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FHS > Accounting > Flashcards

Accounting Flashcards

1
Q

Relevance vs reliability

A

Holtshausen and Watts (2001):
- value relevance literature offers little insight
- other important aspects: contracting, litigation, stewardship
Barth, Beaver, Landsman (2001):
- primary focus is on equity investment

Both sides have merit

Ball and Brown (1968): evidence that the timeliness of info and the impact it has on stock market values

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2
Q

Analysis if interested in growth

A

Share price (NPV future cash flow)
Balance growth
Income statement growth
Asset base growth

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3
Q

Conceptual framework aspects

A 
Timeliness
relevance
reliability - verifiable
representational fairness
Presentation 
neutrality (no bias) Conservatism (bias downwards)
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4
Q

Example relevance vs reliability

A

Physical assets: historical cost + depreciation - have receipts, economically meaningless

Financial assets: track value most days - reflective of underlying firm?

Intangible assets - no deep and liquid market.

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5
Q

Single setter

A

Different jurisdictions: luxembourg -banking, Japan- automotive.

Market will turn to alternatives if not timely / appropriate e.g. integrated reporting

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6
Q

Loss in relevance of income statement.

A

Hail (2013):

  • alternative ways to disseminate information
  • more pronounced in countries with strong institutional background
  • relevance in terms of ability to summarise firm value
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7
Q

Influence of pre-dominant national culture

A

Hossfeld (2011):

  • even if only IFRS used
  • for PRESENTATION
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8
Q

Legitimacy of accounting profession

A

Kirk (1984): additional services shouldn’t impinge independence

Zeff (2003): reward systems - salesmanship over technical efficiency

FT (2019): commercial cultures

Is it a profession or a service? Increased commercialisation

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9
Q

Hail et al (2010)

A
  • confer monopoly status
  • 2002 Norwalk agreement: funding dependent on lobbyists.
  • convergence involve compromise amongst very diverse set of constituents
  • one size doesn’t fit all
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10
Q

Examples of issues with convergence

A

Karthik (2013):

  • China MoF lobby expedient exceptions
  • India Tata Steel - vol net income 64% - deferred convergence twice
  • Canada fully embrace

Armstrong et al (2010):
- domiciled code-law countries -ve reaction when adopt IFRS in EU - investors harbouring concerns over weaker enforcement

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11
Q

Critic conceptual framework

A

Benston et al (2007):

  • fails to distill into a coherent whole. Many disparate issues.
  • neutrality & conservatism both prioritised
  • not applicable to specific standards
  • neglects stewardship role
  • relies on fair value
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12
Q

Empiric study on switch to principles from rules (leases)

A

Henderson and Brian (2014): looks at UK and AUS

  • omit bright lines doesn’t curb transaction structuring, didn’t inc use of capital leases
  • Nobes (2011): deep-stead and resistant
  • Ball (2006): not overcome incentives of those who prepare and audit -> law bigger influence for change
  • cultural or regulatory setting not the accounting standard that drives the outcome

Cohen et al (2013): experiment 97 auditors
- find constrain reporting under principle-based, under weak & strong regulatory regime

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13
Q

Rules vs principles theory

A

Benston et al (2007): FASB more rules
- Enron, rules under fire - not intent but tech requirement
Schipper (2005): exposure draft to solicit public comment - prov answers, erode extent..
Quinn (2003): if dishonest what’s true & fair to scoundrel?
ICAS (2006): ethics debate
Dunn et al (2003): less moral reasoning
Influence of predominant national culture: difference not from nature of standards but

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14
Q

Earnings management examples

A

Sherman and Young (2016):

  • Kraft bought Cadbury 14% IFRS, 9% GAAP
  • RBS wrote-down greek bonds 51% - CNP and BNP 21%
  • traceable securities vs intangibles

Bank investments: traceable sec (every period) vs AFS

Lufthansa (12 years, 15% salvage) vs KLM (20 years, 0)

Software/phone inc future upgrades - then future cost not known so don’t record rev - carve out price upgrades - stop using more attractive bundling strategy

