1. Scale and diversification - larger companies with wide variety of products across broad geographical range are better credit risks
2. Operational Efficiency - items suc as ROA, operating margin, EBITDA margins
3. Margin Stability - stability of the relevant margin profitability
4. Leverage - measures of free cash flow to interest, total debt. Firms with with greater earnings in relation to their debt and interest are better credit risks

NO

But, the LIFO inventory cost method is permitted by U.S. GAAP

NO

But, U.S. GAAP allows firms to treat items as "extraordinary items" on the income statement

Held-to-maturity securities are debt securities acquired with the intent and ability to own them until they mature

They are reported on the balance sheet at amortized cost

HTM securities are reported on the balance sheet at amortized cost.  Amortized cost is = to face (par) value less any unamortized discount or plus any unamortized premium. 

***Subsequent changes in fair value are ignored unless the security is sold or otherwise disposed of****

Held-for-trading securities are debt and equity securities including derivatives, acquired wiht the intent to profit from near-term price fluctations

Held-for-trading    AFS    HTM

Balance Sheet

Income Statement

State how these are classified

Held-for-trading BS=Fair value, IS=unrealized G/L

Available-for-sale BS=Fair Value, IS=No Effect

Held-to-maturity BS=amortized cost, IS=No Effect

Example of Classification of investment securities

Triple D Corp purchase 6% bond at par for $1,000,000 at beg of year

Interest rates have increased and market value of bond declined $20,000

What are the bond's treatment on financial statements under all three classifications?

Held-to-Maturity (HTM) bond reported on balance sheet at $1,000,000 and interest income of $60,000 ($1,000,000 * 6%) is reported on Income Statement

Held-for-trading (TS) bond is reported on balance sheet at $980,000 and the $20,000 unrealized loss and $60,000 interest income are reported on Income Statement

Available-for-sale (AFS) bond is reported on balance sheet at $980,000 and $60,000 interest income is reported on Income Statement, $20,000 unrealized loss reported as OCI and decreases stockholders' equity

Yes

Ownership interest is between 20% and 50%

Under IFRS Significant Influence is defined as the power to participate in financial and operating policy decisions of the investee without control or joint control over those policies. 

If an ownership interest is > than 50% the investor can control the investee.  The firm reports all of the assets and liabilities and the net income of the investee in its own financial statement items

What is proportionate consolidation method?

 Who uses proporionate consolidation IFRS or U.S. GAAP?

Eliminate Goodwill when computing ratios

Exclude Goodwill impairment charges form income statement when analyzing trends

Evaluate future acquisitions in terms of price paid relative to the earning power of the acquired assets

Fair Value at the date of acquisition

Acquiring firm reports assets and liabilities with a mixture of bases for valuation: old assets continue to be reported at historical cost whice acquired assets are carried at their fair value

What are Provisions?

Does IFRS or U.S. GAAP use provisions?

Provisions are nonfinancial liabilities that are uncertain as to their timing or amount. 

Examples: warranty obligations and contingencies

IFRS uses Provisions

**U.S.GAAP does not use the term Provisions

For Operating Expenses, which standard differentiates bethween expenses and losses

IFRS or U.S. GAAP?

Yes

These differences can create both deferred tax assets and deferred tax liabilities

U.S.GAAP dividends are paid to firm's shareholders and reported as CFF and interest paid/received and dividends received is reported as CFO. 

IFRS interest and dividends received may be classified as either CFO or CFI.  Dividends paid to firm's shareholders and interest paid on firm's debt may be classified as CFO or CFF

Example: LIFO adjustments for comparison purposes

Brown Co. is LIFO fimr

End of last yr. reported inventory of $2 million

COGS $6.4 million

LIFO reserve beg of yr  was $600,000

LIFO reserve end of yr $900,000

Calculate COGS and Ending Inventory on a FIFO basis

LIFO reserve increased $300,000 ($900,000-600,000)

Subtract increase in LIFO reserve from LIFO COGS

COGS on FIFO basis is $6.1 million ($6.4 million - $300,000)

Add LIFO reserve of $900,000 to Brown Co. LIFO inventory of $2 million

Inventory on a FIFO basis is $2.9 million ($2 million + $900,000)

What are the adjustments during an inflationary Period LIFO inventory and LIFO COGS to their FIFO equivalents for the following:

Gross Profit Margin

Operating Profit Margin

Net Profit Margin

Current Ratio

Total asset turnover ratio

Inventory Turnover ratio

debt-to-equity ratio

Higher GPM [(revenue -COGS}/revenue]

Higher OPM [operating profit / revenue]

Higher NPM [net income/revenue]

Higher current ratio [current assets / current liabilities]

Lower total asset turnover ratio [revenue / avg total assets]

Lower inventory turnover ratio [COGS/avg inventory]

Lower debt-to-equity raito because of higher equity