Inventories/LT assets/taxes Flashcards
Double declining balance depreciation method
= (Orig cost - prev deprec) • 2 / dep life
Deferred Tax Liability calculation
= [(pretax income - depreciation) - (taxable income - depreciation)] • tax rate + prev yr DTL
Units of production depreciation method
= (orig cost - salvage val)
•
(Output units in period)/(life in output)
pretax income
income before income tax expense on the income statement
taxable income
income subject to tax as reported on the tax return
taxes payable
tax liability based on taxable income, as shown on the tax return
income tax paid
actual cash outflow for taxes paid during the current period
tax loss carryforwards
losses that could not be deducted on the tax return in the current period but may be used to reduce taxable income and taxes payable in future periods
income tax expense
noncash income statement item that includes: \+ cash tax expense \+ increase in DTL - decrease in DTL - increase in DTA \+ decrease in DTA
deferred income tax expense
excess of income tax expense over taxes payable
valuation allowance
a contra account that reduces a deferred tax asset for the probability that it will not be realized under US GAAP
Deferred Tax Asset
taxable income (tax return) > pretax income (fin stmt)
revenues recognized prior to recording on financial statement
expenses for financial reporting are reported prior to recognizing them as deductible expense for tax
Deferred Tax Liability
taxable income (tax return) < pretax income (fin stmt)
expected to result in future cash outflows
depreciation expense on income statement is less than depreciation expense on tax return
LIFO v FIFO on Income Statement
Under LIFO…
COGS - higher
EBT - lower
TAXES - lower
NET INCOME - lower
LIFO v FIFO on Balance Sheet
Under LIFO…
Inventories - lower
working capital - lower
R/E - lower
LIFO v FIFO in Cash Flows
Under LIFO….
CFO is higher
product costs
capitalized under inventories on the balance sheet
- purchase costs less trade discounts and rebates
- conversion costs incl labor and overhead
- other costs necessary to bring inventory to present location and condition
period costs
expensed in period incurred
- abnormal waste of materials, labor, overheads
- storage costs
- administrative overhead
- selling costs
COGS
= beginning inventory
+ purchases
- ending inventory
periodic inventory system
inventory values and COGS are determined at the end of the accounting period
perpetual inventory system
inventory values and COGS are updated continuously
Capitalization v. Expensing
Capitalizing produces….
lower income variability higher profitability early on lower profitability later the same cash flows higher CFO lower CFI lower debt/equity ratio
straight-line depreciation
= (cost - salvage value) / useful life
double declining balance depreciation
= (cost - accumulated deprecation) x 2/useful life
more to write-off means less taxable income at first
unites of production depreciation method
depreciation =
cost - salv) x (units prod/hrs wkd) / (total units/hrs
intangibles not capitalized under US GAAP
R&D
advertising
software development to est. feasibility
intangibles capitalized under US GAAP
purchased patents, copyrights, franchises, licenses, brands, trademarks
direct response advertising
goodwill arising from transactions
software development costs once feasibility is established
Impairment Recognition US GAAP
- recoverability test: carrying value > undiscounted cash flow from asset’s use and disposal
- loss measurement: loss = carrying value - fair market value (or PV of CFs)
Impairment Recognition IFRS
compare carrying value to either:
fair value - selling costs
value in use
Inventory cost flow and rising prices
FIFO provides an artificially low value of COGS
LIFO provides an artificially low value of ending inventory
In an inflationary environment, LIFO is higher for:
COGS and CFO
Inventory turnover
Assuming inflation, FIFO produces higher:
Inventory balances
Current ratio
Working capital
Current assets
Capitalizing costs
Reported as asset on balance sheet
Involves depreciating or amortizing assets cost over useful life
Capitalize if future economic benefit
capitalization of expenses creates
an asset
capitalization of leases creates
an asset and a liability
change in a an accounting estimate such as useful life or salvage value is..
