CFA Level II 2020 > Financial Reporting & Analysis > Flashcards

Financial Reporting & Analysis Flashcards

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1
Q

Under IFRS and GAAP Purchasing Power Gain/Losses are

A

Recognized on the income statement

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2
Q

Accruals Ratio CF

A

NI - CFO - CFI

(NOAend + NOAbeg) / 2

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3
Q

Accruals Ratio BS

A

NOAend - NOAbeg

(NOAend + NOAbeg) / 2

NOA = (Total assets - cash) - (total liabilities - total debt)

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4
Q

NI FIFO Formula

A

NI FIFO = NI LIFO + [∆ in reserve * (1 - t)]

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5
Q

Analyzing the B/S

A
  1. Put assets as a % of total assets
  2. Then compare

Note: Can do the same for capital structure

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6
Q

Beneish Model

Altman Model

A

Beneish

Purpose: Determine probability of earnings manipulation

Analysis: Lower the better. Should be below -1.78

Altman

Purpose: Probability to file bankruptcy

Analysis: Higher the better

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7
Q

Warnings Signs of Overstated Operating Cash Flows

A
  1. Increase in payables with decrease in inventory/receivables
  2. Capitalized expenditures
  3. Sale and leaseback of assets
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8
Q

Warning Signs of Misstated Earnings

A
  1. CFO lower than earnings
  2. Revenue growth higher than peers
  3. Receivables growth higher than revenue growth
  4. High customer returns
  5. Boost in operating income
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9
Q

Measuring Earnings Quality

A

Aggregate Accruals = Accrual based earnings - cash earnings

Cash = quality

Accrual = not quality

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10
Q

Reporting and Earning Quality

A

Reporting: need to be accurate and relevant, decision useful

Earnings: Adequate (meets required return) Sustainable

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11
Q

Hyperinflation G/L under IFRS are treated how?

A

Hyper inflation is 100% over 3 years

GAAP: Use the temporal method

IFRS: Restate monetary assets/liabilites. Use current rate method

Take monetary assets - monetary liabilities

a. depreciating currency and net liability = gain
b. appreciating currency and net liability = loss

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12
Q

Passive Investments are:

A

Security Reported as G/L

  1. Marketable securities fair value R and UR on I/S
  2. Trading securities fair value R and UR on I/S
  3. Available-for-sale fair value R on I/S, UR in OCI
  4. Held-to-maturity amoritized cost R and UR on I/S
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13
Q

Available for Sale Securities vs. Trading Securities

A

AFS: Only realized G/L are reported on the I/S

Trading Securities: Realized and uncrealized G/L are reported

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14
Q

Monetary Assets/Liabilities are:

A
  1. Cash
  2. AR
  3. AP
  4. STD
  5. LTD
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15
Q

When do you use the current rate method? Temporal method?

A

Current Method: 1. functional currency NOT same as parent

  1. local is functional

Temporal Method: 1. Functional currency same as parent

  1. Local is NOT functional
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16
Q

Temporal Method Affects….. Current Rate Method Affects….

A

Temporal: I/S - this means G/L go there

Current Rate: B/S - G/L goes to OCI equity on the B/S

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17
Q

Temporal Method I/S Rates

A

Revenues & Expenses: Average Rate

Rest at historical (this includes COGS, Dep, and Amortization)

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18
Q

Current Rate Method B/S Rates Current Rate Method I/S Rates

A

Use: when functional currency NOT same as parent

B/S:

Retained earnings - average rate

Capital Stock - historical rate

Everything else - current rate

I/S: All average rates

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19
Q

Temporal Method BS Rates

A

Monetary Assets/Liabilities at Current Rate

Everything else at historical

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20
Q

PBO Balance Sheet

A

Funded Status = plan assets - PBO

Will be an asset or liability or the B/S

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21
Q

PBO Total Periodic Pension Cost for GAAP and IFRS

A

GAAP

service costs + interest costs + actuarial loss - actual return on plan assets

Recognized on OCI

IFRS

Service cost + interest costs + past service costs

Both GAAP and IFRS:

Plan contributions - ∆ in funded status

Note: Interest cost = discount rate * beg funded stats

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22
Q

PBO Ending Value of Plan Assets

A

Beg value + actual return + contributions - benefits paid

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23
Q

PBO What happens if we raise or lower the discount rate?

