1. US vs. International accounting boards and rules
    US: FASB creates GAAP

    International: IASB creates IFRS
  2. Where are gains/losses on asset disposal reported?
    Income statement
  3. What is the accounting equation
    assets = liabilities + owner's equity
  4. What are the types of cash flows
    • operating: result from "normal" business of the firm
    • investing: acquisition/sale of PPE, of a subsidiary or segment, of securities, and investment in other firms
    • financing: issuance/retirement of firm debt/equity and dividends to stockholders
  5. Types of audit opinions
    • unqualified: statements are free from material errors/omissions
    • qualified: explain reasonably made exceptions to accounting principles
    • adverse: statements not presented fairly or are materially nonconforming
  6. Six steps of FSA
    • State the objective and context
    • Gather data
    • Process the data (make appropriate adjustments)
    • Analyze and interpret the data
    • Report the conclusions/recommendations
    • Update the analysis
  7. What 2 things make up owner's equity
    contributed capital + retained earnings
  8. Chart for indirect method of going from IS to CF statement
    • Assets increase = outflow
    • Assets decrease = inflow
    • Liabilities increase = inflow
    • Liabilities decrease = outflow
  9. Classification of dividends and interest as a cash flow
    • FASB: Dividends paid are financing, dividends received are operating, and interest either paid or received is operating.
    • IASB: All situations can be either financing or operating cash flows
  10. FASB vs IASB on purposes of the framework, objectives of financial statements, assumptions, qualitative characteristics, and financial statement elements
    • Purposes of the framework: IASB requires management to consider the framework if no explicit standard exists. FASB does not
    • Objectives: FASB presents different objectives for business and non business reports. IASB does not.
    • Assumptions: IASB places more emphasis on going concern assumption
    • Qualitative characteristics: FASB only lists relevance and reliability. IASB has those and comparability and understandability
    • Financial statement elements:
    • 1) IASB lists income and expenses as performance crucial. FASB also includes revenue, expenses, gains, losses, and comprehensive income.
    • 2) FASB says asset is a future economic benefit. IASB says its a resource from which a future economic benefit is expected
    • 3) FASB does not allow the value of most assets to be adjusted upward
    • 4) FASB uses the word "probable" to define assests and liabilities
  11. General IS format
    • Revenue
    • (COGS)
    • = Gross Profit
    • (GSA)
    • (Depreciation expense)
    • = Operating Profit
    • (Interest expense)
    • =Income before tax
    • (Tax)
    • = Income from continuing operations
    • Earnings (loss) from discontinued operations net of tax
    • = Net income
  12. Explain two methods for recognizing long-term contracts
    Percentage-of-completion: Recognize same % of final revenue as the % of final cost that has occurred. Ex. if have completed 50% of project in Q1 (based on cost), recognize 50% of the sale price

    in year 2, calculate revenue recognized by: TOTAL costs incurred/total estimated costs * total expected revenue - revenue already recognized

    if costs exceed projections, recognize remaining revenue only, and income may be a loss

    Completed-contract: recognition of all revenue and expense occurs upon completion
  13. Installment sale recognition methods
    • Normal recognition: if collectibility is certain or can be reasonably estimated, revenue is recognized at the time of sale
    • Installment method: profit is recognized as cash is collected. Profit = cash collected * total expected profit/total sales
    • Cost recovery method: revenue = expenses = cash collected until all costs are accounted for, then the rest is considered profit
  14. Gross revenue reporting vs net revenue reporting
    • Gross: revenue and cogs are recognized separately
    • Net: only the difference in sales and cogs is reported
  15. Criteria for using gross method
    • be the primary obligor under the contract
    • bear the inventory risk and credit risk
    • be able to choose supplier
    • have reasonable latitude to establish the price
  16. What is the matching principle?
    expenses to generate revenue are recognized in the same period as the revenue
  17. Period costs, what are they and when are they expensed
    • cannot be tied directly to revenue generation (ex. admistrative)
    • expensed in the period incurred
  18. Straight line depreciation
    SL depreciation expense = (cost - residual value)/useful life
  19. Double declining balance depreciation method (DDB)
    • DDB depreciation = (2/useful life)*(cost - accumulated depreciation)
    • Depreciation continues until residual value is reached since it's not explicitly used in the formula
  20. Beginning -> ending inventory
    Beginning inventory + Purchases - COGS = Ending Inventory
  21. Periodic vs perpetual inventory systems
    • Periodic: inventory purchased during the accounting period is recorded in a Purchases account. At the end of the period, Purchases and Sales are used to reconcile the Inventory and COGS accounts
    • Perpetual: Inventory and COGS are updated continuously. A purchases account is unneccessary.
  22. Does LIFO or FIFO provide a better measure of ending inventory? Why?

