Financial_reporting_and_analysis
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Business activities can be classified into three groups: operating activities, investing activities and financing activities companies classify transaction into common accounts that are components of the five financial statement elements: assets, liabilities, equity, revenue, and expense.
T-Account
Debit
Credit
Balance Sheet
Assets
Liabilities Owners' Equity
contributed capital: 投入资本
assets: economic resources of a company
non-current assets:
intangible assets including goodwill
property, plant, and equipment
investment property
investments in joint ventures and associates
current assets:
inventories
trade and other receivables
cash and cash equivalents
liabilities: creditors' claims on the resources
owners' equity: residual claim on those resources;
expense: outflows of economic resources or increases in liabilities
Balance sheet
Income statement
statement of cash flow
statement of owners' equity
unearned revenue(or deferred revenue) 预收账款，已收款，权利义务并为交割
unbilled revenue(accrued revenue): arises when a company earns revenue prior to receiving cash but has not yet recognized the revenue at the end of an accounting period. 应计收入，权利义务已交割，但收入未到账
prepaid expense
accrued expense: arise when a company incures expenses that have not yet been paid as of the end of an accounting period
balance sheet
statement of comprehensive income
statement of changes in equity
cash flow statement
financial notes and supplementary schedules: note disclosures include information about the following:
financial instruments and risks arising from financial instruments
commitments and contingencies
legal proceedings
related-party transactions
subsequent events (events that occur after the balance sheet date)
business acquisitions and disposals
operating segments' performance
management commentary of management's discussion and analysis (MD & A)
publicly held companies typically include a section in their annual reports where management discusses a variety of issues of concern, including:
the nature of the business
past results
future outlook
auditor's reports
financial statements presented in companies' annual reports are generally required to be audited (examined) by an independent accounting firm in accordance with specified auditing standards. The independent auditor then provides a written opinion on the financial statements. under ISAs, the objectives of an auditor in conducting an audit of financial statements are:
to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement
to report on the financial statements, and communicate as required by the ISAs, in accordance with the auditor's findings.
classified balance sheet: a balance sheet organized so as to group together the various assets and liabilities into subcategories (e.g., current and non-current)
liquidity based presentation: a liquidity-based presentation rather than a current/non-current presentation, is used when such a presentation provides information that is reliable and more relevant. With a liquidity-based presentation, all assets and liabilities are presented broadly in order of liquidity.
general ledger(总分类账): collection of all business transactions sorted by account in an accounting system
general journal(普通日记账): collection of all business activities sorted by date
Journal entries and adjusting entries -> General ledger and T-accounts -> Trial balance and adjusted trial balance -> Financial statements
International Accounting Standards Board (IASB): the independent standard-setting body of the IFRS (International Financial Reporting Standards) Foundation. Under IAS No.1, a complete set of financial statements includes:
statement of financial position
statement of comprehensive income
statement of changes in equity
statement of cash flows
notes comprising a summary of significant accounting policies
other explanatory information
US Financial Accounting Standards Board (FASB): established US GAAP (generally accepted accounting practices)
To provide financial information in making decisions.
historical cost: in reference to assets, the amount paid to purchase an asset, including any costs of acquisition and/or preparation; with liabilities, the amount of proceeds received in exchange in issuing the liability.
amortised cost: the historical cost (initially recognized cost) of an asset, adjusted for amortization and impairment.
current cost: the amount of cash or cash equivalents that would have to be paid to buy the same or an equivalent asset today.
realizabel value: the amount of cash or cash equivalents that could currently be obtained by selling the asset in an orderly disposal
present value: the present discounted value of future cash flow
the amount at which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm's-length transaction.
the measurement of performance are income and expense the measurement of financial position are assets, liabilities and equity
grouping by nature: with reference to the presentation of expenses in an income statement, the grouping together of expenses by similar nature, e.g., all depreciation
grouping by function: with reference to the presentation of expense in an income statement, the grouping together of expenses serving the same function, e.g., all items that are costs of goods sold.
installment method: with respect to revenue recognition, a method that specifies that the portion of the total profit of the sale that is recognized in each period is determined by the percentage of the total sales price for which the seller has received cash.
cost recovery method: a method of revenue recognition in which the seller does not report any profit until the cash amounts paid by the buyer -- including principal and interest on any financing from the seller -- are greater than all the seller's costs for the merchandise sold.
