Financial Reporting and Analysis Flashcards

Which of the following is a non-cash item that must be added back to net income in the operating section of the indirect cash flow statement?

Answer: Depreciation expense

Depreciation is a non-cash charge that reduces net income but does not involve a cash outflow, so it is added back under the indirect method.

The acid-test (quick) ratio excludes which current asset from the numerator?

Answer: Inventory

The acid-test ratio excludes inventory because it is the least liquid current asset and may not be quickly converted to cash.

Under IAS 36, an impairment loss is recognized when an asset's carrying amount exceeds its:

Answer: Recoverable amount

IAS 36 requires an impairment loss when the carrying amount exceeds the recoverable amount, which is the higher of fair value less costs of disposal and value in use.

Earnings per share (EPS) is calculated by dividing:

Answer: Net income by weighted average shares outstanding

Basic EPS divides net income attributable to ordinary shareholders by the weighted average number of ordinary shares outstanding during the period.

A company's gearing ratio measures:

Answer: The proportion of debt financing relative to equity or total capital

Gearing (leverage) ratios measure the extent to which a company is financed by debt relative to equity or total capital.

Under IFRS 15, revenue is recognized when:

Answer: A performance obligation is satisfied

IFRS 15 requires revenue to be recognized when (or as) a performance obligation is satisfied by transferring promised goods or services to the customer.

The gross profit margin ratio is calculated as:

Answer: Revenue minus cost of goods sold, divided by revenue

Gross profit margin equals (Revenue – Cost of Goods Sold) / Revenue, showing the percentage of revenue retained after direct production costs.