    Which is most appropriate for inventory whose value deteriorates quickly?
    FIFO does because ending inventory (beginning + purchases - COGS) is made of the most recent purchases, which better reflects current market prices and therefore current economic value.

    FIFO is most appropriate for deteriorating inventory
  23. Inventory write-down rules for IFRS and GAAP
    IFRS: inventory is recorded as lower of net realizable value (sales price - selling cost) and original cost. Allowed both write-ups and write-downs.

    GAAP: inventory is recorded as lower of market and cost. Market must be less than NRV and greater than NRV - Normal profit margin. Write-ups not allowed.
  24. FIFO and LIFO allowances under GAAP and IFRS
    GAAP allows both, IFRS only allows FIFO
  25. Capitalizing vs. Expensing on: total assets, shareholder's equity, net income (first year), net income (subsequent years), cash flow from operations, cash flow from investing, Debt ratio and Debt/equity ratio, investment coverage (first year), investment coverage (subsequent years)
    Image Upload 1
  26. Common size ratios (BS, IS, CF)
    • Balance sheet: All balances as percentage of assets
    • Income statement: All items as percentage of sales
    • Cash flow statement: All items as a percentage of total inflows (outflows if overall negative) or as a percentage of net revenue
  27. Free cash flow
    • measure cash available for discretionary purposes
    • operating cash flow - net capital expenditures - change in working capital
  28. Liquidity ratios (current, quick, cash, defensive interval)
    • current: current assets/current liabilities
    • higher implies more liquid (greater ability to meet short term obligations)
    • quick: (cash + marketable securities + receivables)/current liabilities
    • similar to current, but more conservative because it includes only the most liquid assets
    • cash: (cash + marketable securities)/current liabilities
    • represents liquidity in crisis situations (could be unreliable since mrkt sec lose value quickly in these situations)
    • defensive interval: (cash + marketable securities + receivables)/daily cash expenditures
    • measures how long the firm can continue to pay its expenses from its existing liquid assets assuming no cash flows
  29. Cash conversion cycle ratios: receivables turnover, inventory turnover, payables turnover ratio, days of sales outstanding, days of inventory on hand, number of days of payables, cash conversion cycle
    • receivables turnover: annual sales/average receivables
    • high ratio can indicate highly efficient credit and collection. Alternatively, high could also indicate too stringent of collection policies, competitor's policies may be more attractive
    • days of sales outstanding (DSO): 365/receivables turnover
    • number of days between sale and collection
    • inventory turnover: COGS/average inventory
    • high ratio may indicate effective inventory management or company may not carry adequate inventory, damaging sales
    • days of inventory on hand (DOH): 365/inventory turnover
    • number of days inventory is held
    • payables turnover ratio: purchases/average trade payables
    • purchases = COGS + ending inventory - beginning inventory or approximated as simply COGS
    • high ratio indicates either company is not taking advantage of available credit facilities or is taking advantage of early payment discounts
    • number of days of payables: 365/payables turnover ratio
    • number of days the company takes to pay its suppliers
    • Cash Conversion Cycle: DOH + DSO - number of days of payables
    • indicates the amount of time that elapses from the point when a company invests in working capital until the company collects cash
    • shorter cycle indicates higher liquidity and implies that firm only needs to finance its inventory and A/R for a short period of time
  30. Total asset, fixed asset, working capital, working capital turnover
    • total asset turnover: revenue/average total net assets
    • fixed asset turnover: revenue/average net fixed assets
    • working capital: current assets - current liabilities
    • working capital turnover: revenue/working capital
    • indicates how efficiently the firm generates revenue with its working capital
    • 4.0 indicates $4 revenue for every $1 working capital
    • if near 0 or negative, this number can't be interpreted
  31. Gross margin, operating margin, net margin
    • gross margin: gross profit/revenue
    • operating margin: operating profit/revenue = EBIT/net sales
    • net margin: net income/revenue
  32. Debt-to-equity, debt-to-assets (total-debt), debt-to-capital, leverage, interest coverage, fixed charge coverage
    • debt-to-equity: total debt/total shareholder's equity
    • high means low solvency
    • ratio of 1 implies debt to capital of 50%
    • book value or market value of equity
    • debt-to-assets: total debt/total assets
    • indicates percentage of assets financed with debt
    • debt-to-capital: total debt/(total debt + total shareholder's equity)
    • high indicates higher risk and weaker solvency
    • leverage: average total assets/average total equity
    • total assets supported with 1 unit of equity
    • interest coverage: EBIT/interest payments
    • number of times a firm's ebit could cover its interest payments
    • "times interest earned"
    • fixed charge coverage: (EBIT + lease payments)/(interest payments + lease payments)
    • same as interest coverage but includes leases
  33. Growth rate
    • retention rate(b) * ROE
    • b = 1 - dividends declared/operating income after taxes
  34. Return on assets, return on equity
    • Net income/average total assets
    • interest expense added back: (net income + interest expense[1-tax rate])/average total assets
    • Pre-interest and pre-tax ROA aka operating ROA: EBIT/average total assets
    • ROE: net income/average total equity
    • return on common equity: (net income - preferred dividends)/average common equity
  35. Dupont analysis - regular and extended
    • regular: ROE = (net income/sales)*(sales/assets)*(assets/equity)
    • aka - ROE = net profit margin * asset turnover * equity multiplier
    • extended: ROE = (net income/EBT)*(EBT/EBIT)*(EBIT/revenue)*(revenue/average total assets)*(average total assets/average equity)
    • aka - ROE = tax burden * interest burden * EBIT margin * asset turnover * leverage
  36. Basic EPS, diluted EPS
    basic EPS: (net income - preferred dividends)/weighted average number of common shares outstanding[WACSO]

