1/9/19 Deck Flashcards
reporting in RE for changes in entity, estimate, & error (AP change)
Change in est = prospective
Change in entity = restate
Error = PPA (restate)
Notes to FS disclosures (relevant to decision makers & integral part of FS)
- change in SE
- contingency
- off BS contracted obligations
- pension plan
- post BS but before FS issued
- related party
- significant est/risk
- products, customers’ geography
What is included in total revenues and total expenses & losses
Total revenue = R & G
Total expenses & losses =
expenses, losses, and ITE
HFS criteria:
- Mgt commits to a plan to sell component
- available for immediate sale in its present condition
- active program to locate buyer is initiated
- sale of component is probable & sale is expected to be completed in 1 year
- sale of component is actively marketed
When a component is classified as HFS:
- an impairment analysis of the component must be conducted
- is considered discont’d op’s, also discont’d if it has been disposed of
- once class’d as HFS, it is measured at LC-NRV
disposal of component/group is reported as discont’d op’s if:
represents strategic shift or will have major effect on entity’s operations and financial results
- strategic shift examples:
- disposal of a major geographic area
- disposal of major equity method investment
- disposal of major line of business
Comparative vs. Noncomparative FS for change in AP:
- Comparative: diff b/w BB RE and RE if retro’ly applied to all prior affected periods
- Noncomparative: diff b/w BB RE in first period presented and RE if retro’ly applied to all prior periods
change in AP (net tax) GR:
One acceptable method of acct (GAAP to GAAP or IFRS to IFRS)
Because new method presents the fin info more fairly than old method
Exception: change in dep to LIFO (inseparable from change in est)
- change in est = prospective
- change in entity = restate BB RE
- error correction = PPA & restate BB RE
change in AP (net tax) GR:
One acceptable method of acct (GAAP to GAAP or IFRS to IFRS)
Because new method presents the fin info more fairly than old method
Exception: change in dep to LIFO (inseparable from change in est)
- change in est = prospective
- change in entity = restate BB RE
- error correction = PPA & restate BB RE
Selling Expenses:
- freight out
- sales salaries & commissions
- advertising
G&A expenses:
- general OH
- officer’s salaries
- accounting & legal fees
- insurance
non-op expenses: [separate line items]
- auxilliary activities (non-related)
- interest exp
- gains and losses
change in estimate:
- depreciation method
- UL of depreciable asset
- residual value
- BD %
- loss accruals
neither a change in AP or estimate: [prospective]
- change from FV method to equity method (due to increase in ownership)
- adopt new equity method as of date investment qualifies as equity method
- retro adj not req’d (cost of acq’ing add’l int in investee is added to CV of prev’ly held investment)
- if investment was prev’ly accounted for as AFS, recognize the “un” G/L from AOCI
- adopting pension plan for all employees
rules for AJE:
- never involves cash
* all AJE will hit 1 IS account and 1 BS account
key financial ratios are:
- liquidity ratio (WC, QR, CaR)
- activity ratio (AR TO, A TO, Inv TO, days sales AR & Inv TO in days, days in Inv, AP TO, etc)
- coverage ratio (DER, times int earned, Op CF/total debt, equity multiplier)
- profitability ratios (not key); return on sales, ROA, ROE, NPM
- investor ratios (EPS, PER, div payout ratio)
liquidity ratios:
- WC = CA - CL
- WC ratio = CA/CL
- QR (acid) = CA-inv/CL [no PPD/inv]
- CaR (most liquid) = (CA - inv - AR)/CL
Activity ratios:
- AR TO = NS/ avg AR
- AR TO days = 365/AR TO
- days sales in AR = EB AR/(NS/365)
- Inv TO = COGS/avg Inv
- Inv TO days = 365/inv TO
- days in Inv (#days to sell) = EI/(COGS/365)
- AP TO = COGS/avg AP
- days payable o/s = EB AP/(COGS/365)
- Cash conversion cycle = days in AR + days in inv + days in AP (lower the better)
- operating cycle = AR TO days + inv TO days (less is better)
- WC TO = NS/avg WC
- total A TO = NS/avg A
Activity ratios:
- AR TO = NS/ avg AR
- AR TO days = 365/AR TO
- days sales in AR = EB AR/(NS/365)
- Inv TO = COGS/avg Inv
