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Flashcards

Financial Reporting and Analysis 1

Henry Lynch (NZ) CFA Business Analyst English 90 cards

Cards in this deck (90)

  1. 1Under IFRS and GAAP, are tax assets and deferred tax liabilities current or non-current line items?IFRS - Non-current
    GAAP - Current or non-current, depending on how the underlying asset or liability is classified.
  2. 2Companies are required to report segment data under IFRS, GAAP or both?Both IFRS and GAAP
  3. 3Under IFRS, interest paid will be classified where on the CF statementOperating or financing cash flow
  4. 4What are temporary and permanent differences in regard to differences in taxable income and pretax income?Temporary differences between taxable income (for tax reporting) and pretax income (for financial statement reporting) result in deferred tax assets or liabilities. Permanent differences result in a company's effective tax rate being different from the statutory tax rate. There is no time limit on temporary differences to reverse.
  5. 5What is a valuation allowance?A valuation allowance is a contra account (offset) against deferred tax assets that reflect the likelihood that the deferred tax assets will never be realised. The establishment of the valuation allowance reduces reported income, offsets (reduces) assets and reduces equity.
  6. 6For a company which owns a majority of the equity of a subsidiary, whether to create a deferred tax liability for undistributed profits from the subsidiary depends on an "indefinite reversal criterion" under IFRS, GAAP or both?US GAAP but not IFRS
  7. 7What is the amortisation treatment of intangible assets under IFRS?Acquired intangible assets with finite expected useful lives are amortized. Intangible assets with indefinite lives are not amortized but are tested at least annually for impairment. Renewal at a nominal cost means the trademark should be treated as an asset with an indefinite life.
  8. 8Under US GAAP, what form of cash flow are dividends paid to shareholdersFinancing
    (IAS GAAP recognises dividend payments to shareholders as CFF or CFO)
  9. 9When reclassifying a property from owner-occupied to investment property and using the fair value model for valuation, what does IFRS specify in regard to recognising a gain?IFRS specifies that the firm should treat the event as a revaluation, recognizing a gain only if it reverses a previously recognized loss.
  10. 10Under IFRS, what defines an investment property?Under IFRS, investment property is an asset that is owned for the purpose of earning income from rentals, capital appreciation, or both.
  11. 11What are the requirements under IFRS US GAAP for the use of component depreciation (ie. separate depreciation schedules for plant and machines).IFRS requires firms to use component depreciation. Each component of an asset is depreciated separately based on its estimated useful life. U.S. GAAP permits component depreciation but does not require firms to use it.
  12. 12In accounting for PP&E using the cost model, companies are required to disclose both gross asset value and accumulated depreciation under IFRS, US GAAP or both?Both IFRS and US GAAP
  13. 13Difference between operating liability and a financing liabilityOperating liabilities result from the operations of the firm and consist of operating and trade liabilities such as accounts payable, customer advances and accrued liabilities. Financing liabilities are a result of prior financing inflows. Financing liabilities (current) include short term notes payable and the current maturities of of long-term debt.
  14. 14What are the three classifications of leases under US GAAP?Sales-type lease
    Direct financing lease
    Operating lease
  15. 15A liquidity-based balance sheet, on which assets and liabilities are not classified as current or non-current, is permitted under IFRS, US GAAP or both?IFRS only
  16. 16For portions of a company that are distinguishable by their risk and return characteristics, IFRS and U.S. GAAP require segment reporting if a portion accounts for more than what % of the company's revenues or assets?10% of either
  17. 17Deferred tax items should be measured based on what?Tax rate that will apply when the temporary difference reverses
  18. 18If a firm pledges inventories as collateral for a loan, the firm must do what under IFRS and US GAAP?Must disclose the carrying value of the pledged inventories.
    (does not need to create a contra asset account)
  19. 19Under IFRS, if the lessor classifies a lease as an operating lease, the leased asset appears on the balance sheet of the lessor or the lessee?With an operating lease, the leased asset remains on the lessor's balance sheet and the lessor recognizes depreciation expense on the asset.
  20. 20What gives rise to differences in effective and statutory tax rates?Permanent tax differences such as tax credits, non-deductible expenses, and tax differences between capital gains and operating income give rise to differences in the effective and statutory tax rates.
  21. 21Are deferred tax liabilities best treated as liabilities or equity?The recommended analyst treatment of deferred tax liabilities is to treat them as liabilities if they are expected to reverse or as equity if they are not expected to reverse.
  22. 22How is inventory value measured under IFRS and US GAAP?Under IFRS, inventory is measured at the lower of cost or net realizable value. Inventory that has been written down can later be revalued upward if its net realizable value recovers, but only to the extent that reverses the writedown (i.e., no higher than cost). Under U.S. GAAP, inventory that has been written down may not be revalued upward.
