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Accounting and Financial Analysis
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Accounting and Financial Analysis
Accounting and Financial Analysis
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1
Question
What is the equity method for accounting investments and how is it applied?
Answer
Under the equity method, an investor records their share of the investee's net income, which increases the investment account, and reduces the investment when dividends are received. For example, if 25% of a start-up is owned, the investor's share of net income and adjustments to inventory cost are recorded accordingly.
2
Question
How is Cost of Goods Sold (COGS) generally calculated?
Answer
COGS is calculated as Beginning Inventory plus Purchases minus Ending Inventory.
3
Question
What is the difference between the accounting treatment of Available-for-Sale (AFS) securities and Held-to-Maturity (HTM) securities on the balance sheet?
Answer
AFS securities are accounted for at fair value, with unrealized gains and losses recognized in Other Comprehensive Income (OCI). HTM securities are recorded at amortized cost with no recognition of fair value changes until realized or sold.
4
Question
How are interest payments handled under accrual accounting?
Answer
Interest expense is recognized when incurred, not when paid. Accrued interest becomes a liability until it is paid.
5
Question
What accounting mistake did Silicon Valley Bank (SVB) make with their debt investments that contributed to its collapse?
Answer
SVB classified long-term securities as Held-to-Maturity, delaying loss recognition. When they had to sell during a liquidity crunch, realized losses triggered panic and collapse.
6
Question
What is the journal entry to record depreciation?
Answer
Debit Depreciation Expense and credit Accumulated Depreciation.
7
Question
How is bond discount or premium managed in accounting?
Answer
The bond discount or premium is amortized over time and recorded as a contra-account adjusting the bond payable value accordingly.
8
Question
How is significant influence over an investee accounted for?
Answer
Using the equity method, the investor recognizes their share of the investee's net income and reduces the investment account when dividends are received.
9
Question
What is an impairment loss for bad inventory and when is it recognized?
Answer
If the net realizable value (expected selling price minus costs to sell) is less than the cost of inventory, the inventory is impaired by the difference as a loss.
10
Question
Between FIFO and LIFO, which inventory costing method results in higher net income in times of inflation and why?
Answer
FIFO results in higher net income in inflationary periods because the older, cheaper costs are assigned to COGS, leaving newer, more expensive inventory on the balance sheet.
11
Question
What is the journal entry to record an unrealized gain on an Available-for-Sale (AFS) security?
Answer
Debit the AFS Security account and credit Unrealized Gain on AFS (Other Comprehensive Income).
12
Question
How are trading securities recorded in terms of fair value changes?
Answer
Trading securities are recorded at fair value, with unrealized gains and losses recognized in net income.
13
Question
Describe the difference in accounting treatment between accrued interest expense and when interest is paid.
Answer
Accrued interest expense is recognized as a liability when incurred (before payment). Interest paid reduces the liability and cash balance.
14
Question
What are the three categories of equity investment based on ownership level?
Answer
Passive investor (<20% ownership), Significant influence (20-50%), and Control (>50%).
15
Question
How is Return on Equity (ROE) decomposed in the DuPont analysis?
Answer
ROE = Profit Margin × Asset Turnover × Financial Leverage.
16
Question
What are the three main types of ratio analysis used in financial analysis?
Answer
Liquidity ratios (short-term solvency), Solvency ratios (long-term solvency), and Profitability ratios (efficiency and returns).
17
Question
What are the three phases in the life cycle of a long-lived asset?
Answer
Acquisition, Use (including depreciation or impairment), and Disposal.
18
Question
How are internally developed intangible assets treated under GAAP?
Answer
Costs are expensed immediately, except for some software development costs which can be capitalized.
19
Question
Can inventory write-downs be reversed under US GAAP and IFRS?
Answer
Under US GAAP, inventory write-downs cannot be reversed. Under IFRS, reversals are allowed up to the amount of prior impairments.
20
Question
What are long-lived assets?
Answer
Assets used over multiple periods such as property, plant, and equipment (PPE), intangibles, and natural resources.
21
Question
What are the three types of expense recognition for long-lived assets?
Answer
Depreciation (PPE), Amortization (intangibles with definite life), and Depletion (natural resources).
22
Question
What costs are included in inventory valuation?
Answer
All costs to acquire inventory and prepare it for sale, including purchase price, transportation, handling, and inspection costs. Selling and administrative costs are excluded.
23
Question
What happens when an asset is sold?
Answer
The asset and its accumulated depreciation are removed from the books, and cash or other consideration received is recorded. Any gain or loss on sale is recognized.
24
Question
What is Other Comprehensive Income (OCI)?
Answer
OCI includes items excluded from the income statement but flow into the equity account Accumulated Other Comprehensive Income (AOCI). These include unrealized gains and losses on certain investments.
25
Question
What is Accrual Earnings Management (AEM)?
Answer
Manipulating accounting estimates or timing (such as underestimating bad debts) to alter reported earnings without affecting cash flows.
26
Question
What is Real Earnings Management (REM)?
Answer
Altering actual business activities (like delaying R&D or discounting sales) to meet earnings targets.
27
Question
What is a coupon rate on a bond?
Answer
The annual interest rate stated on the bond used to calculate periodic interest payments.
28
Question
What is accumulated depreciation?
Answer
A contra-asset account that tracks total depreciation charged against an asset to date.
29
Question
What is an Accounts Receivable (A/R)?
Answer
An asset representing a promise to pay cash for revenue that has already been recognized, typically from credit sales.
30
Question
What is goodwill in accounting?
Answer
The excess of purchase price over the fair value of identifiable net assets in an acquisition, recorded as an intangible asset.