The following are some of the more common information sources used by analysts
securities offerings registration statement
Forms 10-K, 20-F, and 40-F
Annual Report
Proxy statement/Form DEF-14A
Forms 10-Q and 6-K
A core objective of the IOSCO is to ensure that the markets are fair, efficient, and transparent. The other core objectives are to reduce, not eliminate, systematic risk and to protect investors, not all users of financial statements.
Rules-based, principles-based, and objectives-oriented approaches are recognized approaches to standard-setting.
other summary see page 137
income: income is increases in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity, other than those relating to contributions from equity participants.
IFRS specifies the revenue from the sale of goods is to be recognized when the following conditions are satisfied:
the entity has transferred to the buyer the significant risks and rewards of ownership of the goods;
the entity retains neither continuing managerial involvement to the degree usually associated with ownership nor effective control over the goods sold;
the amount of revenue can be measured reliably;
it is probable that the economic benefits associated with the transaction will flow to the entity;
the costs incurred or to be incurred in respect of the transaction can be measured reliably.
US GAAP specify that revenue should be recognized when it is "realized or realizable and earned" with following lists:
there is evidence of an arrangement between buyer and seller.
the product has been delivered, or the service has been rendered.
the price is determined, or determinable.
the seller is reasonably sure of collecting money.
before transaction
after transaction
the percentage-of-completion method is used
the installment method and cost recovery method are appropriate
down payment: 首付
install method: the portion of the total profit of the sale that is recognized in each period is determined by the percentage of the total sales price for which the seller has received cash.
cost recovery method: the seller does not report any profit until the cash amounts paid by the buyer-including principal and interest on any financing from the seller-are greater than all the seller's costs for merchandise sold.
Method
Description
COGS when prices are rising
Ending Inventory when prices are rising
FIFO
first in, first out
Lowest
Highest
LIFO
last in, first out
Highest
Lowest
Weighted average cost
---
Middle
Middle
LIFO is prohibited under IFRS
straight-line method: (cost - residual)/useful life
double declining method: 2*(cost - accumulated depreciation)/useful life
discounted operations: is one that management has decided to dispose of, but either has not yet done so, or has disposed of in the current year after the operation had generated income or losses.
continuing operations
the weighted average number of shares outstanding is a time weighting of common shares outstanding. weighted average numbers = [T1 out1 +(T2-T1) (out2+out1) + (T3-T2) (out3+out2+out1)+...+(TN-T{N-1})(outN+...+out1)]/(TN)
diluted EPS when a company has convertible preferred stock outstanding
$Diluted EPS = \frac{(Net income)}{(Weighted average number of shares outstanding + New common shares that would have been issued at conversion)}$
diluted EPS when a company has convertible debt outstanding
$Diluted EPS = \frac{(Net income + After tax interest on convertible debt - Preferred dividends)}{(Weighted average number of shares outstanding + Additional common shares that would have been issued at conversion)}$
diluted EPS when a company has option outstanding
$Diluted EPS = \frac{(Net income - Preferred dividends)}{(Weighted average number of shares outstanding + (New shares that would have been issued at option exercise - Shares that could have been purchased with cash received upon exercise) \times (Proportion of year during which the financial instruments were outstanding)}$
expenses may be categorized by either nature of function:
expense by function: COGS;
expense by nature: tax expense/ interest expense
net revenue is revenue for goods sold during the period less any returns and allowances
for long term:
percentage-of-complete method: both for US GAAP & IFRS when outcome can be measured reliably
completed contract method is used under US GAAP when outcome cannot be measured reliably
cost recovery method is used under IFRS when outcome cannot be measure reliably
current assets include cash and other assets that will likely be converted into cash or used up within one year or one operating cycle, whichever is greater.
