All of Topic 4 - Financial Reporting & Analysis
ending gross fixed assets
beginning gross fixed assets + purchase price of new fixed assets - historical cost of disposed fixed assets
ending retained earnings
beginning retained earnings + net income - dividends declared
ending shareholder's equity
beginning shareholders' equity + net income + other comprehensive income - dividends declared
conservative accounting choices
biased accounting choice that seeks to decrease a company's reported financial performance and financial position in the current period; does not lead to a sustainability issue as later periods may then report improved financial performance and financial position
account format
balance sheet presentation format where assets are presented on the left-hand side of the balance sheet, with liabilities and equity on the right-hand side
report format
balance sheet presentation format where assets, liabilities, and equity are presented in a single column; most common format used
classified balance sheet
balance sheet presentation format where different types of assets and liabilities are grouped into subcategories to give a more effective overview of the company's financial position; typically grouped into current and non-current portions (as required by IFRS and U.S. GAAP)
vertical common-size balance sheet
balance sheet that expresses each item as a percentage of total assets; this allows for analysis across firms and over time
common-size balance sheets
balance sheets that express each item as a percentage of total assets
warranty accounts
expense accounts on the income statement used to cover the possibility of having to pay for repairing or replacing defective products in the future
doubtful accounts
expense accounts on the income statement used to cover the possibility that some customers will not be able to meet their payment obligations when sales are made on credit
accrued liabilities
expenses that have been recognized on the income statement but have still not been paid for as of the balance sheet date
marketable securities
investments in debt or equity securities that are traded on public markets; considered financial assets whose balance sheet values are based on market price
activity ratios (asset utilization ratios, operating efficiency ratios)
measure how productive a company is in using its assets and how efficiently it performs its everyday operations
liquidity ratios
measure the company's ability to meet its short-term cash requirements
valuation ratios
measure the quantity of an asset or flow (e.g., earnings) associated with ownership of a specific claim (e.g., common stock)
footnotes
portion of financial statements that contain important details about the accounting methods, estimates, and assumptions that have been used by the company in preparing its financial statements
IFRS Interpretations Committee
portion of the IFRS Foundation that is responsible for reviewing accounting issues that arise in the application of IFRS and are not specifically addressed by IFRS
IFRS Advisory Council
portion of the IFRS Foundation that provides advice to the IASB on agenda decisions and priorities among other items
current portion of long-term liabilities
portions of long-term debt obligations that are expected to be paid within a year of the balance sheet date or within one operating cycle, whichever is greater
solvency
refers to the ability of a company to satisfy its long-term debt obligation (both principal and interest payments)
credit analysis - capacity
refers to the ability of the issuer to fulfill its obligations
amortization
refers to the allocation of the cost of an intangible asset over its useful life
credit analysis - collateral
refers to the assets pledged to secure a loan
weighted average number of shares outstanding
refers to the number of shares that were outstanding over the year (adjusted for stock splits and stock dividends), weighted according to the proportion of the year that they were outstanding
company's profitability
ability to generate profits from core business activities
financial flexibility
ability to react and adapt to financial adversities and investment opportunities
FOB destination
accounting choice that recognizes revenue upon delivery of goods to customer
FOB shipping point
accounting choice that recognizes revenue upon shipment of goods
credit analysis
evaluation of the 4 C's of a company; (1) character, (2) capacity, (3) collateral, and (4) covenants
cash flow analysis
helps to evaluate how well a business is being run and estimate its future cash flows
examples of liabilities
(1) accounts payable and trade payables, (2) financial liabilities such as notes payable, (3) deferred tax liabilities, (4) long-term debt, (5) unearned revenue
underlying financial statement assumptions
(1) accrual basis accounting (transactions are recorded when they actually occur, irrespective of when the related exchange of cash occurs, and (2) going concern (the assumption that the company will continue operating for the foreseeable future)
examples of investing activities
(1) acquisition or disposal of fixed assets like property, plant, and equipment (PP&E), (2) purchase or sale of other corporations' equity and debt securities
financial ratio analysis guidelines
(1) actual ratios should be compared to the company's stated objectives, (2) a company's ratios should be compared with those of others in the same industry, and (3) ratios should be studied in light of the current phase of the business cycle
financial statement elements
(1) assets, (2) liabilities, (3) owner's equity (or shareholder's equity), (4) revenues, and (5) expenses
examples of owners' equity
(1) capital in the form of common and preferred stock, (2) additional paid-in capital, (3) retained earnings, (4) other comprehensive income
examples of current assets
(1) cash and cash equivalents, (2) accounts receivable and trade receivables, (3) prepaid expenses, (4) inventory
differences between IFRS and U.S. GAAP with cash flow statements
(1) classification of cash flows (IFRS offers more flexibility), and (2) presentation format (only for cash flow from operating activities)
limitations fo ratio analysis
(1) companies may have divisions that operate in different industries, (2) one set of ratios may suggest there is a problem while another suggests the problem is only short term, (3) there are no set ranges within which particular ratios for a company must lie, and (4) firms enjoy significant latitude in the choice of accounting methods
supplemental qualitative characteristics of financial information
(1) comparability (presentation should be consistent over time to facilitate comparisons), (2) verifiability (independent observers should be able to verify the information), (3) timeliness (should be available in a timely manner, and (4) understandability (users with basic business/accounting knowledge should be able to easily understand the information)
examples of expenses
(1) cost of goods sold, (2) selling, general, and administrative expenses, (3) depreciation and amortization expenses, (4) interest expense, (5) tax expense, (6) losses
financial analysis framework
(1) define the purpose and context of analysis, (2) collect data, (3) process data, (4) analyze/interpret the processed data, (5) develop and communicate conclusions, and (6) follow up
warning signs related to revenue
(1) ease of premature revenue recognition through FOB shipping point and bill-and-hold transactions, (2) significant portion of revenue is from barter transactions, (3) high impact of rebate programs, (4) growth not in line with competitors, industry, or economy, (5) receivables are increasing as a percentage of sales, (6) unusual trend or change in receivables turnover
general components of changes in pension expense under U.S. GAAP
(1) employee service costs for the period, (2) interest expense accrued on the beginning pension obligation, (3) expected return on plan assets, (4) past service costs, and (5) actuarial gains and losses
general components of changes in pension expense under IFRS
(1) employee service costs, (2) net interest expense or income, and (3) remeasurements
assumptions of pension obligations
(1) expected salary at date of retirement, (2) number of years the employee is expected to live after retirement, and (3) the discount rate (typically assumed to be the high-quality corporate bond yield)
examples of other comprehensive income
(1) foreign currency transactions, (2) certain costs relating to the company's defined benefit post-retirement plans, (3) unrealized gains or losses on derivatives contracts, accounted for as hedges, and (4) unrealized holding gains and losses on available-for-sale securities
benefits of conservatism
(1) given asymmetrical information, it may protect contracting parties with less information and higher risk, (2) it reduces the possibility of litigation (a company is highly unlikely to be sued if it understated good news/overstated bad news), (3) it protects politicians and lawmakers, as it reduces the possibility that companies under their supervision have overstated earnings or assets, and (4) in many jurisdictions, companies can use it to lower the present value of their tax payments
warning signs related to inventories
(1) growth levels not in line with competitors or industry benchmark, (2) growth without accompanying increase in sales, (3) declining inventory turnover, (4) inflated profits through LIFO liquidation
converged standards revenue recognition steps
(1) identify the contract(s) with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract, and (5) recognize revenue when (or as) the entity satisfies a performance obligation
accounting treatment of expensed costs
(1) immediately expensed on income statement, which reduces net income for the current period by its entire after-tax amount, (2) the associated cash outflow is classified under operating activities on the statement of cash flows; crucially, no related asset is recognized on the balance sheet, so no related depreciation or amortization charges are incurred in future periods
examples of financing activities
(1) issuance or repurchase of common or preferred stock, (2) issuance or redemption of debt, (3) dividend payments on common and preferred stock
limitations of audit opinion
(1) it is based on information prepared by a company, so can be used to deceive auditors, (2) it is based on a sample of information, and the sample might not reveal any misstatements, (3) there is an "expectations gap" between the public wanting an auditor to look for fraud, while their role is just to verify that financial reports are fairly presented, and (4) fees are often established through a competitive process, and the company being audited bears the cost of the audit so it leads to a leniency of the auditing company toward the company being audited
the four stages of accounting system flow of information
(1) journal entries, (2) general ledger, (3) trial balance, and (4) financial statements
common debt covenants to protect creditors
(1) maintenance of pledged collateral, (2) restrictions on dividend payments, (3) requirements to meet certain working capital levels, (4) maximum levels of leverage
categories of financial reporting
(1) operating activities (day-to-day activities), (2) investing activities (acquisition/disposal of long-term assets), and (3) financing activities (raising/repaying capital)
conditions conducive for lower quality financial reports
(1) opportunity - poor internal controls, an ineffective board of directors, or accounting standards that allow divergent choices and/or provide minimal consequences for inappropriate choices, (2) motivation - personal reasons (e.g., increasing bonus payments) or corporate reasons (e.g., alleviating concerns about being able to raise funds in the future), and (3) rationalization - individuals justifying their choices to themselves
lease reporting requirements under IFRS
(1) present finance lease obligations as a part of debt on the balance sheet, (2) disclose the amount of total debt attributable to obligations under finance leases, and (3) present information about all lease obligations
examples of noncurrent assets
(1) property, plant, and equipment, (2) investment property, (3) intangible assets (patents, trademarks, licenses, copyrights, and goodwill), (4) financial assets, trading securities, and investment securities, (5) investments accounted for by the equity method
ways of managing earnings
(1) real actions (deferring R&D expenses until the next year to improve reported performance in the current year) or (2) accounting choices (changing certain accounting estimates such as estimated product returns, bad debts expense, or asset impairment to manipulate reported performance)
accounting treatment of capitalized costs
(1) recognized as a non-current asset on the balance sheet, (2) the associated cash outflow is listed under investing activities on the statement of cash flows, and (3) in subsequent periods, the initial cost amount is allocated (expensed) over the asset's useful life as depreciation expense (for tangible assets) or amortization expense (for intangible assets with finite lives)
fundamental qualitative characteristics of financial information
(1) relevance (information should be useful in making forecasts and/or be useful to evaluate past decisions), and (2) faithful representation (information presented should be complete, neutral, and free from error)
