Financial Reporting & Analysis Flashcards

Which of the following adjustments is made when converting net income to operating cash flow under the indirect method?

Answer: Subtract gain on sale of equipment

Gains on asset disposals are subtracted in operating activities because proceeds appear in investing activities, preventing double-counting.

Under IFRS, investment property measured using the fair value model requires:

Answer: No depreciation; gains/losses recognized in profit or loss

Under IAS 40's fair value model, investment property is not depreciated; all fair value changes are recognized directly in profit or loss.

A company has total assets of $2,000,000, total liabilities of $1,200,000, and net income of $160,000. What is the return on equity (ROE)?

Answer: 20%

Equity = $2,000,000 – $1,200,000 = $800,000; ROE = $160,000 / $800,000 = 20%.

Under IFRS 15, the five-step revenue recognition model begins with which step?

Answer: Identify the contract with a customer

The five steps start with identifying the contract, followed by identifying performance obligations, determining the price, allocating it, and then recognizing revenue.

What does the interest coverage ratio measure?

Answer: How easily a company can pay interest from operating earnings

Interest coverage ratio = EBIT ÷ Interest Expense; a higher ratio indicates greater ability to service debt from operations.

Under IAS 8, a change in accounting policy is applied:

Answer: Retrospectively, restating prior period comparatives

IAS 8 requires retrospective application of a voluntary accounting policy change, with restatement of prior period comparatives unless impracticable.

When a company issues bonds at a discount, the carrying value of the bond liability over time will:

Answer: Increase toward face value as the discount is amortized

Discount amortization using the effective interest method increases the carrying value each period until it equals face value at maturity.