cash and cash equivalents
marketable securities
accounts receivable
inventories
following techniques can be used for measurement of the cost:
standard cost
retail method: sales value is reduced by the gross margin to calculate cost
other current assets
current liabilities are obligations that will be satisfied within one year or operating cycle.
accounts payable
notes payable and current portion of long-term debt
deferred income or unearned earning
non-current assets will not be converted into cash or used up within one year or operating cycle.
property, plant and equipment (PP&E)
recoverable amount: the higher of an asset's fair value less cost, and its value in use
fair value less cost
value in use: the present value of the future cash flows expected to be derived from the assets
investment property
intangible assets
good will
financial assets
derivatives
held-to-maturity
held for trading
available-for-sale
non-current liabilities
long-term financial liabilities
deferred tax liabilities
current assets minus current liabilities equals working capital
equity: note the value of share in the statement is the book value instead of the market value
contributed capital
preferred shares
treasury shares
retained earning (留存收益)
accumulated other comprehensive income
non-controlling interest (or minority interest): 非控制权益; refers to owners of the remaining shares of the subsidiary that are not owned by the parent.
vertical common-size analysis
cross sectional common-size analysis
ratio
calculation
indicates
current ratio
current asset / current liabilities
ability to meet current liabilities
quick ratio
(cash+marketable securities + receivables) / current liabilities
ability to meet current liabilities more
cash ratios
(cash+marketable securities) / current liabilities
most
ratio
calculation
indicates
long-term debt-to-equity
long-term debt / total equity
financial risk and financial leverage
debt-to-equity
total debt / total equity
ditto
total debt
total debt / total assets
ditto
financial leverage
total assets / total equity
ditto
accrued liabilities: 应计费用
impairment write-downs: reduction in equity
operating activities (CFO)
such as selling inventory and providing services, dealing securities or trading securities
for financial assets classified as trading securities, unrealized gains and losses are reported on the income statement and flow to shareholders' equity as part of retained earnings.
for financial assets classified as available for sale, unrealized gains and losses are not recorded on the income statement and instead are part of other comprehensive income. Accumulated other comprehensive income is a component of Shareholders' equity.
for financial assets classified as held to maturity, are measured at amortised cost. Gains and losses are recognized only when realized.
investing activities (CFI)
include purchasing and selling long-term assets and other investments.
financing activities (CFF)
including obtaining or repaying capital, such as equity and long-term debt.
operating cash flow + investing cash flow + financing cash flow = change in cash balances
changing in cash balance + beginning cash balance = ending cash balance
The steps in calculating CFO under the indirect method can be summarized as follows: 1. begin with net income 2. subtract gains or add losses that resulted from financing or investing cash flows (such as gains from sale of land) 3. add back all noncash charges to income (such as depreciation and amortization) and subtract all noncash components of revenue 4. add or subtract changes to balance sheet operating accounts as follows
increase in the operating asset accounts (uses of cash) are subtracted, while decreases are added
increase in the operating liability accounts (sources of cash) are added, while decreases are subtracted.