Nelson et al (2003): expenses most common

Subscriptions paid in advanced: quality of deferred revenue

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15
Q

Earnings mgmt definiton

A

Management using reporting discretion to produce financial statements that place mgmt in a particular light.
- decisions opportunistically favourable

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16
Q

Earnings management author / point

A

Sherman and Young (2016):

  • influence way business done - become more than just a messenger.
  • Serving interest of short-term reporting that undermines long-term performance
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17
Q

Fair value examples

A

Chang et al (2010):

  • Levels: 0.98, 0.97, 0.68
  • concern over reliability

Wells Fargo: 9% inc net income but negative if not Level 3

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18
Q

Fair value opinions

A

Penman (2007):

  • passage of time historical cost becomes irrelevant - investors want value not cost
  • unbiased market measure - not firm specific
  • conceptual level should read equity value with no further analysis needed - vs implementation (if no observable prices then opp to manipulate to meet own objectives)
  • relies on EMH but some not traded

Barth (2010): prove more prone to measurement error
- no better alternative

Magnan et al (2015): forecast error higher -> prone to manipulation -> lack decision usefulness

Based on past costs and present data, not hypothetical expectations of future

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19
Q

Revenue rec standard

A

2014:
- identify contract
- identify p.o
- determine t p
- allocate t p to p o
- rec when satisfy p o

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20
Q

Revenue recognition problems

A

Colson et al (2010):

  • SSP when have multiple p o.
  • early recognition
  • e.g. warranties
  • notion of control

KPMG (2015):

  • e.g. rebates (contractual vs relationship)
  • e.g. credit card fees & other services (receivables or revenue standard)
  • e.g. software and integration services
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21
Q

GAAP vs non-GAAP

A

McLannahan (2017):

  • average difference is 31%
  • 96% report them

FT (2019):

  • 50% 2 decades ago
  • favourable spin or GAAP no good
  • accountants shouldn’t try value but establish verifiable lower bound
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22
Q

R and treatment

A

R&D:

  • GAAP D not capitalised except software
  • IFRS D capitalised: non-bright line requirements.
  • Probable benefit?
  • When to amortise?

ASB in 1970s: 2% R ideas become commercially viable. D - 15%

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23
Q

Intangible asset definition and what to mention

A

An identifiable non-monetary asset without physical substance

  • probable future benefit, control, separable, more info in disclosures
  • seperable or arising from a contractual or legal right
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24
Q

Intangible assets list

A

RandD
Copyright - 20 years
Customer list - control?
Patents - indefinite renewals US office of 10 years each
Goodwill - indefinite life?
Brands - legal contract or external evidence

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25
Q

Brand contradiction

A

Sinclair and Keller (2014):

  • not separable: distinguished from general business cost
  • suggests asset accretion rank in importance with impairment
  • not representational fairness? but conservatism?
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26
Q

Facebook / WhatsApp

A

FB paid $19bn - loss of $138m

- accounts communicating eco information / value?

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27
Q

OCI components

A
  • Revaluation surplus
  • Actuarial gains / losses on benefits
  • FX translations
  • AFS
  • Hedging instruments
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28
Q

OCI authors

A

Probonis and Zulch (2011):

  • presentation irrelevant - empirics: influences decisions
  • no evidence CI has superior predictive income

Nishikawa et al (2016):

  • financial position (CI) vs performance (NI)
  • net income: irreversible outcomes
  • difference is one of timing
  • want predictor of earnings

Chasan et al (2014):

  • OCI distort P/E
  • employee benefits through OCI: dis-incentivise deal large liabilities head-on. BHS.
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29
Q

Capital lease old requirements

A
  • transfer ownership
  • contains bargain purchase
  • PV payments >90% fair value
  • non-cancellable lease term: 75% useful life.
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30
Q

Lease statistics

A

Enron : $1.25tn

IFRS (2016): listed companies using IFRS or GAAP have $3.3trn lease commitments. >85% not on BS

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31
Q

Lease changes impact

A

Singh (2011): if capitalised

Negative: interest coverage and capital ratios
Positive cash flow measures: EBIT / EBITDA
- as interest / amortisation not operating expense

