Cfa Level 1 Fianancial Statement

Front 1

Primary propurse for cash for statement of cash flow

Back 1

1. infos about cash recive and cash paid
2. infos about operating, investing, fiancing activities.

Hint 1

2 of them

Front 2

important info for investment decidion making presented in the statement of cash flows includes whether:

Back 2

1.regular operations generate enough cash to sustain the business
2.enough cash to pay debts as they mature
3.need addition financing
4.unexpected obligations can be met
5.the firm can take advatage of new business opportunities as they arise.

Front 3

The Financial Accounting standards Board(FASB) stats that financial statement should include info about

Back 3

1.how the firm get and spend $
2.the firm's borrowing and pay debts activities.
3.The firm's sale and buyback of its ownership secuities.
4.Dividend payment and other cash distributions.
5.Other factors affecting liquidity and solvency.

Front 4

Net cash flow from operations focuses on:

Back 4

liquidity of the company rather than on profitability.

Hint 4

L or P

Front 5

interest and dividend revenue and expense, are they considered cash flow from what?

Back 5

I renvenue and expense are CFO, dividend rev are CFO, Dvi exp are CFF

Front 6

income tax are cash flow from what activities?

Back 6

operating, even if some arise from finacing or investing.

Hint 6

Operating, investment or finance.

Front 7

what Cash flow from investing represents?

Back 7

buy or sale of productive assets(physical assets and investments)

Front 8

Cash flow from investing (CFI) deal with what assets?

Back 8

lower left-hand portion of the balance sheet(fixed assets)

Front 9

Cash flow from Investing include:

Back 9

1.capital expenditure from long term assets
2.sales fo assets
3.CF form investments in joint ventures and affiliates and long term investment in securities.

Front 10

Cash flow from financing deal what in balance sheet

Back 10

lower right hand portion
aka long term debt and equity

Front 11

exaple of cash flow from financing

Back 11

1.debts financing shor or long term
2.divident paid becase div flow through the retained earnings statement.

Front 12

Key element of operating cash flow

Back 12

1.cash from sales
2.inputs into manuf.or retail(COGS)
3.cash interest expense
4.cash tax payments

Front 13

Key elements of investing cash flow

Back 13

1.buy property, plant, equipment.
2.investments in joint ventures and affiliates.
3.payments for business aquired.
4.sales of assets.
5.buy or sales of marketabke securities.

Front 14

Key elemetn of financing cash flow

Back 14

1.cash dividents paid
2.increases or decrease in short term borrowing
3.long term borrowing and repayment of long term borrowing
4.stock buy and sales.

Front 15

receivables, cash for what for balance sheet?

Back 15

CFO

Front 16

inventories, cash for what for balance sheet?

Back 16

CFO

Front 17

Prepaid expenses,cash for what for balance sheet?

Back 17

CFO

Front 18

Taxes, interest payment, and miscellaneous payables,cash for what for balance sheet?

Back 18

CFO

Front 19

Cash sales, cash for what for Income statement?

Back 19

CFO

Front 20

COGS, cash for what for Income statement?

Back 20

CFO

Front 21

Cash general and administrative expenses,cash for what for Income statement?

Back 21

CFO

Front 22

Cash taxes,cash for what for Income statement?

Back 22

CFO

Front 23

Interest paid and received,cash for what for Income statement?

Back 23

CFO

Front 24

Dividends received,cash for what for Income statement?

Back 24

CFO

Front 25

cash from fixed asset,cash for what?

Back 25

CFI

Front 26

Martetable securities, cash for what?

Back 26

CFI

Front 27

Dividents paid,cash for what for Income statement?

Back 27

CFF

Front 28

liability accounts that represent debt,cash for what?

Back 28

CFF

Front 29

change in equity accounts,cash for what?

Back 29

CFF

Front 30

Direct method of cash flow

Back 30

taking each item form income stetement, converting it by adding of subtracting the changes in the corresponding balance sheet acounts.

Front 31

Cash outflows in CFO

Back 31

cash input, cash operating expense, cash interest, cash taxes.

Front 32

how to deal with deferred tax in cash flow

Back 32

add them back as it's non cash expense

Front 33

constructing the statement of cash flows using the indirect method

Back 33

1.calculate the change in cash
2.calculate the change in all other balance sheet items
3.identify changes as potential adjustments for operating, investing, and financing activities
4.determing CFO,CFF,CFI
5.compute CFO,CFF,CFI

Front 34

Free cash flow

Back 34

FCF attempts to measure the cash available for discretionary purposes,which is cash flow minus those cash flows necessary to maintain the firm's present productive capacity.

free cash flow = operating cash flow - net capital expenditures

where:
net capital expendiures = total capital expenditures - after-tax procceds from asset sales

Front 35

IAS GAAP, interest and dividends received, CFO,CFI or CFF?