  23. 23What is the effect of an inventory write-down on ROA in the current period and in later periods?Writing down inventory to net realizable value decreases both net income and total assets in the period of the writedown. Because net income is most likely less than assets, the result in the period is a decrease in ROA. In later periods, lower-valued inventory will decrease COGS and increase net income. Combined with a lower value of total assets, this will increase ROA.
  24. 24The average age of a firm's property, plant, and equipment can be estimated by dividing:accumulated depreciation by depreciation expense.
  25. 25When are revenues recognised in accrual accounting?Revenues are recognised in the same period in which the associated expenses are incurred
  26. 26What should an analyst do to adjust a LIFO firm's financial statements to a FIFO basis, including tax effects?An analyst should increase inventory by the LIFO reserve, decrease cash by (LIFO reserve × tax rate), and increase retained earnings by [LIFO reserve × (1 – tax rate)].
  27. 27What effect does an impairment write down have on debt to equity?An impairment write-down reduces equity and has no effect on debt. The debt-to-equity ratio would therefore increase.
  28. 28Under IFRS, firms that use the revaluation model for PP&E must also disclose what?Its carrying value under the historical cost model and whether the useful lives of intangible assets are finite or indefinite
  29. 29What sort of product costs are capitalised to inventory?Purchase cost, conversion or manufacturing cost (including labor and overhead), and other costs to bring inventory to its present state and location.
  30. 30Under U.S. GAAP, land owned by the firm is most likely to be reported on the balance sheet at:historical cost
    Unless impairment has been recognized, land is reported at historical cost and is not subject to depreciation. Increases in value are not reflected in balance sheet values under U.S. GAAP.
  31. 31Where is the difference between the fair value of a defined benefit pension plan's assets and its estimated benefit obligation is recognized?On the balance sheet as a net pension asset or liability
  32. 32The revaluation model for investment property is permitted under IFRS, US GAAP or both?Neither
    For long-lived assets classified as investment property, IFRS allows either the cost model or the fair value model. The revaluation model is permitted for long-lived assets that are not classified as investment property. U.S. GAAP only permits the cost model for valuation of long-lived assets and does not identify investment property as a specific subset of long-lived assets.
  33. 33A tax rate that has been substantively enacted is used to determine the balance sheet values of deferred tax assets and deferred tax liabilities under IFRS, US GAAP or both?IFRS
    Under IFRS, a tax rate that has been enacted or substantively enacted is used to measure deferred tax items. Under U.S. GAAP, only a tax rate that has actually been enacted can be used.
  34. 34Under which financial reporting standards is the full amount of a deferred tax asset shown on the balance sheet, regardless of its probability of being realized fully?US GAAP but not IFRS
  35. 35For a company which owns a majority of the equity of a subsidiary, whether to create a deferred tax liability for undistributed profits from the subsidiary depends on an "indefinite reversal criterion" under US GAAP, IFRS or both?US GAAP but not IFRS
  36. 36Fricks Ltd. is a gold mining company headquartered in Indonesia with operations throughout the world. Fricks reports under IFRS. When subsidiaries located in the United States and Canada pay dividends to the Indonesian parent company, Fricks may classify the dividends as:cash flow from either investing or operations
  37. 37According to International Financial Reporting Standards, how do cash dividends received from trading securities and financial securities measured at fair value through OCI affect net income?Both an increase.
    Dividends received from trading securities and available-for-sale securities are recognized in the income statement. The difference in trading and available-for-sale classifications relates to the treatment of any unrealized gains and losses.
  38. 38Under accrual accounting, revenues are recognized in the same period in which the associated:Expenses are incurred
    Accrual accounting is based on the matching principle, under which revenues are recognized in the same period that the expenses are incurred to generate those revenues.
  39. 39Which set of accounting standards requires firms to disclose estimated amortization expense for the next five years on intangible assets?US GAAP only
  40. 40A reconciliation of beginning and ending carrying values for each class of property, plant, and equipment is required for firms reporting under:IFRS only
  41. 41Capitalizing interest costs related to a company's construction of assets for its own use is required by:Both IFRS and U.S. GAAP.
    Both U.S. GAAP and IFRS require companies to capitalize the interest that accrues during the construction of capital assets for their own use.
  42. 42Where in the cash flow statement are interest received, dividends received, interest paid and dividends received allocated under US GAAP and IFRS?Interest received, dividends received, and interest paid are operating cash flows under U.S. GAAP, and dividends paid are financing cash flows. Interest received and dividends received may be shown as operating or investing cash flows under IFRS. Interest paid and dividends paid may be shown as operating or financing cash flows under IFRS.