examples of operating activities
(1) sales of goods and services to customers, (2) costs associated with the provision of goods and services, (3) income tax expenses
examples of revenues
(1) sales, (2) gains, (3) investment income
four credit risk analysis categories
(1) scale and diversification of the business (large companies have greater leverage in negotiations with supplies/lenders, while large product lines and geographical reach offer more diversification and thus lower credit risk), (2) operational efficiency (higher ROA, EBITDA, and operating margin yields lower credit risk), (3) stability and sustainability of profit margins (consistently high profit margins indicates low credit risk), and (4) degree of financial leverage (high ratios of free cash flow to total debt and to interest expense indicate low credit risk)
common long-term debt footnotes
(1) stated and effective interest rates, (2) maturity dates, (3) restrictions imposed by creditors (covenants), (4) pledged collateral, (5) scheduled repayments over the next 5 years
amortization expense yearly estimate requirements
(1) the original value of the intangible asset, (2) the residual value at the end of its useful life, and (3) the length of its useful life
accounting manipulation choices
(1) timing of revenue recognition, (2) changes in depreciation estimates and methods for long-lived assets, (3) capitalization policies related to intangible assets, (4) changing inventory cost methods, (5) deferred tax assets and valuation accounts, (6) warranty reserve amounts, (7) transactions with related nonpublic companies, and (8) misclassifying operating cash flows to/from investing and financing cash flows
motivations for lower quality financial reports
(1) to mask poor performance, (2) to meet or beat analysts' and/or management's forecasts, (3) to address managers' concerns regarding their careers (most don't want to work for a struggling company), or (4) to avoid debt covenant violations
objective of audits
(1) to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, thereby enabling the auditor to express an opinion on whether the financial statements are prepared, in all material respects, in accordance with an applicable financial reporting framework; and (2) to report on the financial statements, and communicate as required by the ISAs, in accordance with the auditor's findings
constraints on financial statements
(1) tradeoffs between desirable characteristics (urgency in timeliness leads to estimates and lack of verifiability), (2) costs (providing useful financial information should have benefits that outweigh the costs), and (3) intangible aspects (company rep, brand name, and loyalty cannot be quantified and thus are omitted)
characteristics of an effective financial reporting framework
(1) transparency (should reflect the underlying economics of the business), (2) comprehensiveness (based on universal principles that provide guidance for recording all kinds of financial transactions), and (3) consistency (transactions of a similar nature should be measured and reported in a similar manner)
pretax margin (earnings before tax, EBT)
a profitability ratio that measures the operating efficiency of a company; it says how many cents of profit the business has generated for each dollar of sale before deducting taxes
profitability ratios
measure a company's ability to generate an adequate return on invested capital
solvency ratios
measure a company's ability to meet long-term debt obligations
inventory valuation methods allowed
IFRS allows companies to use any of three valuation methods for inventory—separate identification, FIFO, and AVCO; while U.S. GAAP allows companies to use the three methods allowed under IFRS but also accepts LIFO
return on total capital
a profitability ratio that measures the profits that a company earns on all sources of capital that it employs-short-term debt, long-term debt, and equity
grouping of expenses
IFRS permits grouping by nature (combining depreciation of factory equipment with depreciation of transport vehicles and stating a single aggregate amount for depreciation on the income statement) or by function (combining direct product costs, such as raw material costs and freight charges, under cost of goods sold
return on equity
a profitability ratio that measures the rate of return earned by a company on its equity capital; it measures a firm's efficiency in generating profits from every dollar of net assets (assets minus liabilities)
return on assets (ROA)
a profitability ratio that measures the return earned by a company on its assets; the higher the ratio, the greater the income generated by a company given its total assets
return on common equity
a profitability ratio that measures the return earned by a company only on its common equity
operating ROA
a profitability ratio that reflects the operating return on all assets used by the company
conservative revenue recognition policy
policies where revenue is recognized later rather than sooner
credit analysis - covenants
refers to limitations and restrictions placed on the activities of issuers
adjusted ROA
a profitability ratio that reflects the return on all assets used by the company, whether financed with debt or equity, by adding back in interest expense (adjusted for tax shield)
ITE
taxes payable (TP) + change in deferred tax liability (DTL) - change in deferred tax assets (DTA)
change in cash over the year
CFO + CFI + CFF (= year end balance - beginning of year balance)
COGS/EI relationship under falling prices
COGS(FIFO) > COGS(AVCO) > COGS(LIFO) and EI(LIFO) > EI(AVCO) > EI(FIFO)
COGS/EI relationship under rising prices
COGS(LIFO) > COGS(AVCO) > COGS(FIFO) and EI(FIFO) > EI(AVCO) > EI(LIFO)
diluted EPS
EPS that is calculated after taking into account all dilutive financial instruments in the capital structure; required to be disclosed by accounting standards
IASB
International Accounting Standard Board
IOSCO
International Organization of Securities Commission
SROs
Self-Regulatory Organizations
FASB
U.S. Financial Accounting Standards Board
retention rate ratio
a valuation ratio that measures the percentage of earnings that a company retains and reinvests in the business
Form 3
a "Initial Statement of Beneficial Ownership of Securities" document filed by a company insider or major shareholder with the Securities and Exchange Commission (SEC); used to help regulate insider trading
Form 144
a "Notice of Proposed Sale of Securities" with the Securities and Exchange Commission by an executive officer, director, or affiliate of a company; needed when placing an order to sell that company's stock during any three-month period in which the sale exceeds 5,000 shares or units or has an aggregate sales price greater than $50,000
Form 4
a "Statement of Changes in Beneficial Ownership" document that must be filed with the Securities and Exchange Commission (SEC) whenever there is a material change in the holdings of company insiders
deferred tax assets (DTA)
a balance sheet asset that arises when an excess amount is paid for income taxes relative to accounting profit; the taxable income is higher than accounting profit and income tax payable exceeds tax expense
deferred tax liability (DTL)
a balance sheet liability that arises when a deficit amount is paid for income taxes relative to accounting profit; the taxable income is less than the accounting profit and income tax payable is less than tax expense
two-way DuPont decomposition
a breakdown of ROE that illustrates how ROE is function of a company's return on assets (ROA) and financial leverage ratio; shows how a company can improve its ROE by improving its ROA or by using leverage (debt) more extensively to finance its operations
three-way DuPont decomposition
a breakdown of ROE that illustrates that a company's ROE is a function of its net profit margin, asset turnover ratio, and financial leverage ratio
five-way DuPont decomposition
a breakdown of ROE that illustrates that a company's ROE is a function of the company's tax burden, interest burden, operating profitability, efficiency, and leverage
complex capital structure
a capital structure that contains certain financial instruments that can be converted into common stock (e.g., convertible bonds, convertible preferred stock, warrants, and options)
simple capital structure
a capital structure that does not have any financial instruments outstanding that can be converted into common stock
ratio of annual capital expenditure to depreciation expense
a company for which this ratio is significantly lower than 100% is currently replacing its fixed assets at a rate that is slower than the rate at which they are being depreciated, while a company for which this ratio is close to 100% is replacing its fixed assets at a rate similar to that of their use
solvency
a company's ability to meet its long-term obligations
liquidity
a company's ability to meet its short-term obligations
assets
a company's economic resources
liabilities
a company's obligations from previous transactions that are expected to result in outflows of economic benefits in the future
derivative
a complex financial instrument that derives its value from some underlying factor (e.g., interest rate, exchange rate, underlying asset price) and requires little or no initial investment; commonly used for hedging or speculation
Form 10-K
a comprehensive report filed annually by a publicly traded company about its financial performance; the report contains much more detail than a company's annual report and some of the information required is the company's history, organizational structure, financial statements, earnings per share, subsidiaries, and executive compensation
Form 10-Q
a comprehensive report of a company's performance that must be submitted quarterly by all public companies to the Securities and Exchange Commission (SEC); firms are required to disclose relevant information regarding their financial position
valuation allowance
a contra-asset account created under U.S. GAAP to reduce deferred tax assets (DTA)
lease
a contract between the owner of the asset (lessor) and another party that wants to use the asset (lessee); the lessee gains the right to use the asset for a period of time in return for periodic payments
financial instrument
a contract that gives rise to a financial asset for one entity, and a financial liability or equity instrument for another entity
geographical segment
a distinguishable component of a company that is engaged in providing an individual product or service within a particular region
Form 40-F
a filing with the Securities and Exchange Commission (SEC) by companies domiciled in Canada with securities registered in the U.S.; similar to Form 10-K for U.S-based companies in purpose and content
Form DEF-14A
a filing with the Securities and Exchange Commission (SEC) that must be filed by or on behalf of a registrant when a shareholder vote is required; it is commonly used in conjunction with an proxy statement and should provide security holders with sufficient information to allow them to make an informed vote at an upcoming security holders' meeting
statement of comprehensive income (income statement plus other comprehensive income, statement of operations, profit and loss statement)
a financial statement that provides information about a company's profitability over a stated period of time
statement of owner's equity
a financial statement that reconciles the beginning-of-period and end-of-period balance sheet values of shareholders' equity; provides information about all factors affecting shareholders' equity
cash flow statement
a financial statement that reflects a company's ability to generate cash from its core business activities
Form 11-K
a form filed with the Securities and Exchange Commission (SEC) that is used for annual reports and deals with employee stock purchases and savings plans with interests in securities
Form 20-F
a form issued by the U.S. Securities and Exchange Commission (SEC) that must be submitted by all "foreign private issuers" with listed equity shares on exchanges in the United States
double-declining balance (DDB)
a form of accelerated depreciation that uses an acceleration factor of 200 (it depreciates the asset at a rate that is two times the straight-line rate)
declining balance depreciation
a form of accelerated depreciation, which applies a constant rate of depreciation to a declining book value
Form 6-K
a form that foreign private issuers of securities are required to submit as a cover statement on annual, semi-annual or quarterly financial report filings with the regulators in its home country
net pension liability
a liability on a company's balance sheet that reflects a deficit that arises when the fair value of plan assets is lower than the pension obligation (the present value of estimated payments to retirees)
cash conversion cycle (net operating cycle)
a liquidity measurement that evaluates the length of the period between the point that a company invests in working capital and the point that the company collects cash proceeds from sales; shorter is better as it indicates greater liquidity, while longer implies that the company has to finance its inventory and accounts receivable for a longer period of time
cash ratio
a liquidity ratio that is a very reliable measure of an entity's liquidity position in the event of an unforeseen crisis; a high ratio indicates greater liquidity