    diluted EPS: [(net income - preferred dividends) + convertible preferred dividends + convertible debt interest*(1-tax rate)]/[WACSO + shares from conversion of convertible preferred shares + shares from conversion of convertible debt + shares issuable from stock options]

    convertible instruments issued during the year are also time weighted in the average

    Average annual share price is used as denominator for converting options
  37. Captializing vs expensing
    • capitalizing: lowers income variability, increases near term profits, increases assets, increases equity
    • expensing: opposite effects
  38. depreciation - straight line, double declining balance, units of production
    • straight line: (cost - residual value)/useful life
    • double declining balance: (2/useful life)*(net book value)
    • units of production: (cost - salvage value)/useful life in units * output units
  39. Held-to-maturity vs available for sale vs trading assets
    Image Upload 2
  40. WACC
    WACC = wdKd(1-t) + wpsKps + wcsKce
  41. Kd, Kps, Kce
    • Kd = Current YTM on firm's debt
    • Kps = preferred dividends/market price of ps
    • Kce = (CAPM) rf + B(E[Rm] - rf), (Dividend Discount) Price = Image Upload 3, (Bond) kce = bond yield + risk premium,
  42. BETA asset, BETA project
    • BETA asset (use other firm's info that does only the specific project's business) = BETA equity * Image Upload 4
    • BETA project (use subject firms information) = BETA asset * 1+((1-t)*Debt/Equity)
  43. Country risk premium (CRP)
    • revised Kce = Rf + Beta[Rmkt - Rf + CRP]
    • CRP = sovereign yield spread * annualized standard deviation of developing country / annualized standard deviation of sovereign bond market in terms of developed market currency
  44. Flotation costs
    treated as an initial outflow, not part of ROE
  45. Degree of Leverage (DOL)
    Image Upload 5

    • Q = Units sold
    • P = Price per unit
    • V = Variable cost per unit
    • F = Fixed Costs
  46. Degree of Financial Leverage (DFL)
    Image Upload 6
  47. Degree of Total Leverage
  48. IFRS Framework: 4 characteristics that enhance 2 characteristics
    FS should have: timeliness, comparability, verifiability, and understandability

    To enhance: relevance, faithful representation
  49. what is convergence?
    the effort of creating one global accounting standard
  50. Forms 8-K, DEF-14A, 144
    8-K: Filed to disclose material events to shareholders (M&A, management changes, etc.)