  43. 43Listed debt securities owned by a company, for which the company intends to collect interest payments and sell the securities, must be carried at fair value with gains and losses reported as other comprehensive income under US GAAP, IFRS or both?US GAAP only
  44. 44The two primary assumptions in preparing financial statements under IFRS are:Accrual accounting and going concern
  45. 45An accounts receivable aging schedule is best used to:Identify trends in how well the firm is doing at collecting receivables and converting them to cash.
    An aging schedule shows either the absolute or percentage amount of accounts receivable that are current and that are past due by various lengths of time.
  46. 46Under U.S. GAAP, an asset is considered impaired if its book value is:greater than the sum of the estimated undiscounted future cash flows from its use and disposal.
  47. 47A lessor may retain the lease asset on its balance sheet for a long-term lease under:both U.S. GAAP and IFRS.
    For a lease classified as an operating lease by the lessor, the lease asset is retained on the lessor's balance sheet under both U.S.GAAP and IFRS.
  48. 48What is a change in accounting principle that is required retrospectively?Change in salvage value of an asset.
    Inventory methods and percentage of completion (contract revenue recognition) require retrospective presentation.
  49. 49What are the two fundamental characteristics that make financial information useful?relevance and faithful representation
  50. 50What makes financial statements relevant?if they contain information that can influence economic decisions or affect valuations of past events or forecasts of future events.
  51. 51What are the four characteristics that enhance relevance and faithful representation?Comparability
    Verifiability
    Timeliness
    Understandability
  52. 52What are the features underlying the preparation of financial statements?Fair presentation
    Going concern basis
    Accrual basis
    Consistency
    Materiality
    Aggregation
    No offsetting
    Reporting frequency
    Comparative information
  53. 53Define the historical cost method to valuing assetsValuing assets at the amount of cash paid or the fair value of the consideration given to acquire them at the time of acquisition.
  54. 54Define the net realisable value method to valuing assetsValuation technique where assets are recorded at the amount that would be received in an orderly disposal
  55. 55Cash to income ratioCFO / Operating income
  56. 56Where are dividends received classified in the cash flow statement under IFRS?Operating
    or
    Investing
  57. 57Under US GAAP, for reporting periods after 15 December 2015, unusual or infrequent items are shown where on the income statement?Separately but as part of continuing operations
  58. 58Under US GAAP bank overdrafts should be classified in what area of the CF statement?financing
    (non considered part of cash and cash equivalents)
  59. 59Trade receivables are most commonly reported at what value?net realisable value
  60. 60Under what circumstance must a company disclose separate information about an operating segment?If a segment constitutes 10% or more of overall revenue, assets or profit/loss
  61. 61If a company owns more than 50% of another company, how are revenues of the subsidiary presented in the parents financial statement?The parent must present consolidated financial statements which will include 100% of the subsidiaries revenues.
    If the parent only owned a minority interest, it would present only the minority portion of revenues.
  62. 62Under IFRS the carrying value of inventories is reflected as what cost?The lower of historical cost or net realisable value
  63. 63Define the matching principle under IFRS (with regard to expensing warranties)Under the matching principle, a company is required to estimate the amount of future expenses resulting from its warranties and to update the expense as indicated by the experience over the life of the warranty
  64. 64What effect does an impairment of long-lived assets have on total assets and equity?Decrease in total assets
    Decrease in total equity
  65. 65For financial assets classified as held to maturity, how are unrealised gains and losses reflected in shareholder's equity?They are not recognised.
    Financial assets classified as held to maturity are measured at amortised cost. Gains and losses are recognised only when realised.
  66. 66How are cash received from customers and cash paid to suppliers calculated?Cash received from customers = revenue + change in acc. rec.
    Cash paid to suppliers = COGS + change in inv. + change in acc. pay.
  67. 67What are the different balance sheet format styles under IFRS and GAAP?Firms allowed to choose liquidity based or classified under IFRS
    Classified only under GAAP
  68. 68How is inventory revaluation recognised under IFRS and GAAP? and where is a loss recognised?IFRS and GAAP: lower of cost or NRV (selling cost less completion costs and disposal) - loss is recognised in the income statement by adding to COGS
  69. 69How is an inventory write-up recognised under IFRS and GAAP? and where is a gain recognised?IFRS: Allowed (up to original cost only) - gain is recognised by reducing COGSm by the amount of the recovery
    GAAP: No write-ups of inventory allowed
  70. 70What are the conditions under IFRS and GAAP when disclosing inventory method changes?IFRS: Change made retrospectively. Firm must demonstrate that the change will provide reliable and more relevant information.
    GAAP: Change made retrospectively. Firm must explain why the change is preferable.