quick ratio
a liquidity ratio that measures a company's ability to meet its short-term obligations with its most liquid assets (recognizes that certain assets, such as prepaid expenses, represent costs that have been paid in advance in the current year and cannot usually be converted into cash); a high ratio indicates greater liquidity
current ratio
a liquidity ratio that measures a company's ability to pay short-term obligations or those due within one year; a high ratio is desirable as it indicates a higher level of liquidity, while a low ratio indicates less liquidity and implies a greater reliance on operating cash flow and outside financing to meet short-term obligations
defensive interval ratio
a liquidity ratio that measures how long the company can continue to meet its daily expense requirements from its existing liquid assets without obtaining any additional financing; a ratio of 40 indicates that the company can pay its operating expenses for 40 days by liquidating its quick assets
chart of accounts
a listing of all accounts used in the general ledger of an organization
ratio
a mathematical relationship between two quantities in terms of a percentage or a proportion
International Organization of Securities Commission
a non-regulatory authority whose members regulate a large portion of the world's financial capital markets; its core objectives of securities regulation include (1) protection of investors, (2) ensuring that markets are fair, efficient, and transparent, and (3) reducing systematic risk
mark-to-market
a process of adjusting the values of trading assets and liabilities to reflect their current market values; these adjustments are usually made on a daily basis
company's cash flow
ability to generate cash receipts in excess of cash payments
operating profit margin
a profitability ratio that shows a company's ability to manage its indirect (operating) costs; a high ratio indicates that a company has successfully controlled indirect costs, while a low ratio suggests that a company has not
net profit margin
a profitability ratio that shows how much profit a company makes for every dollar it generates in revenue; a low ratio indicates a low margin of safety and higher risk of reduction in shareholder wealth
gross profit margin
a profitability ratio that tells the percentage of a company's revenues that are available to meet operating and nonoperating expenses; a high ratio can be a combination of high product prices (reflected in high revenues) and low product costs (reflected in low COGS)
Form 8-K
a report of unscheduled material events or corporate changes at a company that could be of importance to the shareholders or the Securities and Exchange Commission (SEC)
revenue/expense approach
a reporting measurement approach where changes in the elements are properly valued over a period of time
asset/liability approach
a reporting measurement approach where the elements are properly valued at a point in time; been the preferred approach by standard-setters in recent years
objectives-oriented approach
a reporting standard-setting approach that includes a framework of principles and appropriate levels of implementation guidance
principles-based approach
a reporting standard-setting approach that provides a broad financial reporting framework with limited guidance on how to report specific transactions; it requires the use of subjective judgment in financial reporting
rules-based approach
a reporting standard-setting approach that provides strict rules for classifying elements and transactions
antidilutive financial instrument
a security that can be converted into common stock, but whose conversion does not reduce EPS below basic EPS; not included in diluted EPS calculation
diluted financial instrument
a security whose conversion into shares of common stock would result in a reduction in EPS
business segment
a separately identifiable component of a company that is engaged in providing an individual product or service or a group of related products or services
debt-to-equity ratio
a solvency ratio that measures the amount of debt capital relative to a firm's equity capital; a higher ratio is undesirable and indicates higher financial risk
financial leverage ratio
a solvency ratio that measures the amount of total assets supported by each money unit of equity (for example, a ratio of 2 means that each dollar of equity supports $2 worth of assets); the higher the ratio, the more leveraged (dependent on debt for finance) the company
interest coverage ratio
a solvency ratio that measures the number of times a company's operating earnings (earnings before interest and tax, or EBIT) cover its annual interest payment obligations; a higher ratio provides assurance that the company can service its debt from operating earnings
fixed charge coverage ratio
a solvency ratio that measures the number of times a company's operating earnings can cover its interest and lease payments; a higher ratio suggests that the company is comfortably placed to service its debt and make lease payments from the earnings it generates from operations
debt-to-capital ratio
a solvency ratio that measures the proportion of a company's total capital (debt plus equity) that is composed of debt; a higher ratio indicates higher financial risk and is undesirable
debt-to-assets ratio (total debt ratio)
a solvency ratio that measures the proportion of the firm's total assets that have been financed by debt; a higher ratio is undesirable because it implies higher financial risk and a weaker solvency position
Financial Accounting Standards Board
a standard-setting body that issues new and revised standards with the aim of improving standards of financial reporting so that information provided to users is useful for decision-making
stock dividend
a type of dividend in which a company distributes additional shares of its common stock to shareholders instead of cash; a 25% dividend gives a holder of 1,000 shares a new total of 1,250 shares
direct financing lease
a type of finance lease in which the present value of lease payments equals the carrying value of the asset; there is no gross profit recognition at lease inception and the leases generate interest income only
sales-type lease
a type of finance lease in which the present value of lease payments equals the selling price of the asset; there is a gross profit (the normal selling price of the product minus its cost), which is recognized at inception of the lease, and interest income as payments are received over the lease term
price-to-earnings ratio
a valuation ratio that expresses the relationship between the price per share of common stock and the amount of earnings attributable to a single share; it basically tells how much a share of common stock is currently worth per dollar of earnings of the company
dividend payout ratio
a valuation ratio that measures the percentage of earnings that a company pays out as dividends to shareholders
acquisition method
accounting method used (under both IFRS and U.S. GAAP) for the transaction that occurs when a company acquires another company; if the purchase price paid by the acquirer to buy a company exceeds the fair value of its net assets, the excess is recorded as goodwill
average age of an asset
accumulated depreciation expense / annual depreciation expense
non cash investing and financing activities
activities that do not involve any receipt or payment of cash and thus are not reported on the cash flow statement; examples include barter transactions of nonmonetary assets, convertible securities, and real estate acquisition through seller financing
investing activities
activities that relate to the acquisition or disposal of long-term assets
operating activities
activities that relate to the day-to-day core business activities of a company
financing activities
activities that relate to the injection or repayment of capital
adjustments related to investments
adjustments made by analysts when comparing companies with different classifications for investments in securities of other companies; for example, one company classifies investment securities as "available-for-sale" (not included on income statement) while another classifies investment securities as for "trading" (included on income statement)
adjustments related to property, plant, and equipment
adjustments made by analysts when comparing companies with different depreciation methods and life assumptions; for example, a company that uses accelerated depreciation methods and shorter estimated life assumptions for long-lived assets will report lower net income and must be adjusted when comparing with a firm that employs longer useful life assumptions and straight-line depreciation
adjustments related to goodwill
adjustments made by analysts when comparing companies with different growth methods (via acquisitions or internally); for example, a company that grows via acquisitions will have higher reported assets and a greater book value due to goodwill even if the real economic values of the two companies are identical, and thus the inflating effect of goodwill on book value needs to be adjusted or the price-to-tangible book value ratio should be relied upon to make comparisons
adjustments related to inventories
adjustments made by analysts when comparing companies with different inventory valuation methods; for example, a company using LIFO must be adjusted to show performance under FIFO when comparing with a company that uses FIFO
adjustments related to off-balance sheet financing
adjustments made by analysts when comparing companies with different lease classifications; for example, a company that classifies a rental contract as an operating lease needs to be adjusted (by adding rent, interest, and depreciation expense back into the income statement) when comparing with a company that classifies a rental contract as a capital lease
mixed use of revaluation and cost methods
allowed by IFRS only when (1) the company applies the same model to assets in a particular class (e.g., land and buildings, machinery, factory equipment, etc.) and (2) whenever a revaluation is performed, all assets in the particular class are revalued (to avoid selective revaluation)
reversals of impairments of long-lived assets
allowed under U.S. GAAP for assets held-for-use (but not held-for-sale) if the fair value of the asset increases subsequent to impairment recognition, and allowed under IFRS regardless of asset classification
revenue (sales, turnover)
amounts charged (and expected to be received) for goods and services in the ordinary activities of a business
trade payables (accounts payable)
amounts owed by the business to its suppliers for purchases on credit; considered financial liabilities
Form 5
an "Annual Statement of Changes in Beneficial Ownership of Securities" document that company insiders must file with the Securities and Exchange Commission (SEC) if they have conducted transactions during the year that they did not previously report; helps to prevent illegal insider trading through disclosure
construction-in-progress asset
an account for when billings and costs are accumulated on the balance sheet rather than expensed on the income statement
contra account
an account used to offset another accounts; common examples include allowance for bad debts (offset against accounts receivable) and accumulated depreciation (offset against PP&E)
useful life
an accounting estimate of the number of years it is likely to remain in service for the purpose of cost-effective revenue generation
working capital turnover
an activity ratio that indicates how efficiently the company generates revenue from its working capital; a higher ratio indicates higher operating efficiency
days of inventory on hand (DOH)
an activity ratio that is inversely related to inventory turnover
number of days of payables
an activity ratio that is inversely related to payables turnover
days of sales outstanding (DSO)
an activity ratio that is inversely related to receivables turnover
fixed asset turnover
an activity ratio that measures how efficiently a company generates revenues from its investments in long-lived assets; a higher ratio indicates more efficient use of fixed assets in generating revenue, while a low ratio could be an indicator of operating inefficiency, or alternatively could be the result of a capital intensive business environment
liquidity-based presentation
balance sheet presentation format where all assets and liabilities are broadly presented in order of liquidity; typically used by banks
payables turnover
an activity ratio that measures how many times a year the company theoretically pays off all its creditors; a high ratio can indicate that the company is not making full use of available credit facilities and repaying creditors too soon, or alternatively could result from a company making payments early to avail early payment discounts, while a low ratio could indicate that a company might be having trouble making payments on time, or alternatively could result from a company successfully exploiting lenient supplier terms
total asset turnover
an activity ratio that measures the company's overall ability to generate revenues with a given level of assets; a high ratio indicates efficiency, while a low ratio can be an indicator of inefficiency or the level of capital intensity of the business
inventory turnover
