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Study Session 6: Financial Reporting and Analysis: Quality of Financial Reports and Financial Statement Analysis


In CAFI exam A afternoon session;

Q. Which of the following from Andrei’s Beneish M-score determination is the best indicator that Galaxy could be manipulating earnings?

  1. The total M-score
  2. The days sales in receivable index
  3. The leverage index

Why would the answer be 2, DSR is a factor that indicates what is being manipulated and it is an indication contributing to the total M-Score. But in the end the main indicator should not be the M-Score?

CFAI Reading 20 Question 3

Hey guys, really confused here. The question is about capitalizing leases and you have to calculate the new leverage ratio (D/E). The question gives you average assets= 2075 and average equity= 1156. The capitalized leases are worth 1,297. What is the new financial ratio? So what I did was add the capitalized leases to the average assets to get 3,372, I then subtracted the average equity to get liabilities of 2,216. I then computed D/E as 2,216/1,156 and arrived at 1.92.

LIFO and Cash Flows

When using LIFO when inventory prices are falling, why would thos result in lower cash flows?

Leasing Variable interest entity

What does a variable interest entity leasing equipment do? Is it a regular leasing company, or is it a company that has interrelated activities with lets say company X where they are considered sister companies and the leasing company serves only company X?

Effect on current ratios above one

why is it when current ratio is above one, and we add notes payable and notes receivable by the same amount, the current ratio decreases?

Capital Lease

When changing from reporting operating to capital lease, in the liability side, why do we add the interest expense and subtract the rent?

is not this equation adjusted in the I/S? Should not the liability side include the principal amount without the interest?

Capitalization Vs Expense: Effect on Ratios

I’,m currently doing the CFA Topic Test for FRA and came across a strange situation:  In the problem, CCCL was expensing something but they have changed their policy to capitalize it.

Q. The new accounting policy adopted in 2016 for the customer acquisition cost related to long-term wireless contracts (Exhibit 3, Note 1 d) most likely increases CCCL’s: