio analysis.
149
Interpreting ratios, for comparing to a benchmark (industry, comparable), we use:
cross sectional (comparing two company's number at the same point in time)
150
When interpreting ratios, for comparing to historical performance, we use
time-series (comparing one company's numbers over a period of time)
151
Which type of ratio bests measures operating performance?
activity ratios
152
How efficiently is the company using it's assets?
activity ratios
153
An increase in number of days of payable, will have what effect on the cash conversion cycle?
shorten the cash conversion cycle
improving liquidity
154
In order to assess a company’s ability to fulfill its long-term obligations
solvency
155
Increasing debt to equity will tell us what about a company's solvency?
solvency is decreasing- the company is taking on more debt, therefore having more debt to pay off in the long term
156
Decline in a company's equity could indicate that the company is:
incurring losses
paying dividends greater than income
repurchasing shares
157
Is the book value of a company's equity impacted by the changes in MV of it's common stock?
No
* Beginning equity + New shares issuance – Shares repurchased + Comprehensive income – Dividends = Ending equity
158
Creditworthiness is not evaluated based on how much a company has ______ but rather on its willingness and ability to pay its obligations
increased its debt
159
Current ratio shows a company's ____?
liquidity; ability to make its short term obligations
160
Dupont analysis=?
ROA * leverage
net profit margin * asset turnover * leverage ratio
161
5 point dupont analysis=?
= tax burden * interest burden * EBIT margin* asset turnover (efficiency) * leverage
162
Common size income statement divides all accounts by?
Total sales
163
Common size balance sheet divides all account by?
Total assets
164
A higher quick ratio indicates:
the firm has higher liquidity
165
When inventory is purchased, what happens to the quick ratio?
Inventory is not included in the quick ratio as an asset, but the cash used to fund the purchase would decrease, thus decreasing the numerator & decreasing the quick ratio
166
If Current Ratio is > 1, and if CA and CL both fall, the overall ratio will _____.
increase; the numerator decreases by less percentages than the denominator
167
Diluted EPS is calculated to be the ______ EPS that could have been reported if all dilutive securities were converted.
Lowest possible EPS
168
Per share valuation ratio?
Earnings per share (EPS)
169
Per share measures are not comparable amongst firms because why?
the number of shares outstanding (the denominator) differ amongst firms
170
Dividends are declared on a _____ basis
per common share basis
171
RE is the earning that are used to _____, rather than ______
grow the firm, rather than be distributed to equity shareholders
172
The proportion of earnings reinvested
retention rate
173
Measures how fast a company can grow without additional external equity issues, while holding leverage constant
Sustainable growth rate
174
Growth in shareholders’ equity, in isolation, will indicate what about profitability?
Nothing; does not provide enough information to assess profitability
175
Measures the “multiple” that the stock market places on a company’s EPS
P/E ratio
176
A company must disclose separate information about any operating segment that constitutes 10% or more of the combined operating segments’ _____, _____, _____.
revenue, assets, or operating profit/loss
177
Forecasts should involve _______. The results of financial analysis are integral to this process, along with ______
a range of possibilities
judgment of the analysts
178
Shows the range of possible outcomes as specific assumptions are changed
Sensitivity analysis; “what if” analysis
179
Shows changes in key financial quantities that result from given economic events
Scenario analysis
180
Computer-generated sensitivity or scenario analysis based on probability models for the factors that drive outcomes
Simulation
181
Profitability ratios include:
dividing by revenue
return on ratios
182
Accounting standards require segment for a distinguishable part of a firm that compromises at least:
10%
183
The dead costs included included in inventories on the balance
product costs
184
Product costs are _______ in the inventories (asset) account on the _______.
Capitalized
Balance sheet
185
Absorption costing, which includes costs including labor and overhead are _____ costs, a type of ____ cost.
conversion/manufacturing
product costs (capitalized on balance sheet)
186
Inventories hit the income statement as ____ when ______.
COGS (expense)
they are sold
187
Costs that are **expensed** when they are incurred:
-abnormal waste
-finished goods storage costs
-admin overhead
-selling costs (freight-out)
period costs
## Footnote
costs that do not contribute to getting the good to its final state, ready for sale
188
Trade discounts are _______ inventory costs (product costs).
subtract from inventory expense
189
Inventory valuation method that best matches the physical flow of the inventory items because it tracks the actual units that are sold
Specific identification
190
Which inventory valuation method is best used for inventory items are not interchangeable?
specific identification
191
Inventory values and COGS are updated continuously
perpetual inventory system
192
How does the perpetual inventory stem impact the inventory valuation methods?
