Financial Reporting & Analysis Flashcards

Under IFRS, investment property may be measured using which model that is NOT permitted under US GAAP?

Answer: Fair value model

IFRS allows the fair value model for investment property, where gains and losses flow through the income statement; US GAAP does not permit this.

When a company uses the indirect method for the cash flow statement, depreciation is added back to net income because:

Answer: It is a non-cash charge that reduced net income

Depreciation is a non-cash expense that reduces net income; the indirect method adds it back to reconcile net income to operating cash flow.

Which of the following transactions is classified as an investing activity on the cash flow statement?

Answer: Purchase of equipment

Purchasing equipment is a capital expenditure classified as an investing outflow under US GAAP and IFRS.

A high accounts receivable turnover ratio generally indicates:

Answer: The company is collecting receivables quickly

A high A/R turnover ratio means the company converts receivables to cash rapidly, indicating efficient collections.

Under the acquisition method of accounting for business combinations, goodwill is measured as:

Answer: The excess of purchase price over fair value of net identifiable assets

Goodwill = Purchase Price - Fair Value of Net Identifiable Assets Acquired; it represents the premium paid above identifiable fair value.

Which earnings quality indicator suggests that a company may be recognizing revenue prematurely?

Answer: Accounts receivable growing faster than revenue

When receivables grow faster than revenue, it may signal aggressive revenue recognition without corresponding cash collections.

The Dupont decomposition expresses ROE as a product of which three components?

Answer: Net profit margin × Asset turnover × Financial leverage

The three-factor DuPont formula: ROE = Net Profit Margin × Asset Turnover × Financial Leverage (Equity Multiplier).