Financial Reporting and Analysis: Inventories, Long-Lived Assets, Income Taxes, and Non-Current Liabilities Flashcards
1
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Inventories: Inventory Equation
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2
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Inventories: Inventory Costs
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Product costs are capitalized as invntory
- Purchase cost less discount and rebated
- Conversion costs including labor and overhead
- Other costs necessary to bring the inventory to its present location
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Period costs are expenses when incurred
- Abnormal waste
- Storage costs (unless a required production cost)
- Selling and administrative cost
3
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Inventories: Capitalization of Inventory Cost - Example
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4
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Inventories: Inventory Cost Flow Methods
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5
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Inventories: Inventory Cost Flow - Example
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6
Q
Inventories: Inventory Systems
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Periodic System
- Inventory and COGS are determined at the end of the period
- Beg Inv + Purchases - End Inv = COGS
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Perpetual System
- Inventory and COGS are continuously updates as each sale occurs
- No puchases account needed
7
Q
Inventories: LIFO vs FIFO Inflationary Environment
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8
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Inventories: Inventory Valuation (IFRS)
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9
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Inventories: Inventory Valuation (U.S. GAAP)
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10
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Inventories: Inventory Valuations
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- Under IFRS an U.S. GAAP, reporting inventory above cost is permitted in some industries, primarily producers and dealers of commodity-like products
- Reported on the balance sheet as net reaizable value
- If active market exists, quoted market price is usedl otherwise, recent market transactions are used
- Unrealized gains/losses recognized in the income statement
11
Q
Inventories: Inventory Disclosures
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- Cost flow method used (LIFO, FIFO, etc.)
- Carrying value of inventory in totat and by classification (raw materials, work-in-process, and finished goods), if appropriate
- Carrying value of inventory reported at fair value less selling costs
- COGS for the period
- Inventory write-downs for the period
- Reversal of write-downs for the period (IFRS only)
- Carrying value of pledged inventory
12
Q
Inventories: Profitability Ratios and Inventory Method
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13
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Inventories: Liquidity Ratios and Inventory Method
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14
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Inventories: Activity Ratios and Inventory Method
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15
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Inventories: Leverage Ratios and Inventory Method
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16
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Inventories: Inventory Management Ratios
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17
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Inventories: Inventory Management
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18
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Inventories: Inventory Methods - Problem
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19
Q
Long-Lived Assets: Capitalizing vs Expensing: Overview
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- Costs can either be capitalized as an asset on the balance sheet or immediately expensed on the balance sheet or immediately expenses in the income statement
- Capitalizing involves depreseiating or amortizing the asset’s cost over its useful life
- Expensing results in an immediate reduction of net income
- General rule
- Capitalize if there is a future economic benefit
- Immediately expense if the future benefit is unikely or highly uncertain
- Capitalized cost includes expenitures necessary to prepare the asset for use (e.g. freight, installation, taxes)
- Subsequent related expenditures that provide more benefits are capitalized (e.g., replacing the roof on a building)
- Costs that merely sustain the asset’s usefulness are immediately expensed (e.g., repair and maintenance)
20
Q
Long-Lived Assets: Capitalizing vs. Expensing: Financial Statement Effects
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21
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Long-Lived Assets: Capitalizing Interest Costs
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- Interest incurred during the construction is capitalized (“held-for-use” assets and discrete projects)
- Objective is to accurately measure the asset’s cost and better match cost with revenues
- The interest rate is based (in order) on:
- Project-specific debt
- Unrelated debt
- Interest expense on debt in excess of construction cost is immediately expense
- Capitalized interest is reduced by income earned from temporarily investing the debt proceeds (IFRS only)
- Once construction is complete, capitalized interest is depreciated in the income statement
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Capitalizing interest costs results in higher interest coverage ration (lower denominator)
