CFA Financial Statement Analysis Flashcards

11/18/22, 10:25 AM CFA Financial Statement Analysis Flashcards | Chegg.
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CFA Financial Statement
Analysis
124 cards Finance | Financial Accounting
Practice all cards
Unqualified opinion
Also known as unmodified opinion, auditor states that they believe the
statements are free of material errors
Qualified opinion
Auditor can explain any exceptions to the accounting principles
Proxy statements
Issued to shareholders when there are issues that require a shareholder vote
Standard setting bodies
professional organizations of accountants and auditors that establish financial

reporting standards.
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The two primary standard-setting bodies are the Financial Accounting

Standards Board (FASB) and the International Accounting Standards Board
(IASB).
International Organization of Securities Commissions (IOSCO)
The members of IOSCO regulate more than 95% of the world's financial
markets. IOSCO is not a regulatory body, but its members work together to
make national regulations and enforcement more uniform around the world.
Form S-1
Registration statement filed prior to the sale of new securities to the public. The
registration statement includes audited financial statements, risk assessment,
underwriter identification, and the estimated amount and use of the offering
proceeds.
From 10-k
Required annual filing that includes information about the business and its
management, audited financial statements and disclosures, and disclosures
about legal matters involving the firm
Form 10-Q
U.S. firms are required to file this form quarterly, with updated financial
statements (unlike Form 10-K, these statements do not have to be audited) and
disclosures about certain events such as significant legal proceedings or
changes in accounting policy.
Form DEF-14A
When a company prepares a proxy statement for its shareholders prior to the
annual meeting or other shareholder vote, it also files the statement with the
SEC as Form DEF-14A.
Form 8-k
Companies must file this form to disclose material events including significant
asset acquisitions and disposals, changes in management or corporate
governance, or matters related to its accountants, its financial statements, or
the markets in which its securities trade.
Form 144
A company can issue securities to certain qualified buyers without registering

the securities with the SEC but must notify the SEC that it intends to do so.
Forms 3,4,5
Involve the beneficial ownership of securities by a company's officers and

directors. Analysts can use these filings to learn about purchases and sales of
company securities by corporate insiders.
Accrual accounting
Accrual accounting means that financial statements should reflect transactions

at the time they actually occur, not necessarily when cash is paid.
Going concern
assumes the company will continue to exist for the foreseeable future
Net revenue
Revenue less adjustments for allowances and estimated returns
Minority interest (non controlling interest)
When a firm owns a controlling interest in a subsidiary, the share of income

from the subsidiary not owned by the parent company is recorded as minority
interest
Subtracted from total income
Gross vs operating profit
Gross profit subtracts direct costs of producing the good from revenue, while
operating profit further subtracts costs of operating (SG&A expenses)
Unearned revenue
A liability created when cash is received before delivery of the good/service
Matching principle
Expenses should be recognized in the same period as the revenue they helped
generate
Period costs
Cannot be directly tied to the revenue generated, they are expensed in period
accrued
Eg: administrative expenses
straight line depreciation expense
(Cost-residual value)/useful life
Double declining balance depreciation cost
(2/useful life)*(cost - accumulated depreciation)
How are intangibles amortorized?
They are not; however once a year they are evaluated for impairment, and if
impaired, an expense equal to the impairment amount is recognized on the
income statement
Discontinued operation
A discontinued operation is one that management has decided to dispose of,

but either has not yet done so, or has disposed of in the current year after the
operation had generated income or losses.
Retrospective application
With retrospective application, any prior-period financial statements presented

in a firm's current financial statements must be restated, applying the new
policy to those statements as well as future statements.
Simple capital structure
Contains no dilutive securities
basic EPS
(net income - preferred divs)/weight average number of shares outstanding
T/F: If convertible bonds are dilutive, then the bonds' after-tax interest
expense is not considered an interest expense for diluted EPS. Hence, interest
expense multiplied by (1 – the tax rate) must be added back to the numerator.
True
T/F: If convertible preferred stock is dilutive (meaning EPS will fall if it is

converted to common stock), the convertible preferred dividends must be
added to earnings available to common shareholders.
True
Treasury stock method
Assumes that proceeds from exercising options would be used to purchase

