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CFA Financial Statement Analysis Flashcards - Chegg - Com1
CFA Financial Statement Analysis Flashcards - Chegg - Com1
com
Analysis
124 cards Finance | Financial Accounting
Unqualified opinion
Also known as unmodified opinion, auditor states that they believe the statements are free of material
errors
Qualified opinion
Proxy statements
Issued to shareholders when there are issues that require a shareholder vote
professional organizations of accountants and auditors that establish financial reporting standards.
The two primary standard-setting bodies are the Financial Accounting Standards Board (FASB) and the
International Accounting Standards Board (IASB).
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.
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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
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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
Gross profit subtracts direct costs of producing the good from revenue, while operating profit further
subtracts costs of operating (SG&A expenses)
Unearned revenue
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
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
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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.
basic EPS
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
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
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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
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
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.
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Standard costing
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
Under U.S. GAAP for companies that use inventory cost methods other than LIFO or retail, inventory
reported at:
PP&E other than land is reported at amortized cost (historical cost minus accumulated depreciation,
amortization, depletion, and impairment losses)
Goodwill
Excess of purchase price over the fair value of the identifiable net assets (assets minus liabilities)
acquired in a business acquisition.
Authorized shares
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the number of shares that may be sold under the firm's articles of incorporation
Issued shares
Outstanding shares
the issued shares less shares that have been reacquired by the firm (i.e., treasury stock).
debt ratio
Cash flows in and out resulting from transactions that affect net income
resulting from the acquisition or disposal of long-term assets and certain investments.
Direct method
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each line item of the accrual-based income statement is converted into cash 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
The general principle here is to adjust each income statement item for its corresponding balance sheet
accounts and to eliminate noncash and nonoperating transactions.
cash available to all investors, both equity owners and debt holders.
Free cash flow to equity (FCFE) is the cash flow that would be available for distribution to common
shareholders
FCFE formula
FCFF formula
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NCC = non cash charges
Int = cash interest paid
FCInv = net capital expenditures
WCInv = working capital investment
CFO/total debt
Interest coverage
Reinvestment ratio
Eg, all income statement figures expressed as % of sales (vertical common size)
Receivables turnover
Inventory turnover
COGS/average inventory
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Payables turnover
Purchases/average payables
Cash ratio
length of time it takes to turn the firm's cash investment in inventory back into cash
Interest coverage
EBIT/interest paid
ROE formula
Retention 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
Product costs
Period costs
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Specific identification method
A method to value inventory costs. Each unit sold is matched with the unit's actual cost
Period system, inventory values and COGS are determined at end of accounting period. Perpetual
system, values are updated continuously.
LIFO Reserve
FIFO COGS = LIFO COGS - (ending LIFO reserve - beginning LIFO reserve)
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
Capitalize
If a firm makes an expenditure, it can capitalize the cost as an asset on the balance sheet
Capitalized interest
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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
Research costs are expensed on income statement, however development costs may be capitalized
If capitalized, recorded as outflow from investing activities. If expensed, outflow from operating
activities.
If carrying value is greater than asset's future undiscounted cash flow stream
If an asset is expected to provide benefits over multiple periods, it is capitalized rather than expensed
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
Expense for taxes on income statement, equal to taxes payable plus change in deferred taxes
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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.
Accelerated depreciation is used for tax reporting but straight line for the income statement
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
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.
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Technical default
Finance lease
Both the benefits and the risks of the lease are transferred to the lessee
Lease receivable
If a firm leases an asset, they remove the asset from the balance sheet and add a lease receivable asset
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, 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
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location for a period of time.
Taking longer to pay suppliers increases operating cash flows and is referred to as
Stretching payables
COMPANY
CHEGG NETWORK
CUSTOMER SERVICE
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