Financial Reporting and Analysis: Inventories, Long-Lived Assets, Income Taxes, and Non-Current Liabilities Flashcards
Inventories: Inventory Equation
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
Inventories: Capitalization of Inventory Cost - Example
Inventories: Inventory Cost Flow Methods
Inventories: Inventory Cost Flow - Example
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
Inventories: LIFO vs FIFO Inflationary Environment
Inventories: Inventory Valuation (IFRS)
Inventories: Inventory Valuation (U.S. GAAP)
Inventories: Inventory Valuations
- 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
Inventories: Inventory Disclosures
- 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
Inventories: Profitability Ratios and Inventory Method
Inventories: Liquidity Ratios and Inventory Method
Inventories: Activity Ratios and Inventory Method
Inventories: Leverage Ratios and Inventory Method
Inventories: Inventory Management Ratios
Inventories: Inventory Management
Inventories: Inventory Methods - Problem
Long-Lived Assets: Capitalizing vs Expensing: Overview
- 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)
Long-Lived Assets: Capitalizing vs. Expensing: Financial Statement Effects
Long-Lived Assets: Capitalizing Interest Costs
- 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)
Long-Lived Assets: Capitalization of Interest - Example
Long-Lived Assets: Capitalizing Expenses - Problem
Long-Lived Assets: Intangible Assets: Externally developed
- 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
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
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
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
Long-Lived Assets: Depreciation of Long-Lived Assets
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
Long-Lived Assets: Depreciation Methods - Formulas
Long-Lived Assets: Depreciation - Example
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Long-Lived Assets: Impact of Depreciation Method on Financial Statements
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
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
Long-Lived Assets: Depreciation Methods - Problem
Long-Lived Assets: Amortizing Intangibles
- Process is identical to dpereciation except estimating useful lives is more complicated because of legal, regulatory, and economic factors
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Intangibles with finite lives
- Amortize over useful life
- Pattern should match consumption of benefits (use straight-line, accelerated, or units-of-production)
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Intangibles with indefinate lives
- No amortization
- Periodic impairment review
Long-Lived Assets: Asset Revaluation
- U.S. GAAP: Depreciated historic cost
- IFRS choice: Depreciated historic cost or fair value
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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
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Revaluation above original cost
- B/S asset increased to fair market value
- Gain taken directly to equity
Long-Lived Assets: Impairment of Long-Lived Assets: IFRS
Long-Lived Assets: Impairment of Long-Lived Assets: U.S. GAAP
Long-Lived Assets: Impairment of Long-Lived Assets: IFRS & U.S. GAAP
Long-Lived Assets: Impairment - Example
Long-Lived Assets: Impact of Impairment on Financial Statements
Long-Lived Assets: Impact of Impairment on Ratios
Long-Lived Assets: Impairment of Long-Lived Assets
Long-Lived Assets: Disposal of Long-Lived Assets
Long-Lived Assets: Disclosure Requirements
Long-Lived Assets: Investment Property
Income Taxes: Income Tax Accounting
Income Taxes: Tax Terms From the Tax Return
Income Taxes: Tax Terms for Financial Reporting
Income Taxes: Differences: Accounting vs. Taxable Profits
Income Taxes: Deferred Tax
Income Taxes: Deferred Tax Liabilities - Example
Income Taxes: Tax Bases
Income Taxes: Liability Method for Deferred Taxes
Income Taxes: Effect of a Change in Tax Rate
Income Taxes: Permanent Differences (not reversible)
Income Taxes: Temporary Differences - Initial Recognition
Income Taxes: Business Combinations
Income Taxes: Valuation Allowance
Income Taxes: Comparison of Deferred Tax Items
Income Taxes: Required Deferred Tax Disclosures
Income Taxes: Disclosures About Deferred Tax Items
Income Taxes: Analyst Treatment of Deferred Tax Liabilities
Income Taxes: Key DIfferences IFRS and U.S. GAAP
Income Taxes: Deferred Taxes - Problem
L-T Liabilities: Bond Terminology
L-T Liabilities: Financial Statement Effects of Debt Issuance
L-T Liabilities: Bonds Issued at Face Value - Market rate = coupon rate
L-T Liabilities: Bonds Issued at a Discount
L-T Liabilities: Bonds issued at a Premium
L-T Liabilities: Bonds issued at a Premium - Amortization
L-T Liabilities: Accounting for Bonds Issued at a Discount
L-T Liabilities: Accounting for Bonds Issued at a Discount - Effective Interest Example
L-T Liabilities: Accounting for Zero Coupon Bonds - Effective Interest Example
L-T Liabilities: Accounting for Premium Bonds - Effective Interest Example
L-T Liabilities: Accounting for Premium Bonds - Straight-line Example
L-T Liabilities: Issuance Costs
L-T Liabilities: Bonds Issuance - Problem
L-T Liabilities: Effect of Changing Interest Rates
L-T Liabilities: Debt Extinguishment
L-T Liabilities: Covenants
L-T Liabilities: Disclosure of Long-Term Debt
L-T Liabilities: Reasons to Lease
L-T Liabilities: Finance (Capital) vs. Operating Lease
L-T Liabilities: Treatment of Finance Lease
L-T Liabilities: Finance vs. Operating Lease
L-T Liabilities: Leases - Problem
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L-T Liabilities: Lessor Financial Reporting
L-T Liabilities: Sales-type Lease
L-T Liabilities: Direct Financing Lease
L-T Liabilities: Direct Financing Lease - Example
L-T Liabilities: Lease Disclosure
L-T Liabilities: Lease - Problem
L-T Liabilities: Pensions
L-T Liabilities: Defined Contribution Plan Reporting
L-T Liabilities: Defined Contribution Plan Reporting - Estimated Obligation
L-T Liabilities: Defined Contribution Plan Reporting - Change in net pension a or l
L-T Liabilities: Defined Benefit Plan Reporting - Manufacturing Companies
L-T Liabilities: Solvency
L-T Liabilities: Leverage Ratios
L-T Liabilities: Coverage Ratios
