FinTree - FRA Sixty Minute Guide

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Sixty Minute Guide Financial Repoerting & Analysis CFA- Level I

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1. Important Basic concepts
Audit independent review of an entitys financial statements
Unqualified Opinion
Qualified opinion
Adverse opinion
Basic accounting equation Assets = Liabilities + Owners equity
Two primary assumptions 1.Accrual basis 2.The Going concern assumption.
Flow of information in Accounting system

Journal entries
General ledger
Initial trial balance
Adjusted trial balance
Financial Statement
2.Understanding the Income Statement
Revenue recognition
(Revenue is recognized when earned and expenses are recognized when incurred)
Long Term Contracts
Installment sales
Barter transactions
% of completion competed Contract Method method Recognize

revenue in proportion of cost incurred Recognize revenue only when contract is complete
Recognise revenue If collect ability Is reasonably assured
Normal rev. Recognition
Installment Sales
Used if collectability cannot be reasonably estimated
Cost recovery Method used if collectability is highly uncertain
Barter transaction: recognize revenue only

If fair value can be estimated
Expense recognition
is based on the matching principle expenses to generate revenue are recognized in the same period as the revenue
Discontinued operation
Barter transactions is one that management has decided to dispose off but has not yet done so
IMP
Unusual or infrequent items
either unusual in nature or infrequent in occurrence, but not both These are included in income from continuing operations and are reported before tax.
extraordinary item
Only under U.S. GAAP it is a material transaction or event that is both
unusual and infrequent in occurrence reported separately in the income statement, net of tax, after income from continuing operations IFRS does not allow extraordinary items to be separated from operating results in the income statement
Change in accounting principle

prior-period financial statements are restated to reflect the change.
Change in accounting estimate

Prospective application
Dilutive securities
are stock options, warrants, convertible debt convertible preferred stock that would decrease EPS if exercised or converted to common stock
3.Understanding the Balance Sheet
Investments (Financial Instruments)
Held to maturity
1.On BS: @ Amortized Cost 2.Realised gain: taken to income Statement 3.Unrealized gain is not recognized
Available for Sale

1.On BS: @ Fair Value 2.Realised gain: Taken to income statement 3.Unrealised gain: Taken to other Comprehensive income
Trading securities
1.On BS: @ Fair Value 2.Realised gain: Taken to income statement 3.Unrealised gain: Taken to income statement
4.Understanding the Cash Flow Statement
Cash Flows
CFO CFO
Inflows and outflows of cash resulting from transactions that affect a firms net income.
CFI CFI
inflows and outflows of cash resulting from the acquisition or disposal of long-term assets and certain investments.
CFF CFF
Inflows and outflows of cash resulting from transactions affecting a firms capital structure, such as issuing or repaying debt and issuing or repurchasing stock .
Item
1. Dividends paid 2. Interest paid 3. Dividends received 4. Interest received
US GAAP Treatment
Financing activities (CFF)
IFRS Treatment
CFO or CFF (Gives flexibility to management ) CFO or CFF (Gives flexibility to management )
Operating activities (CFO)
IMP
CFO or CFI (Gives flexibility to management ) CFO or CFI (Gives flexibility to management )
operating activities (CFO)
5.Taxes paid related to operating activities 6. Taxes paid related to investing and financing transactions
CFI and CFF respectively
IMP
FCFF Formula
1.Starting From Net Income NI + NCC WCinv +(INT X (1-t)) FCinv CFO + (INT X (1-t)) FCinv
2. Starting From EBIT (EBIT X (1-t))+ Dep - WCinv CFO + (INT-tax%)

- FCinv
-FCinv
5.Inventories
Inventory Cost Flow Methods
FIFO
LIFO
Weightd avg.
Specific
identificn
1.COGS consist of older purchases 2.Ending Inventory bal consist of more recent cost 3.. In either Inflationary or deflationary Environment FIFO Ending inventory Balance reflects economic reality 4.In Inflationary environment, FIFO COGS is lower than LIFO COGS
FIFO
1.COGS consist of recent purchases 2.Ending Inventory bal consist of older cost 3.. In either Inflationary or deflationary Environment LIFO COGS reflects economic reality 4.In inflationary environment, LIFO closing inventory is lower than FIFO closing inventory
LIFO
6.Long-lived Assets
IFRS
Research cost Development cost
Expensed as incurred
Capitalized
US GAAP
Research cost Development cost
Expensed as incurred
Expensed
(Except, software development cost)
7.Income Taxes
Create
IT Exp. (Income Statement) is greater

than Tax pble
DTA if,
Create
IT Exp. (Income Statement) is less

than Tax pble
DTL if,
Assets Tax Base

Is its value for tax purposes. The tax base for a depreciable fixed asset is its cost minus any depreciation previously taken on the tax return
Income tax expense = taxes payable + DTL DTA.

