Financial Reporting: Long-lived Assets: Financial Statements and Ratios

Question 1

Implication for years after a capitalized vs non-capitalized expense

Answer 1

1. Capitalized Expense
   - Higher NI the first year
   - Lower NI in following years unless more expenses are capitalized

Question 2

Asset Turnover

Answer 2

Sales / Average Assets

Question 3

Effects on Income Statement of Impairment Loss (prior and post years)

Answer 3

1. Prior years NI was likely overstated because depreciation was too low
2. Year of Impairment will have lower NI
3. Years following Impairment will have lower NI because depreciation has been increased.

Question 4

Estimate of remaining useful life

Answer 4

Est Remaining Useful Life = Net Plant & Equip / Annual Dep Expense

Question 5

Net Plant & Equipment

Answer 5

Net Plant & Equip = Gross P&E - Accum Dep.

Question 6

Finance or Capital Lease

Answer 6

1. The risk of the asset is transfered to the Leasee (IFRS)
2. This is like a rent-to-own situation.
3. GAAP qualifies a finance lease as one…
   - Ownership is transfered at the end of the lease
   - Lease includes a bargain purchase option
   - Term is 75% or more of the asset’s life
   - PV of lease payments is 90% or more of assets value

Question 7

Operating Lease

Answer 7

This is a rental agreement

Question 8

Effect on Fin Statements from Capitalizing an Expense

Answer 8

1. Cash Flow from Operations is Higher / CF Investing is Lower
2. NI is higher in first year
3. Assets are higher in initial years

Question 9

Effects of Capitalized Interest on Fin Statements and Ratios

Answer 9

1. Interest payments are in CF from investing
2. Assets are increased by the interest and it is expensed with the assets depreciation
3. NI is increased initially as interest is capitalized on the BS
4. Interest coverage ratio should include capitalized interest payments

Question 10

Interest Coverage Ratio (adjusted for Capitalized Interest)

Answer 10

1. EBIT / Interest Charges
2. EBIT + (portion of cap interest expensed that period) / Interest expense + Cap interest payments ie (100 + 15) / (20 + 22)

Question 11

Effects on Financial Statements of Capital(finance) Lease

Answer 11

1. IS only shows % of payment that is interest expense
2. Depreciation and % will be higher on IS than operating intially
3. BS shows asset and associated liability
4. CF statement shows lease payments (minus interest) as investment outflows

Question 12

Two types of Financing or Capital Leases

Answer 12

1. Direct Financing: when the PV of the lease payments = fair value of asset
2. Sales Lease: when PV of lease payments > fair value of asset

Question 13

Estimated Average Useful Life of P&E

Answer 13

Est Ave Useful Life = Ave remaining life + average age

Question 14

Estimated Average Age of P&E

Answer 14

Ave age = Accum Dep / Dep Exp

Question 15

Effects on Financial Statements for Asset Revaluation

Answer 15

1. Asset values go up on BS
2. Shown as “other comprehensive income” on BS Equity
3. ROE will fall because equity goes up