Test 1 Flashcards by Alex McBride

True or False

A change in accounting estimate must be disclosed as a separate line item, net of tax on the I/S

False

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True or False

A qualified audit report states that financial statements comply with GAAP

False

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True or False

Restructuring charges are to be disclosed before income from continuing operations

True

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True or False

Under GAAP, advertising should be reported as expense when the payment is made

False

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True or False

Auditors are required to measure and report on quality of earnings

False

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True or False

Economics recognizes all holding gains and losses, while accounting recognizes only some unrealized and all realized

True

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True or False
For valuing inventory, “market” under the “lower of cost or market” rule, means replacement cost at the balance sheet due date

True

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True or False

Accountants compute prior service costs related to a pension plan

False

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True or False

A credit balance in deferred taxes payable means that the firm has had less GAAP income than taxable income

False

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True or False

A firm with low earnings quality could report high earnings

True

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True or False

Morningstar likes to invest in companies with narrow economic moats

False

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True or False

Goodwill is recognized when a firm pays more than the book value of another company

False

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Investor or Creditor
Emphasize earnings and the long term
Emphasizes ST liquidity
Emphasizes quality of earnings
Emphasizes current value of assets

Investor
Creditor
Investor
Creditor

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Fundamental or Technical Analysis
Evaluates quality of earnings
Includes use of traditional ratios
Follows price behavior of stock
Used to measure intrinsic value of stock

Fundamental
Fundamental
Technical
Fundamental

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Pension benefits earned by company employees during the year

Service cost

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Stefan issues an audit report that states Oakes Co. financial statements do not fairly present the financial position and results of operations. What is this type of opinion?

Adverse

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Terry is getting his own measure of the current per share value of a company stock. What is the term for that stock

Intrinsic value

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This type of financial statement analysis allows the comparison of firms of different sizes

Common size

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This concept related to deferral of taxes believes that only items (difference between tax and GAAP) that will reverse within the near future should be deferred

Partial allocation

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Positive or Negative effect on EQ
Zhang receive going concern qualification on Wang
Zhang has a restructuring
Isken Co. changes an accounting principle
Diaz and Mrotek Co. uses conservative accounting methods

Negative
Negative
Negative
Positive

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Myth or Truth
Cash flows are more reliable than accruals
Accrual accounting income is more relevant than cash flow
All accruals accounting adjustments are value irrelevant
Cash flows cannot be manipulated

Truth
Truth
Myth
Myth

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Event risk for a bank

Natural disasters and litigation

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What type of trend is longer in duration?

Secular

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Rolls Royce correlates negatively with

Terrorism or terrorist attacks

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Biotech or Utility Higher growth rate Lower dividend yield

Biotech | Biotech

Early, Mid, or Late Affected least by overall economy Capital intensive with volatile EPS and CF's Manufacturing, industrial and consumer discretionary companies

Mid Early Early

Depreciation

Charges costs to accounting periods

Firm can manage earnings through:

Pensions- increase amortization of prior service costs | Leases- financing a lease like a structured lease, when its characteristics are more in line with a capital lease

What is the intrinsic value of a stock and how is it measured?

The intrinsic value of a stock is found by taking into account the economy, industry and earnings quality of a company without believing in the current stock price. Measured by adjusting reported earnings, converting them to cash and discounting the cash

Describe how intrinsic value is used in equity analysis

Intrinsic value is used to compare to market price of the stock. If intrinsic value is greater than market price, buy. If it is lower than market price, sell

True or False | The purpose of depreciation is to show the current value of tangible assets

False

Extraordinary transactions are to be disclosed after "income from continuing operations"

True

True or False | Comprehensive income is the accounting's proxy for economic income

True

True or False | Cash flows are less relevant than accruals

True

True or False | Analysts' forecasts are less relevant than accruals

True

True or False The equity method of accounting for investments is to be used when the investing firm has between 20 and 50 percent of the voting stock in the investee company

True

True or False | A credit balance in deferred taxes payable means that the firm has a liability to the IRS to pay taxes in the future

False

True or False | Service cost is the pension expense for a given year

False

Pension benefits earned before pension plan adoption

Prior service costs

This income figure is a proxy for economic income and includes unrealized gains and losses