Increase in DTL Decrease in DTA Increase in DTA Decrease in DTL
ADD LESS
When income tax rate increases deferred tax assets and deferred tax liabilities are both increased to reflect the new rate If DTA is not likely to be realised create valuation allowance to reduce DTA If DTL is not likely to be reversed consider it a a part of equity for analysis purpose
8.Non-current (Long-term) Liabilities
The book value of the bond liability is equal to the PV of the remaining future cash flows (coupon payments and maturity value) discounted at the market rate of interest at issuance
1. coupon rate > market yield at issuance
Premium bond
2. reported on the balance
1. coupon rate < market yield at issuance 2. reported on the balance sheet at less than its face value . 3. book value of the bond liability will increase until it reaches its face value at maturity. 4. interest expense is greater than the coupon payment
Discount bond
sheet at a value greater than its face value.
liability will decrease until it reaches its face value at maturity.
3. book value of the bond
4. interest expense is less

than the coupon payment
Finance lease
Treat a lease as a capital (finance) lease if any one of the following criteria is met: 1.Title transfer clause 2. Bargain purchase option 3.Lease period > 75% life 4.PV of lease pmts > 90% of Fair value of asset
US GAAP
IFRS
If substantially all the rights and risks of ownership are transferred to the lessee, the lease is treated as a finance lease by both the lessee and lessor
Impact on financial statements

Finance lease Operating lease
Net income
(early yrs)
Lower Higher Higher Higher
Higher Lower Lower Lower
Net income
(later yrs)
EBIT CFO
CFF
Lower
Higher
9.Financial Reporting Quality
Fraud Triangle
Incentives and pressuresthe motive to commit
fraud.
Opportunitiesthe firm has a weak internal
control system.
Attitudes and rationalizationsthe mindset that
fraud is justified
US GAAP & IFRS differences

Items Investment: Joint control Inventory on balance sheet Recovery of asset write down
US GAAP Equity method Lower of cost or market value Not allowed IFRS Proportionate Consolidation Lower of cost or Net realisable value Allowed
Upward Revaluation
Cost of Goods Sold Operating Expenses Interest capitalization Extraordinary items Both unusual and infrequent
Not allowed
LIFO permitted Differentiates betn expenses and losses Must reported in the income statement, net of tax, below income from continuing operations
Allowed
LIFO not permitted IFRS does not Optional It does not permit firms to treat items as extraordinary in the income statement.

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www. FinTreeindia.

Sixty Minute Guide Financial Repoerting & Analysis CFA- Level I

1. Important Basic concepts

Audit independent review of an entitys financial statements

Basic accounting equation Assets = Liabilities + Owners equity

Two primary assumptions 1.Accrual basis 2.The Going concern assumption.

Flow of information in Accounting system

Initial trial balance

Adjusted trial balance

2.Understanding the Income Statement

Long Term Contracts

% of completion competed Contract Method method Recognize

Recognise revenue If collect ability Is reasonably assured

Normal rev. Recognition

Cost recovery Method used if collectability is highly uncertain

Barter transaction: recognize revenue only

Only under U.S. GAAP it is a material transaction or event that is both

Change in accounting principle

Change in accounting estimate

3.Understanding the Balance Sheet

Investments (Financial Instruments)

Available for Sale

4.Understanding the Cash Flow Statement

Operating activities (CFO)

operating activities (CFO)

operating activities (CFO)

operating activities (CFO)

Operating activities (CFO)

CFI and CFF respectively

2. Starting From EBIT (EBIT X (1-t))+ Dep - WCinv CFO + (INT-tax%)

Inventory Cost Flow Methods

IT Exp. (Income Statement) is greater

IT Exp. (Income Statement) is less

Assets Tax Base

Income tax expense = taxes payable + DTL DTA.

8.Non-current (Long-term) Liabilities

1. coupon rate > market yield at issuance

sheet at a value greater than its face value.

liability will decrease until it reaches its face value at maturity.

3. book value of the bond

4. interest expense is less

Impact on financial statements

Lower Higher Higher Higher

Higher Lower Lower Lower

9.Financial Reporting Quality

Opportunitiesthe firm has a weak internal

Attitudes and rationalizationsthe mindset that

US GAAP & IFRS differences

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