A

Discount rate lower

  1. Higher PBO
  2. Higher Pension cost
  3. Lower stockholders equity

Discount rate higher

  1. Lower PBO
  2. Lower Pension cost
  3. Lower service cost
  4. Higher funded status
  5. Higher stockholders equity
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24
Q

PBO Expected Return

A

a. Does not affect PBO
b. Does affect PBO expenses

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25
PBO Prior service cost is treated by GAAP and IFRS
GAAP: amortized from OCI over years IFRS: Expensed immediately
26
PBO Funded Stats equals
Fair value of plan assets - PBO
27
PBO Change in Funded Status
Company contributions - total periodic pension cost
28
PBO Cash Flow Adjustments
If TPPC \< Firm contributions: reclassify the differences from CFF to CFO **---\> Make to to multiply by (1 - T)** If TPPC \> Firm Contributions: CFO to CFF after-tax **--\> Make to to multiply by (1 - T)**
29
SPE
Special Purpose Entity Purpose: Isolate certain assets and liabilities **Must be consolidated** Also Variable Interest Entity (VIE) if: 1. Insufficient at risk equity 2. lack of decision rights 3. Shareholders do not absorb losses 4. Does not have to be managed by the parent
30
Goodwill Formula
Formula: Purchase price - FMV of new assets IFRS: Allows partial or full GAAP: Only full
31
Equity vs Acquisition Method
Both report same NI **Equity;** Only reports what you own Formula: FV + % of earnings - % of dividends - amort. Loss is recognized on the IS Has higher NPM, ROE, and ROA **Acquisition:** consolidates everything. The % not owned goes to a minority interest account Any Goodwill goes on the B/S
32
Reclassification of Investments
**IFRS:** a. Does not all the FV to be reclassified b. AFS and HtM can switch **GAAP:** a. Does allow FV to be reclassified
33
Business Combinations
Merger: acquiring firm absorbs all assets & liabilities Acquisition: Both entities continue to exist Consolidation: a new entity is formed
34
Take Over Methods
**_Cost or market/Financial assets (IFRS/GAAP same)_** investment in securities Own \< 20% **_Equity Method (IFRS/GAAP same)_** Significant influcent, NOT control Own 20-50% Used for Joint Venture **_Consolidation/Acquisition Method_** Controlling interest Own 50%+ Same NI as equity but higher shareholders equity
35
Operating Lease vs Finance Lease
**_Operating Lease_** Is a rental agreement 1. Current Ratio increase 2. Asset turnover decrease 3. Debt/Equity Ratio decrease **_Finance lease_** Increases assets, liabilities, levered ratios, operating cash flow, operating income
36
Different types of Depreciation Analysis
Purpose: Identify old assets that make firms less competitive **Average age (in years):** accumulated depreciation / annual depreciation expense **Average Depreciable Life:** Ending gross investment / annual depreciation expense **Remaining useful life:** Ending net investments / annual depreciation expense a. Net means to subtract off land
37
Depreciable Life
Ending Gross Investment / Depreciation expense
38
Capitalizing Expenses
1. Reduces expenses in the current period 2. Also added to assets 3. Increases equity by increasing net income and retained earnings
39
Impairments Result In...
Means: past earnings were overstated 1. Lower assets 2. Lower equity 3. Lower ROE and ROA first year 4. No impact on earnings
40
Impairments IFRS vs GAAP
**IFRS:** **Impaired down to recoverable amount** This does include selling costs Impairment is recognized on the IS (can b reversed) **GAAP:** Impaired down to the fair value DOES not include selling cost **_GAAP Example:_** Cost: 2,800 Dep: 13% per year Future CF: 1,350 Step one: Test impairment: 2,800 x (1 - .13)4 = 1,604. Means BV is higher than MV so impairment exists
41