put into effect in the current period and prospectively
change in estimate is applied to assets book value and depreciation is calculated going forward with new estimate
previous periods are not affected by the change
intangible assets with finite lives
reported on balance sheet at fair values and reduced by amortization
does not include internally developed intangible assets
derecognition of long-lived assets
removed from balance sheet when sold, exchanged, or abandoned
sale of long-lived asset
remove from balance sheet
difference between sale proceeds and carrying value is reported as gain/loss on income statement
abandonment of long-lived asset
remove from balance sheet
no proceeds to report, recognize loss of carrying value in income statement
exchange of long-lived asset
gain or loss is computed by comparing carrying value of old asset with fair value of old asset.
Carrying value of old asset is removed from balance sheet, and new asset is recorded at fair value
carrying value
original cost less accumulated depreciation
impairment
if carrying value > recoverable amount
write value down on balance sheet to recoverable amt
recognize impairment loss on income statement
recoverable amount
greater of:
fair value less selling costs
value in use
value in use
PV of future CF stream from continued use
impairment under IFRS
measured annually
impairment loss may be reversed if value recovers in the future to the value of original carrying value
impairment under US GAAP
tested only when events and circumstances indicate to
asset revaluations under US GAAP
long-lived assets cannot be revalued upward except for held-for-sale assets
asset revaluations under IFRS
assets may be revalued upward to fair value
gains from reversal are reported on income statement and excess gains are adjustment to equity as revaluation surplus
investment property
IFRS only
property a firm holds for capital appreciation or to collect rental income
coupon rate
stated rate used to calculate the coupon payment
recorded on cash flow statement
effective interest rate
discount rate (IRR) that equates PV of future CFs with issue price yield on bond when it's first issued (YTM)
interest expense
= book value at beg of period * market rate at time of issuance (YTM)
recorded on income statement
debt issuance effect on cash flow statement
CFO is reduced by coupon interest
CFF is increased by proceeds at issuance
CFF is decreased by principal paid at maturity
effective interest rate method of amortization of premium/discount debt issuance
interest expense = YTM at issuance * beg balance sheet liability
amortization = interest expense - coupon interest
required under IFRS, preferred under US GAAP
straight-line amortization of premium/discount debt issuance
annual amortization = (par value - issuance) / years
interest expense = coupon +/- amortization
permitted under US GAAP
Issuance costs for debt under IFRS
deducted from initial bond liability
result is higher effective interest rate
Issuance costs for debt under US GAAP
shown on balance sheet as prepaid expense (asset)
controversial b/c does not provide future economic benefit
amortized over bond’s life
Capital Lease criteria for US GAAP
- title to leased asset is transferred to lessee at end of lease
- bargain purchase option exists
- lease period is at least 75% of asset’s economic life
- PV of lease payments is >= 90% of leased asset’s fair value
Capital Lease criteria for IFRS
substantially all rights and risks of ownership are transferred
with a finance lease assets and liabilities are
higher than with an operating lease
with a finance lease net income is
lower in early years and higher in later years than with an operating lease
total net income is the same for both types of leases
with a finance lease CFO is
higher than with an operating lease
with a finance lease CFF is
lower than with an operating lease
Lessor reporting of operating lease
report leased asset on balance sheet
recognize lease payment as rental income
recognize depreciation expense on asset
Lessor reporting of finance lease
report lease receivable on balance sheet
recognize lease payment as part interest revenue and part return of capital
treat as either sales-type lease or direct financing lease
sales-type lease
lessor is dealer or seller of leased equipment
at time of inception, lessor recognizes gross profit on sale
interest revenue recognized over period of lease
direct financing lease
lessor is not dealer of leased equipment
no gross profit is recognized at time of lease inception
all profit is interest revenue recognized over period of lease
total interest expense
= coupon pmts + discount interest
= coupon pmts + (face value - issue value)
New Book Value
= beginning book value + interest expense - coupon pmt
