Long-lived assets reported on BS at ________?

Upward adjustments to long-lived assets under US GAAP are ____________?

Exception to this?

Under U.S. GAAP, long-lived assets are reported on the balance sheet at depreciated cost less any impairment losses ($750 million original cost less $70 million accumulated depreciation and less $80 million impairment loss, for a net amount of $600 million).

Increases are generally prohibited with the exception of assets held for sale. Since these assets are currently in use, this exception does not apply. Therefore, Marcel may not revalue the assets upward. 

For LESSEE in finance lease:

Principal portion of a payment is _____ outflow?

Interest portion is _____ outflow?

The principal portion of a finance lease payment is a financing cash outflow for the lessee.

The interest portion is an operating cash outflow.

COGS from LIFO to FIFO

COGS_F = COGS_L − Increase in LIFO reserve

COGS_F = COGS_L - (LIFO reserve_E − LIFO reserve_B)

Tax burden (2 formulas)

=NI/EBT

=(1 - effective tax rate)

facilitate an economic decision

A derivative instrument used in a cash flow hedge is reported on the balance sheet at _____ value and the unrealized gains and losses are recognized in ________

fair value

other comprehensive income

If the lease transfers ownership of the property to the lessee at the end of the lease term, the lessee will classify the lease as a ______ lease

finance

Net income and equity under proportionate consolidation/equity methods compared to proportionate consolidation method

Same net income and equity

The basis for using the current rate method is when Functional Currency is

not the same as Parent's Presentation (reporting) Currency. 

The basis for using the temporal method is when:

Functional Currency = Parent's Presentation Currency

The local currency is remeasured into the functional currency under the:

temporal method

The functional currency is translated into the reporting currency using the:

If a U.S. firm uses LIFO for tax purposes, it must use ____ for financial reporting purposes, according to U.S. tax law. 

LIFO

Which of the following categories requires realized and unrealized gains and losses to be reported as income? Debt and _____

As a general rule for the current rate method, all revenues and operating expenses are translated using the ______ rate.

average rate

The two major differences between accounting income and economic income:

(1) Accounting depreciation is based on the original cost of an investment, while economic depreciation is based on the market value of the asset.

(2) The interest expense that is subtracted from accounting income is not considered when computing economic income because interest expenses are implicit in the required rate of return used to calculate the asset’s market value.

The stocks were classified as debt and equity securities available for sale, but now they will be classified as debt and equity trading securities.

Effect on net income? Effect on reported value of assets?

Securities transferred from available-for-sale to trading securities are transferred at (this value) and unrealized gains or losses would be ______:

Will affect net income, the change in status will not impact the reported value of the assets.

Securities transferred from available-for-sale to trading securities are transferred at fair market value and unrealized gains or losses would be included in income.

Income from continuing operations includes all revenues and expenses (income statement) except discontinued operations and extraordinary items:

$187,000 operating income + $3,400 gain on sale of equipment – $12,400 interest expense – $71,200 income tax expense = $106,800.

(Use IS values, not net of tax)

With the cash basis of accounting:

With the cash basis of accounting, revenues are recognized when cash is collected and expenses are recognized when cash is paid. Therefore, the cash flows may occur in different periods than when the revenues are actually earned or when the expenses are actually incurred. For example, the purchase of equipment used in a firm’s manufacturing operation may result in an immediate cash outflow but the equipment generates revenues over its useful life. In this case, the revenues and expense are reported in different periods.

With the accrual basis of accounting:

With the accrual basis of accounting, revenues are recognized when earned and expenses are recognized when incurred, regardless of the timing of the cash flows. With the equipment purchase, the cost of the equipment will be allocated to the income statement (not cash flow statement) over the asset’s life and at the same time, matched with the revenues generated.