Back 35

CFO or CFI

Front 36

Dividend and iterest paid, CFO,CFI or CFF?

Back 36

CFF or CFO

Front 37

Interpret common-sizew balance sheet and income statements.

Back 37

cz bal.sheet express all accounts as a % of total asset
c-z inc.statement expresses all income statement items as a % of sales

Front 38

which circumstances does the use of common-size financial statements is appropriate.

Back 38

easier for comparision of financial data across firms and time;in addition, cz is good for quickly viewing certain fianancial rations. ex,gross profit margin, operating profit margin, net profit margin.

Front 39

limitations of financial ratios

Back 39

1.not useful when viewed in isolation. must compare other firms or time.
2.difficult compare with othrer firms when accounting method of priciple are different.(us and isa gaap)
3.difficult in firms in multiple industries.
4.conclusions can't be made from viewing on set of ratios.
5.determining the target or comparision value is difficult without values.

Front 40

ask urself Qs when viewing financial ratios:

Back 40

1.similar accounting practices for all firms?
2.comparable divisions within a firm?
3.do the ratios being used give consistent reading?
4.do the ratios yield a reasonable figure for the industry?

Front 41

how to compare firms in same indusry by financial ratios?

Back 41

1.compare with industry averages, if variations is large, use medians.
2.don't use all firms but a subset with similar characteristics, sizes.
3.for multi-industry firms,use cross-sectional analysis to find a group of firms that in similar mix of industries,or calculate composite industry average by average based on the proportion of the company's sales in each industry segment.

Front 42

Operating performance ratio can be divide into :

Back 42

1.Operating Efficiency ratio
2.Operating Profitability ratio

Front 43

Operating efficiency rato include

Back 43

1.total asset turnover
2.net fixed asset turnover
3.equity turnover

Front 44

Operating profitablility ratios include:

Back 44

1.gross profit margin
2.operating profit margin
3.net profit margin

Front 45

equataion: total asset turnover

Back 45

Total asset turnover = net sales/ average total net assets

Front 46

equation: fix asset turnover

Back 46

Fix asset turnover = net sales / average net fixed assets

Front 47

equity turnover equation

Back 47

equity turnover = net sales / average equity
(equity include all preferred and common stock, paid-in capital, and retained earnings)

Front 48

gross profit margin equation

Back 48

Gross Profit Margin = gross profit/ net sales. where gross prfit = net sales - COGS

Front 49

Operatin profit margin equation

Back 49

Operating profit margin = operating profit(EBIT) / net sales, where operating profit= gross profit - operating expense

Front 50

Net profit margin equation

Back 50

Net profit margin = Net income / net sales

Front 51

Return of total capital ratio equation

Back 51

ROTC = (Net income + gross interest expense) / average total capital, where gross interest expense = net interest expense + interest income

Front 52

two group of risk analysis

Back 52

1.financial risk
2.business risk

Front 53

3 calculation measure business risk

Back 53

1.business risk
2.sales volatility
3.operating leverage

Front 54

Coefficient of variation of business risk

Back 54

business risk = stdv. of operating income(EBIT)/mean of operating income(EBIT)
note: data should be b/w 5 to 10 years. less is not reliability, more is not relevant.

Front 55

sales variability equation

Back 55

sales variability = stdv. of sales / mean sales
note: data should b/w 5 to 10 years.

Front 56

operating leverage equation

Back 56

operating leverage = mean |%change in operating earnings / % change in sales|

it measure how much of te company's production cost are fixed. the greater the use of fixed costs, the greater the risk.

Front 57

debt-to-equity ratio

Back 57

DTE ratio = total long-term debt / total equity = (long term - liabilities + deferred tax + PV of leases) / (common + preferred equity)

Front 58

long-term capital equation

Back 58

long term capital = long term debt + common and prefferd shares

Front 59

interest coverage equation

Back 59

interest coverage = earnings b4 interest and taxes / interest expense

Front 60

fixed financial cost ratio

Back 60

fixed financial cost ratio = EBIT + ELIE / gross interest expense + ELIE

ELIE = estimated lease interest expense

Front 61

cash flow coverage of fixed financial costs

Back 61

cash flow coverage of fixed financial costs = CFO + interest expense + ELIE / interest expens + ELIE

Front 62

Cash flow to long-term debt

Back 62

cash flow to long term debt = CFO / Book Value of long-term debt + PV of operating leases

Front 63

cash flow to total interest-bearing debt

Back 63

cash flow to total interest-bearing debt = CFO / total long-term debt + current interest-bearing liabilities

Front 64

Sustainable growth rate equation

Back 64

g = RR X ROE

RR: the retention rate of earnings

Front 65

ROE is a function of which 3 components?