an activity ratio used to evaluate the effectiveness of a company's inventory management; a high ratio relative to industry norms might indicate highly effective management or alternatively, inadequate inventory levels (which can hurt sales if shortages arise) while a low ratio can be an indicator of slow moving or obsolete inventory
receivables turnover
an activity ratio used to quantify a company's effectiveness in collecting its receivables or money owed by clients; a high ratio might indicate that the company's credit collection procedures are highly efficient or alternatively, result from overly stringent credit/collection policies which can hurt sales (if competitors offer more lenient credit terms), while a low ratio relative to industry averages will raise questions regarding the efficiency of a company's credit or collection procedures
contract
an agreement and commitment, with commercial substance, between the contacting parties; it establishes each party's obligations and rights, including payment terms
net pension asset
an asset on a company's balance sheet that reflects a surplus that arises when the fair value of plan assets is greater than the pension obligation (the present value of estimated payments to retirees)
net realizable value
an estimate of fair value based on the company's expectations regarding collectability
changes in equity
an increase from one year to the next implies cash inflows from issuance of new shares, while a decrease implies a share repurchase that results in a cash outflow
changes in long-term debt
an increase from one year to the next implies cash inflows from new borrowings, while a decrease implies debt repayment and an outflow of cash
stock split
an increase in the number of shares outstanding with a consequent decrease in share price (due to split in existing shares), but no change to the company's underlying fundamentals; a 2-1 split gives a holder of 1,000 shares a new total of 2,000 shares, each share valued at half its original value
goodwill
an intangible asset that cannot be separated from the business as a whole, and represents the excess of the purchase price of an acquired company over the value of the net assets acquired
specific identification method
an inventory accounting method that identifies which specific inventory items were sold and which remained in inventory to be carried over to later periods
LCM principle
an inventory valuation principle (for LIFO) whose application requires inventory to be valued at the lower of cost or market value; it was previously required by U.S. GAAP but as of December 15, 2016, it is now required to be the lower of cost or net realizable value (NRV)
audit
an objective examination and evaluation of the financial statements of an organization to make sure that the records are a fair and accurate representation of the transactions they claim to represent
regression analysis
analysis that can help identify relationships between variables (e.g., between sales and inventory) over time and assist analysts in making forecasts (e.g., the relationship between GDP and sales can be used to make revenue forecasts)
scenario analysis
analysis that shows the changes in key financial quantities that result from given events (such as a loss of supply of raw materials or a reduction in demand for the firm's products)
sensitivity analysis
analysis that shows the range of possible outcomes as underlying assumptions are altered
receivable
appears on the seller's balance sheet if all performance obligations have been satisfied but payment has not been received
top-down approach
approach typically used to forecast sales that involves (1) attaining forecasts for the economy's expected GDP growth rate, then (2) using regression models to determine the historical relationship between the economy's growth rate and the industry's growth rate, and finally (3) undertaking market share analysis to evaluate whether the firm being analyzed is expected to gain, lose, or retain market share over the forecasting horizon
deferred tax liabilities
arise when a company's income tax expense exceeds taxes payable; these unpaid taxes will be paid in future periods and are therefore a liability for the company
deferred tax assets (DTA)
arise when a company's taxes payable exceed its income tax expense; they represent a kind of prepayment of taxes and therefore, count as assets
unearned revenue (deferred revenue, deferred income)
arises when a company receives cash in advance for goods and services that are still to be delivered; the company is obligated to either provide the goods or services or to return the cash received
basic account equation (expanded)
assets = liabilities + contributed capital + beginning retained earnings + revenue - expenses - dividends declared
basic accounting equation
assets = liabilities + owner's equity
basic account equation
assets = liabilities + owners' equity
current assets (liquid assets)
assets that are expected to be consumed or converted into cash in the near future, typically one year or less
noncurrent assets
assets that are expected to benefit the company over an extended period of time (usually more than one year)
long-lived assets
assets that are expected to provide economic benefits to a company over an extended period of time, typically longer than one year
identifiable intangible assets
assets that can be acquired one at a time and are usually related to rights and privileges that accrue to the their owners over a finite period
unidentifiable intangible assets
assets that cannot be purchased separately and may have an indefinite life; the best example of such an asset is goodwill
intangible assets
assets that do not have physical substance (e.g., patents and trademarks)
tangible assets
assets that have physical substance, (e.g., land, plant, and equipment)
financial assets
assets that include securities issued by other companies
reclassification of assets held for sale
assets that management intend to sell and are no longer in use; they are tested for impairment upon re-categorization and then no longer depreciated or amortized by the company
identifiable intangible assets
assets that meet three definitional criteria (identifiable, under the company's control, and expected to earn future economic benefits) as well as two recognition criteria (it is probable that their expected future economic benefits will flow to the entity, and the cost of the asset can be reliably measured)
value of a company's debt obligations
at any point in time, t, equals the present value of all remaining payments discounted at current market interest rates (mit)
aggressive accounting choices
biased accounting choice that seeks to increase a company's reported financial performance and financial position in the current period; leads to a sustainability issue as later periods may then report depressed financial performance and financial position
remaining useful life of an asset
book value / annual depreciation expense
notes payables (current borrowings)
borrowings from creditors that are documented by a loan agreement; considered financial liabilities
leverage ratios
branch of solvency ratios that are derived from balance sheet numbers and measure the extent to which a company uses debt rather than equity to finance its assets; higher ratios indicate weaker solvency
coverage ratios
branch of solvency ratios that focus more on income statement and cash flow numbers to measure the company's ability to service its debt; higher ratios indicate stronger solvency
CFI changes
calculated from changes in asset balances under the noncurrent assets section of the balance sheet
CFF changes
calculated from changes in the equity and noncurrent debt sections of the balance sheet
common-size cash flow statements
can be constructed as either (1) each item expressed as a percentage of net revenues (most common) or (2) each cash inflow item as a percentage of total cash inflows and each cash outflow item as a percentage of total cash outflows
DTL from investments in subsidiaries or similar ventures
can be recognized unless (1) the parent is in a position to control the timing of the future reversal of the temporary difference, and (2) it is probable that the temporary difference will not reverse in the future
unsustainable earnings
can be the result of (1) a company being unable to expect to earn the same level of return on investment in the future, or that (2) the earnings, though sustainable, will not generate a return on investment sufficient to sustain the company
gross revenue reporting under U.S. GAAP
can be used when the company (1) is the primary obligor under the contract, (2) bears inventory and credit risk, (3) can choose its suppliers, and (4) has reasonable latitude to establish price
tax base of accrued expense liability
carrying amount of the liability (financial reporting) minus amounts that have not been expensed for tax purposes yet, but can be expensed (are tax deductible) in the future
tax base of unearned revenue liability
carrying value of the liability minus the amount of revenue that has already been taxed, and therefore will not be taxed in the future
cash flow from financing activities (CFF)
cash inflows and outflows generated from issuance and repayment of capital (interest-bearing debt and equity)
free cash flow to equity (FCFE)
cash that is available only to common shareholders; positive amounts suggest that the company has operating cash flows available after payments have been made for capital expenditure and debt repayment, and this excess belongs to common shareholders
free cash flow to the firm (FCFF)
cash that is available to equity and debt holders after the company has met all its operating expenses and satisfied its capital expenditure and working capital requirements
change in net income after tax under FIFO vs LIFO
change in LIFO reserve x (1 - tax rate)
operating lease under IFRS
classification of lease when all the risks and rewards of ownership are not transferred to the lessee
finance lease under IFRS
classification of lease when all the risks and rewards of ownership are transferred to the lessee
change in deferred tax liability
closing DTL balance - opening DTL balance
adjusted EBITDA
commonly used measure by companies to conveniently exclude more items from net income; example is EBITDAR (earnings before interest, taxes, depreciation, amortization, and rentals) which excludes rental payments for operating leases
internal controls
company system that seeks to ensure the reliability of processes used by the company in preparing its financial statements; in the US, management is responsible for its effectiveness
cross-sectional analysis (relative analysis)
compares a specific metric for one company with the same metric for another company or group of companies over a period of time; allows for comparison of companies of significantly different sizes and/or that operate in different companies
gain (loss) on extinguishment
computed by subtracting the amount paid to retire bonds from their book value; for example, if a liability with a book value of $5 million is retired before maturity for $5.25 million, there is a loss of $0.25 million
simulations
computer-generated sensitivity or scenario analyses based on probability models for the factors that drive outcomes
company insiders
consist of directors and officers of a company, as well as any shareholders, owning 10% or more of the company's outstanding stock
long-term contracts
contracts that extend over more than one accounting period, such as construction projects
capitalized costs
costs associated with an item if the item is expected to provide benefits to the company for a period longer than one year
expensed costs
costs associated with an item if the item is expected to provide economic benefits in only the current period
cost of an intangible asset with a finite life
costs that are amortized over its useful life (e.g., patent)
cost of an intangible asset with an infinite life
costs that are not amortized; instead, the asset is tested (at least annually) for impairment
period costs
costs that cannot be directly matched with the timing of revenues and are thus expensed immediately
inventory costs
costs that include direct materials, direct labor, and overheads, but not storage costs after production, selling costs, or administrative overhead
reinvestment ratio
coverage ratio that measures ability to buy long-term assets with operating cash flows; calculated as (CFO / cash paid for long-term assets)
investing and financing ratio
coverage ratio that measures ability to buy long-term assets, settle debt obligations and make dividend payments from operating cash flows; calculated as (CFO / cash outflows for investing and financing activities)
dividend payment ratio
coverage ratio that measures ability to make dividend payments with operating cash flows; calculated as (CFO / dividends paid)
debt payment ratio
coverage ratio that measures ability to meet debt obligations with operating cash flows; calculated as (CFO / cash paid for long-term debt repayment)
interest coverage ratio
coverage ratio that measures ability to satisfy interest obligations; calculated as [(CFO + interest paid + taxes paid) / interest paid]
debt coverage ratio
coverage ratio that measures leverage and financial risk; calculated as (CFO / total debt)
liabilities
creditors' claims on a company's economic resources
working capital