addition
non-cash items
depreciation expense of tangible assets
amortization expense of intangible assets
depletion expense of natural resources
amortization of bond discount
non-operating losses
loss on sale or write-down of assets
loss on retirement of debt
loss on investments accounted for under the equity method
increase in deferred income tax liability
changes in working capital resulting from accruing higher amounts for expenses than the amounts of cash payments or lower amounts for revenues than the amounts of cash receipts
decrease in current operating assets (e.g. accounts receivable, inventory, and prepaid expenses)
increase in current operating liabilities (e.g. accounts payable and accrued expense liabilities)
subtraction
non-cash items (e.g. amortization of bond premium)
non-operating items
gain on sale of assets
gain on retirement of debt
income on investments accounted for under the equity method
decrease in deferred income tax liability
changes in working capital resulting from accruing lower amounts for expenses than the amounts of cash payments or higher amounts for revenues than for cash receipts
increase in current operating assets (e.g. accounts receivable, inventory, and prepaid expenses)
decrease in current operating liabilities (e.g. accounts payable and accrued expense liabilities)
FCFF = NI + NCC + Int(1 - Tax rate) - FCInv - WCInv where: NI = Net income NCC = Non-cash charges (such as depreciation) Int = Interest expense FCInv = Capital expenditures (fixed capital) WCInv = Working capital expenditures
FCFF = CFO + Int(1 - Tax rate) - FCInv
Free cash flow to equity is the cash flow that would be available for distribution to common shareholders. FCFE can be calculated as follows:
FCFE = CFO - FCInv + net borrowing
performance ratios
calculation
what it measures
cash flow to revenue
CFO/net revenue
operating cash generated per dollar of revenue
cash return on assets
CFO/avg total assets
operating cash generated per dollar of asset investment
cash return on equity
CFO/avg shareholders' equity
operating cash generated per dollar of owner investment
cash to income
CFO/operating income
cash generating ability of operations
cash flow per share
(CFO - Preferred dividends)/(Number of common shares outstanding)
coverage ratios
calculation
what it measures
Debt coverage
CFO/ total debt
Financial risk and financial leverage
Interest coverage
EBIT/Interest paid
Ability to meet interest obligation
Reinvestment
CFO/Cash paid for long-term assets
Ability to acquire assets with operating cash flow
Debt payment
CFO/Cash paid for long-term debt repayment
Ability to pay debts with operating cash flows
Dividend payment
CFO/Dividends paid
Ability to pay dividends with operating cash flows
Investing and financing
CFO/Cash outflows for investing and financing activities
Ability to acquire assets, pay debts, and make distributions to owners
An effective analysis encompasses both computations and interpretations.
Net profit margin = Net income/Revenue
return on assets (ROA) = operating income/ avg total assets
activity ratios: also know as asset utilization ratios or operating efficiency ratios receivables(rcv) turnover (TO) = annual sales/avg receivables days of sales outstanding (DSO) = 365/rcv TO, which is avg number of days it takes for the customer to pay their bills inventory TO = COGS/avg inv days of inv on hand (DOH)= 365/inv TO payable TO = purchases/avg trade payables days of payables = 365/payable TO total asset TO = revenue/avg total assets fixed asset TO = revenue/avg net fixed assets working capital TO = revenue/avg working capital, how effectively a company is using its working capital
liquidity ratios current ratio = current assets/current liabilities quick ratio = (cash+short-term marketable investment+receivables)/current liabilities cash ratio = (cash+short-term marketable investments)/current liabilities defensive interval ratio = (cash+short-term marketable investments+receivables)/(daily cash expenditures) cash conversion cycle = DOH + DSO - Number of days of payables
solvency ratios: refers to a company's ability to fulfill its long-term debt obligations
debt ratios
debt-to-assets ratio = total debt/total assets
debt-to-capital ratio = total debt/(total debt+total shareholders' equity)
debt-to-equity ratio = total debt/total shareholders' equity
financial leverage ratio = average total assets/avg total equity
coverage ratios
interest coverage = EBIT/Interest payments
fixed charge coverage = (EBIT+lease payments)/(Interest payments+lease payments)
profitability ratios
return on sales
gross profit margin = gross profit/revenue
operating profit margin = operating income/revenue
pretax margin = EBT(earning before tax but after interest)/revenue
net profit margin = net income/revenue
return on investment
operating ROA = operating income/avg total assets
ROA = Net income/avg total assets
return on total capital = EBIT/short-and long-term debt and equity
ROE = Net income/avg total equity
return on common equity = (Net income - preferred dividends)/avg common equity
valuation ratios
P/E = price per share / earnings per share
P/CF = price per share / cash flow per share
P/S = price per share / sales per share
P/BV = price per share / Book value per share
dividend-related quantities
dividend payout ratio is ratio of cash dividends paid to earnings for a period
retention rate = 1 - payout ratio
The coefficient of variation for a variable is its standard deviation divided by its expected value.