No Change: FIFO and specific identification
Change: LIFO and weighted average costs
LIFO & FIFO relationships remain
193
When calculating that current ratio, what impact will the inventory have on the numerator and denominator?
Impacts Numerator: Assets- includes inventory
No impact denominator: accounts payable is to suppliers, not based on inventory accounting
194
In a period of rising price, LIFO will result in _____ inventory and ____ cost of sales
lower inventory, cheaper inventory is still held
higher COGS because of more expensive current inventory prices
195
Inventory valuation methods relate to the debt-to-equity ratio through?
Equity: net income and inventory
196
LIFO liquidation occurs when a firm's inventories:
Decline
197
In a period of rising prices, LIFO liquidation results in
Higher earnings
Since older layers of inventory that are liquidated were purchased at lower prices, the cost of goods sold will be lower and earnings will be higher.
198
Write-downs occur when:
| & recorded how
* When: NRV < Inventory value on BS
* Income statement: Reports a **Loss (@ NRV)** on income statement
* Balance sheet: NRV
199
Write ups affect the income statement how?
Gain is recognized by reducing the COGS by the recovery amount
| Recovery amount= NRV- inventory value
200
Lower of cost or market methods are used for which inventory valuation methods?
LIFO (GAAP) or retail
201
The market value can be used when it is in a range of:
NRV - profit margin < Market value < NRV
202
The effect of an inventory writedown on a firm's return on assets (ROA) is:
lower ROA; Writing down inventory to net realizable value decreases both net income and total assets in the period of the write-down. Because net income is most likely less than assets, the result in the period is a decrease in ROA.
203
Using the lower of cost or market principle under U.S. GAAP, if the market value of inventory falls below its historical cost, the minimum value at which the inventory can be reported in the financial statements is the:
When inventory is written down to market, the replacement cost of the inventory is its market value
204
A U.S. GAAP reporting firm changes its inventory cost flow assumption from average cost to LIFO. The firm must apply this change
prospectively, with the carrying value as the first LIFO layer.
Changing the inventory cost flow assumption to LIFO is an exception to the retrospective application of changes in accounting principle. This change is applied prospectively, with the carrying value of inventory on the date of the change as the first LIFO layer.
205
When a company wrote down their inventory to NRV in year 1 and then in year 2 inventory increased above NRV, how would firms report under IFRS and GAAP
* IFRS: a firm that has written down inventory to net realizable value may record any **subsequent reversal** (limited to the original writedown amount) as a **gain** on the income statement
* U.S. GAAP: reversals of inventory writedowns are **not** permitted
206
When the sales growth rate exceeds the finished goods inventory growth rate it indicates that:
effective inventory management
the company is managing to service its increased sales level with a relatively lower level of inventory, indicating effective inventory management
207
A high inventory turnover ratio is usually:
Desireable; unless the firm is also losing sales which signifies insufficient inventory levels compares to sales growth
## Footnote
Higher inventory turnover = lower days of inventory on hand
208
Low inventory turnover (high number of days in inventory) may be a sign of:
slow-moving or obsolete inventory
209
No _____ account is needed for a perpetual system
purchases
210
Companies can covert _ to _ , but not the other way around.
Which creates the:
LIFO to FIFO
LIFO reserve
211
Arises when the number of units sold exceeds the number of units purchased or manufactured, so a portion of the older inventory is thus sold off
LIFO Liquidation
## Footnote
older inventory is liquidated; the statement means that units manufactured (or purchased) equaled or exceeded unit sales for each year.
212
Inventory write downs are permitted under:
IFRS & GAAP, at NRV
213
When finished goods are increasing faster than both raw materials and work in progress goods, this suggests:
That there is a decline in demand, and a strong likelihood of future write-downs
214
When a company constructs an asset, borrowing costs incurred directly related to the construction are:
generally capitalized
215
When a company constructs an asset for sale, the borrowing costs are classified as:
inventory
216
Borrowing costs can be capitalized under IFRS until the tangible asset:
is ready for use
217
Capitalizing an asset will have what effect on ROA?
