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144 Cards in this Set
- Front
- Back
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interest expense = |
Market interest rate × book value |
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new book value = |
beginning book value + interest expense – coupon payment
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Total Expense over Life of a Bond =
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Coupon payments + discount interest |
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discount interest =
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face value – issue value) |
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According to U.S. GAAP, Where is a coupon payment on a bond reported? |
The actual coupon payment on a bond is reported as operating cash outflow under U.S. GAAP. |
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Why aren't accrued liabilities considered debt?
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Only interest- bearing liabilities are considered debt. Accrued liabilities are not interest bearing. |
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What does IFRS require from a firm that presents a nonstandard financial measure?
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IFRS require the firm to reconcile that measure to an IFRS measure and explain why the firm believes the nonstandard measure is relevant to users of the financial statements. |
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What does channel surfing do to revenue?
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increases account receivables as a part of revenue
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Projections of net income and cash flows are typically based on assumptions that what 3 things are constant % of sales? |
cost of goods sold, operating expenses, and noncash working capital remain a constant percentage of sales. |
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If a firm has high market values relative to the book value of their equity, what would this indicate?
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high growth rates |
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What is likely about a stock that has low price to cash flow ratios?
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it is a value stocks |
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What can be said about a firm with high dividend payout ratios?
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likely a mature firms with relatively few growth opportunities.
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What 2 thins must be done to compare a firm that uses LIFO inventory accounting to firms that use FIFO? |
1) add the LIFO reserve to inventories on the balance sheet 2) subtract the change in the LIFO reserve from cost of sales on the income statement |
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What must be done different for the balance vs the income statement? With regards to LIFO reserves |
Balance sheet is cumulative (use the full LIFO reserve) while the income statement refers to the most recent period (use the change for the period in the LIFO reserve) |
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Remaining useful life = |
net PP&E / depreciation expense |
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Average age of assets = |
accumulated depreciation / depreciation expense
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Average useful life = |
gross PP&E / depreciation expense. |
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How should an analyst adjust the financial statements of a firm that uses operating leases to finance its plant and equipment? |
The appropriate adjustment is to treat them as if they were capital leases: estimate the PV of the future lease obligations + (firm’s liabilities) + (long-lived assets) |
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receivables turnover = |
annual sales / average receivables |
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days of sales outstanding= |
365 / receivables turnover |
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inventory turnover =
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cost of goods sold / average inventory |
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days of inventory on hand = |
365 / inventory turnover
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payables turnover = |
purchases / average trade payables |
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number of days of payables = |
365 / payables turnover ratio |
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total asset turnover =
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revenue / average total assets |
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fixed asset turnover = |
revenue / average net fixed assets |
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working capital turnover = |
revenue/ average working capital |
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current ratio = |
current assets / current liabilities |
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quick ratio = |
cash + marketable securities + receivables / current liabilities |
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cash ratio = |
cash + marketable securities/ current liabilities |
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defensive interval = |
cash + marketable securities + receivables / average daily expenditures |
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cash conversion cycle = |
day sales outstanding + days inventory on hand - number of days payable |
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debt-to-equity = |
total debt / total SE equity
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debt-to-capital = |
total debt /total debt + total shareholders’ equity |
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debt-to-assets = |
total debt / total assets |
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financial leverage = |
average total assets / average total equity
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interest coverage = |
EBIT / interest payments |
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fixed charge coverage = |
EBIT + lease payments / interest payments + lease payments |
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net profit margin = |
net income / revenue |
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gross profit margin = |
gross profit /revenue |
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operating profit margin = |
(operating income/revenue) or (EBIT/revenue) |
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pretax margin = |
EBT/ revenue |
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return on assets (ROA) = |
net income / average total assets
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return on assets (ROA) = |
net income + interest expense (1 − tax rate) / average total assets
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operating return on assets = |
operating income/average total assets or EBIT/ average total assets |
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return on total capital = |
EBIT / average total capital
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return on equity = |
net income / average total equity |
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return on common equity = |
net income – preferred dividends /average common equity |
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return on common equity =
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= net income available to common / average common equity |
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FCFF = |
= net income + noncash charges + [interest expense × (1 – tax rate)] – fixed capital investment – working capital investment |
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FCFF =
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= cash flow from operations + [interest expense × (1 – tax rate)] – fixed capital investment |
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FCFE = |
cash flow from operations – fixed capital investment + net borrowing
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common-size income statement ratios = |
income statement account/ sales |
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common-size balance sheet ratios = |
balance sheet account /total assets |
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common-size cash flow ratios = |
cash flow statement account/ revenues |
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basic EPS = |
net income − preferred dividends /weighted average number of common shares outstanding |
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diluted EPS = |
(Net Income - Pref. Dividends)+(