current assets - current liabilities
trading securities
debt and equity securities (e.g., stocks and bonds) that are acquired with the intent of earning trading profits over the near term
available-for-sale securities
debt or equity securities that are neither expected to be traded in the near term, nor held till maturity; commonly sold to address the liquidity needs of the company
held-to-maturity securities
debt securities that are purchased with the intent of holding them till maturity
sources of cash
decreases in current assets or increases in current liabilities
comprehensive income
defined by U.S. GAAP as "the change in equity (net assets) of a business enterprise during a period from transactions and other events and circumstances from nonowner sources; it includes all changes in equity during a period except those resulting from investments by owners and distributions to owners"
income
defined by the IASB Conceptual Framework as "increases in economic benefits during the accounting period in the form of inflows or enhancements of assets, or decreases in liabilities that result in increases in equity, other than those relating to contributions from equity participants"
expenses
defined by the IASB framework as "decreases in economic benefits during the accounting period in the form of outflows or depletions of assets or incurrences of liabilities that result in decreases in equity, other than those relating to distributions to equity participants"
total comprehensive income
defined by the IFRS as "the change in equity during a period resulting from transactions and other events, other than those changes resulting from transactions with owners in their capacity as owners"
accelerated depreciation
depreciation method where a greater proportion of the asset's cost is allocated to the initial years of its use and a lower proportion of the cost is allocated to later years; used when the asset is expected to be utilized more heavily in the years immediately following its purchase
accelerated depreciation
depreciation method where the allocation of depreciable cost is greater in the early years of the asset's use
units-of-production depreciation
depreciation method where the amount of depreciation expense for a period is based on the proportion of the asset's production during the period compared with the total estimated productive capacity of the asset over its useful life
straight-line depreciation
depreciation method where the cost of an asset is allocated evenly across its estimated useful life
straight-line depreciation
depreciation method where the cost of the asset less its estimated residual value is spread evenly over the estimated useful life of the asset; this method requires estimates of residual value and useful life and is calculated as [(cost-residual value)/useful life]
fair value
described under IFRS and U.S. GAAP as the price received to sell an asset or paid to transfer a liability in an orderly transaction between two market participants at the measurement date
working capital
difference between current assets and current liabilities; too low suggests inability to meet short-term obligations while too high suggests lack of utilizing resources efficiently
permanent differences
difference in tax and financial reporting of revenues and expenses that will not reverses at any point in the future
temporary difference
difference in tax and financial reporting of revenues and expenses that will ultimately reverse/offset in the future; results in deferred tax assets/liabilities
deductible temporary differences
differences that result in deferred tax assets and are expected to provide tax deductions in the future; these deferred tax assets arise when (1) the tax base of an asset exceeds its carrying amount, or (2) the tax base of a liability is less than its carrying amount
taxable temporary differences
differences that result in deferred tax liabilities and are expected to result in future taxable income; these deferred tax liabilities arise when (1) the carrying amount of an asset exceeds its tax base, or (2) the carrying amount of a liability is less than its tax base
examples of inventory costs of conversion
direct labor and other (fixed and variable) direct overheads
pre-tax margin
earnings before tax (EBT) / revenue
high-quality earnings
earnings that indicate an adequate return on investments (exceeds the cost of investment and also meets, or even exceeds, the expected return) as well as are sustainable (expected to recur in the future)
purchases
ending inventory + COGS - opening inventory
deferred tax liability (cumulative)
equals (carrying value of asset - tax base) x tax rate
deferred tax asset (cumulative)
equals (carrying value of liability - tax base) x tax rate
tax base of an asset
equals the amount that will be depreciated in future periods (expensed on the tax return) as the asset is utilized over its remaining life (economic benefits of the asset are realized)
carrying value of an asset
equals the historical cost of the asset minus the accumulated depreciation charged against it in previous years on the company's financial statements
general features of financial statements
fair presentation, going concern, accrual basis, materiality (free of commission) and aggregation (common items grouped), no offsetting, reporting frequency (at least annual), comparative information, and consistency (same presentation and classification every period)
fictitious assets and liabilities
fake accounts on the financial statements that companies use in an attempt to cover aggressive accounting practices or even fraud
fictitious transactions
fake transactions used by companies to (1) fraudulently obtain investments by inflating company performance, or (2) obscure fraudulent misappropriation of company assets
balance sheet (statement of financial position, statement of financial condition)
financial statement that provides users with information regarding a company's assets, liabilities, and equity at a specific point in time; it also provides insights into the future earnings capacity of the company as well as indications regarding expected cash flows
top-down analysis
form of analysis used for security selection that involves identifying attractive geographical and industry segments, and then choosing the most attractive investments from them
bottom-up analysis
form of analysis used for security selection that involves selecting specific investments within a specific investment universe
common-size income statement
form of income statement that presents each line item as a percentage of sales; the standardization of each item removes the effect of company size and facilitates financial statement analysis
direct method
format for calculating and presenting CFO by which all cash receipts are reported as inflows, while cash payments are reported as outflows, to arrive at a total cash inflow/outflow from operations
indirect method
format for calculating and presenting CFO by which there is a series of adjustments made to net income to account for non-cash items (e.g., depreciation), nonoperating items (e.g., gains on sale of noncurrent assets), and changes in working capital accounts resulting from accrual accounting
Conceptual Framework for Financial Reporting 2010
framework used by IASB to develop reporting standards; it assists standard setters in developing and reviewing standards, assists preparers of financial statements in applying standards, helps auditors in forming an opinion on financial statements, and aids users in interpreting financial statement information
barter transactions
goods that are exchanged between two parties where there is no exchange of cash
accounting goodwill
goodwill that is based on accounting standards and is only reported for acquisitions when the purchase price exceeds the fair value of the acquired company's net assets
economic goodwill
goodwill that is not reflected on the balance sheet, and is based on a company's performance and its future prospects
regulator authorities
governmental entities that have the legal authority to enforce the financial reporting requirements set forth by the standard-setting bodies, and to exert control over entities that participate in capital markets within their jurisdiction; examples include the Securities and Exchange Commission (SEC) in the United States, and Financial Standards Authority (FSA) in the United Kingdom
net fixed assets
gross fixed assets - accumulated depreciation
asset age base equation
gross fixed assets = accumulated depreciation + net fixed assets (or book value)
gross profit margin
gross profit / revenue
financial statement disclosures about long-term assets
help an analyst to understand a company's investments in tangible and intangible assets, how these investments changed during the reporting period, how the changes affected current performance, and what those changes might indicate regarding future performance
cash and cash equivalents
highly liquid securities that usually mature in less than 90 days; since they are so close to maturity, there is minimal risk of any change in their value due to changes in interest rate
carrying value (book value)
historical cost - accumulated depreciation
estimated useful (depreciable) life of an asset
historical cost / annual depreciation expense
amortized cost
historical cost adjusted for amortization and impairment
depreciable cost
historical cost of a tangible asset minus its estimated residual (salvage) value
intangible assets
identifiable, non-monetary assets that lack physical substance
financial notes
important portion of financial statements that provide detailed explanatory information on (1) accounting policies, methods, and estimates, (2) business acquisitions and disposals, (3) commitments and contingencies, (4) legal proceedings, (5) subsequent events, (6) related-party transactions, (7) business and geographic segments, (8) financial instruments and risks arising from them
pretax income
income as reported on the income statement, in accordance with prevailing accounting standards, before the provisions for income tax expense
basic earnings per share (EPS)
income available to common shareholders (net income minus preferred dividends) divided by the weighted average number of shares outstanding
common-size income statements
income statements that express all income statement items as a percentage of revenues
effective tax rate
income tax expense / pretax income
uses of cash
increases in current assets or decreases in current liabilities
cash flow from investing activities (CFI)
inflows and outflows of cash generated from the purchase and disposal of long-term investments, such as plant, machinery, equipment, intangible assets, and nontrading debt and equity securities
cash flow from operating activities (CFO)
inflows and outflows of cash related to a firm's day-to-day business activities, including highly liquid securities and indirect short-term financing like accounts receivable and accounts payable
first-in, first out (FIFO)
inventory accounting method that assumes that items purchased first are sold first; ending inventory is then composed of the most recent purchases
last-in, first out (LIFO)
inventory accounting method that assumes that items purchased most recently are sold first; ending inventory is then composed of the earliest purchases
weighted-average cost method
inventory accounting method where total inventory costs are allocated evenly across all units
expensed inventory costs
inventory costs (such as administrative expenses, selling and marketing, and abnormal costs) that are not included on the balance sheet but are expensed on the income statement as incurred under IFRS and U.S. GAAP
capitalized inventory costs
inventory costs (such as costs of purchasing and costs of converting) that are included in the cost or carrying value of inventories on the balance sheet; results in a buildup of asset balances and delays recognition of these costs (in COGS) until inventory is sold
weighted average cost (AVCO)
inventory valuation method that allocates the total cost of goods available for sale (beginning inventory, purchases, and other inventory-related costs) evenly across all units available for sale
separate identification
inventory valuation method where costs remain in inventory until the specific unit is sold
last in, last out (LIFO)
inventory valuation method where newest units purchased or manufactured are assumed to be the first ones sold
first in, first out (FIFO)
inventory valuation method where oldest units purchased or manufactured are assumed to be the first ones sold
common perception in biased accounting
investors may prefer conservative accounting because positive surprises are more acceptable than negative surprises, while management may prefer aggressive accounting as it improves reported financial performance in the current period
market-oriented investors
investors who are in between growth and value investing and fit into neither category
growth investors
investors who invest companies that are expected to see higher earnings growth in the future; they might set earnings growth and/or momentum screens like a high price-to-cash flow ratio and sales growth exceeding 20% over the last three years
value investors
investors who try to pay a low price relative to a company's net asset value or earning prowess; they might set screens like a higher-than-average return on equity (ROE) and a lower-than-average P/E ratio to shortlist equity investments that suit their style
