Others

Question 1

A core objective of the International Organization of Securities Commissions

Answer 1

ensure that markets are fair, efficient, and transparent. Protect investors & reduce (not eliminate) systemic risk

Question 2

If Interest were capitalized & qn wants it to be expensed

Answer 2

CFO will reduce by the interest amount

Question 3

If asset was previously capitalized & now qn wants it to be expensed

Answer 3

CFO will reduce by asset amount. Don’t consider D or A exp

Question 4

Accounting standards do not require

Answer 4

issuers to disclose effect of either scope or exchange rate changes on FS but they do

Question 5

Under IFRS income includes

Answer 5

increases in economic benefits from increases in assets, enhancement of assets, and decreases in liabilities.

Question 6

Under the converged accounting standards, the incremental costs of obtaining a contract and certain costs incurred to fulfill a contract must be

Answer 6

Capitalized. If a company expensed these incremental costs in the years prior to adopting the converged standards, all else being equal, its profitability will appear higher under the converged standards.

Question 7

Warrants given in EPS calculation

Answer 7

Ignore for BEPS

Question 8

Decrease in DTL & gain on asset sale

Answer 8

Deduct from CFO

Question 9

Common size CF statement

Answer 9

Show each line item of CF as % of revenue. (or) Show inflow as a % of total inflow & outflow as a % of total outflow

Question 10

The first step in cash flow statement analysis should be to

Answer 10

identify the major sources and uses of cash

Question 11

an analyst would typically be more interested in understanding

Answer 11

what assets a company acquired (e.g., franchise rights) than in the precise portion of the purchase price a company allocated to each asset. Understanding the types of assets a company acquires can offer insights into the company’s strategic direction and future operating potential.

Question 12

Aggressive vs Conservative a/cing

Answer 12

Preferred by mgt vs investors. creates sustainability issue vs doesn’t

Question 13

Neutrality

Answer 13

lack of upward or downward bias. Conceptual framework support this

Question 14

Big Bath Accounting (One-time hit to clean up books)

Answer 14

A company intentionally reports large losses in a bad year by accelerating expenses, write-offs, or impairments. To make future earnings appear stronger.

Question 15

Cookie Jar Reserve Accounting (Saving profits for future use)

Answer 15

A company overstates expenses or liabilities in good years to create reserves. In bad years, these reserves are reversed to inflate earnings.

Question 16

Low quality FR (Fraud Triangle)

Answer 16

Opportunity + Pressure or motivation + Rationalization

Question 17

Mkt discipline poor FR quality

Answer 17

Co seeking to minimize long term cost of capital should provide high quality FR

Question 18

IOSCO

Answer 18

Recognized as the “global standard setter for the securities sector” although it does not actually set standards but rather establishes objectives and principles to guide securities and capital market regulation.

Question 19

SEC prohibits

Answer 19

Exclusion of charges or liabilities requiring cash settlement from any non-GAAP liquidity measures, other than EBIT and EBITDA. Also prohibited is the calculation of a non-GAAP performance measure intended to eliminate or smooth items tagged as non-recurring, infrequent, or unusual when such items are very likely to occur again. The SEC views the period within two years of either before or after the reporting date as the relevant time frame for considering whether a charge or gain is a recurring item

Question 20

Ratio is an indicator which tells

Answer 20

what happened but not why happened

Question 21

Vertical common size BS vs P&L vs Horizontal common size BS

Answer 21

Divide all item by asset vs Revenue (except tax - divide by pre tax income) vs quantity of each item by a base year quantity

Question 22

Activity ratios

Answer 22

Inventory receivable payable asset FA WC turnover, DSO, DPO, DOH

Question 23

Regression analysis help identify

Answer 23

relationship or correlation between variable. Sale to GDP to identify whether co is cyclical

Question 24

Dupont ROE

Answer 24

ROA (NI / Avg total asset) x Leverage (Avg total asset / Avg total equity)
Net profit Margin x Total Asset Turnover x Leverage
Tax Burden (Net Income / EBT) x Int Burden (EBT / EBIT) x EBIT Margin (EBIT / Revenue) x TAT x Leverage