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32
Q

Lease authors

A

Spencer and Webb (2015):
- lenders, rating agencies, analysts under OBS leases

FT (2016):
- analysts already capitalise leases -> minimal impact

Bratton et al (2013):

  • depends if disclosures are reliable if so then not processed differently
  • recognised vs as-if recognised & proxies for costs of debt and equity
  • they overcome info asymmetries
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33
Q

Lease pressures

A

US lawmakers:

- destroy jobs as inc cost of capital as makes BS look riskier

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34
Q

Ratios

A 
Profitability: 
- margins, ROE
- EPS: net income / no. shares
Solvency: 
- leverage
- dividend cover: EPS / D
- interest coverage 
- volatility 
Liquidity
- quick ratio, current, stable cash flow 
Management of resources: 
- working capital cycle: inventory days + sales days - payable days
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35
Q

Ratio criticism

A

Johnson (1994):

- no accounting system said if in control or customer satisfied

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36
Q

Absorption costing table

A
  • Sales
  • COGS (inc fixed)
  • Gross profit
  • S&A
  • Operating income
  • PVV
  • Net profit
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37
Q

Absorption costing issues

A
  • PVV shown in net profit but doesn’t account for how many sitting in storage
  • increasing production by unethical managers
  • incentive to spread cost among more products
  • ‘FASB’ allow for normal excess capacity, expense abnormal
  • Segarra (2012) e.g. Ford, Crysler, GM using to keep up with ST incentives
  • Long term: advertising and inventory holding costs (e.g. replacing tyres) increase. Sell at discount -> impacts brand image.
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38
Q

Variable costing table

A
  • Sales
  • Variable cost
  • CM
  • Fixed
  • S&A
  • Operating income
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39
Q

Variable costing

A

Horngren amd Sorter (1961):

  • fixed related to capacity than specific units vs both necessary
  • expenses as incurred vs becoming assets
  • VC conceptually and pragmatically superior as changes in production levels don’t impact profit calculations
  • usefulness enhanced by exp stating total fixed incurred and released from/ added to inventory
  • more closely aligned with cash flows
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40
Q

Solution to absorption costing

A

Baldenius & Reichelstein (2005):

  • residual income performance metric
  • subtracts an interest charge for the value of all operating assets including inventory
  • measurement reflects value created by sales AND production
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41
Q

Traditional costing criticisms

A
  • arbitrary overhead allocation
  • if use greater proportion then under-costed
  • impact on business decisions
  • Overcosting: use relatively few resources but reported to have high cost
  • product cross subsidisation: have efficient processes subsidising less efficient
42
Q

ABC in services

A

Gordon & Loeb (2001):

  • customer as primary cost objective
  • software identify internet ad that routes customer
  • trace specific software-related costs
43
Q

Issues with ABC

A
  • if target costing (market dictates price)
    Kaplan and Anderson (2004):
  • timely, costly –> abandoned

Norren and Soderstrom (1997):

  • hospitals: 30% variable of overhead
  • if assume proportional then grossly overstate
  • ‘learning organisation’: don’t repeat mistakes

Distorting incentives: do activities differently
Intrusive culture

44
Q

Benefits of ABC

A
  • cost accuracy, better control, decision making
  • inc accuracy, more decision support, continuous improvement
  • software and big data creating huge possibilities

MacAurther et al (2008):
- harder to perpetuate fraud

45
Q

ABC empirics

A

Max (2008): ABC in a bank
- leadership and improved tech supporting new successful ABC initiatives

Provost (2013): DHL case study

  • INSIGHT: every shipment
  • Whether accurate to how act

Stratton et al (2009):

  • 348 manufacturing and services
  • greater decision support
  • concerns are less

Kutcha and Troska (2007): case study. 400/1400 profitable
- small orders

46
Q

Relevant costing things to remember

A
  • say incremental
  • check if fits in relevant capacity
  • ignore fixed costs (special order)/ allocated costs (continue segment)
  • use CM approach
47
Q

CVP assumptions

A
  • costs separated into F and V
  • no significant changes in inventory levels
  • linear revenue
  • constant VC per unit
  • Therefore constant CM
48
Q