Permanent

This concept of income recognizes all realized and unrealized gains and losses

Economic

This type of analysis follows stock price behavior to help make decisions on stock investments

Technical

This type of financial statement examines one firm's performance over a number of years

Trend

Four pressures to manage EPS:

Hot stock market Analyst forecast Management promotion

Audit report can be:

Clean (fair) Qualified (except for) Disclaimer (no opinion)

Truth or Myth Since company value depends on future cash flows, only current cash flows are relevant for valuation Accrual accounting income is more relevant than cash flow Cash flows are more reliable than accruals All cash flows are value relevant All accrual accounting adjustments are value irrelevant

``` Myth Truth Truth Myth Myth ```

Cash flows cannot be manipulated All income is manipulated Accrual accounting numbers are subject to accounting distortions Company value can be determined by using accrual accounting numbers It is impossible to consistently manage income upward in the long rain

``` Myth Myth Truth Truth Myth ```

Economic Income (permanent and operating income)

cash flows + present value of expected future cash flows

Accounting income

Revenue recognition and expense matching

Capital Lease Accounting

transfer substantially all benefits and risks of ownership | Asset acquisition and a liability incurrence by the lessee and a sale and financing transaction by the lessor

Operating Lease Accounting

for leases other than capital leases | Lessee (lessor) accounts for the minimum lease payment as a rental expense (income)

Off-Balance-Sheet Financing

lessee structures a lease so it is accounted for as an operating lease when the economic characteristics of the lease are more in line with a capital lease (neither the leased asset nor its corresponding liability are recorded on the balance sheet)

Effects of Lease Accounting

Operating lease understates liabilities, understates assets, delays expense recognition, understates current liabilities by ignoring current portion of lease principal payment, and includes interest with lease rental

Example of off-balance-sheet financing

Operating leases that are indistinguishable from capital leases

Service cost

actuarial present value of pension benefit earned by employees

Interest cost

increase in projected benefit obligation arising when pension payments are one period close to being made

Actuarial Gain or Loss

change in Pension Benefit Obligation (PBO) that occurs when one or more actuarial assumption are revised in estimating PBO

Prior Service Cost

effect of changes in pension plan rules on PBO

Allocation

process of periodically expensing a deferred cost to one or more future expected benefit periods

True or False | Recording deferred taxes payable is not an example of off-balance-sheet financing

True

True or False | Under GAAP, R&D should be recorded as expense when R&D is conducted

True

True or False | Goodwill is the excess of purchase price over the fair value of assets purchased

True

True or False | Off-balance-sheet financing and earnings management are against GAAP

False

True or False | In recent years, improper revenue recognition has been one of the most frequent reasons for restatements of earnings

True

Valuation of Assets (ACCO vs. ECON)

Book value | Fair Value

Measurement of Earnings (ACCO vs. ECON)

Revenue recognition and expense matching | Cash flows + change in present value of expected future CF's

Utility or Biotech Higher P/E Ratio Smaller Growth rate

Biotech | Utility

Regarding social awareness, Mr. Schwei said this is the most important

Empathy

He suggested taking more courses in

Psychology

Repo 105

An accounting trick in which a company classifies a short-term loan as a sale and subsequently uses the cash proceeds from said sale to reduce its liabilities.

Two causes of stock run up for early dot-com companies

New internet technology and people finally understanding how to use it. Also, people being able to create websites at will and people investing in them (Greed)

Two causes of the stock crash for dot-com companies

Grew too fast and didn't have capital. There wasn't a market for these companies

Describe the managers of the early dot-com companies

Young and very energetic. They believed that they would continue to grow and grow

Comprehensive income

includes most changes to equity that result from non-owner sources; it is the accountant's proxy for economic income

Solvency

the ability to pay liabilities when they mature

Earnings quality process (2 steps)

Reports "true" EPS | Help predict EPS

What are the two largest non-interest expenses of banks?

Operational and Capital

Two criteria when deciding substance vs. form of a lease agreement

Whether there is a transfer of ownership to lessee after the lease has ended If more than 25% of the economic life of the lease property is in the hands of the lessee

Intrinsic Value

value of a company determined through fundamental analysis without reference to its market value

Measuring Intrinsic Value

Report Earnings Adjust earnings Convert earnings to Cash Discount Cash back to present value

Test 1 Flashcards

(80 cards)