CFO Financial Reporting & Accounting Flashcards

What is EBITDA and why is it widely used by CFOs and analysts despite not being a GAAP measure?

Answer: Earnings Before Interest, Taxes, Depreciation, and Amortization — used as a proxy for operating cash flow and for comparing companies across different capital structures

EBITDA removes the effects of financing, taxes, and non-cash charges, making it a useful (though imperfect) proxy for operating performance and enabling cross-company comparisons.

What is 'channel stuffing' and why is it a financial reporting concern?

Answer: Artificially inflating reported sales by pushing excessive inventory to distributors or retailers beyond actual demand

Channel stuffing involves recording revenue from shipments to distributors that will likely be returned or won't be sold, resulting in overstated revenues and fraudulent financial reporting.

What is the difference between 'depreciation' and 'amortization' on financial statements?

Answer: Depreciation is the systematic allocation of tangible asset cost over useful life; amortization is the same process for intangible assets

Depreciation allocates the cost of physical (tangible) assets like equipment over their useful lives, while amortization does the same for intangible assets like patents and trademarks.

Under U.S. GAAP, how are contingent liabilities (like pending lawsuits) reported on financial statements?

Answer: Recorded as a liability if the loss is probable and can be reasonably estimated; disclosed in footnotes if reasonably possible

ASC 450 requires accrual of a contingent loss when it is both probable and reasonably estimable; if only reasonably possible, it must be disclosed in footnotes.

What is the primary difference between U.S. GAAP and IFRS in accounting for research and development (R&D) costs?

Answer: GAAP expenses most R&D immediately; IFRS allows capitalization of development costs once technological feasibility is established

Under U.S. GAAP, most R&D must be expensed as incurred, while IFRS (IAS 38) permits capitalizing development costs once specific criteria for technological and commercial feasibility are met.

What does the 'lower of cost or net realizable value' (LCNRV) rule require for inventory accounting under U.S. GAAP?

Answer: Inventory must be written down to its net realizable value if that value falls below its cost, recognizing the loss immediately

ASC 330 requires inventory to be valued at the lower of its cost or net realizable value (estimated selling price minus completion and selling costs), writing down any excess immediately.