shares at average market price.
Number of shares created = number of shares created from options - number

of shares purchased with proceeds
Retained earnings
At the end of each period, net income - declared dividends are added to
stockholders' equity section through retained earnings
Trading securities
Debt securities that a firm owns but intends to sell; gains and losses reported
on the income statement
Held to maturity
Debt securities that a firm owns but does not intend to sell;
Reported at amortized (not fair value) on balance sheet, not reported on

income statement
Available for sale securities
Debt securities held by a firm that are not planned on being sold in the near
term but also will not be held to maturity.
Unrealized gains/losses are reported as other comprehensive income, but not

on income statement
Comprehensive income
Sum of net income and other comprehensive income
Operating cycle
the time it takes to produce or purchase inventory, sell the product, and collect
the cash.
Working capital
CA - CL
Marketable security
Marketable securities are financial assets that are traded in a public market and
whose value can be readily determined.
Accounts receivable are recognized at:
Net realizable value
Gross value - bad debt expense
Standard costing
Method of recording inventory, used often by manufacturing firms.

11/18/22, 10:25 AM
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involves assigning predetermined amounts of materials, labor, and overhead

to goods produced
Retail method
Method of recording inventory, measure inventory at retail prices and then

subtract gross profit in order to determine cost.
Under U.S. GAAP, companies using LIFO or the retail method report
inventories
At lower of cost or market
Under U.S. GAAP for companies that use inventory cost methods other than
LIFO or retail, inventory reported at:
Lower of cost or net realizable value
Cost method of PP&E
PP&E other than land is reported at amortized cost (historical cost minus
accumulated depreciation, amortization, depletion, and impairment losses)
Historical cost for PP&E
Purchase price + costs needed to set it up (delivery, installation, etc)
Goodwill
Excess of purchase price over the fair value of the identifiable net assets (assets
minus liabilities) acquired in a business acquisition.
T/F: Goodwill is amortized
False; tested annually for impairment
Authorized shares
the number of shares that may be sold under the firm's articles of
incorporation
Issued shares
the number of shares that have actually been sold to shareholders
Outstanding shares
the issued shares less shares that have been reacquired by the firm (i.e.,
treasury stock).
debt ratio
Total debt/total assets

Financial leverage ratio
total assets/total equity
Operating cash flow
Cash flows in and out resulting from transactions that affect net income
Cash flow from investing
resulting from the acquisition or disposal of long-term assets and certain

investments.
Cash flow from financing
resulting from transactions affecting a firm's capital structure.
Cash based accounting
Revenue and expenses are recognized when cash is exchange/received
Direct method
each line item of the accrual-based income statement is converted into cash
receipts or cash payments
receipts or cash payments.
Basically converts accrual based income statement into cash based income
statement
Indirect method
net income is converted to operating cash flow by making adjustments for

transactions that affect net income but are not cash transactions.
Eg. D & A
The only difference between the indirect and direct methods of presentation is
in the
Cash flow from operations section
General principle for converting from direct to indirect method
The general principle here is to adjust each income statement item for its
corresponding balance sheet accounts and to eliminate noncash and
nonoperating transactions.
Free cash flow
Cash flow available once firm has covered capital expenditures
Free cash flow to the firm (FCFF)
cash available to all investors, both equity owners and debt holders.
Free cash flow to equity (FCFE)
Free cash flow to equity (FCFE) is the cash flow that would be available for
distribution to common shareholders
FCFE formula
CFO - net capital expenditures + net borrowing
FCFF formula
NI + NCC + [Int × (1 − tax rate)] − FCInv − WCInv
NCC = non cash charges