    DEF-14A: statement that must be filed with the SEC when the company holds a shareholder proxy vote

    144: an announcement to the SEC that the company is going to issue unregistered securities
  51. components of contributed capital
    Common shares + additional paid-in capital

    additional paid-in capital: happens when shares are purchased for more (or less) than their par value
  52. financial statements required by IAS No. 1
    • balance sheet
    • statement of comprehensive income
    • cash flow statement
    • statement in changes of owner's equity
    • explanatory notes that include accounting policies
  53. The flow of information in an accounting system is
    journal entries, general ledger, trial balance, financial statements
  54. How do warrants increase number of shares outstanding
    number promised - number of shares cash flow from conversion will buy at current market prices
  55. IFRS vs GAAP on projects where costs cannot be reasonably estimated
    GAAP: contract completion method - recognize everything at the end

    IFRS: if can assume costs will be recovered, revenue = costs (cost recovery method)
  56. accounting principle changes vs accounting estimates changes
    accounting principles changes must be applied retroactively, accouning estimates changes must only be applied going forward
  57. simple capital structure
    no securities exist that can dilute eps
  58. what amount do companies receive on stock issuance
    par + additional paid in capital
  59. warranty expense, bad debt expense
    warranty expense: held as a liability, decreases NI, increases liabilities

    bad debt expense: expensed on the spot, decreases NI, decreases Assets via uncollectable account for A/R
  60. which method is used in the hypothetical conversion of warranties?
    treasury stock method - it is assumed the firm uses money paid to first purchase shares in the open market, then creates any shares still needed from the conversion
  61. Average inventory
    (beginning inventory - ending inventory)/2
  62. valuation allowance
    under GAAP, this is required if there is doubt that a deferred tax asset will be recovered

    under IFRS, the DTA is written down directly
  63. bad debt expense and taxes
    bad debt expense cannot be deducted from taxable income until the A/R is deemed worthless
  64. interest expense on income statement = ?
    book value of the bond at the beginning of the period * market rate at issuance
  65. asset impairment
    undiscounted future cash flows < asset carrying value
  66. finance lease payments are split into _____
    • principal, which is CFF
    • interest, which is CFO
  67. defined benefit option
    PV of future pension benefits earned to date
  68. tax loss carryforward
    net taxable loss that can be used to reduce taxable income in the future

    NI was negative, so that can be applied to a positive NI later to curve taxes
  69. tax expense =
    tax rate * taxable income + DTL
  70. effective and statutory tax rates difference are caused by:
    tax credits, non-deductible income, and differences between capital gains and operating taxes
  71. revaluation model
    under IFRS, assets can be adjusted for their fair value on the BS. any adjustment below original cost hits, IS, and others only go on BS under Assets and Equity (Revaluation Surplus)

    firms must state finite or infinite life and disclose the carrying value under the historical cost model
  72. software development costs: GAAP vs IFRS
    • GAAP: developed for in house, all expensed.
    • developed for sale, expensed until feasible, then capitalized
    • purchased, capitalized

    • IFRS: all expensed until feasible, then capitalized
    • purchased, capitalized
  73. when is a current liability expected to be settled?
    within one year or one operating cycle, whichever is greater
  74. net income vs comprehensive income
    NI = Rev - COGS - Operating expenses +- sale of equipment - taxes paid

    Comprehensive income = unrealized gains/losses from available for sale securities, unrealized gains/losses from cash flow hedging derivatives, unrealized gains/losses from currency translation

    Dividends are not included in either
  75. calculate goodwill
    purchase price - fair market value (assets - liabilities
  76. leverage vs financial leverage
    Debt/Equity vs Assets/Equity
  77. treasury stock: voting rights and cash dividends
    no and no
  78. Notes payable is CF_
  79. Treasury shares treatment on balance sheet
    Treasury shares are a reduction in shareholder's equity, not an asset
  80. Reinvestment ratio
    CFO/cash paid for long-term investments
  81. Financial reporting vs Tax reporting terminology
    • FR: Pretax income, tax expense
    • tax expense = tax payable + DTL - DTA (DT must be based on future tax rates, which creates a difference between tax expense and (pretax income * tax rate)

    TR: Taxable income, tax payable, tax basis of asset (cost - depreciation)
  82. component depreciation
    depreciating different components of an asset separately

    IFRS requires component depreciation, GAAP does not
  83. Capitalized interest costs
    treated as part of the cost of the constructed capital asset

  84. effective tax rate
    weighted average taxes. tax exempt items do weigh in at 0
  85. LIFO conformity rule
    in the U.S., under GAAP, if a firm uses LIFO for tax purposes, it must also use LIFO for financial reporting
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