credit-rating process
involves the analysis of a company's financial reports and a broad assessment of a company's operations; common procedures include meetings with management, tours of major facilities, meetings of several ratings committees, and monitoring of publicly distributed ratings
unusual/infrequent items
items that are either unusual in nature or infrequent in occurrence; these items are listed as separate line items on the income statement but are included in income from continuing operations and hence reported before-tax
other current assets
items that are not material enough to be reported as a separate line item on the balance sheet that are then aggregated into a single amount and reported as one item; examples include prepaid expenses and deferred tax assets
non-current assets (long-term assets, long-life assets)
less liquid assets that are not expected to be converted into cash within one year or within one operating cycle
non-current liabilities
liabilities are not expected to be settled within a year or within one operating cycle; typically a source of long-term financing for a company
current assets
liquid assets that are likely to be converted into cash or realized within one year or one operating cycle, whichever is longer
property, plant, and equipment (PP&E)
long-term assets that have physical substance
earnings management
making intentional choices or taking deliberate action to influence reported earnings and their interpretation
fair value
measurement base that is defined in IFRS and U.S. GAAP as an exit price; the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date
current cost
measurement base that refers to the amount that an asset can be purchased for today, or for liabilities, the total undiscounted amount of cash that would be required to settle the obligation today
realizable (settlement) value
measurement base that refers to the amount that an asset can be sold for in an ordinary disposal today, or for liabilities, the undiscounted amount of cash expected to be paid to settle the liability in the normal course of business present value: measurement base that refers to the discounted value of future net cash flows expected from an asset, or for liabilities, the present discounted value of future net cash outflows that are expected to be required to settle the liability
historical cost
measurement base that refers to the amount that an asset was originally purchased for, or for liabilities, the amount of proceeds that were received initially in exchange for the obligation
amortized cost
measurement base where the historical cost is adjusted for amortization, depreciation, or depletion and/or impairment
enforcement mechanisms
mechanism established and enforced by market regulators in which regulators are granted various powers to enforce securities market rules, such as assessing fines, suspending or permanently barring companies, and bringing criminal prosecution against companies
straight-line (interest) method
method of accounting for noncurrent liabilities, permitted but not preferred under U.S. GAAP, that evenly amortizes the premium or discount over the life of the bond
effective interest method
method of accounting for noncurrent liabilities, required under IFRS and preferred under U.S. GAAP, where the market interest rate at issuance is applied to the carrying amount of the bonds to determine periodic interest expense; results in a constant rate of interest over the life of the bond
installment method
method used when collectability of revenues cannot be reasonably estimated, and states that profits are recognized as cash is received; the percentage of profit recognized in each period equals the proportion of total cash received in the period
cost-recovery method
method used when collectability of revenues is highly uncertain, and states that profits are recognized only once total cash collections (including principal and interest on any financing provided to the buyer) exceed total costs
matching principle
most important principle of expense recognition, which requires that expenses be matched with associated revenues when recognizing them on the income statement
recognition of loss under IFRS and U.S. GAAP
must be recognized immediately, even if only expected, regardless of the revenue recognition method used
net profit margin
net income / revenue
prepaid expenses
normal operating expenses that have been paid in advance, so are recognized as assets on the balance sheet; over time, they are expensed on the income statement and the value of the asset is reduced
current liabilities
obligations that are likely to be settled within one year or one operating cycle, whichever is longer
element recognition
occurrence when the future benefit from an item (flowing into or out of the firm) is probable, and if its value/cost can be estimated with reliability
spin-off
occurrence where an entire cash-generating unit of a company is separated into a new entity, with shareholders of the parent company receiving a proportional number of shares in the new company; all the assets of the new entity are removed from the balance sheet of the parent at the time of the separation
installment sale
occurs when a company finances a customer's purchase of its products and customers make payments to the company over an extended period
bill-and-hold transaction
occurs when a customer purchases goods but requests that the goods remain with the seller until a later date
LIFO liquidation
occurs when a firm that uses LIFO sells more units during a given period than it purchases over the period; this causes year-end inventory levels to be lower than the beginning-of-year inventory levels
derecognition
occurs when an asset is disposed of or is not expected to provide any future economic benefits from use or disposal; a company can dispose of a long-lived operating asset by selling it, by exchanging it for another asset, or by abandoning it
asset impairment
occurs when an intangible asset's current value is lower than its book value; if this is the case, a charge (expense) is made on the income statement to bring its value down to its true current value
impairment
occurs when an intangible asset's current value is lower than its book value; if this is the case, a charge (expense) is made on the income statement to bring its value down to its true current value
operating margin
operating income (EBIT) / sales
disclaimer of opinion
opinion that is issued when the auditor, for whatever reason, is not able to issue an opinion on the financial statements
unqualified opinion
opinion that states that the financial statements have been presented fairly in accordance with applicable accounting standards
qualified opinion
opinion that states that the financial statements have been presented fairly, but do contain exception(s) to the accounting standards
adverse opinion
opinion that states that the financial statements have not been presented fairly and significantly deviate from acceptable accounting standards
research
original and planned investigation undertaken with the prospect of gaining new scientific or technical knowledge and understanding
owners' equity
owners' residual claim on a company's resources
defined-contribution plans
pension plans in which the company is required to contribute a certain (agreed-upon or defined) amount of funds into the plan
defined-benefit plans
pension plans in which the company promises to pay future benefits to the employee during retirement
cash return on assets ratio
performance ratio that measures cash generated from all resources, equity, and debt; calculated as (CFO / average total assets)
cash return on equity ratio
performance ratio that measures cash generated from owner resources; calculated as (CFO / average shareholders' equity)
cash flow to revenue ratio
performance ratio that measures cash generated per unit of revenue; calculated as (CFO / net revenue)
cash flow per share ratio
performance ratio that measures operating cash flow available for each shareholder; calculated as [(CFO - preferred dividends) / number of common shares outstanding]
cash to income ratio
performance ratio that measures the ability of business operations to generate cash; calculated as (CFO / operating income)
operating lease under U.S. GAAP
permitted classification from the perspective of the lessee when none of the four conditions of a capital lease hold
revaluation model
permitted under IFRS but not under U.S. GAAP, this model states that long-lived assets are reported at fair value
earnings quality (quality of reported results)
pertains to the earnings and cash generated by the company's core economic activities and its resulting financial condition; a high-quality (1) comes from activities that the company will be able to sustain in the future and (2) provides an adequate return on the company's investment
inventories
physical stocks held by the company in the form of finished goods, work-in-progress, or raw materials
objective revenue recognition policy
policies where not too many estimates of revenue are left to management discretion
liabilities
present obligations of an enterprise arising from past events, the settlement of which is expected to result in an outflow of resources embodying economic benefits; creditors' claims on the resources of a company
contract asset
presented on the balance sheet when revenue is recognized
contract liability
presented on the seller's balance sheet if payment is received in advance of transferring good(s) or service(s)
core principle of converged standards
principle that states that revenue should be recognized in order to "depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in an exchange for those goods or services"
standard-setting bodies
private sector organizations of accountants and auditors that develop financial reporting rules, regulations, and accounting standards (have no authority unless their standards are recognized by regulatory authorities); examples include the IASB and FASB
net income
profits earned from ordinary business activities as well as gains and losses (increases and decreases in economic benefits) from nonoperating activities
investment property
property that is owned (or leased under a finance lease) for rental income and/or capital appreciation
investment property
property that is owned (or leased under a finance lease) for the purpose of earning rentals or capital appreciation or both
recognition of revenue guidelines
provided by the SEC, when (1) there is evidence of an arrangement between the buyer and seller, (2) the product has been delivered or the service has been rendered, (3) the price is determined or determinable, and (4) the seller is reasonably sure of collecting money
trend analysis
provides important information about a company's historical performance, as well as offer assistance in forecasting the financial performance of a company
examples of inventory costs of purchase
purchase price, import duties, taxes, insurance, and other costs that are directly attributable to the acquisition of finished goods, trade discounts, and other rebates that reduce costs of purchase
fair value reporting option
recent allowance of companies to report their financial liabilities at their fair value so as to not overstate/understate the true economic value of such obligations and their subsequent effect on leverage levels
asset impairment loss under IFRS
recognized as the carrying amount minus the recoverable amount
asset impairment loss under U.S. GAAP
recognized as the difference between the asset's carrying amount and its fair value (or the discounted value of future cash flows, if fair value is not known)
book value of a company's debt obligations
recognized on the balance sheet at any point in time, t, equal to the present value of its obligations discounted at market interest rates at issuance (mi0)
warning sign related to the relationship between cash flow and income
red flag raised when net income is consistently higher than cash provided by operations
warning sign related to capitalization policies and deferred costs
red flag raised when policies are out of line with the industry norm
cookie jar reserve accounting
refers to the practice of creating a liability when a company incurs an expense that cannot be directly linked to a specific accounting period; companies may recognize such expenses in periods during which profits are high, as they can afford to take the hit to income, with a view to reducing the liability (the reserve) in future periods during which the company may struggle
credit analysis - character
refers to the quality of management
earnings
refers to the share of net income of a company that is owned by common shareholders only
financial reporting quality
refers to the usefulness of information contained in the financial reports, including disclosures in notes; a high-quality provides information that is useful in investment decision making in that it is relevant and faithfully represents the company's performance and position
high-quality financial reports
reports that (1) conform to the accounting standard acceptable in the company's jurisdiction, (2) adhere to all the characteristics of decision-useful information, such as those defined in the Conceptual Framework (relevance and faithful representation), and (3) meet the enhancing characteristics of useful information as defined by the Conceptual Framework (comparability, verifiability, timeliness, and understandability)