Int = cash interest paid
FCInv = net capital expenditures
WCInv = working capital investment
Cash flow per share
(CFO - preferred divs)/wghted avg shares outstanding
Debt coverage ratio
CFO/total debt
Interest coverage
(CFO + interest paid + taxes paid)/interest paid
Reinvestment ratio
CFO/cash paid for long-term assets
Common size statements
Normalize balance sheet and income statement elements.
Eg, all income statement figures expressed as % of sales (vertical common size)
Or base year = 1, (horizontal common size)
Receivables turnover
Annual sales/average receivables
Days sales outstanding
365/receivables turnover ratio
Inventory turnover
COGS/average inventory
Payables turnover
Purchases/average payables
Total asset turnover
Revenue/average total assets
fixed asset turnover
Revenue/average fixed assets
working capital turnover
Revenue/average working capital
Cash ratio
(Cash + marketable securities)/current liabilities
Most conservative liquidity ratio
defensive interval ratio
(Cash + marketable securities + receivables)/average daily expenditures
cash conversion cycle
length of time it takes to turn the firm's cash investment in inventory back into
cash
days sales outstanding + days of inventory on hand - number of days of

payables
Interest coverage
EBIT/interest paid
Fixed charge coverage ratio
(EBIT + lease payments)/(interest + lease payments)
ROE formula
net profit margin × asset turnover × leverage ratio
Dividend payout ratio
Dividends declared/net income available to common
Retention ratio
1- dividend payout ratio
Business segment
a portion of a larger company that accounts for more than 10% of the
company's revenues, assets, or income, and is distinguishable from the
company's other lines of business in terms of the risk and return characteristics
of the segment
COGS inventory formula
COGS = Beginning inventory + purchases - ending inventory
Product costs
Inventory costs capitalized on the balance sheet. Includes:
1. Purchase cost less discounts/rebates

2. Conversions costs (labor, overhead)
3. Other costs necessary to bring inventory to present location and condition
Period costs
Inventory costs that are expensed in the period incurred:
1. Abnormal waste of materials labor or overhead

2. Storage costs
3. Administrative overhead
4. Selling costs
Specific identification method
A method to value inventory costs. Each unit sold is matched with the unit's
actual cost
Difference between periodic and perpetual inventory system
Period system, inventory values and COGS are determined at end of

accounting period. Perpetual system, values are updated continuously.
LIFO Reserve
The amount by which LIFO inventory is less than FIFO inventory
FIFO and LIFO COGS formula
FIFO COGS = LIFO COGS - (ending LIFO reserve - beginning LIFO reserve)
Under GAAP, inventory is reported at:
If LIFO or retail method, lower of cost or market.
If other method, lower of cost or net realizable value
How do inventory write downs work?
If net realizable value of inventory is less than the balance sheet value of
inventory, the inventory is written down to NRV and the loss is recognized on
the income statement
Four steps when converting from LIFO to FIFO
1. Add LIFO reserve to LIFO inventory

2. Subtract change in LIFO reserve for period from COGS
3. Decrease cash by LIFO reserve x tax rate
4. Increase retained earnings by LIFO reserve * (1-tax rate)
Capitalize
If a firm makes an expenditure, it can capitalize the cost as an asset on the

balance sheet
Capitalized interest
If a firm constructs an asset for its own use or for resale, the interest that
accrues during the construction is capitalized as part of assets cost
How are R&D costs handled?
Research costs are expensed on income statement, however development

costs may be capitalized
How are expensed/capitalized costs treated on cash flow statement
If capitalized recorded as outflow from investing activities If expensed outflow

If capitalized, recorded as outflow from investing activities. If expensed, outflow
from operating activities.
Units of production method
Depreciation expense based on usage.
(Original cost-salvage value)/life in output units * output units used in period
How can you tell if an asset is impaired
If carrying value is greater than asset's future undiscounted cash flow stream
When are assets capitalized rather than expensed?
If an asset is expected to provide benefits over multiple periods, it is capitalized

rather than expensed
Tax loss carryforward
A current or past loss that can be used to reduce taxable income (thus, taxes
payable) in the future. Can result in a deferred tax asset.
Accounting profit
Earnings before tax
Income tax expense
Expense for taxes on income statement, equal to taxes payable plus change in
deferred taxes
Deferred tax liability
Balance sheet amounts that result from an excess of income tax expense over
taxes payable that are expected to result in future cash outflows.
Valuation allowance
Reduction of deferred tax assets based on the likelihood the assets will not be
realized.
A deferred tax liability is created most often when:
Accelerated depreciation is used for tax reporting but straight line for the
income statement
Typical causes of tax deferred assets
Post-employment benefits, warranty expenses, and tax loss carryforwards
Liability tax base
carrying value of the liability minus any amounts that will be deductible on the
tax return in the future.
Permanent difference
Difference between pretax income and taxable income that will not reverse in
the future
Effective tax rate
Income tax expense/pretax income
Valuation allowance
If it is more likely than not that a deferred tax asset will not be realized, it must
be reduced in value
T/F: IFRS and U.S. GAAP give firms the irrevocable option to report debt at fair
value.
True; changes can be recognized on income statement
Technical default
Investors can demand immediate repayment if a firm violates a covenant
Requirements to qualify as a lease
For a contract to qualify as a lease, three things must be true:
1. It must refer to a specific asset

