Financial Analysis & Reporting Flashcards
7 cards from real IAR practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Financial Analysis & Reporting flashcards as text
A company reports a large deferred tax liability on its balance sheet. This most commonly arises because:
Answer: The company depreciates assets faster for tax purposes than for financial reporting
Accelerated depreciation for tax purposes reduces taxable income now but creates a deferred tax liability because higher book income will be taxed later.
Which of the following events would increase a company's reported earnings per share (EPS) without changing net income?
Answer: A share repurchase that reduces the weighted-average shares outstanding
Buying back shares reduces the share count denominator in the EPS calculation, mathematically increasing EPS even if net income is unchanged.
Which accounting treatment is required when a company determines that a held-to-maturity bond investment has experienced a credit loss under CECL?
Answer: Record an allowance for credit losses against the amortized cost basis
Under CECL (Current Expected Credit Loss), even held-to-maturity securities require an allowance for expected credit losses recorded against their amortized cost.
When analyzing a firm's leverage, which ratio most directly measures the ability to service debt from operating earnings?
Answer: Interest coverage ratio (EBIT / Interest expense)
The interest coverage ratio shows how many times EBIT covers interest charges, directly measuring the company's capacity to service debt from operations.
An adviser is comparing two firms using price-to-book (P/B) ratios. Which situation would make P/B least meaningful as a valuation metric?
Answer: A technology firm with large intangible assets that are not capitalized on its balance sheet
P/B is least meaningful for firms whose primary value drivers (internally developed software, brand, human capital) are expensed and absent from the balance sheet.
Which of the following would most likely cause a firm's operating leverage to be high?
Answer: A large proportion of fixed costs relative to total costs
High operating leverage arises when fixed costs dominate; small changes in revenue produce amplified changes in operating income because fixed costs don't vary with output.
Under IFRS, how are investment properties (real estate held for rental income or capital appreciation) typically reported?
Answer: At fair value with changes recognized in profit or loss, or at cost less depreciation
IFRS (IAS 40) allows firms to choose either the fair value model (gains/losses in P&L) or the cost model for investment property.