IAR Financial Analysis & Reporting 5

Question 1

A client asks about a company whose revenue has grown 20% but operating income has declined. Which analytical step should the adviser take first?

Accepted Answer

Examine the operating expense breakdown to identify which cost categories grew faster than revenue

Answer

The first analytical step is to disaggregate operating expenses (COGS, SG&A, R&D) to identify which costs are growing disproportionately relative to revenue.

Question 2

Which of the following is true about pro forma (non-GAAP) financial measures disclosed by public companies?

Accepted Answer

They must be reconciled to the nearest GAAP measure in SEC filings

Answer

SEC Regulation G requires that whenever a public company discloses a non-GAAP financial measure, it must provide a reconciliation to the most directly comparable GAAP measure.

Question 3

Which scenario best illustrates channel stuffing as an earnings quality concern?

Accepted Answer

A company ships excess inventory to distributors at quarter-end with generous return rights to boost reported revenue

Answer

Channel stuffing inflates near-term revenue by pushing products to distributors before demand exists, especially when return rights make the revenue recognition questionable.

Question 4

When evaluating a company's pension obligation for analysis purposes, an adviser should be aware that a higher discount rate assumption will:

Accepted Answer

Reduce the reported pension liability and pension expense

Answer

A higher discount rate reduces the present value of future benefit obligations, lowering both the pension liability on the balance sheet and the service cost component of expense.

Question 5

An investment adviser reviews a company's balance sheet and notices a significant 'off-balance-sheet' operating lease commitment disclosed only in the footnotes (pre-ASC 842). To adjust the analysis, the adviser would most appropriately:

Accepted Answer

Capitalize the lease by adding the present value of future lease payments to both assets and debt

Answer

Analysts adjust for off-balance-sheet operating leases by capitalizing them — estimating the present value and adding it to assets and debt to better reflect economic leverage.

IAR Practice Test

IAR Practice Test

IAR Financial Analysis & Reporting 5