convertible pref. dividends) + (convertible debt interest)(1-t) / (weighted average shares)+(shares from conversion of pref. stock)+(shares from conversion of pref. debt)+(shares from issuable stock options) |
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CV sales = |
standard deviation of sales / mean sales
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CV operating income = |
= standard deviation of operating income / mean operating income |
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CV net income = |
= standard deviation of net income / mean net income |
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ending inventory = |
beginning inventory + purchases – COGS
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FIFO COGS = |
LIFO COGS – (ending LIFO reserve – beginning LIFO reserve) |
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straight-line depreciation= |
cost−salvage value / useful life |
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DDB depreciation = |
(2 / useful life) (cost – accumulated depreciation) |
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units-of-production depreciation = |
(original cost − salvage value/life in output units)×output units in the period |
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average age = |
accumulated depreciation / annual depreciation expense |
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total useful life = |
historical cost/ annual depreciation expense |
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remaining useful life = |
ending net PP&E/ annual depreciation expense |
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income tax expense = |
taxes payable + ΔDTL – ΔDTA
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cash flow per share = |
CFO - preferred dividends /weighted average number of common shares |
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debt coverage = |
CFO/ total debt |
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interest coverage = |
= CFO + interest paid + taxes paid interest paid |
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reinvestment coverage ratio= |
CFO/ cash paid for long-term assets |
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debt payment coverage ratio = |
CFO cash long-term debt repayment |
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investing and financing coverage ratio= |
CFO / cash outflows from investing and financing activities |
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Where would you find information about accounting estimates, assumptions, and methods chosen for reporting? |
financial statement notes |
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Where would you find information about elections of members to a company’s Board of Directors?
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proxy statements
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6 steps financial statement analysis framework.
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Stating the objective, processing the data, gathering the data, analyzing the data, updating the analysis, and reporting the conclusions. |
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How is Accumulated depreciation classified on financial statements? |
Contra assets |
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expanded accounting equation = |
assets = liabilities + contributed capital + beginning retained earnings + revenue – expenses – dividends |
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If a firm raises $10 million by issuing new common stock, which of its financial statements will reflect the transaction? |
Balance sheet, cash flow statement, and statement of owners’ equity |
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What is the main way the general journal and general ledger differ? |
The general journal lists all of the company’s transactions by date. The general ledger lists them by account. |
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According to the IASB Conceptual Framework, the fundamental qualitative characteristics that make financial statements useful are |
The fundamental qualitative characteristics are relevance and faithful representation. |
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According to IAS No. 1, When must financial statements be presented?
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According to IAS No. 1, financial statements must be presented at least annually |
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Compare FASB conceptual framework, as compared to the IASB conceptional framework
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The FASB framework lists revenues, expenses, gains, losses, and comprehensive income. The IASB framework only lists income and expenses. |
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What type of expense is depreciation? What type is interest expense?
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Depreciation is included in the computation of operating expenses. Interest expense is a financing cost. Thus, it is excluded from operating expenses. |
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How are Income taxes grouped? How are Cost of goods sold grouped? |
Income taxes are expenses grouped together by their nature. Cost of goods sold includes a number of expenses related to the same function, the production of inventory. |
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AAA contract to build for $100,000 with time to completion of 3 years. A reliable cost estimate is $60,000. In the first year, AAA incurred costs of 24,000. How much profit should AAA report at the end of the 1st under the percentage-of-completion method and completed-contract method? |
$24,000/$60,000=40% of the project completed. 40% of $100,000 = $40,000 revenue. $40,000 revenue – $24,000 cost = $16,000. No profit for completed contract method. |
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How is a change in an accounting estimate reported?
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A change in an accounting estimate is reported prospectively. |
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How is the operating income of a physically and operationally distinct division that is currently for sale, but not yet sold treated? |
A physically and operationally distinct division that is currently for sale is treated as a discontinued operation. The income from the division is reported net of tax below income from continuing operations. |
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What does a change in accounting principle require? |
A change in accounting principle requires retrospective application; that is, all prior period financial statements currently presented are restated to reflect the change. |
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What does it mean when the exercise price of warrants are less than the average share price?
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the warrants are dilutive |
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What does it mean price per share is less than basic eps?
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The bonds are antidilutive. Thus, diluted EPS = basic EPS
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What does it mean if a average price per share is less than the exercise price? |
antidilutive |
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What is the impact of foreign currency translation gains on statements?
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A foreign currency translation gain is not included in net income but the gain increases owners’ equity. |
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Comprehensive income includes all changes in equity except what interaction?
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Comprehensive income includes all changes in equity except transactions with shareholders. Therefore, dividends paid to common shareholders are not included in comprehensive income. |
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classified balance sheet |
A classified balance sheet groups together similar items (e.g., current and noncurrent assets and liabilities) to arrive at significant subtotals. |
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How should the proceeds received from the advance sale of tickets to a sporting event be treated by the seller, assuming the tickets are nonrefundable? |
Revenue is deferred until the sporting event is held |
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A vertical common-size balance sheet expresses each category of the balance sheet as a percentage of what? |
assets
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Which inventory valuation methods is required by the accounting standard-setting bodies? |
Lower of cost or net realizable value |
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How is goodwill developed internally treated on the balance sheet?
