FINANCIAL ANALYSIS IV Flashcards
GAAP financing cash flows
Dividends paid
GAAP operating cash flows
Taxes, interest paid, interest received and dividends received
IFRS operating/financing cash flows
Dividends paid and interest paid
IFRS operating/investing cash flows
Dividends received and interest received
IFRS operating cash flows
Taxes
Sustainable growth rate
(1-dividend payout ratio) * ROE
B.S. Inventory costs
purchase cost, conversion costs and other costs necessary to bring inventory to present location and condition
B.S. Period costs (inventory)
Abnormal waste, most storage costs, administrative and selling costs are expensed as incurred
IFRS inventory values
- Lower of cost or net realizable value
2. Write-ups allowed = to previous write-down
GAAP inventory value
- Lower of cost or market value
2. No subsequent write-up is allowed
Interest during construction (expense/capitalize)
Generally capitalized, and depreciated over useful life
Cost of internally developed intangible asset
Expensed
IFRS research/development costs
- Research = expensed
2. Development = capitalized
GAAP research/development costs
Both are expensed
Revaluation IFRS
- Permissible
- If gain originally, bypass net income and go to equity.
- If loss, hit net income. Revaluation gain will hit net income, any surplus goes to equity.
Revaluation GAAP
Not permissible
IFRS impairment
- When carrying value > recoverable amount
- Recoverable amount: greater of fair value - selling costs, or discounted cash flows
- Loss recoveries permitted, but not above historical cost
GAAP impairment
- Carrying value > undercounted future cash flows
- Written down to fair value
- Loss recoveries not allowed
Asset impairments
Result in losses on the income statement
Long-lived asset abandoned
Removed from balance sheet, loss recognized in that amount
Long-lived asset exchanged
Gain/loss based on carrying value vs. fair value (new or old asset, whichever you can tell)
Premium bond
Coupon rate > market yield. Amortized down to maturity where = face value.
Bonds redeemed before maturity
Difference between carrying and book value results in gain/loss.
- GAAP: Unamortized cost included in gain/loss.
- IFRS: Already included in book value.
Operating vs. finance lease
- Finance lease keeps the asset and debt on the books
2. Operating lease does not
IFRS: finance lease
If substantially all rights and risks are transferred to the lease, finance
GAAP: finance lease
Any of the following criteria met:
- Title is transferred at end of period
- Bargain purchase option exists
- Lease period is 75% or more of useful life
- Present value of payments is 90% or more of fair value
Finance lease: cash flow treatment (lessee)
Expense = depreciation and interest
Operating outflow = interest payment
Financing outflow = principal payment
Operating lease: cash flow treatment (lessee)
Rental payment reported as expense, and operating cash outflow
Finance lease: lessor
Lease payments are CFO (interest) and CFF (principal)
Sales-type: profit at inception and interest over the life
Direct financing: interest income only
GAAP: Defined benefit (over and underfunded)
Reported on balance sheet
Overfunded = asset
Underfunded = liability
IFRS: Defined benefit
Firms remove unrecognized actuarial gains and losses from fund status. Does not represent reality
Capitalize - cash flow treatment
Cash outflow for capitalized item is reported in cash flow from investing (CFI)
Expense - cash flow treatment
Cash outflow from expense is reported in operating cash flows (CFO)
IFRS component depreciation
IFRS requires companies to have separate depreciation schedules for building/machinery.
GAAP component depreciation
Recommends, but does not require separate depreciation schedules.
Statutory vs. effective tax rate
Caused by permanent difference, like reinvesting earnings of a foreign subsidiary
LIFO reserve
Companies using GAAP LIFO must report
FIFO inventory - LIFO inventory
COGS (FIFO) = COGS(LIFO) - change in LIFO reserve
Characteristics of effective financial reporting system
1) transparency
2) consistency
3) comprehensiveness
Barriers to creating an effective financial reporting system
1) valuation
2) standard-setting approach
3) measurement
IFRS technological developments
Expensed until feasibility is determined, then capitalized
Inventory - use of different methods
Permitted, but must use the same method for similar assets.
Change in salvage value or useful life
Changes in depreciation in subsequent periods, but does not retroactively change accumulated depreciation.
Enterprise value
Market value of common stock + market value of debt - cash and short term securities