2. It must give the lessee full economic benefits of the asset over the life of the
contract
3. It must give the lessee freedom on how to use the asset during the lease
term
Finance lease
Both the benefits and the risks of the lease are transferred to the lessee
Conditions for finance lease
A lease is a finance lease if any of the following are true:

1. Ownership transferred to the lessee
2. The lessee has an option to buy the asset and is expected to exercise it.
3. The lease is for most of the asset's useful life.
4. The present value of the lease payments is greater than or equal to the
asset's fair value.
5. The lessor has no other use for the asset.
Lease receivable
If a firm leases an asset, they remove the asset from the balance sheet and add
a lease receivable asset
Two characteristics of decision useful reporting
Relevance: refers to the fact that information presented in the financial

statements is useful to users of financial statements in making decisions
Faithful representation: encompasses the qualities of completeness neutrality

Faithful representation: encompasses the qualities of completeness, neutrality,
and the absence of errors.
Overloading a distribution channel with more goods than would normally be

sold during a period is referred to as
Channel stuffing
bill-and-hold transaction
customer buys the goods and receives an invoice but requests that the firm
keep the goods at their location for a period of time.
Taking longer to pay suppliers increases operating cash flows and is referred
to as
Stretching payables
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11/18/22, 10:25 AM CFA Financial Statement Analysis Flashcards | Chegg.

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CFA Financial Statement

Practice all cards

Auditor can explain any exceptions to the accounting principles

Standard setting bodies

professional organizations of accountants and auditors that establish financial

The two primary standard-setting bodies are the Financial Accounting

International Organization of Securities Commissions (IOSCO)

A company can issue securities to certain qualified buyers without registering

Involve the beneficial ownership of securities by a company's officers and

Accrual accounting means that financial statements should reflect transactions

Revenue less adjustments for allowances and estimated returns

Minority interest (non controlling interest)

When a firm owns a controlling interest in a subsidiary, the share of income

Subtracted from total income

Gross vs operating profit

A liability created when cash is received before delivery of the good/service

Eg: administrative expenses

straight line depreciation expense

(Cost-residual value)/useful life

Double declining balance depreciation cost

(2/useful life)*(cost - accumulated depreciation)

How are intangibles amortorized?

A discontinued operation is one that management has decided to dispose of,

With retrospective application, any prior-period financial statements presented

Simple capital structure

Contains no dilutive securities

(net income - preferred divs)/weight average number of shares outstanding

T/F: If convertible preferred stock is dilutive (meaning EPS will fall if it is

Treasury stock method

Assumes that proceeds from exercising options would be used to purchase

Number of shares created = number of shares created from options - number

Reported at amortized (not fair value) on balance sheet, not reported on

Available for sale securities

Unrealized gains/losses are reported as other comprehensive income, but not

Sum of net income and other comprehensive income

Accounts receivable are recognized at:

Net realizable value

Gross value - bad debt expense

Method of recording inventory, used often by manufacturing firms.

involves assigning predetermined amounts of materials, labor, and overhead

Method of recording inventory, measure inventory at retail prices and then

At lower of cost or market

Lower of cost or net realizable value

Cost method of PP&E

Historical cost for PP&E

Purchase price + costs needed to set it up (delivery, installation, etc)

T/F: Goodwill is amortized

False; tested annually for impairment

the number of shares that have actually been sold to shareholders

Total debt/total assets

Financial leverage ratio

total assets/total equity

Operating cash flow

Cash flow from investing

resulting from the acquisition or disposal of long-term assets and certain

Cash flow from financing