What’s missing in CVP

A

Guidry et al (1998):
- wealth of firms (only cover full costs if profit exceeds COC), asset structures, risk levels
Banker et al (2016):
- sticky costs: asymmetric retention of slack resources e.g. dismissed workers and disposal (curvilinear nature of rev and cost schedules)
- including would be radical departure from the point - its simplicity

49
Q

i) Breakeven point
ii) Breakeven no. units
iii) Breakeven no. sales
iiii) CM ratio

Breakeven point with mixed products

A

i) Total CM = Total fixed costs
ii) fixed costs / unit CM
iii) fixed / CM ratio (units*p)
iiii) Total CM / sales revenue

= Total fixed / weighted average CM per unit

50
Q

Operating leverage equation

Definition

What is means

A

factor = CM / net income

how % change in sales will impact profit

(high = high fixed/ variable = high risk of loss if fall but quick inc profits if rise)

51
Q

Margin of Safety
- usefulness

Ratio (%)
- interpret

A

actual no. of sales - breakeven units
- likelihood of making a loss in the near future, a measure of risk

Margin of safety / actual no. sales units

  • sales volume can drop 25% before make a loss
  • if more capital intensive the often find this declines
52
Q

Tax relationship with NPAT

A

NPBT = NPAT / ( 1-t)

53
Q

ZBB points

A

Cichocki (2012)

  • how activities performed vs what performed
  • justify expenses from scratch - bottom-up reconsidered not last year +- 3%
  • start with clean state (ignore past)
  • very volatile industry
  • q long-standing assumption, allocate resources partially on a need and benefit approach
  • expensive

Mahler (2016):

  • focus on SandA rather than core processes e.g supply chain, procurement or cost drivers e.g. complexity
  • most outcomes are burdensome policies that fail to address underlying fundamentals (e.g. travel)
  • need scale make it worth while
  • look at costs at interfaces not in organisational silos
54
Q

Beyond budgeting issues and alternatives

A

Hope and Fraser (2003):

  • time consuming, distorts behaviour, impedes flexibility , disconnected from strategy
  • command and control culture predominant to IT, BSC, process reengineering, moving to devolved networks
  • disempowers front-line, slow responses

Alternatives:

  • world-class benchmarks (market feedback - eco conditions that prevail at the time) (relative performance contract - not fixed)
  • rolling forecasts (don’t manipulate) - 5/8 quarters - few key variables
55
Q

Examples of costly budgeting

A

WorldComm CEO: rigid demands 2% under and nothing else acceptable
- breakdown in ethics - $3.3bn in acc errors
Ford Motor: $1.2bn process

1999 study: only 21% time spent analysing numbers, rest of ‘lower-value-added’ - gathering and processing
- 30% of management’s time

56
Q

Budget and compensation

A

Jensen (2001):

  • traditional system has a kink
  • suggests a linear compensation plan
  • if reward for falsifying numbers then threaten integrity
  • extra $ rev, same bonus this year as next: PfP independent of budget target
  • paid for luck?
57
Q

Critics of Beyond budgeting

A

Libby and Lindsey (2010):

  • perceived as value-added - < 20% report little value
  • not fundamentally flawed, just adjust use
  • fixed performance contract less prevalent: 5% Canada, 9% US
  • revised frequently, allowance for uncontrollable events
  • time not excessive
  • not everyone in unpredictable so budgets not quickly outdated
58
Q

Examples of good budgeting

A

Frow et al (2010): Astronia

  • continuous budgeting
  • allows discretion when unexpected events but imposes strict accountabilities
  • solve tension with meeting targets (accountability) and being flexible (empowerment)
  • contributed effectively to both the flexibility and the financial discipline required for effective strategy implementation.

