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CFA: Level 1 > Financial Reporting and Analysis: Inventories, Long-Lived Assets, Income Taxes, and Non-Current Liabilities > Flashcards

Financial Reporting and Analysis: Inventories, Long-Lived Assets, Income Taxes, and Non-Current Liabilities Flashcards

1
Q

Inventories: Inventory Equation

A
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2
Q

Inventories: Inventory Costs

A
  • **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
  • Period costs are expenses when incurred
    • Abnormal waste
    • Storage costs (unless a required production cost)
    • Selling and administrative cost
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3
Q

Inventories: Capitalization of Inventory Cost - Example

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4
Q

Inventories: Inventory Cost Flow Methods

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5
Q

Inventories: Inventory Cost Flow - Example

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6
Q

Inventories: Inventory Systems

A
  • Periodic System
    • Inventory and COGS are determined at the end of the period
    • Beg Inv + Purchases - End Inv = COGS
  • Perpetual System
    • Inventory and COGS are continuously updates as each sale occurs
    • No puchases account needed
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7
Q

Inventories: LIFO vs FIFO Inflationary Environment

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8
Q

Inventories: Inventory Valuation (IFRS)

A
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9
Q

Inventories: Inventory Valuation (U.S. GAAP)

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10
Q

Inventories: Inventory Valuations

A
  • 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
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11
Q

Inventories: Inventory Disclosures

A
  • 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
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12
Q

Inventories: Profitability Ratios and Inventory Method

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13
Q

Inventories: Liquidity Ratios and Inventory Method

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14
Q

Inventories: Activity Ratios and Inventory Method

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15
Q

Inventories: Leverage Ratios and Inventory Method

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16
Q

Inventories: Inventory Management Ratios

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17
Q

Inventories: Inventory Management

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18
Q

Inventories: Inventory Methods - Problem

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19
Q

Long-Lived Assets: Capitalizing vs Expensing: Overview

A
  • 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)
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20
Q

Long-Lived Assets: Capitalizing vs. Expensing: Financial Statement Effects

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21
Q

Long-Lived Assets: Capitalizing Interest Costs

A
  • 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
  • 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)
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22
Q

Long-Lived Assets: Capitalization of Interest - Example

A
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23
Q

Long-Lived Assets: Capitalizing Expenses - Problem

A
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24
Q

Long-Lived Assets: Intangible Assets: Externally developed

A
  • Intangible assets lack physical substance
  • 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
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25
Q

Long-Lived Assets: Intangible Assets: Internally developed

A

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

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26
Q

Long-Lived Assets: Intangible Assets: Software Development

A

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
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27
Q

Long-Lived Assets: Intangible Assets: Purchased Intangibles

A

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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28
Q

Long-Lived Assets: Depreciation of Long-Lived Assets

A
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29
Q

Long-Lived Assets: Depreciation Methods

A

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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30
Q

Long-Lived Assets: Depreciation Methods - Formulas

A
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31
Q

Long-Lived Assets: Depreciation - Example

A

.

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32
Q

Long-Lived Assets: Impact of Depreciation Method on Financial Statements

A
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33
Q

Long-Lived Assets: Estimates in Depreciation Calculations

A

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
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34
Q

Long-Lived Assets: Component Depreciation

A

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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35
Q

Long-Lived Assets: Depreciation Methods - Problem

A
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36
Q

Long-Lived Assets: Amortizing Intangibles

A
  • 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
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37
Q

Long-Lived Assets: Asset Revaluation

A
  • 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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38
Q

