FR&A

Question 1

LIFO Liquidation: Inv Qty and Effects

Answer 1

• Occurs when Inventory QTY decreases
• Older and Cheaper Inv layers get included in COGS
• Results in artificially inflated Earnings
  - Must be disclosed bc unsustainable

Question 2

LIFO Reserve

Answer 2

• What Inventory would have been if FIFO used
• FIFO COGS = LIFO COGS - Change in LIFO Reserve
  - Bc LIFO COGS > FIFO COGS
• FIFO Inv & RE = LIFO Inv & RE + LIFO Reserve

Question 3

3 Classifications of Securities on BS/IS

Answer 3

1. Trading Securities
2. Available for Sale
3. Held-to-Maturity

Question 4

Trading Securities (IS and BS)

Answer 4

• Held for trading i.e. ST
• BS: Marked-to-market each period
• IS: Unrealized G/L each period

Question 5

Available for Sale Securities (IS and BS)

Answer 5

• May get sold prior to maturity
• BS: Marked-to-market each period
• IS: Not included
• Unrealized G/L taken directly to SE via OCI (other comp. income)

Question 6

Held-to-Maturity Securities (IS and BS)

Answer 6

• Shouldn’t be sold prior to maturity
• BS: Marked at Amortized Cost (unless impaired)
• IS: Unrealized G/L not recognized unless impairments

Question 7

Capital Lease: BS Effects

Answer 7

• Same Treatment as an Amortizing Loan
• Reported at Lower of PV(pmts) vs. Fair Value
• Increases A and L
• E unchanged

Question 8

Capital Lease: Changing IS Effects over tenor

Answer 8

• Initial Years: (Depr + Int Exp) > Lease Pmt
• Later Years: Become < Lease Pmt
• Bc Depr and Int Exp are based on the higher initial carrying value of the lease*
  
  • i.e. Same treatment as an amortizing loan

Question 9

Capital Lease: CF Types

Answer 9

Repaid Principal = CFF

Interest = CFO