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Goodwill developed internally is expensed as incurred |
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Goodwill=
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Purchase price – fair value of net assets |
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What is accumulated other comprehensive income and preferred stock's value apart of? |
Shareholder equity
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Unrealized gain from the investment in Beta is is included, where? |
included in accumulated other comprehensive income |
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What is the impact of Profit on the sale of land on the balance sheet? |
Profit on the sale of land should be subtracted from net income |
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What type of cash flow is depreciation? |
operations
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Cash from sale of building impact on investing activities? |
added for investing activities |
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What type of cash flow is purchase of machinery?
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investing activities |
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What type of cash flow is sale of preferred stock?
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+Cash flow from financing activities
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What type of cash flow is issuance of bonds?
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+Cash flow from financing activities
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What type of cash flow is principal payments on bank borrowings?
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- Cash flow from financing activities
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What type of cash flow is repurchase of common stock?
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– Cash flow from financing activities |
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What type of cash flow is dividends paid?
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- Cash flow from financing activities
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What is the impact on cash flows of increase in accounts receivable, increase in inventory and decrease in accounts payable?
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decrease in cash flow from operations i
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The payment of interest on debt is an _________ cash flow under U.S. GAAP.
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operating
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Is taxes paid an operating or financing activity? |
Taxes paid are an operating cash flow under U.S. GAAP. |
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Would dividends received from investments be an operating or financing cash flow?
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Dividends received from investments would be classified as operating cash flow under U.S. GAAP. |
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Exchange of debt securities for equity securities is what type of transaction?
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The exchange of debt securities for equity securities is a noncash transaction. |
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What is the impact of on
Received dividends on cash flows? |
increase operations |
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What is the impact of Unrealized gains on cash flows?
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decrease operating cash flow
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Is issuing bonds operating or financing activity?
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issuing bonds would be classified as financing cash flow |
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Is sales of inventory operating or financing activity?
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Sales of inventory would be classified as operating cash flow. |
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Are dividends paid a operating or financing activity?
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Under U.S. GAAP, dividends paid are reported as financing activities. Under IFRS, dividends paid can be reported as either operating or financing activities. |
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Is change in notes payable a operating or financing activity?
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financing
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Sale of land would be classified as ______ cash flow |
investing
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The write-off of obsolete equipment would be classified as what type of cash flow? |
no cash flow impact
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What is the cash flow impact of purchase of new fixed assets? |
decrease from investing
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How can the cash flow statement be converted to common-size format?
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The cash flow statement can be converted to common-size format by expressing each line item as a percentage of revenue. |
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Retention rate =
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(1 – dividend payout ratio)
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Sustainable Growth Rate =
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(retention rate)(ROE)
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For finance lease what portion is considered CFO and what portion is considered CFF?
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Interest portion of the lease payment is classified as CFO. Principal is CFF
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Under IFRS, How is the reversal of an inventory write recognized?
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The reversal of an inventory write down is not recognized as a gain, but instead as a reduction in the cost of sales for the period.
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Impairment charges reduce ____________ and __________ in the period of the charge.
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Impairment charges reduce operating income and net income in the period of the charge.
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What do Impairment charges do to taxes?
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Taxes are not affected because any loss in asset value will reduce taxes only when the asset is disposed of and the loss is actually realized.
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How is interest paid on loans to finance construction of a long-lived asset shown for US GAAP?
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Interest on loans that specifically fund construction of long-lived assets must be capitalized under U.S. GAAP.
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How are research and development costs reported under U.S. GAAP?
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They are expensed
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What is the benefit capitalizing a purchase instead of recognizing it as an expense in the current period?
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to increase CFO
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A firm that purchases a building that it intends to rent out would report this asset as investment property ONLY under _________
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IFRS
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Under IFRS, How is it reported when a company redeems bonds before they mature?
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gain or loss = bonds’ carrying amount - cost to redeem the bond
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Under a defined contribution pension plan, what is recognized as a pension expense?
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The company’s only pension expenses are the predetermined contributions required to be made to the plan for the period.
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Under U.S. GAAP, how are unamortized issue costs are reported?
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Under U.S. GAAP, unamortized issue costs are reported on the balance sheet as an asset and are not included in the book value of the bond liability. Written off when bond called
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Gain or loss on redemption =
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= book value – reacquisition price – unamortized issue costs
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________________________ on trading securities are reported in the income statement under both U.S. and IFRS standards
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Unrealized gains and losses
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What is the effect if a firm receives a receipt of tax-exempt interest income?
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This will create a permanent difference between pretax income and taxable income. Since the tax-free interest increases pre-tax income, but not income tax expense,
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