Simons (1987): Johnson nd Johnson
- decentralised mgmt, culture info sharing, multiple revision, long-term

59
Q

Price variance

A

(AP - SP) * (AQ)

- to get standard price can either do historical data or task analysis (costs should vs what they were last year)

60
Q

Usage variance

A

(AQ - SQ) * (SP)

61
Q

Direct materials if different

A

Price: (AQpurchased) * (AP - SP)

Quantity: (SP) * (AQused - SQ)

62
Q

Fixed overhead usage variance

A

PVV: BOH * (AQ - SQ)

63
Q

Reconcile absorption and marginal

A

= fixed cost per uni * change in inventory

64
Q

Variable overhead variance analysis

A

VO absorption rate = cost / hours

Price: (actual hours * VOAH) - (actual cost)

Usage: (SH - AH) * VOAR

65
Q

Interpret price variance

A
  • rush orders (low quantity)
  • quality - lower = more defects
  • negotiation
  • discounts
66
Q

Interpret usage variance

A
  • worker efficiency
  • machine maintenance
  • PVV: inventory build up?
67
Q

General usefulness of variance analysis

A
  • assists in management by exception: action when diverge significantly but don’t blindly follow
  • less useful in rapid change
  • focus on cost not performance
  • distort behaviour (quality or bulk buying - build inventory)
  • needs to be timely

Cheatham (1996):

  • overemphasis on price and efficiency to the exclusion of quality
  • PVV measure capacity utilisation while ignoring overproduction and unnecessary build up of inventory
68
Q

Full cost accounting

A

Bebbington et al (2001):

  • make costs more visible so decisions more compatible with sustainability agenda
  • top-down vs bottom-up
  • top: evaluate at global-level then divided by total units

Antheaume (2007):

  • ‘non-market’ monetary value: morality?
  • no appropriate market mechanism

Ittner and Larker (2003):
- factory: crime rate, water pollution

International Energy Agency

69
Q

Environmental regulation

A

Burke and Clarke (2016)
- 3% qualify as IIRC. SA.

Megash (2012):

  • IFRS >100 countries
  • legal backing, credibility
  • public good, voluntary
  • 3 mining: fluff, non-disclosure, non-recognition

IFRIC 3: Emissions rights 04-05.
- 15 variations on EU ETS

International Integrated Reporting Council: principle-based framework. Auditors to check?

Global Reporting Initiative: 93% report on sustainability.

Market based vs regulatory intervention.

70
Q

Benefits of integrated reporting

A

Eccles (2012):

  • 90 H v L: policies guiding impact
  • H> L acc and stock
  • B2C: compete on brand
  • why don’t: agency (lower vol), inertia, don’t know how

Burke and Clarke (2016):
- not just ethical story: corporate relations and understanding valuation creation

71
Q

Balance score card

A

Kaplan and Norton (1992):

  • inno, internal, customer, financial
  • lag vs leading
  • how achieved - maximise the collective - tension

Simon:

  • how results achieved
  • managers held accountable
  • translate strategy to measures - at centre rather than control
  • 90% vs 100% satisfaction
72
Q

Empirics on BSC

A

Bain (2015): 38% use and inc

Ittner (2003): large bank

  • subjectivity, reduce the balance, weight on financial for bonuses
  • implementation issues

Campbell et al (2008):

  • Store24
  • reveal problems faster than quarterly review.
  • hypothesised links are valid
73
Q

BSC causal links

A

Ittner and Larker (2003):

  • 60 service and manufacturing
  • 23% built causal models. Had 5.14% higher ROE
74
Q

Problems with BSC

A
  • Window-dressing rather than internal marketing tool
  • Manipulation (Ittner 2003)
  • Links not validated
  • Hard to measure costs
  • bias, difficulty in measuring, alternative interpretations: magnified in sustainability world
75
Q

Things to mention with budgeting

A
  • applications to variance analysis and target culture
  • responsibility accounting
  • dysfunctional incentives: if want to inc resources allocated to their unit or if evaluated on performance relative to budgeted amounts then incentive to bias info going in
76
Q

Comprehensive income definition

A

All operating income plus the changes in the value of assets and liabilities that are not derived in operations

  • OCI: Change in BS that doesn’t flow through net income
  • move away from dirty surplus - all changes in BS sweep through income
77
Q

Sales variances

A

Price = (AP - SP) * AQ

Sales volume contribution variance = (actual volume - budgeted volume) * budgeted CM per unit