- Many analysts add capitalized interest to interest expense before interest coverage
- The result is a reduction in interest converage (higher denominator)
22
Q
Long-Lived Assets: Capitalization of Interest - Example
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23
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Long-Lived Assets: Capitalizing Expenses - Problem
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24
Q
Long-Lived Assets: Intangible Assets: Externally developed
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- Intangible assets lack physical substance
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Indentifiable intangibles
- Can be separated from, and controlled by, the firm
- Expected to provide future benefits that are probable and whose cost can be reliably measured
- Unidentifiable intangibles cannot be separated from the firm (e.g. goodwill)
- Finite-lived intangibles are amortized over their useful lives
- Indefinite-lived intangibles are not amortized but tested for impairment
25
Long-Lived Assets: Intangible Assets: Internally developed
**Internally developed intangibles expenses as incurred**
**Exception: R&D, software development costs**
* _Research costs_ involve the discovery of new knowledge and understanding
* _Development costs_ involve the translation of research findings into a plan
**IFRS:** Research costs are expensed as incurred but development costs are capitalized
**U.S. GAAP:** Reseach _and_ development are expensed as incurred
26
Long-Lived Assets: Intangible Assets: Software Development
**_Software Development Costs_**
* Software developed for sale
* **IFRS** & **GAAP**: Expensed as incurred until technoloical feasibility is reached
* _Issue_: Determining feasibility required judgment
* Software developed for internal use
* **IFRS:** Same as software developmed for sale
* **U.S. GAAP**: Capitalize all software deveopment
27
Long-Lived Assets: Intangible Assets: Purchased Intangibles
**_Purchased intangibles_**
* Recorded at cost
* When purchased as part of a group, price paid is allocated based on fair value of each asset
_Issue:_ Analyst usually interest in type of asset than value assigned (e.g., franchise rights may provide insight into future performance)
**_Intangibles obtained in a business acquisition_**
* Identifiable net assets recorded at fair value
* Difference in purchase price and fair value of identifiable net assets reported as **goodwill**
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Long-Lived Assets: Depreciation of Long-Lived Assets
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Long-Lived Assets: Depreciation Methods
**_Straight-Line_**
* Equal amount of expense each period
* Often used for financial reporting purposes
**_Accerlerated (Double-declining balance)_**
* Higher expense in the early years and low expense in the later years
**_Units-of-production_**
* Expense is based on usage rather than time
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Long-Lived Assets: Depreciation Methods - Formulas
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Long-Lived Assets: Depreciation - Example
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Long-Lived Assets: Impact of Depreciation Method on Financial Statements
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Long-Lived Assets: Estimates in Depreciation Calculations
Changes in _salvage value_ and _useful life_ both represent changes in accounting estimates, not changes in accounting principle
* Firm does not restate past incomel change disclosed in notes
* Given longer useful life or higher salvage alue, depreciation is ledd, leading to increased EBIT, net income, and ROS
* Shorter life or lower salvage value has opposite effect
34
Long-Lived Assets: Component Depreciation
Component depreciation involved depreciating an asset based on the separate useful lives of the asset's individual components
* Required under IFRS
* Permitted under U.S. GAAP but seldom used
Example: An office building consists of a roof, walls, elevator, HVAC, carpeting, furniture, fixtures, etc
_Issue:_ The firm must estimate the useful live of each component and depreciate each separately
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Long-Lived Assets: Depreciation Methods - Problem
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Long-Lived Assets: Amortizing Intangibles
* Process is identical to dpereciation except estimating useful lives is more complicated because of legal, regulatory, and economic factors
* _Intangibles with finite lives_
* Amortize over useful life
* Pattern should match consumption of benefits (use straight-line, accelerated, or units-of-production)
* _Intangibles with indefinate lives_
* No amortization
* Periodic impairment review
37
Long-Lived Assets: Asset Revaluation
* U.S. GAAP: Depreciated historic cost
* IFRS choice: Depreciated historic cost or fair value
* **_Revaluation below historic cost_**
* B/S asset reduced to fair market value
* Loss taken to income statement
* Subsequent reversals of value recognized in income statement up to original loss
* Increase in value above original cost taken to equity
* **_Revaluation above original cost_**
* B/S asset increased to fair market value
* Gain taken directly to equity
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Long-Lived Assets: Impairment of Long-Lived Assets: IFRS
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Long-Lived Assets: Impairment of Long-Lived Assets: U.S. GAAP
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Long-Lived Assets: Impairment of Long-Lived Assets: IFRS & U.S. GAAP
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Long-Lived Assets: Impairment - Example
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Long-Lived Assets: Impact of Impairment on Financial Statements
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Long-Lived Assets: Impact of Impairment on Ratios