Lower ROA because the denominator (total asset) to be higher to account for the non-current asset on the balance sheet
218
Firms that capitalize costs can be expected to report: _____ asset levels and _____ equity levels in the early years of the asset's life
higher
lower
The capitalized cost is recorded as an asset, which is then expensed in the form of depreciation over future years. Spreading the depreciation out over future years causes net income to increase along with retained earnings and equity in the early years of the asset's life
219
Research & development are reported on the balance sheet as:
Longlived, intangibles
Expensed:
* GAAP: R&D both expensed (except for software which can be capitalized)
* IFRS: R expensed, D can be capitalized
CFO
220
Purchased intangible assets, compared to internally created, can be beneficial for financial reporting purposes, due to it's impact on BS and CF by:
non-current asset
investing cash outflow (instead of OCF which is used in many valuation ratios)
## Footnote
Internally created (R&D) is reported as a OCF outflow, where as if it's externally generated, it can be Classified as CFI
221
Balance sheet account that is created when an acquisition's purchase price exceeds the value of acquired net identifiable assets
Goodwill
## Footnote
Under IFRS & GAAP, if an item is acquired in a business combination and cannot be recognized as a tangible asset or identifiable intangible asset it is:
222
Income tax expense is recorded on?
Financial reports
223
Taxes payable is records the value from the?
Tax returns
224
The taxes a company must pay in the immediate future are
taxes payable
225
Using the straight-line method of depreciation for reporting purposes and accelerated depreciation for tax purposes would most likely result in a
temporary difference
226
When accounting standards require an asset to be expensed immediately but tax rules require the item to be capitalized and amortized, the company will most likely record
deferred tax asset
227
A company incurs a capital expenditure that may be amortized over five years for accounting purposes, but over four years for tax purposes. The company will most likely record
deferred tax liability
228
the income based upon IRS rules that determines taxes due and is used for tax reporting
taxable income
income tax payable
229
A temporary difference between pretax income reported in a firm's financial statements and taxable income the firm reports to the tax authorities results in
deferred tax item
230
The net taxable loss that can be used to reduce taxable income in the future
tax loss carryforward
231
Reserve against deferred tax assets based on the likelihood that those assets will not be realized
Valuation allowance
232
Reflect the difference in tax expense (reporting) and taxes payable (tax return) that are expected to be recovered from future operations
Deferred tax assets
233
If timing differences that give rise to a deferred tax liability are not expected to reverse, then the deferred tax:
should be considered an increase in equity
234
US GAAP prohibits the revaluation of _____, which is the source of differences in income tax expense for GAAP and IFRS
PPE
235
The deferred tax liability should be excluded from both debt and equity when both _____ and _____ resulting from the reversals of temporary differences are uncertain
the amounts and timing of tax payments
236
Temporary difference between income tax payable & taxes payable:
DTL
| Income tax payable > Taxes payable
237
When DTA > DTL, and the tax rate increases, what happens to income tax expense?
An increase in tax rate will increase both DTAs and DTLs, but since the DTA > DTL the net effect for an increase in tax rate will decrease tax expense
238
Covenants benefit a bond issuer by:
agreeing to restrict their actions protects the bondholder, and issuer reduces default risk and borrowing costs
239
Innovative Inventions, Inc. needs to raise €10 million. If the company chooses to issue zero-coupon bonds, its debt-to-equity ratio will most likely
rise as the maturity date approaches
The value of the liability for zero-coupon bonds increases as the discount is amortised over time. Furthermore, the amortised interest will reduce earnings at an increasing rate over time as the value of the liability increases.
240
A company selecting the fair value option for a liability with a fixed coupon rate will report a _____ when market interest rates decrease
loss
241
What is the balance sheet value of a bond?
The PV of the bond
242
Under US GAAP, any unamortized debt issuance costs must be:
Written off at the time of redemption and included in the gain or loss on debt extinguishment
243
High-quality financial reporting is:
decision useful: relevant, faithful representation
unbiased
244
quality of reported results are:
sustainable over time
adequate returns
245
Pertains to the quality of information in the financial reports
quality financial reporting
246
Low-quality earnings are likely not _____ over time
sustainable
because the company does not expect to generate the same level of earnings in the future or because earnings will not generate sufficient return on investment to sustain the company
247
Combining the results from two segments is an example of :
biased reporting
248
Earnings that result from non-recurring activities are _____, which are an example of :
unsustainable
lower-quality earnings
249
Depreciating equipment over the shortest estimated period of its useful life is a ______ accounting choice.
conservative
that reduces earnings in the early years and increases them in the future, creating a positive trajectory
250
Deferring research and development (R&D) investments into the next reporting period is an example of _________ by taking a _____ action
earnings management
real
251
Choices tend to decrease the company's reported earnings and financial position for the current period
Conservative bias
252
choices tend to increase reported earnings or improve the financial position for the current period
Aggressive
253
Earnings smoothing is the understatement of earnings _____
volatility
254
Earnings smoothing: using _____ bias when company is doing well, and using _____ bias when company is not
conservative
aggressive
255
making intentional choices or deliberate actions to influence reported earnings and their interpretation
earnings management
256
The possibility of bond covenant violations may provide __________ to inflate earnings in the reporting period
motivation to managers
257
An audit is intended to provide assurance that the company’s financial reports are presented:
fairly, thus providing discipline regarding financial reporting quality.
