Learning Module 2 Analyzing Income Statements

Under the converged revenue recognition standard, which of the following is the correct five-step sequence an entity should use to recognize revenue from contracts with customers?

Which indicator is NOT typically used to assess whether control of a good or service has transferred to a customer under the converged revenue recognition model?

MegaMarketplace sells third-party goods on its platform. For items where MegaMarketplace acts as an agent (arranges sale for a third-party seller), how should MegaMarketplace present revenue related to those transactions?

CReaM Software sells perpetual software licenses and cloud subscriptions. Under IFRS, when should revenue from a perpetual 'right-to-use' software license typically be recognized?

AVI, a defense contractor, uses the percentage-of-completion method for a multi-year contract whose performance 'creates an asset controlled by the customer as it is created.' If total contract revenue is EUR10 million and total estimated cost is EUR7 million, and costs incurred in Year 1 equal EUR4.2 million (60% of estimated costs), what amount of revenue and gross profit should AVI recognize in Year 1 under IFRS input (cost-incurred) measurement?

Which of the following statements about the treatment of incremental costs of obtaining a contract under the converged revenue standard is true?

Under IFRS, internally generated intangible assets are accounted for by separating research and development phases. Which of the following is the correct treatment?

If a firm capitalizes a EUR900 equipment purchase with a 3-year useful life instead of expensing it immediately, what immediate effect will this have on Year 1 operating cash flow and Year 1 net income (assume tax rate = 30 percent and straight-line depreciation)?

Which of the following is the correct formula for Free Cash Flow to the Firm (FCFF) using operating cash flows?

Acme Corporation reports operating cash flow (CFO) of USD2,606, interest paid of USD258, an effective tax rate of 34 percent, and capital expenditures (net) of USD538 in the year. What is Acme's FCFF for the year (USD, rounded)?

Which cash flow measure represents cash flow available to common shareholders after capital expenditures and net debt repayments?

WhiteCo has CFO (cash flow from operations) of EUR10 million, capital expenditures of EUR6 million, and repaid EUR2 million of debt during the year (no new borrowing). What is WhiteCo's FCFE for the year?

An analyst observes a company with consistently positive net income but negative operating cash flow over several years. Which of the following interpretations is MOST consistent with this observation?

Which of the following adjustments would an analyst typically make when converting an indirect-method operating cash flow to a direct-method presentation using balance sheet and income statement information?

Which of the following statements about capitalized interest is CORRECT from an analyst's perspective?

Under IFRS, how are subsequent increases in the net realizable value of inventory previously written down treated?

Which inventory cost flow assumption will typically produce the highest ending inventory value during a period of rising purchase prices (inflation)?

A retailer using FIFO has gross profit margin of 40 percent in Year 1. A competitor using LIFO in the same industry reports a gross margin of 34 percent in Year 1 during an inflationary period. Holding all else equal, which statement is most accurate?

Which inventory valuation method is prohibited under IFRS (i.e., IFRS does not permit it)?

During a deflationary period (falling costs), which inventory cost method generally results in the LOWEST reported net income, all else equal?

Which of the following is an example of an item typically expensed as incurred rather than capitalized under normal accounting rules?

Which of the following disclosures should an analyst expect to find in the footnotes regarding inventories under IFRS?

A company reports a significant increase in its finished goods inventory while sales remain flat and management discloses no expected near-term sales growth. Which analyst concern is MOST relevant?

Which of the following ratios directly measures how many days on average a company's inventory is held before sale?

Company A uses FIFO and reports inventory of EUR50 million. Company B in the same industry uses LIFO and reports inventory of EUR30 million in the same period of rising costs. Which analytical adjustment is most appropriate when comparing their balance sheets?

Which of the following inventory-related items is most likely to appear in the MD&A (management discussion and analysis) as a key performance indicator (KPI) that helps analysts forecast future sales and working capital needs?

A company reports a significant inventory write-down in the current year. Which of the following ratio effects would the analyst MOST likely observe immediately after the write-down (holding all else equal)?

When analyzing disclosures about inventories, which of the following elements is LEAST directly helpful in assessing obsolescence risk?

Which accounting treatment for inventory under US GAAP differs from IFRS and may result in a permanent reduction in book value of inventory that cannot be reversed later?

A company's inventory turnover (COGS / average inventory) increases substantially in Year 2 relative to Year 1. Which scenario is the MOST likely cause if sales and COGS are unchanged?

When a firm capitalizes development costs for internal software under IFRS, how does that decision typically impact reported operating cash flow and reported operating profit in the initial period compared with expensing the costs?

Which of the following best describes an analyst's appropriate treatment of goodwill when comparing return on assets across firms?

In calculating diluted EPS using the treasury stock method for options, which of the following steps is required?

Which of the following inventory-related ratios is the BEST indicator of whether a firm may be at risk of inventory obsolescence?

Which of the following correctly explains why a firm might report higher operating cash flow (CFO) if it capitalizes expenditures rather than expensing them immediately?

Which of the following is TRUE about treatment of inventory for certain agricultural producers under IFRS?

Which of the following best describes how an analyst should treat an inventory write-down when comparing operating trends across multi-year periods?

Which of these is the most direct effect of changing a depreciation method from straight-line to an accelerated method on the income statement and cash flows (assuming no tax timing differences)?

An analyst observes a company with inventory classified into raw materials, work-in-process, and finished goods. Over the past year, raw materials fell 10%, WIP rose 50%, and finished goods rose 5%. Sales have been steady. Which interpretation is MOST consistent with these patterns?

Under US GAAP after the 2016 update, inventories measured using methods other than LIFO and the retail inventory method are measured at:

A firm reports a disclosure: 'If any single customer represents 10 percent or more of total revenue, the company will disclose that fact.' Why is this disclosure relevant to an analyst assessing inventory risk?

When a company’s inventory is measured at net realizable value (NRV) because selling prices fell, how is the write-down recorded in the financial statements under IFRS?

Which of the following best explains why the choice of inventory costing method affects financial ratios like ROE and profit trends?

If an analyst wants to compare operating profitability across companies with differing inventory policies, what is the BEST first step?

Which of the following journal entries reflects an inventory write-down to net realizable value under IFRS (assume a direct write-down approach)?

A company using LIFO during a period of materially rising prices reports a lower current ratio compared to an otherwise identical FIFO peer. Which explanation is MOST LIKELY?

Which disclosure would most help an analyst adjust a LIFO company's financials to approximate FIFO amounts?

Which of these is NOT a required disclosure about inventories under IAS 2 that analysts commonly use?

Which of the following is the most appropriate immediate analytical reaction to a large, unexplained increase in a retailer's inventory turnover ratio (COGS / average inventory)?

Which of the following best summarizes why inventory accounting and disclosures are particularly important for equity valuation models of merchandising companies?