(Marginal Tax rate x Amount of Debt in Capital Structure)

In periods of rising prices and stable or increasing inventory quantities, using the LIFO method for inventory accounting compared to FIFO will have (effect on):

(1) COGS

(2) taxes

(3) net income

(4) inventory balances

(5) working capital

(6) cash flows

(1) HIGHER COGS

(2) LOWER taxes

(3) LOWER net income

(4) LOWER inventory balances

(5) LOWER working capital

(6) HIGHER cash flows

Adjustment to balance sheet for operating leases:

If expected to have {X1, X2....Xn} operating leases over next n years, given current financing rate and the rate implicit in the lease contract is 7%

Recall that the interest rate in this present value computation is the lower of the firm’s financing rate or the interest rate that is implicit in the lease. Therefore, the PV (operating leases) is:

Find PV at that rate, reduce BOTH long-term assets and liabilities by that amount

For LESSOR:

the principal portion of direct finance lease payment is a _________ on the lessor's cash flow statement.

Profit recognized at inception of lease?

Cash flow from INVESTING

NONE

If the projected benefit obligation (PBO) and the plan assets are the same, then (balance sheet treatment):

Nothing needs to be reported on BS.

If plan assets > PBO record an asset

If plan assets < PBO record a liability

When earnings are relatively free of accruals, mean reversion will occur __________

Capitalizing costs creates _______ cash flows from operations and ______ cash flows from investing.

Higher CFO

Lower CFI

Plan assets > PBO: overfunded plan

Plan assets < PBO: underfunded plan

Plan assets/fair value (end of year) = Fair Value (beg. of year) + Contributions + Actual return - Benefits paid

PBO at end of year: PBO (beg. of year) + service cost + interest cost + past service cost (plan amend. during yr) (+/-) actuarial (losses/gains) - benefits paid

Funded status is an asset/liability

The PBO is the actuarial present value (at an assumed discount rate) of all future pension benefits earned to date, based on expected future salary increases.

OPERATING LEASE:

all payments made for an operating lease are CFO outflows

FINANCE LEASE:

Interest paid is CFO; principal paid is CFF

Common stock is translated at the historical rate (which is the rate that applied when the transaction was made)

LT debt is translated at the current rate 

The three main factors that a financial analyst must consider when evaluating how a firm’s capital structure impacts valuation are:

(1) changes in the firm’s capital structure over time

(2) differences in capital structure between competitors with similar business risk

(3) company specific factors such as quality of corporate governance that may impact agency costs

Using the lower of cost or market principle under U.S. GAAP, if the market value of inventory falls below its historical cost, the minimum value at which the inventory can be reported in the financial statements is the:

market price minus selling costs minus normal profit margin

When inventory is written down to market, the replacement cost of the inventory is its market value, but the “market value” must fall between net realizable value (NRV) and NRV less normal profit margin. NRV is the market price of the inventory less selling costs. Therefore the minimum value is the market price minus selling costs minus normal profit margin.

Less than 20% ownership of the acquired corporations common stock would ordinarily mean the _____ method of accounting would be used to record this investment in financial assets. GTH has announced their desire to exert significant influence, hence, the _____ method is the appropriate choice.

(A) cost or market method

(B) equity

Reclassifying investment assets from “trading” to “available-for-sale” under IFRS vs GAAP

GAAP:

Unrealized gains and losses are recognized on the income statement

IFRS:

Severely restricts reclassification out of the held-for-trading category

To avoid biases from an increase in expected inflation, an analyst should revise:

WACC (up/down) and cash flows (up/down)

WACC up cash flows up

Required rates of return on investments generally exceed inflation. An increase in expected inflation will generally increase the required return on equity and debt; therefore, the WACC will rise as inflation rises. To avoid a downward bias on net present value, cash flows should be adjusted up to reflect inflation effects.

The functional currency is defined as:

the primary currency of the economic environment in which the foreign subsidiary operates.

Inventory which is translated at the ____ rate with the temporal method and at the _____ rate with the current rate method

historical rate with the temporal method

current rate with the current rate method

TPPC = ending PBO - beginning PBO + benefits paid - actual return on plan assets

TPPC =contributions - (ending funded status - beginning funded status)

Accruals^BS formula

Accruals^BS = NOA_END − NOA_BEG

Under U.S. GAAP rules, where an investor owns a significant number (39%) of the voting shares of an investee but has no involvement in policy making and no Board of Directors’ representation, which investment classification is most appropriate to characterize the situation?