CV sales = std of sales/ mean sales
CV operating income = std of operating income/ mean operating income
CV net income = std of net income/ mean net income
ROE = NI/avg shareholders' equity = NI/avg total assets avg total assets/avg shareholders' equity ROE = ROA Leverage
ROE = NI/revenue revenue/avg total assets avg total assets/avg shareholders' equity ROE = Net profit margin total asset TO leverage
ROE = NI/EBT EBT/EBIT EBIT/revenue revenue/avg total assets avg total assets/avg shareholders' equity ROE = Tax burden Interest burden EBIT margin Total asset TO Leverage
Common-size analysis involves expressing financial data, including entire financial statements, in relation to a single financial statement item, or base.
vertical common-size balance sheet, dividing each item by the same period's total assets and expressing the results as percentages, highlights the composition of the balance sheet.
horizontal common-size balance sheet, computing change in percentage terms of each balance sheet item from prior year or by a base year, highlights changes.
cross-sectional analysis: compares a specific metric among a group of companies
trend analysis
credit risk is the risk of loss
sensitivity analysis
scenario analysis
simulation
COGS = beginning inventory + purchases - ending inventory
product cost:
purchase cost less trade discounts and rebates
conversion costs including labor and overhead (经常费用， 管理费用)
other cost necessary to bing inventory to its present location and condition
period cost, some costs are expensed in the period incurred, not capitalized:
abnormal waste of materials, labor, or overhead
storage costs (unless required as part of production)
administrative overhead
selling cost
specific identification
first-in, first out
COGS will be understated compared to current cost
weighted average cost
last-in, first-out (LIFO is not allowed under IFRS)
in an inflationary environment, LIFO ending inventory is less than current cost.
In periodic inventory system, inventory values and COGS are determined at the end of the accounting period. In a perpetual inventory system, inventory values and COGS are updated continuously.
For the FIFO and specific identification method, ending inventory and values and COGS are the same whether a periodic or perpetual system is used. However, periodic and perpetual inventory system can produce different values under LIFO and weighted average cost method.
These four relations hold when prices have been rising over the relevant period: 1. LIFO inventory < FIFO inventory 2. LIFO COGS > FIFO COGS 3. LIFO net income < FIFO net income 4. LIFO tax < FIFO tax
FIFO COGS = LIFO COGS - (ending LIFO reserve - beginning LIFO reserve) FIFO NI = LIFO NI + (ending LIFO reserve - beginning LIFO reserve)*(1-Tax rate) FIFO RE (Retained earning) = LIFO RE + ending LIFO reserve *(1-Tax rate)
Profitability: LIFO -> higher COGS -> lower earnings -> lower profitability
Liquidity: LIFO -> lower inventory -> lower current asset(inv) -> lower liquidity(use current asset) -> unaffected quick ratio
Activity: LIFO -> lower inventory & higher COGS -> higher inventory TO -> lower days of inventory on hand
solvency: LIFO -> lower inventory -> lower total assets -> lower stockholders' equity -> higher debt ratio
net realizable value = expected sales prices - estimated selling costs and completion costs under IFRS, inventory is the lower of cost and net realizable value. If the NRV < cost of inventory, the inventory is "write down" to NRV and the loss is recognized in the income statement. If there is a subsequent recovery in value, the inventory can be "written up" and the gain is recognized in the income statement by reducing COGS by the amount of the recovery.
IFRS allow the inventories of producers and dealers of agricultural and forest products, agricultural produce after harvest, and minerals and mineral products to be carried at net realizable value even if above historical cost. GAAP similar. Under IFRS, reversal of write-down is required if net realizable value increases. The reversal of write-down is not permitted under GAAP.
