CFA Financial Reporting and Analysis Flashcards

24 sample cards from the Financial Reporting and Analysis deck

Sampled from the end of the deck, so these are different cards from the ones shown on the syllabus page.

1. In the indirect method, how are depreciation and an increase in accounts receivable treated?

   Depreciation (a non-cash expense) is added back to net income; an increase in accounts receivable is subtracted (cash not yet collected). Conversely, an increase in accounts payable is added back.

2. How is free cash flow to the firm (FCFF) computed from net income?

   $$\text{FCFF} = \text{NI} + \text{NCC} + [\text{Int} \times (1 - \text{tax rate})] - \text{FCInv} - \text{WCInv}$$ where NCC is non-cash charges, FCInv is fixed-capital investment, and WCInv is working-capital investment.

3. How is free cash flow to equity (FCFE) computed from FCFF?

   $$\text{FCFE} = \text{FCFF} - [\text{Int} \times (1 - \text{tax rate})] + \text{Net Borrowing}$$

4. Under US GAAP, how may interest paid, interest received, and dividends received be classified on the cash flow statement?

   Under US GAAP, interest paid, interest received, and dividends received are all classified as operating (CFO); dividends paid are financing (CFF).

5. Under IFRS, how may interest and dividends be classified on the cash flow statement?

   IFRS allows flexibility: interest and dividends received may be operating or investing; interest and dividends paid may be operating or financing — as long as classification is consistent.

6. Name the four primary inventory cost-flow assumptions.

   Specific identification, First-In First-Out (FIFO), Weighted Average Cost, and Last-In First-Out (LIFO). Note: LIFO is permitted under US GAAP but prohibited under IFRS.

7. Under FIFO, which costs flow to COGS and which remain in ending inventory?

   FIFO assumes the oldest (first-purchased) costs are expensed first as COGS, leaving the most recent (newest) costs in ending inventory.

8. Under LIFO, which costs flow to COGS and which remain in ending inventory?

   LIFO assumes the newest (most recent) costs are expensed first as COGS, leaving the oldest costs in ending inventory.

9. State the cost of goods sold (COGS) / inventory equation.

   $$\text{COGS} = \text{Beginning Inventory} + \text{Purchases} - \text{Ending Inventory}$$

10. In a period of rising prices, how does FIFO vs. LIFO affect COGS, net income, and ending inventory?

    With rising prices: FIFO gives lower COGS, higher net income, and higher (more current) ending inventory. LIFO gives higher COGS, lower net income (lower taxes), and lower ending inventory.

11. What is a LIFO reserve and how does it convert LIFO inventory to FIFO?

    The LIFO reserve is the difference between FIFO and LIFO inventory values. $$\text{Inventory}_{\text{FIFO}} = \text{Inventory}_{\text{LIFO}} + \text{LIFO Reserve}$$ and $\text{COGS}_{\text{FIFO}} = \text{COGS}_{\text{LIFO}} - \Delta\text{LIFO Reserve}$.

12. At what value is inventory measured under IFRS?

    At the lower of cost and net realizable value (NRV), where $\text{NRV} = \text{Estimated Selling Price} - \text{Estimated Costs of Completion and Sale}$. Reversals of prior write-downs are permitted (up to original cost).

13. At what value is inventory measured under US GAAP?

    For FIFO/average-cost firms: lower of cost or net realizable value. For LIFO or retail method: lower of cost or market. Once written down, reversals are NOT permitted under US GAAP.

14. How does the inventory turnover ratio measure efficiency?

    $$\text{Inventory Turnover} = \frac{\text{COGS}}{\text{Average Inventory}}$$ Days of inventory on hand $= \frac{365}{\text{Inventory Turnover}}$.

15. How does an error overstating ending inventory affect COGS and net income in the current period?

    Overstating ending inventory understates COGS and therefore overstates gross profit and net income in the current period (and understates the following period's income as it reverses).

16. Define depreciation and amortization and how they differ.

    Depreciation systematically allocates the cost of a tangible long-lived asset (e.g., PP&E) over its useful life; amortization does the same for intangible assets with finite lives. Both are non-cash expenses.

17. State the straight-line depreciation formula.

    $$\text{Depreciation Expense} = \frac{\text{Cost} - \text{Salvage Value}}{\text{Useful Life}}$$

18. State the double-declining-balance (DDB) depreciation formula.

    $$\text{DDB Depreciation} = \frac{2}{\text{Useful Life}} \times \text{Beginning Book Value}$$ Salvage value is not subtracted from the base, but the asset is not depreciated below salvage value.

19. State the units-of-production depreciation formula.

    $$\text{Depreciation} = \frac{\text{Cost} - \text{Salvage}}{\text{Total Estimated Units}} \times \text{Units Produced in Period}$$

20. Compared to straight-line, how does an accelerated method affect early-year net income and asset book value?

    An accelerated method (e.g., DDB) records higher depreciation expense in early years, producing lower net income and lower asset book value in early years relative to straight-line; the pattern reverses in later years.

21. How are intangible assets with indefinite useful lives (e.g., goodwill) accounted for?

    They are not amortized; instead they are tested for impairment at least annually (or when indicators exist) and written down if impaired.

22. Under IFRS, how is impairment of PP&E identified and measured?

    An asset is impaired if its carrying amount exceeds its recoverable amount, where $\text{Recoverable Amount} = \max(\text{Fair Value} - \text{Costs to Sell},\ \text{Value in Use})$. The impairment loss reduces the asset to its recoverable amount. IFRS permits reversal of impairments (except goodwill).

23. Under US GAAP, how is impairment of a long-lived asset held for use tested and measured?

    Two steps: (1) Recoverability — impaired if carrying amount exceeds the undiscounted expected future cash flows; (2) Measurement — the loss equals carrying amount minus fair value. Under US GAAP, impairment losses may NOT be reversed for assets held for use.

24. Contrast the cost model and the revaluation model for long-lived assets under IFRS.

    Cost model: asset carried at cost less accumulated depreciation and impairment. Revaluation model (IFRS only, not permitted under US GAAP): asset carried at fair value at revaluation date less subsequent depreciation; upward revaluations above original cost go to a revaluation surplus in OCI/equity, while reversals of prior losses can flow through the income statement.

What this deck covers

Financial Reporting and Analysis flashcards FAQ