78
Q

Making budgets format

A
  • Sales
  • Closing
  • Opening
  • Production
79
Q

Underpinning issues of the conceptual framework / what to always mention

A

Recognition (timeliness, which statement), measurement, disclosure
- relevance and reliability feed into measurement basis

80
Q

Controversial issues

A 
OCI
Leases
Fair value
Goodwill
Banks - Level 3 
Intangibles 
Business combinations
81
Q

Where is pressure coming from for OCI

A 
Large companies (large pension liabilities) 
Banks (lots of volatility)
82
Q

What other information want when analysing statements

A

Competitive landscape, economic landscape, previous volatility to make more nuance analysis
- discontinuity in market forces?

83
Q

Recent changes impact management accounting

A
  • Robotics: more overhead costs

- Technology increase traceability

84
Q

Bright lines trade-off

A

Convenience and transaction structuring

85
Q

Levels of variance analysis

A

Level 0: static vs actual
Level 1: flexible vs actual (reflects difference in activity levels) - add in in-between
Level 2: understand price and usage variance (cost control)

86
Q

Defintion of accounting

A

Accounting is the process of identifying, measuring and communicating economic information, with the purpose of informing decision-making relating to the financial performance and financial position of an organisation.

87
Q

Earnings management trade off

A

More flexibility may increase quality as the representation may be more accurate than if straightjacketed by regulation

greater flexibility allows greater scope for manipulation a la Enron

88
Q

How can capitalise development

A

IFRS:

  • technical feasibility, intention to complete, how generate benefit, availability of resources to complete, measure reliably
  • i.e. costly/difficult to do and release proprietary info
89
Q

Treatment of indefinite / fine lived asset

A

Indefinite: hold at cost subject to annual impairment review
Definite: amortise over useful life

90
Q

Goodwill treatment

A

Occurs when price paid > value intangibles. Represents brands / synergies

Impairment: analyse fair value using DCF analysis then match that with value of goodwill

  • easy to manipulate
  • discretion on whether to impair
  • if amortise then a constant earnings drag - may have been previous mgmt - also penalises those with high intangibles - discourage investment
  • IFRS allow reversal to lower of recoverable amount and net carrying amount w/o impairment. Costly for a non-cash expense
91
Q

Period vs product cost

Variable cost

Indirect

A

Product: become part of COGS
Period: all other costs other than period

Variable: change in direct proportion

Indirect: not specifically and exclusively identified with a given cost objective

92
Q

Benefit of flexible budget

A

Removes uncontrollable volume variances from manager’s performance evaluation
- enables variance analysis

93
Q

Integrated reporting functions

A

Eccles and Serfeim (2014):

  • information function: so investors make capital allocation decisions - financial reporting more focused on this
  • transformative function: engage with stakeholders to get their input on how resources allocated - focus of sustainability reporting
  • reg inhibit info
  • trade off in accomplishing both - hard to address
94
Q

Goodwill example

A

Carillion:

  • Goodwill was worth the equivalent of 35% of total assets
  • 5 years before 2017 (when collapsed), the group impaired not a penny of its goodwill pile, despite growing evidence that some of those assets might have slumped in value.
  • is it in asset? in face of bankruptcy then no value
95
Q

Materiality

A

Information provided should be all information that would have a significant influence on decisions of users

96
Q

Define rules and principles

A

Rules-based can be defined as containing numerous specific requirements and much detailed implementation guidance in an attempt to address as many potential contingencies as possible.

Principle-based is a conceptual framework that consists of a hierarchy of underpinning principles.

97
Q

Accruals

A

measure transactions at the time they take place rather than when cash changes hands

98
Q

Fair value and the financial crisis

A

Barth and Landsman (2010):

  • objectives differ: transparency vs stability
  • no role in financial crisis but transparency of info with CDS was insufficient to properly value and assess risk
99
Q

Controversial issues

A

Leases, goodwill, capitalising development

100
Q

Cash flow budget ordering

A 
Inflow
Outflow
Net
Balance start
Balance end

FHS (8 decks)

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