Long-lived tangible assets, referred to as property, plant, and equipment and sometimes as fixed assets, include land, buildings, furniture and fixtures, machinery and vehicle; example of long-lived intangible assets include patents and trademarks; financial assets include investments in equity or debt securities issued by other companies.
As a general rule, an expenditure that is expected to provide a future economic benefit over multiple accounting periods is capitalized; however, if the future economic benefit is unlikely or highly uncertain, the expenditure is expensed in the period incurred.
carrying book value: net value on the balance sheet
historical cost: also known as gross investment in the asset
depreciation method
straight-line method
depreciation expense = (original cost - salvage value)/depreciable life
accelerated methods
DDB depreciation in year x = 2/depreciable life in years*book value at beginning of year x
units-of-production method
units-of-production depreciation = (original -salvage value)/life in output units * output units in the period
only cost necessary for the machine to be ready to use can be capitalized.
Under IFRS, income earned on temporarily investing the borrowed monies decreases the amount of borrowing costs eligible for capitalization.
value increase brought about by the revaluation should be recorded directly in equity.
Impairment = max(Fair value - costs to sell, value in use) - net carrying amount
according to IFRS, all of the following pieces of information about PP&E must be disclosed in a company's financial statements and footnotes except for acquisition dates
according to IFRS, all of the following pieces of information about intangible assets must be disclosed in a company's financial statements and footnotes except for fair values
when a company uses the fair value model to value investment property, changes in the fair value of the property are reported in the income statement -- not in the other comprehensive income.
a company will change from the fair value model to either the cost model or revaluation model when the company transfers investment property to PP&E.
taxable income
taxes payable
income tax paid
tax loss carryforward: a current or past loss that can be used to reduce taxable income. can result in a deferred tax asset.
tax base: net amount of an asset or liability used for tax reporting purpose.
income tax expense. Expense recognized in the income statement that includes taxes payable and changes in deferred tax assets and liabilities (DTA and DTL):
income tax expense = taxes payable + Delta DTL - Delta DTA
deferred tax liabilities: balance sheet amounts that result from an excess of income tax expense over taxes payable that are expected to result in future cash outflows.
deferred tax assets: balance sheet amounts that result from an excess of taxes payable over income tax expense that are expected to be recovered from future operations. Can also result from tax loss carryforwards.
deferred tax liabilities are expected to reverse as liabilities while as equity when they are not expected to reverse. When both timing and amount of tax payments are uncertain, should treat it as neither liabilities nor equity.
permanent difference are difference between tax and financial reporting of revenue that will not be reversed at some future date. These differences do not give rise to deferred tax.
income or expense items not allowed by tax legislation, and
tax credits for some expenditures that directly reduce taxes
effective tax rate = income tax expense/pretax income
taxable temporary differences result in expected future taxable income deductible temporary differences result in expected future tax deduction tax credits that directly reduce taxes are a permanent difference
valuation allowance is a contra account that reduces the DTA value on the balance sheet. Increasing the valuation allowance will increase income tax expense and reduce earnings. If circumstances change, the DTA can be revalued upward by decreasing the valuation allowance, which would increase earnings.
issued at par
issued at a premium
issued at a discount
market rate=coupon rate
market rate < coupon rate
market rate > coupon rate
interest = coupon rate*face value=cash paid
interest=cash paid-amortization of premium
interest = cash paid + amortization
interest is constant
interest decreases
interest increases
Under US GAAP, expenses incurred such as print fee... when issuing bonds are generally recorded as an asset and amortized to the related expense over the life of bonds. Under IFRS, they are included in the measurement of the liability. The related cash flow are financing activities.
