Financial Analysis & Reporting Flashcards

A company records a large restructuring charge in the fourth quarter of a profitable year. A financial examiner should be alert to the possibility that:

Answer: The charge is being used as a 'big bath' to shift future costs to the current period and boost future earnings

A 'big bath' strategy involves taking an unusually large charge in one period to clean the balance sheet and set the stage for improved future reported results.

When translating a foreign subsidiary's financial statements into the parent's reporting currency under ASC 830, monetary assets and liabilities are translated at:

Answer: The current (closing) exchange rate at the balance sheet date

Under the current rate method, monetary items are remeasured at the closing rate; resulting translation adjustments flow through other comprehensive income.

An examiner reviewing segment disclosures under ASC 280 finds that a company reports all operations as one segment despite having diverse business lines. The primary risk this raises is:

Answer: Insufficient transparency, potentially masking underperforming divisions or hiding fraud

Improper aggregation of segments into one unit can obscure poor performance in individual divisions and limit the examiner's ability to detect fraud or financial distress.

The Altman Z-Score model is primarily used to:

Answer: Predict the probability of corporate bankruptcy using financial ratios

The Altman Z-Score combines five weighted financial ratios into a composite score used to assess the likelihood of corporate financial distress or bankruptcy.

Under GAAP, contingent liabilities must be accrued on the balance sheet when the loss is:

Answer: Probable and the amount can be reasonably estimated

ASC 450 requires accrual when a contingent loss is both probable and the amount can be reasonably estimated; otherwise, disclosure in footnotes may be required.

A decrease in accounts payable relative to cost of goods sold most likely indicates that a company is:

Answer: Paying suppliers more quickly or losing trade credit arrangements

A declining accounts payable-to-COGS ratio suggests the company is paying suppliers faster or has lost extended credit terms, reducing short-term financing from trade credit.

Which disclosure requirement helps users of financial statements assess a company's exposure to credit risk from its accounts receivable?

Answer: An aging schedule of accounts receivable and the allowance for doubtful accounts methodology

An AR aging schedule and disclosure of the allowance methodology reveal concentration of credit risk, collection trends, and the adequacy of bad-debt reserves.