interim reports
reports that are prepared either semiannually or quarterly; they contain the four financial statements and footnotes, but are not audited
trade receivables (accounts receivable)
represent amounts owed to the company by customers to whom sales have been made; considered financial assets
performance obligations
represent promises to transfer distinct good(s) or service(s); it is distinct if the customer can benefit from it and if the promise to transfer can be separated from other promises in the contract
retained earnings
represents cumulative net income that has not been distributed to shareholders
operating income
represents the profit earned by a company from its ordinary business activities before accounting for taxes, and in the case of nonfinancial companies, before deducting interest expense; calculated as subtracting all direct and indirect (period) costs from revenues
equity
represents the residual claim of shareholders on a company's assets after deducting all liabilities; can be created as a result of operating activities (business transactions that yield operating profits) and financing activities (issuance of common stock)
capital lease under U.S. GAAP (lessee's perspective)
required classification when (1) the lease transfers ownership of the asset to the lessee at the end of the term, (2) a bargain purchase option exists, (3) the lease term is greater than 75% of the asset's useful economic life, and (4) the present value of the lease payments at inception exceeds 90% of the fair value of the leased asset
capital lease under U.S. GAAP (lessor's perspective)
required classification when any one of the four criteria for recognition of a capital lease by the lessee hold, and the following two criteria also hold- (1) collectability of the lease payments is predictable, (2) there are no significant uncertainties regarding the amount of costs still to be incurred by the lessor under the provisions of the lease agreement
disclosures of lease obligations
required of a company to aggregate and disclose for each of the next five years; allows analysts to evaluate the extent of off-balance-sheet financing is being used by the company
capitalization of interest costs
required of companies for interest costs associated with financing the acquisition or construction of an asset that requires a long period of time to ready for its intended use
research and development (R&D) costs under U.S. GAAP
required that all related costs be expensed when incurred, except for certain costs related to software development that are capitalized once technological feasibility has been established; capitalized costs vary greatly across companies due to the subjective nature of feasibility judgment
research and development (R&D) costs under IFRS
required that expenditures on research, or during the research phase of an internal project, be expensed, while an intangible asset arising from development, or the development phase of an internal project, be capitalized (if certain criteria are met)
discontinued operation
required to be separately reported under IFRS and U.S. GAAP, an operation, or component of an operation, that is disposed of by a company; the operation/component then becomes operationally and physically separable from the rest of the firm, and not involved in formulating future performance expectations of the firm
component method of depreciation
required under IFRS and permitted but not widely used under U.S. GAAP, this method has companies depreciate different components of assets separately (using estimates for each component); for example, a gadget and its related machine are depreciated separately
cost model
required under U.S. GAAP and permitted under IFRS, this model states that the cost of long-lived tangible assets (except land) and intangible assets with finite useful lives is allocated over their useful lives as depreciation and amortization expense
treasury stock method
required under U.S. GAAP, this method assumes that all the funds received by the company from the exercise of options and warrants are used by the company to repurchase shares at the average market price for the period
registration requirements
requirement established and enforced by market regulators in which companies that plan to issue securities must register them with market regulators before offering them to the public
management commentaries
requirement established and enforced by market regulators in which financial reports issued by publicly traded companies must include statements by management including a review of the company's business and description of principal risks and uncertainties facing the company
auditing requirements
requirement established and enforced by market regulators in which financial statements must be accompanied by an audit opinion certifying that presented financials conform to relevant accounting standards
responsibility statements
requirement established and enforced by market regulators in which person(s) responsible for the company's filings are required to explicitly acknowledge responsibility and to attest to the correctness of financial reports
disclosure requirements
requirement established and enforced by market regulators in which publicly traded companies are required to make periodic financial reports (with management comments) available to the public
regulatory review of filings
requirement established and enforced by market regulators in which regulators usually undertake a review process to ensure that companies have followed all rules
assets
resources controlled by an enterprise as a result of past events and from which future economic benefits to the enterprise are expected to flow
assets
resources under a company's control as a result of past transactions that are expected to generate future economic benefits for the company
equity market effects
result of motivation to meet earnings expectations in which management tries to build credibility with market participants to positively impact the company' stock price
trade effects
result of motivation to meet earnings expectations in which management tries to improve the company's reputation with customers and suppliers; particularly important for small companies
net reporting
revenue reporting where only the difference between sales and cost of sales is reported on the income statement
gross reporting
revenue reporting where sales and cost of sales are reported separately on the income statement
non-recurring items
revenues and expenses that are not as likely to occur in the future
management discussion and analysis
section of financial statements (required under U.S. GAAP) that highlight important trends and events that affect a company's liquidity, capital resources, and operations; it also discusses prospects for the upcoming year with respect to inflation, future goals, material events, and uncertainties, and critical accounting policies that require management to make subjective judgments that have a material impact on the financial statements
gain/loss on asset disposal
selling price - book value of asset
installment sale recognition under IFRS
separated into the selling price (discounted present value of all payments) recognized at time of sale, and an interest component recognized over time
treasury shares
shares that have been bought back by the company; while they may be reissued at a later date, no gain or loss is recognized when they are reissued
fair value model
similar to revaluation model for PP&E but differs in how net income is affected; under this model, all changes in the fair value of an asset impact net income
general ledger
sorts all the entries posted in journals into accounts; for example, it can contain an inventory account where all inventory-related journal entries are listed
understatement of earnings volatility (earnings smoothing)
source of bias that can result from employing conservative assumptions to understate performance when the company is actually doing well and then using aggressive assumptions when the company is not doing as well
external sources
sources that provide information about the economy, the industry that the company operates in, and the company's competitors; such information is useful as it allows the analyst to place the company's performance in perspective
proxy statements
statements distributed to shareholders when there are matters that require a shareholder vote; they provide information about management and director compensation, company stock performance, and potential conflicts of interest between management, the board of directors, and shareholders
horizontal common-size financial statements
statements looking for trends over time where dollar values of accounts are divided by their base-year values
common-size statements
statements that allow analysts to compare a company's performance with that of other firms and to evaluate its performance over time
indefinite useful life
status for an asset that has no foreseeable limit to the period over which the asset is expected to generate net cash inflows for the company
retired (abandoned) asset
status of an asset when a company does not receive any cash for it; assets are reduced by the carrying value of the asset at the time of recognition and a loss equal to the asset's carrying amount is recorded on the income statement
exchanged asset
status of an asset when it is given up in order to receive another asset; the carrying amount of the asset given up is removed from the company's balance sheet, and replaced by the fair value for the asset acquired
asset impairment under IFRS
status when an asset's carrying amount exceeds its recoverable amount; the recoverable amount equals the higher of "fair value less costs to sell" and "value in use," where value in use refers to the discounted value of future cash flows expected from the asset
asset impairment under U.S. GAAP
status when an asset's carrying amount exceeds the total value of its undiscounted expected future cash flows (recoverable amount)
perpetual inventory system
system where changes in the inventory account are updated continuously; purchases and sales are recorded directly in the inventory account as they occur
periodic inventory system
system where the quantity of inventory on hand is calculated periodically; the cost of goods available for sale during the period is calculated as beginning inventory plus purchases over the period, and the ending inventory amount is then deducted from the cost of goods available for sale to determine COGS
income taxes payable
taxes (based on taxable income) that have not actually been paid yet
channel stuffing
term for when management pushes shipments out the door under FOB shipping point arrangements; done to maximize revenue recognized in the current accounting period and can be through unusual discounts, threatening to increase prices in the near term, or even shipping goods that were not actually ordered in the hope that customers would keep them
pension expense
the allocation of pension obligation over the course of the employee's employment
journal entries
the amount and relevant accounts affected by transactions are chronologically recorded in journals; at the end of the accounting period, adjusting entries are made to these to account for accruals that had not been recorded earlier
carry value
the amount at which an asset or liability is recognized on the balance sheet for financial reporting purposes
tax base
the amount at which an asset or liability is valued for tax purposes
earnings per share
the amount of earnings per common share of a company; it is one of the most important profitability measures for publicly listed firms
income tax expense (ITE)
the amount of expense that a business recognizes in an accounting period for the government tax related to its taxable profit
taxes payable
the amount of money a company owes in federal, provincial and municipal taxes; tax returns are created to calculate this amount and it results in an outflow of cash from the firm
transaction price
the amount that the seller estimates it will receive in exchange for transferring the good(s) or service(s) identified in the contract to the buyer
development
the application of research findings or other knowledge to a plan or design for the production of new or substantially improved materials, devices, products, processes, systems or services before the start of commercial production or use
double-entry accounting
the basis of recording business transactions by which every transaction affects at least two accounts to keep the accounting equation in balance
retained earnings
the cumulative earnings (net income) of the firm over the years that have not been distributed to shareholders as dividends
net income
the difference between revenue and expenses; what remains after subtracting all expenses (including depreciation, interest, and taxes) from revenue
gross profit (gross margin)
the difference between revenues and cost of goods that were sold
holding gain (inventory profit)
the difference between the original cost of inventory and its current replacement cost
LIFO reserve (LR)
the difference between the value of inventory under LIFO and its value under FIFO; required by U.S. GAAP to be reported in the footnotes of financial statements that use the LIFO inventory cost flow assumption