a gain will be recorded on the income statement when carrying amount greater than paid cash of the purchase of a bond
affirmative covenants: borrowers promises to do certain things
negative covenants: borrowers promises to refrain from certain activities that might adversely affect its ability to repay the outstanding debt, such as:
increasing dividends or repurchasing shares
issuing more debt
engaging in mergers and acquisitions
finance lease
operating lease
Item
Finance Lease
Operating Lease
Assets
Higher
Lower
Liabilities
Higher
Lower
NI (early years)
Lower
Higher
NI (later years)
Higher
Lower
Total NI
Same
Same
EBIT (operating income)
Higher
Lower
CFO
Higher
Lower
CFF
Lower
Higher
Total cash flow
Same
Same
Current ratio (CA/CL)
Lower
Higher
Working Capital (CA - CL)
Lower
Higher
Asset TO (Revenue/Asset)
Lower
Higher
Return on asset (NI/Asset), early
Lower
Higher
Return on equity (NI/SE), early
Lower
Higher
Debt/Asset
Higher
Lower
Debt/Equity
Higher
Lower
leasing can have certain benefits:
less costly financing
reduced risk of obsolescence
less restrictive provisions
off-balance-sheet financing
tax reporting advantage
balance sheet: finance lease results in a reported asset and a liability. TO ratio that use total/fixed assets in denominators lower; return on assets lower; leverage ratios higher such as debt-to-assets and debt-to-equity because of reported liability; current ratio and working capital lower
income statement: as to finance, EBIT will be higher; total expense over the life of a lease will be same; in early years of a finance lease, the interest expense is higher, so NI will be lower in early years
cash flow statement: total cash flow is unaffected; as to finance lease, CFF is lower and CFO is higher
The lessee will disclose
the future obligation by maturity of its operating leases.
The future obligations by maturity, leased assets, and lease liabilities will be shown for finance leases.
defined contribution plan: firm's contribution can includes years of service, the employee's age, compensation, profitability, or even a percentage of the employee's contribution. Make no promise regarding the future value of the plan assets. The investment decisions are left to the employee, who takes all of the investment risk.
defined benefit plan: the firm promises to make periodic payments to employees after retirement, which is usually based on
The company will report a net pension obligation equal to the pension obligation less the plan assets
Aggressive
Conservative
tend to increase reported earnings or improve the financial position for the current period
tend to decrease the company's reported earnings and financial position for the current period
capitalizing current period costs
expensing current period costs
longer estimates of the lives of depreciable assets
shorter estimates of the lives of depreciable assets
higher estimates of salvage values
lower estimates of salvage values
straight line depreciation
accelerated depreciation
delayed recognition of impairments
early recognition of impairments
less accrual of reserves for bad debt
more accrual of reserves for bad debt
smaller valuation allowances on deferred tax assets
larger valuation allowances on deferred tax assets
Conservative choices may decrease the amount of revenues, earnings, and/or operating cash flow reported in the current period and increase those amounts in later periods.
reporting quality, pertains to the information disclosed. High-quality reporting represents the economic reality of the company's activities during the reporting period and the company's financial condition at the end of the period.
results quality ,referred to as earnings quality pertains to the earnings and cash generated by the company's actual economic activities and the resulting financial condition, relative to expectations of current and future financial performance.
An audit opinion of a company's financial report is most likely intended to assure that financial information is presented fairly.
If a company uses a non-GAAP financial measure in an SEC filing, it is required to provide the most directly comparable GAAP measure with equivalent prominence in the filing. In addition, the company is required to provide a reconciliation between the non-GAAP measure and the equivalent GAAP measure.
At the top of the quality spectrum of financial reports are reports that conform to GAAP, are decision useful, and have earnings that are sustainable and offer adequate returns. In other words, these reports have both high financial reporting quality and high earnings quality.
When calculating solvency ratios, analysts should estimate the present value of operating lease obligations and add it to the firm's liabilities.
under GAAP, inventory is the lower of cost or market. Market is usually equal to replacement cost, but cannot be greater than net realizable value (NRV) or less than NRV minus a normal profit margin, that is