Capitalizing vs Expensing Effects
Capitalizing Expensing Net income (first year) Increase Decrease Assets and equity Increase Decrease ROA and ROE (first year) Increase Decrease CFO Increase Decrease CFI Decrease Increase Debt-to-equity Decrease Increase
42
Research & Development
R&D is always expense However the development costs: IFRS: Development costs are capitalized GAAP: Development costs are expensed
43
ROE
NI / Shareholders Equity
44
ROA
NI / Total Assets
45
Net Profit Margin
NI / Sales
46
Current Ratio
current assets / current liabilities
47
Days on Hand
365 / Inventory Turnover
48
Inventory Turnover
COGS / Average Inventory
49
Quick Ratio
(Cash + s/t investments + receivables) / current liabilites
50
Total Asset Turnover
Sales/ Total Assets
51
Cash Ratio
(Cash + s/t securities) / current liabilities
52
Gross Margin
(Sales - COGS) / Sales
53
Operating Profit Margin
Operating Income / Revenue
54
LIFO to FIFO COGS LIFO ro FIFO Taxes
FIFO COGS = LIFO COGS - (∆ LIFO Reserve) Taxes FIFO = Taxes LIFO + (∆LIFO Reserve \* Tax rate)
55
LIFO to FIFO Steps
**_Income Statement_** FIFO COGS = LIFO COGS - ∆ Reserve FIFO Taxes = LIFO Taxes + (∆ Reserve \* Tax Rate) NIFO FIFO = NI LIFO + (∆ Reserve \* 1 - T) **_Total Assets_** FIFO Inventory = LIFO Inventory + Reserve FIFO Cash = LIFO Cash - (Reserve \* Tax Rate) FIFO Equity = LIFO Equity + (Reserve \* 1 - T)
56
LIFO Liquidation Means....
Reduction in inventory levels This means we eat up old inventory Results in: 1. Decrease COGS 2. Increase NPM 3. Increase inventory turnover 4. No impact on sales
57
Inflation affect on FIFO/LIFO
FIFO LIFO Inflationary Ending Inventory Higher Lower Inflationary COGS Lower Higher Deflationary Ending Inventory Lower Higher Deflationary COGS Higher Lower
58
LIFO Results In
1. Lower WC THINK: Lower WINNTC 2. Lower Inventory balances taxes 3. Lower NI 4. Lower Net and gross margins 5. Lower Taxes 6. Lower Current Ratio 7. Higher debt-to-equity THINK: HIGHER DICC 8. Higher inventory turnover 9. Higher COGS 10. Higher cash flows (b/c of less taxes)
59
COGS
Formula: beg inventory + purchases - ending inventory GAAP is the only one that allows LIFO
60
After-Tax Operating Cash Flow
Step One: operating income: sales - cash operating expenses - dep Step Two: operating income x (1 - T) + dep
61
PBO: Adjusted Operating Profit
reported operating profit + reported pension expense − service cost
62
Interest Coverage Ratio
EBIT / Total Interest Paid
63
Finance vs Operating Lease Effects
**_Finance Operating_** CFO Increase Decrease Assets and equity Increase Decrease Debt/Assets Increase Decrease Debt-to-Equity Increase Decrease NI (first year) Increase Increase CFI Decrease Increase Asset Turnover Decrease Increase ROA Decrease Increase ROE Decrease Increase
64
Extended DuPont Analysis
ROE = _NI**adj**_ _EBT__EBIT__Revenue_ _Avg Assets_ EBT EBIT Revenue Avg Assets**adj** Avg Equity **Think: TIE A FAG** T: Tax burden I: Interest burden E: EBIT margin A: Asset turnover F: Financial leverage _Adjustments:_ * *NI:** subtract off earnings from equity investment * *Avg Assets:** Subtract off carrying value of equity investment
65
How to treat an operating lease like a finance lease
**Step 1:** Increase assets and liabilities by the PV of remaining payments **Step 2**: Remove payment from the income statement and replace with depreciation expense and interest expense Example: PV of payments: 30M, discount rate: 10% Lease term: 6 years, lease payment: 6.9M * *Total debt:** increases by 30M * *EBIT:** increases $1.9M: 6.9M - (30/6 years) * *Interest expense:** increases $3M: ($30M \* .10)
CFA Level II 2020
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