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Long-Lived Assets: Impairment of Long-Lived Assets
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Long-Lived Assets: Disposal of Long-Lived Assets
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Long-Lived Assets: Disclosure Requirements
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Long-Lived Assets: Investment Property
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Income Taxes: Income Tax Accounting
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Income Taxes: Tax Terms From the Tax Return
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Income Taxes: Tax Terms for Financial Reporting
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Income Taxes: Differences: Accounting vs. Taxable Profits
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Income Taxes: Deferred Tax
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Income Taxes: Deferred Tax Liabilities - Example
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Income Taxes: Tax Bases
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Income Taxes: Liability Method for Deferred Taxes
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Income Taxes: Effect of a Change in Tax Rate
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Income Taxes: Permanent Differences (not reversible)
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Income Taxes: Temporary Differences - Initial Recognition
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Income Taxes: Business Combinations
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Income Taxes: Valuation Allowance
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Income Taxes: Comparison of Deferred Tax Items
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Income Taxes: Required Deferred Tax Disclosures
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Income Taxes: Disclosures About Deferred Tax Items
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Income Taxes: Analyst Treatment of Deferred Tax Liabilities
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Income Taxes: Key DIfferences IFRS and U.S. GAAP
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Income Taxes: Deferred Taxes - Problem
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L-T Liabilities: Bond Terminology
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L-T Liabilities: Financial Statement Effects of Debt Issuance
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L-T Liabilities: Bonds Issued at Face Value - Market rate = coupon rate
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L-T Liabilities: Bonds Issued at a Discount
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L-T Liabilities: Bonds issued at a Premium
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L-T Liabilities: Bonds issued at a Premium - Amortization
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L-T Liabilities: Accounting for Bonds Issued at a Discount
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L-T Liabilities: Accounting for Bonds Issued at a Discount - Effective Interest Example
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L-T Liabilities: Accounting for Zero Coupon Bonds - Effective Interest Example
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L-T Liabilities: Accounting for Premium Bonds - Effective Interest Example
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L-T Liabilities: Accounting for Premium Bonds - Straight-line Example
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L-T Liabilities: Issuance Costs
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L-T Liabilities: Bonds Issuance - Problem
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L-T Liabilities: Effect of Changing Interest Rates
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L-T Liabilities: Debt Extinguishment
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L-T Liabilities: Covenants
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L-T Liabilities: Disclosure of Long-Term Debt
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L-T Liabilities: Reasons to Lease
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L-T Liabilities: Finance (Capital) vs. Operating Lease
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L-T Liabilities: Treatment of Finance Lease
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L-T Liabilities: Finance vs. Operating Lease
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L-T Liabilities: Leases - Problem
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89
L-T Liabilities: Lessor Financial Reporting
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L-T Liabilities: Sales-type Lease
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L-T Liabilities: Direct Financing Lease
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L-T Liabilities: Direct Financing Lease - Example
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L-T Liabilities: Lease Disclosure
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L-T Liabilities: Lease - Problem
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L-T Liabilities: Pensions
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L-T Liabilities: Defined Contribution Plan Reporting
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L-T Liabilities: Defined Contribution Plan Reporting - Estimated Obligation
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L-T Liabilities: Defined Contribution Plan Reporting - Change in net pension a or l
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L-T Liabilities: Defined Benefit Plan Reporting - Manufacturing Companies
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L-T Liabilities: Solvency
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L-T Liabilities: Leverage Ratios
102
L-T Liabilities: Coverage Ratios
