Financial Reporting and Analysis Flashcards

Which of the following best describes a finance lease under IFRS 16?

Answer: A lease where the lessee obtains substantially all risks and rewards of ownership

Under IFRS 16, a finance lease transfers substantially all risks and rewards incidental to ownership of the underlying asset to the lessee.

Goodwill arising from a business acquisition is subject to:

Answer: Annual impairment testing with no amortization under IFRS

Under IFRS 3 and IAS 36, goodwill is not amortized but must be tested for impairment at least annually.

The debt-to-equity ratio of a company increases when:

Answer: The company takes on additional long-term debt

Taking on additional long-term debt increases the numerator (debt) while equity remains unchanged, thereby raising the debt-to-equity ratio.

Under IAS 37, a provision should be recognized when:

Answer: A present obligation exists, an outflow is probable, and a reliable estimate can be made

IAS 37 requires a provision when there is a present obligation, a probable outflow of economic benefits, and a reliable estimate of the obligation amount.

Vertical analysis of an income statement expresses each line item as a percentage of:

Answer: Revenue (sales)

In vertical (common-size) analysis of the income statement, each item is expressed as a percentage of total revenue to allow comparison across companies of different sizes.

Which of the following transactions would increase a company's operating cash flow?

Answer: A decrease in inventory

A decrease in inventory means inventory was sold and converted to cash (or receivables), which increases operating cash flow under the indirect method.

When using the price-to-earnings (P/E) ratio to value a company, a higher P/E ratio generally indicates:

Answer: Investors expect higher future earnings growth

A higher P/E ratio suggests investors are willing to pay a premium because they expect stronger future earnings growth from the company.