- Inv TO days = 365/inv TO
- days in Inv (#days to sell) = EI/(COGS/365)
- AP TO = COGS/avg AP
- days payable o/s = EB AP/(COGS/365)
- Cash conversion cycle = days in AR + days in inv + days in AP (lower the better)
- operating cycle = AR TO days + inv TO days (less is better)
- WC TO = NS/avg WC
- total A TO = NS/avg A
Profitability ratios:
- return on sales = EBIT/NS
- ROA = NI/avg A
(DuPont same thing; NPM * total A TO) - ROE (ROCE) = NI/ SE
- NPM = NI/NS
Coverage Ratios:
- DER = L/SE
- DAR = L/A
- times int earned (int coverage ratio) = (EBIT + int exp)/int exp
- op CF/L = op CF/L
- Equity multiplier = A/E
Investor ratios:
- EPS = (NI-PD)/WACSO
- PER = price per share/ basic EPS
- div payout ratio = CD/NI
examples of CE’s:
- coin+currency on hand (petty cash)
- checking & savings accounts
- MMF
- deposits held as compensating balances (not restricted)
- negotiating paper (traveler’s checks, bank drafts, cashier’s checks, T-bills, certificate of deposit (OG maturity <90 days)
*NOT legally restricted deposits held as comp balances
2 forms of bank reconciliations:
- simple reconc:
- goal is to calculate “true balance”
- bank add it LOC (deposit - o/s checks)
- svc charges, errors, and NSF deduct from books & bank collections, errors, and interest income add to books
- steps = book bal adj’d to reflect correct bank bal, after adj’d book bal, it will equal true bal, then bank bal per bank statement is reconc’d to true bal
- reconc of CR & CD:
- shows proof of proper recording of cash transactions
perpetual vs periodic inventory:
- perpetual: running total of inventory (updated)
* periodic: no running total & COGS cannot be det’d til end of period when inv counted (includes purchases)
inventory valuation methods: [GAAP vs IFRS]
- GAAP: LCM using LIFO/retail inventory method
* IFRS: LC-NRV using FIFO/WA method
how to calculate LCM:
- ceiling = NRV
- replacement cost = given
- floor = NRV - NPM
Inventory Costing Methods:
- FIFO: EI & COGS are same under perpetual or periodic
- sell old; higher EI, CA, RE
- highest EI & highest NI
- LIFO: (US) tax advantage (better matching); need to use LIFO conformity rule (on FS as well)
- lowest EI & lowest NI
WA - used with periodic inventory:
WA cost per unit = COGAFS/# units available for sale
MA - used with perpetual inventory:
- unit cost changes each time there is a new purchase
* calculate new MA after every purchase (total COGAFS/# units)
DV LIFO:
- computed internally or obtained from external sources
- PI = EI CY/EI BY
- PI*layer = Y1 layer
- Y1 layer + Y1 DV LIFO = EB Y1 DV LIFO
conventional retail method:
*at cost: BI + purch = AFS
- at retail:
- BI + purch + markups = AFS
- AFS - sales - markdowns = EI retail
- cost AFS/retail AFS = cost/retail ratio
- cost/retail ratio * EI retail = EI LCM
sales w/ ROR:
- GR: if goods are sold w/ ROR, they should be included in seller’s inv if amt of goods likely to be returned cannot be est’d
- if amt of goods likely to be returned CAN be est’d, transaction will be recorded as sale w/ allowance for est’d returns
- revenue from sales transaction w/ ROR should be recog’d at time of sale only if crtierias are met:
- SP substantially fixed at date of sale
- buyer assumes all ROL
- buyer has paid some form of consideration
- product sold is substantially complete &
- amt of future returns can be reasonably est’d (rev recognition rule)
exceptions to cost basis:
- precious metals & farm products:
- valued at NRV
*LCM and LC-NRV is used when loss on sale is expected
reversal of write-downs (GAAP vs IFRS):
- GAAP = no
* IFRS = yes (limited to amount of OG write-down)
Inventory write-down JE:
Dr Inv loss due to decline in MV
Cr Inv
Periodic vs. Perpetual JE for purchases:
*Periodic:
Dr Purchases
Cr Cash
*Perpetual:
Dr Inventory
Cr Cash
Specific Identification:
takes precedence over any other inventory costing method (cost of each item is uniquely identified)
- usually for HV items or physically large
Firm PC’s:
- legally enforceable agreements to purchase a specific amount of goods at some time in the future
- must be disclosed in FS or notes
- if price > MV and expected that loss will occur when purch is made, the loss should be recog’d at time of decline in price (conservatism)