Investment in financial assets is the correct classification here because there is no significant influence (i.e. no involvement in policy marking, no Board of Directors’ representation). Although the ownership interest level is significant at 39% (it is between 20% and 50%), the lack of control classifies the investment as an investment in financial assets. 

INV_FIFO = INV_LIFO + LIFO reserve

COGS_FIFO = COGS_LIFO - (LIFO reserve_E - LIFO reserve_B)

Return on assets (return on total capital (ROTC))

2 formulas

ROA = Net Income / Total Assets

Return on assets (total capital) = EBIT / average total capital

Given:

Depreciation Exp $25M

Net Income $35M

Dividends $10M

Assets $250M

Equity $195M

tax rate = 35%

Company changed from acc. dep. to straight-line method decreasing expense by $5. What are ROA and ROE under old method?

New method results in:

NI increases by ($5M*(1-0.35)) = +$3.25M

Assets increase by $5M

If reverting back to old method:

Dep expense = $30M

Net Income = $35 - $3.25 = 31.75M

Assets = 250 - 5 = 245

Equity = 195 - 3.25 = 191.75

ROA = 12.96% (31.75/245)

ROE = 16.56% (31.75/191.75)

The cash received from borrowing against receivables would be reported as a ______.

The cash received from securitizing the receivables would be reported as an ________.

CFF inflow 

CFO inflow

Calculate payout ratio under residual dividend policy:

Target 65% equity 35% debt

After-tax cost of debt 7%, cost of retained earnings 12%, cost of issuing new equity 13.5%

Net Income 4,000,000

Given 5 projects with various IRRs

(1) Determine WACC

WACC = (.35)(.07) + (.65)(.12) = 10.25%

(2) Accept all projects with IRR > WACC

(3) Accepting projects results in total capital budget of (sum them)=4M

(4) Equity portion is 65%, so do $4M*65% = 2.6M, so that leaves 1.4M left for dividends.

(5) Payout ratio = 1.4M/4M = 35%

Proportionate consolidations and acquisitions are the same except for:

the exclusion of minority interests in proportionate consolidations

Annual Compensation expense arising from executive stock options (formula):

Based on the _____ value of the options on ___(date)

Comp. Exp. = (# of options) x (Fair value of options on grant date)

Annual CE = Comp. Exp. / Vesting period

VP = time between issue and when they can be exercised

GAAP: equity method

IFRS: proportionate consolidation preferred, similar to regular consolidation except only include pro-rata share

FASB requires ______ method for:

(1) subsidiaries during periods of normal inflation

(2) subsidiaries during periods of hyperinflation

(1) temporal

(2) current rate

To adjust a LIFO firm's financial statements to reflect FIFO cost flow method:

(1) current assets/LIFO reserve

(2) LIFO reserve/income taxes

(3) LIFO reserve/shareholder equity

(4) LIFO reserve/COGS

(5) change in LIFO reserve/income tax expense

(1) Add LR to current assets (end inventory)

(2) Subtract income taxes on LR from CA (cash)

(3) Add LR, net of tax, to shareholder equity

(4) Subtract change in LIFO reserve from COGS

(5) Add income taxes on change in LIFO reserve to income tax expense

Depreciation analysis:

(1) Average age (in yrs)

(2) Average depreciable life

(3) Remaining useful life

(1) Accumulated depreciation / annual dep. expense

(2) Ending gross investment / annual dep. expense

(3) Ending net investment / annual dep. expense

Accounting for Incorporate Investments:

(1) Investment in Financial Assets

(2) Investments in Associates

(3) Business Combinations

(4) Joint Ventures

(1) <20% owned; no significant influence

(2) 20-50% owned; sig. influence

(3) >50% owned; control

(4) 50% shared control

Investment in Financial Assets (def.)

(1) Held-to-maturity (what value on B/S)

(2) Avail-for-sale (value on B/S; unrealiz. G/L)

(3) Held for trading (value on B/S)

(1) at cost on B/S

(2) at FMV; unrealized G/L in equity

(3) at FMV

-Designated as "fair value" (like held for trading)

If not stated, interest, dividends, unrealized and realized G/L recognizes on I/S

Investment in Associates (def + method)

(1) How earnings accounted for

(2) Dividend received -- how treated

20-50% owned, sig influence. Equity method.