Question 25

Combined Ratio

Answer 25

Profitability measure. The ratio is explaining how much costs (losses and expenses) were incurred for every dollar of revenue (net premiums earned). Lower value for this ratio is better. Ratios greater than 100 percent indicate an overall loss

Question 26

Revenue growth vs Inventory & Dr growth

Answer 26

It is generally more desirable to observe inventory and receivables growing at a slower (or similar) rate than revenue growth. Receivables growing faster than revenue can indicate operational issues, such as lower credit standards or aggressive accounting policies for revenue recognition. Similarly, inventory growing faster than revenue can indicate an operational problem with obsolescence or aggressive accounting policies, such as an improper overstatement of inventory to increase profits.

Question 27

Defensive Interval ratio

Answer 27

Numerator - Same as quick ratio & Denominator - Daily cash exp. Tax are not considered in denominator

Question 28

Fixed charge coverage ratio

Answer 28

EBIT + Lease Payment / I + L

Question 29

ROA & ROE vs RO Common Equity

Answer 29

Numerator - Net Income vs NI - PD

Question 30

Dilutive EPS

Answer 30

If convertible bond is issued in the year, while calculating DEPS apply month / yr ratio. In option calculation share to be issued = (AMP - EP / AMP) * Share opted. Don't use year end price. When AMP is less than EP option is antidilutive. So denominator in BEPS is original share o/s

Question 31

low reporting quality vs earning quality

Answer 31

impede assessment of earning quality vs decrease company value & indicate earning is not sustainable

Question 32

At the top of the quality spectrum of financial reports are reports that conform to GAAP, are

Answer 32

decision useful, and have earnings that are sustainable and offer adequate returns. In other words, these reports have both high financial reporting quality and high earnings quality.

Question 33

Potential benefit of accounting conservatism

Answer 33

A reduction in litigation costs

Question 34

Receivable turnover or TAT decreasing

Answer 34

over a period means revenue upward bias

Question 35

Permanent Difference

Answer 35

I or E items not allowed by tax legislation, such as penalties and fines that are considered expenses for financial reporting purposes, but are not deductible for tax purposes; and Tax credits for some expenditures that directly reduce taxes. Because no deferred tax item is created for permanent differences, all permanent differences result in a difference between the company’s tax rate and its statutory corporate income tax rate.

Question 36

Valuation allowance (Reduces DTA)

Answer 36

Would only arise if there was doubt over the company’s ability to earn sufficient income in the future to require paying the tax.

Question 37

Income Tax Exp

Answer 37

Tax payable (Payable in cash) + Net increase in DTL net off increase in DTA

Question 38

Analysts should treat deferred tax liabilities that are expected to reverse as

Answer 38

liabilities. Deferred tax liabilities should be treated as equity when they are not expected to reverse.

Question 39

When both the timing and amount of tax payments are uncertain

Answer 39

analysts should treat deferred tax liabilities as neither liabilities nor equity

Question 40

A reduction in the statutory tax rate would most likely benefit the company’s

Answer 40

income statement and balance sheet

Question 41

Provision for income tax

Answer 41

Current tax + Net DTL

Question 42

Statutory vs Effective vs Cash tax rate

Answer 42

Corporate income tax rate in the country in which the company is domiciled vs Calculated as the reported income tax expense (Current tax + change in DTL net off DTA) amount on the income statement divided by the pre-tax income vs Tax paid in cash that period (cash tax) divided by pre-tax income.

Question 43

Differences between cash taxes and reported taxes typically result from

Answer 43

differences between financial accounting standards and tax laws and result from changes in DTA or DTL. In forecasting tax expense and cash taxes, respectively, the effective tax rate and cash tax rate are key.

Question 44

Differences between the statutory tax rate and the effective tax rate can arise for many reasons

Answer 44

Tax credits, withholding tax on dividends, adjustments to previous years, and expenses not deductible for tax purposes are among the reasons for differences. Effective tax rates can also differ when companies are active outside the country in which they are domiciled

Question 45

Effective tax rate consistently lower than statutory tax rate or ETR of competitors

Answer 45

Not usual but warrant additional attention when forecasting future tax exp