    Exception to retrospective application applies when a firm changes to LIFO (change is applied prospectively - the carrying value of the inventory becomes the first layer of inventory in the next period)
  71. 71What are the PPE valuation methods under IFRS and GAAP?IFRS: Cost model or revaluation model (under the cost model, assets impaired if carrying value exceeds the recoverable amount)
    GAAP: Only the cost model (assets impaired if carrying value exceeds recoverable amount)
  72. 72Under US GAAP how are assets tested for impairment?1. Assets are tested for impairment by applying the recoverability test (impaired if the carrying value is greater than the assets future undiscounted CFs)
  73. 73When are assets tested for impairment under IFRS and US GAAP?IFRS: Firm must asses whether events or circumstances indicate an impairment of an assets value has occurred
    GAAP: Assets tested for impairment only when circumstances indicate the firm may not be able to recover the carrying value through future use.
  74. 74How is R&D treated by IFRS and GAAP?IFRS: Firm must identify the research stage and the development stage. Firm must expense cost incurred in the research stage but capitalise costs incurred in the development stage.
    GAAP: Expensed as incurred
  75. 75Where are dividends paid found on the CF statement under IFRS and GAAP?IFRS: Financing or Operating
    GAAP: Financing
  76. 76Where is interest paid found on the CF statement under IFRS and GAAP?IFRS: Operating or Financing
    GAAP: Operating
  77. 77Where are interest and dividends received found on the CF statement under IFRS and GAAP?IFRS: Financing or Investing
    GAAP: Operating
  78. 78Where are income taxes paid found on the CF statement under IFRS and GAAP?IFRS: Usually operating (can be financing or investing)
    GAAP: Operating
  79. 79Is component depreciation required under IFRS, US GAAP or both?IFRS: Requires firms to depreciate the components of an asset separately (requiring useful life estimates for each component)
    GAAP: Component depreciation is allowed but not required.
  80. 80Are substantively enacted tax rates allowed under IFRS, GAAP or both?IFRS only
  81. 81How does a revaluation of a DTA occur under IFRS and GAAP?IFRS: No valuation allowances (DTA is written down directly)
    GAAP: DTA are reduced by creating valuation allowance (reduced DTA and operating income, reversal does the opposite).
  82. 82How are bonds valued under IFRS / GAAP?IFRS: Effective interest rate method of amortising a discount or premium is required
    GAAP: Effective interest rate method is preferred, but the straight line method is allowed if the results are not materially different.
    BOTH give the irrevocable option to report debt at fair value, where gains and losses (resulting from changes in yield) are reported in the income statement.
  83. 83Explain the financial reporting of long-term leases, from the lessee's perspective, under IFRSReports and asset and liability, both equal to the present value of lease payments.
    Asset is a right-of-use asset amortised over the term of the lease.
    The interest portion of the lease payment is reported as interest expense, while the principal repayments reduces the lease liability.
  84. 84Explain the financial reporting of short-term or low value leases, from the lessee's perspective, under IFRSNo balance sheet entry required.
    Rent expense reported on the IS and classified as an operating cash outflow.
  85. 85Explain the financial reporting of leases, from the lessee's perspective, under GAAPClassified as finance (same as IFRS) or operating lease.
    Operating lease is where benefits and risk of holding the asset are not transferred to the lessee.
    Reporting of operating same as finance lease except the entire lease payment is recorded as a lease expense on the IS (no separate interest expense reported).
    US GAAP allows interest expense as CFO only.
  86. 86Explain the financial reporting of leases, from the lessor's perspective, under IFRSClassified as finance or operating leases.
    Finance lease: Lessor removes leased asset from BS and add a lease receivable asset (equal to value of future lease payments). If the lessor is a manufacturer or dealer, revenue (as value of lease rec.) and COGS (net book value of leased asset) are also reported.
    Operating lease: lessor reports lease payments as income and depreciation and other associated costs as expenses.
  87. 87For financial reporting of leases, from the lessor's perspective, under GAAP, what conditions need to be met for a lease to be a sales-type lease?Needs to meet transfer of ownership criteria
    Collection of lease payments is judged to be probable.
  88. 88For financial reporting of leases, from the lessor's perspective, under GAAP, what conditions need to be met for a lease to be a direct financing lease?The transfer of ownership criteria are not met
    A third party guarantees the residual value of the asset at the end of the lease
    The sum of the promised lease payments and the asset's residual value is greater than or equal to the fair value of the asset.
  89. 89Explain the financial reporting of leases, from the lessor's perspective, under GAAPSales-type lease: same as Finance lease under IFRS
    Direct financing lease: same as Finance lease less recognition of lease rec in revenue and net book value of leased asset in COGS
    Operating lease: same as operating lease under IFRS
  90. 90In what case is a net pension asset and liability reported by the sponsoring firm under a defined benefit plan?Net pension asset: If the fair value of the plans assets are greater than the estimated future pension obligation (overfunded)
    Net pension liability: If the fair value of the plans assets is less than the estimated pension obligation (underfunded)

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Business Analyst CFA Flashcards on Financial Reporting and Analysis 1, created by Henry Lynch (NZ) on 15/10/2021.
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