(1) Pro-rata share of earnings increase B/S inventory account; also recognized on I/S

(2) Div. rec. decrease investment account (div. not in I/S)

Business Combinations (def + method):

(1) Goodwill -- how treated?

(2) How consolidated?

(3) If <100% own, how accounted for?

>50% owned; control. Acquisition method required under GAAP and IFRS.

(1) Goodwill not amortized; subject to annual impairment test

(2) All assets, liabilities, revenues and expenses of subsidiary combined with parent excluding intercompany transactions. 

(3) Minority interest acct. for share not owned

Financial Effect of choice of consolidation method:

(1) Net income

(2) Assets, liabilities, sales under different methods (rank)

(1) Same net income

(2) Highest under acquisition; proportionate consolidation in between; equity method lowest

GAAP: mergers, acquisitions or consolidations

IFRS: does not distinguish between business combinations

IFRS: permits either partial goodwill or full goodwill methods to value goodwill and non-control interest

GAAP: requires full goodwill method

Entity is a variable interest entity (VIE) if any of the following (4):

Who consolidates the VIE?

(1) Insufficient at-risk equity investment

(2) S/h lack decision-making rights

(3) S/h do not absorb losses

(4) S/h do not receive residual benefits

Primary beneficiary consolidates the VIE

The following will DECREASE pension expense, INCREASE earnings and REDUCE pension liability:

(1) high/low discount rates

(2) low/high compensation growth rates

(3) high/low expected rates of return on plan assets

(1) HIGH

(2) LOW

(3) HIGH

Under GAAP, reported pension expense (formula):

(check w/ Lodish)

Under IFRS:

GAAP: 

IFRS: RPE = service cost + past service cost + net interest expense

= discount rate * beginning funded status

discount rate = expected return on plan assets

Cash flow adjustment for pension cost

(1) Total pension cost < firm contributions

(2) total pension cost > firm contributions

(1) Difference = Change in PBO (reclassify difference from CFF to CFO after-tax)

(2) Difference = borrowing (reclassify balance from CFO to CFF after-tax)

Current rate method (when used)

(1) Assets/liabilities

(2) Common stock

(3) Income statement

(4) Exposure = ?

(5) Dividends

Used for self-contained subsidiary; functional currency NOT equal to presentation currency

(1) Current rate

(2) historical rate

(3) Average rate

(4) Shareholders equity

(5) At rate when paid

Temporal method (when used):

(1) Monetary assets/liabilities

(2) Nonmonetary assets/liabilities

(3) Sales/SGA

(4) COGS/depreciation

(5) Exposure = (formula)

ALSO: net asset position & depreciating foreign currency=

net liab. position & depr. foreign currency=

For integrated subsidiary; functional = presentation currency

(1) Current rate

(2) historical rate

(3) Average rate

(4) Historical rate

(5) Monetary assets - monetary liabilities

loss; gain

Cumulative inflation > 100% over 3 yrs

GAAP: Use temporal method

IFRS: 1st restate foreign currency for inflation. 2nd translate with all-current. Net purchasing power gain/loss reported in income

When derivatives are used to hedge foreign currency exposure related to a foreign 

investment, the gains/losses:

go through other comprehensive income, which is part of 

shareholders’ equity, and thus they bypass the income statement

Used for 20-50% ownership, sig. influence

Under the equity method, the investor recognizes its pro-rata share of the affiliate's income on the income statement. Since Mashburn owns 25,000 shares of Humm and Humm earned $1, the income statement impact of the investment is $25,000.

On June 30^th, the loss on the futures contract should be reported in other comprehensive income. When the goods are sold on September 30^th, the loss should be recognized in the income statement along with the cost of goods sold which is lower since the price of gold declined. The loss is neither extraordinary nor related to a discontinued operation. Thus, the loss is reported “above the line” as a part of income from continued operations.

Under an imputation tax system:

taxes are paid at the corporate level, but are attributed to the shareholder, so that all taxes are effectively paid at the shareholder rate.