258
Under GAAP, an impairment loss on inventory that has become obsolete would be considered an:
operating item on the income statement
259
To assist investors in evaluating operating performance, companies often report non-GAAP earnings by excluding ______.
asset impairment; charges either for long-lived assets, goodwill, or other intangible assets
260
The SEC prohibits the exclusion of charges or liabilities requiring cash settlement from any non-GAAP liquidity measures other than:
EBIT and EBITDA
## Footnote
If a company uses non-GAAP in SEC, the firm must provide comparable GAAP measure
261
EBITDA is a _____ financial measure
non-GAAP
262
The __________ of payments is an example of how choices affect both the balance sheet and income statement.
capitalization
Capitalizing a payment changes the benefit from only the current period—making it an expense—to a benefit in future periods as an asset. The creation of an asset results in a comparable increase in stockholder’s equity
263
Bias choices must occur _____
in the current period in review
264
______ accounting, typically avoids a sustainability issue.
Conservative
265
Meeting or exceeding its own earnings guidance is a possible:
Motivation; for managers to issue low-quality financial reports
266
If diluted EPS = basic EPS, a firm must report:
Both
## Footnote
If a firm contains any potentially dilutive securities outstanding, they must report both even if equal
267
Inventories based on FIFO are preferable to those based on LIFO on the:
Balance sheet;
ending inventory reflects current costs
268
Asset with subsequent depreciation through the income statement:
Capitalization
269
Capitalizing an asset (vs Expensing) will initially result in:
Higher profitability (Less expenses, increased profits)
| After time expensing will show more profit (asset was already expensed)
## Footnote
The cash outflow from capitalizing, is a CFI.... expensing is a cash outflow of CFO
270
The temporary difference between accounting profit being less than taxable income
DTA
| Accounting expense > tax deduction
271
Deferred tax assets represent taxes that:
* have been paid (because of the higher taxable income)
* but have not yet been recognized on the income statement (because of the lower accounting profit)
272
What causes a difference in effective tax rate vs statutory?
Permanent differences (not DTA/DTL)
## Footnote
Sources of differences:
different rates for international subsidaries
permanent timing differences
tax rate changes
tax holidays (period where you don't pay taxes)
deferred tax on overseas and unconsolidated domestic associates
273
When reporting is not compliant with GAAP, the sustainability and adequacy of reported earnings:
cannot be determined
## Footnote
(not one of the combos of quality of financial reporting and quality of reported earnings, on the spectrum of financial reporting quality
274
A significant increase in days payables above historical levels is most likely associated with:
Payables being stretched; low quality of the cash flow statement
## Footnote
Payables are not paid or paid more slowly, which increases cash flow in an unsustainable manner
Decreases net working capital
275
When a bond is issued:
CFF:
* inflow
Balance Sheet:
* Assets: increase by PV of bond
* Liabilities: Bond payable of PV of bond
276
Capitalized interest costs are reported as:
CFI
## Footnote
Treated as part of the capital asset
277
Trading securities for investment purposes are recognized in cash flow from:
CFI
278
Purchase of 30% of the shares of an affiliated company, would be recognized on the cash flow statements as:
CFI outflow
279
Lower asset turnover signifies:
Better efficiency of a company
280
Acquiring (external purchase) of intangible assets is classified as:
CFI outflow
| Patents
281
Principal payments on debt or leases are considered:
CFF
| (Interest paid/received are CFO)
282
Available for sale securities are acquired with the intent to:
Collect interest, but sell before maturity
283
Marketable securities include:
Available for sale
Held to maturity
284
Horizantal common size statement show each line relative to:
Base year
285
Long lived assets are reported on the balance sheet at:
NBV (historic cost - accumulated depreciation)
286
The amount that will be deducted on the tax return in future periods:
Tax Base
287
When income tax expense > taxes payable:
DTL
288
When income tax expense < taxes payable
DTA
289
A decrease in the tax rates decreases:
decreaases both DTA &DTL
290
When retiring debt, how are the financial reports impacted:
Income statement: Loss
* Bonds payable - retired value
* Issuance costs
| Issuance costs are a prepaid asset on BS
291
GAAP recognizes a long lived asset as impaired when:
Carrying value > Expected Future Cash flows
292
Under GAAP how is an impairement loss recorded?
Carrying value - Fair Value = Loss