Long-Lived Assets: Impairment of Long-Lived Assets: IFRS

A
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39
Q

Long-Lived Assets: Impairment of Long-Lived Assets: U.S. GAAP

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40
Q

Long-Lived Assets: Impairment of Long-Lived Assets: IFRS & U.S. GAAP

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41
Q

Long-Lived Assets: Impairment - Example

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42
Q

Long-Lived Assets: Impact of Impairment on Financial Statements

A
43
Q

Long-Lived Assets: Impact of Impairment on Ratios

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44
Q

Long-Lived Assets: Impairment of Long-Lived Assets

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45
Q

Long-Lived Assets: Disposal of Long-Lived Assets

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46
Q

Long-Lived Assets: Disclosure Requirements

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47
Q

Long-Lived Assets: Investment Property

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48
Q

Income Taxes: Income Tax Accounting

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49
Q

Income Taxes: Tax Terms From the Tax Return

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50
Q

Income Taxes: Tax Terms for Financial Reporting

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51
Q

Income Taxes: Differences: Accounting vs. Taxable Profits

A
52
Q

Income Taxes: Deferred Tax

A
53
Q

Income Taxes: Deferred Tax Liabilities - Example

A
54
Q

Income Taxes: Tax Bases

A
55
Q

Income Taxes: Liability Method for Deferred Taxes

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56
Q

Income Taxes: Effect of a Change in Tax Rate

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57
Q

Income Taxes: Permanent Differences (not reversible)

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58
Q

Income Taxes: Temporary Differences - Initial Recognition

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59
Q

Income Taxes: Business Combinations

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60
Q

Income Taxes: Valuation Allowance

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61
Q

Income Taxes: Comparison of Deferred Tax Items

A
62
Q

Income Taxes: Required Deferred Tax Disclosures

A
63
Q

Income Taxes: Disclosures About Deferred Tax Items

A
64
Q

Income Taxes: Analyst Treatment of Deferred Tax Liabilities

A
65
Q

Income Taxes: Key DIfferences IFRS and U.S. GAAP

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66
Q

Income Taxes: Deferred Taxes - Problem

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67
Q

L-T Liabilities: Bond Terminology

A
68
Q

L-T Liabilities: Financial Statement Effects of Debt Issuance

A
69
Q

L-T Liabilities: Bonds Issued at Face Value - Market rate = coupon rate

A
70
Q

L-T Liabilities: Bonds Issued at a Discount

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71
Q

L-T Liabilities: Bonds issued at a Premium

A
72
Q

L-T Liabilities: Bonds issued at a Premium - Amortization

A
73
Q

L-T Liabilities: Accounting for Bonds Issued at a Discount

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74
Q

L-T Liabilities: Accounting for Bonds Issued at a Discount - Effective Interest Example

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75
Q

L-T Liabilities: Accounting for Zero Coupon Bonds - Effective Interest Example

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76
Q

L-T Liabilities: Accounting for Premium Bonds - Effective Interest Example

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77
Q

L-T Liabilities: Accounting for Premium Bonds - Straight-line Example

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78
Q

L-T Liabilities: Issuance Costs

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79
Q

L-T Liabilities: Bonds Issuance - Problem

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80
Q

L-T Liabilities: Effect of Changing Interest Rates

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81
Q

L-T Liabilities: Debt Extinguishment

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82
Q

L-T Liabilities: Covenants

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83
Q

L-T Liabilities: Disclosure of Long-Term Debt

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84
Q

L-T Liabilities: Reasons to Lease

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85
Q

L-T Liabilities: Finance (Capital) vs. Operating Lease

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86
Q

L-T Liabilities: Treatment of Finance Lease

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87
Q

L-T Liabilities: Finance vs. Operating Lease

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88
Q

L-T Liabilities: Leases - Problem

A

.

89
Q

L-T Liabilities: Lessor Financial Reporting

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90
Q

L-T Liabilities: Sales-type Lease

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91
Q

L-T Liabilities: Direct Financing Lease

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92
Q

L-T Liabilities: Direct Financing Lease - Example

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93
Q

L-T Liabilities: Lease Disclosure

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94
Q

L-T Liabilities: Lease - Problem

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95
Q

L-T Liabilities: Pensions

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96
Q

L-T Liabilities: Defined Contribution Plan Reporting

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97
Q

L-T Liabilities: Defined Contribution Plan Reporting - Estimated Obligation

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98
Q

L-T Liabilities: Defined Contribution Plan Reporting - Change in net pension a or l

A
99
Q

L-T Liabilities: Defined Benefit Plan Reporting - Manufacturing Companies

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100
Q

L-T Liabilities: Solvency

A
101
Q

L-T Liabilities: Leverage Ratios

A
102
Q

L-T Liabilities: Coverage Ratios

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CFA: Level 1 (18 decks)

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