7. Inventory & 8. PP&E (Depreciation)

Question 1

Dividend payout ratio

Answer 1

Common dividends / Net income

Question 2

Defensive-interval ratio

Answer 2

Ratio of quick assets to daily op expenditures. Ratio is showing the length of time in days tt the firm can operate with it’s present liquid resources - so it’s a liquidity measure

Question 3

Straight line depreciation

Use the cash equivalent. Not the downpayment + N/P amount

Answer 3

(Basis = cost - salvage value) / useful life

Question 4

Basis vs BV

Answer 4

Basis: cost - salvage value

BV: cost - AD

!Note: Basis do not divide by useful life!

Question 5

DDB depreciation

Answer 5

(SL x 2) x BV (Cost - AD) Ignore salvage value

At the end switch to sum-of-digits year or S/L to salvage value.

Never to actual cost

Question 6

SYD sum of digits yrs

Answer 6

Basis x # yrs left in Asset life

N(n+1) / 2

Question 7

UOP units of production

Answer 7

Basis x (hrs this yr)/total est hrs

Question 8

Depletion depreciation

Answer 8

Depletion base = cost + addtl cost + rest cost - salvage value

Depletion base x (Units extracted/Total est. extraction)

Depletion per ton = above/total units extracted tt year

Question 9

Impairment calculation GAAP & IFRS

Answer 9

2 step (IFRS: step 1 CV>FV written down to NRV)

1. CV > sum expected future CF
2. CV > FV

Question 10

Exchange w comercial substance JE

Answer 10

Dr New Asset

(1. FMV given up + cash given - cash rcvd;
2. FMV A rcvd;
3. BV given up +cash paid - cash rcvd)

Dr loss (plug)

Cr Old asset (cost)

Cr cash

Cr Gain (plug)

Question 11

Exchange w/o commercial substance JE,

(a) with cash received

Answer 11

Dr New Asset (Lower of 1,2,3 + GAIN/Cash Receipt

Dr. Cash

Cr old asset/ Asset given up

Cr Gain is dfrd unless boot was RCVD, NOT paid out

(Boot/(FMV A rcvd + boot)) x (BVCV1 - (Boot+FMV of A rcvd)

Question 12

Exchange w/o commercial substance JE

(2) with cash paid out

Answer 12

Dr New Asset (Lower of 1,2,3)

Dr loss (plug)

Cr old asset or asset given up

Cr cash

Question 13

Credit risk disclos. requirmt: A. Notes to f/s B. Suppmt info to f/s

Answer 13

A. Notes to f/s

Question 14

LCNRV vs LCM

Answer 14

Ceiling: NRV: Selling price - disposal costs (freight out, sales comm.) Replacement Cost: Purchase or reproduction

Floor: NRV - Normal profit margin (no profit at all)

Question 15

Dollar Value LIFO

Answer 15

Inventory at year end cost/ inventory at base yr cost = price index x units

Question 16

Inventory Missing/ Lost

Answer 16

Beg Inv

+ Purchases

= CGAvail for sale

-CGSold – Sales x (1-Profit %)

= ei

-ei count

= Missing/lost inventory

Question 17

PPandE and Investments Held for Sale

Answer 17

1. Not depreciate
2. Can be written up and down
3. Amt is lower of CV and NRV=est. selling price - Cost disposal

Question 18

Amortization of Intangibles (Software)

Answer 18

100k cap cost with SL of 5 years = $20k/yr.

At end of yr-3: CV $60K vs. Est. future revenue $23k minus disposal cost $8k=$15 NRV.

Softw wb written further down to $15k, req. addtl $45k exp=$60-$15k

Question 19

Amortization of intangible.

Use the Larger Rate of (1) SL method, or (2) vol. of output approach or % of sales… x CV

This is further decreased/compared to (3) NRV

If determined - INDEFINITE USEFUL LIFE — No AMORTZ but ck for impairment

same pple as Trademark - if renew it indefinitely – No Amortz

Answer 19

Larger of 1 or 2:

1. S/L x CV
2. Current sales/ Est future sales x CV

Then, use 3 if lower:

3. NRV.