differences between the direct and indirect method
the direct method explicitly lists the actual sources of operating cash inflows and outflows while the indirect method lists the items that are responsible for the differences between net income and operating cash flow
basic EPS
the earnings of a company attributable to each share of common stock
diluted EPS
the earnings per share of a company that would result if all dilutive securities (convertible debt, convertible preference shares, warrants, options) were converted into common shares
residual value
the estimated amount that will be received from disposal of an asset at the end of its useful life
residual value
the estimated value of a fixed asset at the end of its lease or at the end of its useful life
credit analysis
the evaluation of credit risk
free cash flow
the excess of a company's operating cash flows over capital expenditure undertaken during the year
owner's equity (shareholder's equity)
the excess of assets over liabilities; the residual interest of shareholders in the assets of an entity after deducting the entity's liabilities
goodwill
the excess of the amount paid to acquire a business over the fair value of its net assets; can occur for various reasons including unrecognized value (reputation, brand), unrecognized costs (research), and competitive strategy (improving market position)
balance sheet (statement of financial position)
the financial statement that presents an entity's current financial position by disclosing resources the entity controls (its assets) and the claims on those resources (its liabilities and equity claims), as of a particular point in time
revenues
the flow of economic resources into the company
expenses
the flow of economic resources out of the company
sustainable growth rate
the function of a company's profitability (ROE) and its ability to finance its operations from internally generated funds (measured by the retention rate)
International Accounting Standard Board
the independent standard-setting body of the IFRS Foundation, which is an independent, not-for-profit private sector organization
trial balance
the initial balance lists all the ending balances of general ledger accounts; adjustments to record accruals and prepayments that had not been considered in initial construction are made in the adjusted balance
authorized shares
the maximum number of shares that can be sold under the company's Articles of Incorporation
measurement base
the method of how the monetary value of an item recognized on the financial statements is recorded
non-controlling interest (minority interest)
the minority shareholders' pro rata share of the net assets of a subsidiary that is not wholly owned by the company
outstanding shares
the number of shares that were issued less the number of shares repurchased (treasury stock)
lessor
the owner of an asset in a lease
lessee
the party that wants to use an asset in a lease
research phase of an internal project
the period during which a company cannot demonstrate that an intangible asset is being created
taxable income
the portion of an entity's income that is subject to income taxes under the tax laws of its jurisdiction
pension obligation
the present value of the payments the company estimates as the total amount of benefits that it expects to pay out to an employee during their retirement
financial statements
the presentation of the account balances in the adjusted trial balance
accrual accounting
the principle that revenues should be recognized when earned and expenses should be recognized when incurred, irrespective of when the actual exchange of cash occurs
back-testing
the process by which analysts evaluate how a portfolio based on particular screens would have performed historically; this method applies the portfolio selection rules to historical data and calculates returns that would have been realized had particular screens been used
depreciation
the process of allocating the cost of long-lived assets across the accounting periods for which they provide economic benefits
screening
the process of filtering a set of potential investments into a smaller set (that exhibits certain desirable characteristics) by applying a set of criteria that include financial ratios and other characteristics such as market capitalization and membership of popular indices
effective tax rate
the ratio of income taxes as a percentage of pre-tax income
owners' equity
the residual claim of the owners on a company's assets after all liabilities have been paid off; calculated as (OE = A - L) or (OE = contributed capital + ending retained earnings)
credit risk
the risk of loss from a counterparty or debtor's failure to make a promised payment
credit risk
the risk of loss that is caused by a debtor's failure to make a promised payment
inferred shares
the shares that are repurchased by a company at the average market price using the proceeds of an option exercise; the excess of newly issued shares over these shares is added to the weighted average number of shares outstanding in EPS calculations
FASB Accounting Standard Codification
the source of all authoritative U.S. generally accepted accounting principles (U.S. GAAP) for nongovernmental entities; the GAAP are officially recognized as authoritative by the Securities and Exchange Commission (SEC)
big bath behavior
the strategy of manipulating a company's income statement to make poor results look even worse; often implemented in a bad year with a view to inflating subsequent period earnings
issued shares
the total number of shares that have been sold to shareholders
valuation adjustment
the upward or downward adjustments to the values of the assets and liabilities that are required by accounting standards to be shown on the balance sheet at their current market values
process of converting indirect to direct
three steps- (1) aggregate all revenues and all expenses, (2) remove the effect of noncash items from aggregated revenues and expenses and separate the adjusted revenues and expenses into their respective cash flow items, and (3) convert the accrual-based items into cash-based amounts by adjusting for changes in corresponding working accounts
role of financial statement analysis
to assess a company's past performance and evaluate its future prospects using financial reports along with other relevant company information
IFRS Foundation objectives
to develop and promote the use and adoption of a single set of high-quality financial standards; to ensure the standards result in transparent, comparable, and decision-useful information while taking into account the needs of a range of sizes and types of entities in diverse economic settings
objective of general purpose financial reporting
to provide financial information about the reporting entity that is useful to existing and potential investors, lenders, and other creditors in making decisions about providing resources to the entity; those decisions involve buying, selling, or holding equity and debt instruments, and providing or settling loans and other forms of credit (as stated by IASB's Conceptional Framework for Financial Reporting 2010)
role of financial statement reporting
to provide information about a company's financial performance, financial position, and changes in financial position
line graphs
tool that helps identify trends and detect changes in direction or magnitude
stacked common graph
tool that illustrates the changes in various items over the period in graphical form
pie charts
tool that is most useful in illustrating the composition of a total value
graphs
tools that facilitate comparisons of firm performance and financial structure over time, highlighting changes in significant aspects of business operations
net revenue
total revenue adjusted for product returns and amounts that are unlikely to be collected
prepaid expenses
type of accrual entry where a company makes a cash payment before recognizing the expense; recognized as an asset
unbilled (accrued) revenue
type of accrual entry where a company provides a good or service before receiving the cash payment; recognized as an asset
unearned (deferred) revenue
type of accrual entry where a company receives a cash payment before it provides a good or a service to the customer; recognized as a liability
accrued expenses
type of accrual entry where a company recognizes an expense in its books before actually making a payment for it; recognized as a liability
preferred shares
type of equity interest that where shareholders receive dividends (at a specified percentage of par value) and have priority over ordinary shareholders in the event of liquidation
funding defined-benefit pension plans
typically done through a separate legal entity (usually a pension trust fund) where the company makes payments into the fund and invests these assets with a view to accumulating sufficient assets in the plan to meet payment obligations to retirees
inventory under rising prices
under FIFO, prices assigned to ending inventory units are relatively higher while COGS is lower, and under LIFO, ending inventory units are relatively less while COGS is higher; under AVCO, prices of units in ending inventory and COGS are the same regardless of external price changes
accounting valuation for investment property
under IFRS, a company is required to use one model (cost or fair value) for all of these assets, and further, the fair value model may be used only if the company is able to reliably estimate the asset's fair value on a continuing basis; under U.S. GAAP, there is no specific definition for this type of asset given so companies simply use the historical cost model
measurement of inventory
under IFRS, depends on the method used, and under U.S. GAAP, reported as the lower of cost or market value
unused tax losses and credits
under IFRS, may only be recognized to the extent of probable future taxable income against which these can be applied, while under U.S. GAAP, are recognized in full and then reduced through a valuation allowance if they are unlikely to be realized
probable
under IFRS, means "more likely than not" while under U.S. GAAP, means "likely to occur"
extraordinary items
under U.S. GAAP prior to 2015 (not allowed under IFRS), an item that is both unusual in nature and infrequent in occurrence; reported net of tax and as a separate line item after income from continuing operations
use of non-GAAP financial measure in an SEC filing
under U.S. GAAP, it is permissible as long as the company (1) displays the most directly comparable GAAP measure with equal prominence, (2) provides a reconciliation of the non-GAAP measure and the equivalent GAAP measure, and (3) explains why it believes that the non-GAAP financial measure provides useful information regarding the company's financial condition and operations
recognition of current and deferred tax charged directly to equity
under both IFRS and U.S. GAAP, deferred tax assets and liabilities should generally have the same accounting treatment as the assets and liabilities that give rise to them
percentage of completion revenue recognition method
under both IFRS and U.S. GAAP, this method is used if the outcome of the contract can be measured reliably, and states that revenues, costs, and profits are allocated to each accounting period in proportion to the percentage of the contract completed during the given period
interest expense recognized on the income statement
under the effective interest method for a given period, it is calculated as the book value of the liability at the beginning of the period multiplied by the market interest rate at issuance (mi0)
completed contract revenue recognition method
used only under U.S. GAAP and when the outcome of a project cannot be measured reliably, and states that no revenues or costs are recognized on the income statement until the project is substantially finished
press releases
useful sources, in addition to a company's website and conference calls, of current information about the company
recognition of revenue from sale of goods under IFRS
when (1) significant risks and rewards of ownership are transferred to the buyer, (2) the entity retains no managerial involvement or effective control over the goods sold, (3) the amount of revenue can be measured reliably, (4) it is probable that the economic benefits from the transaction will flow to the entity, and (5) costs incurred or to be incurred for the transaction can be measured reliably
recognition of revenue from services rendered under IFRS
when (1) the amount of revenue can be measured reliably, (2) it is probable that the economic benefits associated with the transaction will flow to the entity, (3) the stage of completion of the transaction at the balance sheet date can be measured reliably, and (4) the costs incurred for the transaction and the costs to complete the transaction can be measured reliably
quantified disclosures
when companies are able to quantify the expected impact of accounting standards that have changed but are not yet effective as of the reporting date; these are extremely useful to analysts
recognition of revenue under GAAP
when it is realized or realizable and earned
DTA from investments in subsidiaries or similar ventures
will be recognized only if (1) the temporary difference will reverse in the future, and (2) sufficient taxable profits exist against which the temporary difference can be used