Back 65

1. Net profit margin (Net income / net sales)
2. Total asset turnover(net sales / total asset)
3. Financial leverage(total asset / equity)

Front 66

retention rate equation

Back 66

RR = 1 - divident payout ratio (Divident declared / operating income after taxes)

Front 67

under EPS requirement, a public company muse:

Back 67

1. Report EPS for all components of net income
2.Reconcile basic EPS and diluted EPS numerators and denominators.

Front 68

distinguish b/w simple capital structure and complex capital structure

Back 68

1.SCS is one that contains no portencially dilutive secuirityis(only common stock, nonconvertible debt, and preferred stock)
a complex captital structure has potentially dilutive secuirities(options, warrants, of convertible securities)

Front 69

types of EPS that simple or complex capital structues must report:

Back 69

simple: basic EPS
complex: basic and dilutive EPS

Front 70

what should a company reporting intermediate component of income(income from continuing operations, income b4 extraordinary items) do ?

Back 70

a company reporting intermediate component of income(income from continuing operations, income b4 extraordinary items) must report EPS amounts for these components in either the income statement or in the notes to the financial statement.

Front 71

baisc EPS equation

Back 71

basic EPS = (net income - preferred dividends)/(weighted average # of common shares outstanding)

Front 72

why not deducted dividends of common stock in basic EPS

Back 72

because basic EPS refers to the per-share earnings availabl to common shareholders, and dividends of common share is a part of net income to common holders.

Front 73

A quick way to determine if a convertible bond is dilutive

Back 73

compare
convertible debt interest (1- t)/ convertible debt shares with basic EPS, the convertible is antidilutive if it is greater than basic EPS

Front 74

A quick way to calculate the net increase in commons shares from potential exercise of stock options or warrents

Back 74

[(average market price of CS - option or warrants' exercise price) / average price of CS] # of CS option or warrants can be converted into

Front 75

under what condition should the previously reported EPS be restated ?

Back 75

stock split, so that comparisons of EPS over time ar not misleading.

Front 76

under what condition should the beginning balance of outstanding share be re-adjusted?

Back 76

stock split, it is treated as if it were done at the beginnig of the accounting period.

Front 77

Define capital budgeting process

Back 77

it is the process of evaluating and identiflying capital projects, whici is the project that expected cash flow last longer than one year.

Front 78

FIFO,LIFO, which one has bigger COGS?

Back 78

normally LIFO as under assumption that prices are always getting higher and higher.

Front 79

FIFO,LIFO, which one has bigger Current ratio?

Back 79

FIFO, due to lower COGS, the lower expense will higher current income and assets.

Front 80

FIFO,LIFO, which one has bigger inventory turnover?

Back 80

LIFO,due to higher COGS, which means higher inventory turnover(COGS / average inventory)

Front 81

LIFO liquidation concept

Back 81

firm can match sell old stock with higher price under LIFO by selling more than purchasing in a single period.

see http://www.investopedia.com/terms/l/lifoliquidation.asp

Front 82

How US. firms gain profit under LIFO liquidation?

Back 82

By LIFO liquidation, more GOGS, then lower income on the book, then, lower tax. but actual income is higher due to lower COGS than on the book as old stock are counted at recent cost level.

Front 83

FIFO,LIFO, which one provide the most useful eastimate of the inventory value ?

Back 83

FIFO

Front 84

FIFO,LIFO, which one provide the most useful eastimate of COGS ?

Back 84

LIFO

Front 85

In what part of financial statement should accounting method located in?

Back 85

Footnotes.

Front 86

LIFO to FIFO conversion equation:

Back 86

FIFO inven. = LIFO inven. + LIFO reserve

Front 87

COGS f to COGS l conversion equation:

Back 87

COGS f = COGS l - change in LIFO reserve

Front 88

An estimation of COGS l RSPT COGS f:

Back 88

COGS l = COGS f + (BI f X inflation rate)

wehre BI = Beginning inventory
Infl.rate = infl.rate of the industry the firm belongs

Front 89

An estimation of COGS l RSPT COGS w:

Back 89

COGS l = COGS f + 1/2(BI w X inflation rate)

wehre BI = Beginning inventory
Infl.rate = infl.rate of the industry the firm belongs

Front 90

Working capital definition:

Back 90

Current Asset - Current Liability

Front 91

FIFO,LIFO,which one is better to estimate firm's profitabilty?

Back 91

LIFO

Front 92

FIFO,LIFO,which one is better to estimate firm's cost?

Back 92

LIFO

Front 93

FIFO,LIFO,which one is better to estimate firm's liquidity?

Back 93

FIFO,as data under LIFO is outdated and unrelevant.

Front 94

FIFO,LIFO,which one is better to estimate firm's inventory turnover?

Back 94

average of both(which is call current method.),since COGS are affected by price change under LIFO, FIFO is better but is still misleading.

Front 95

FIFO,LIFO,which one is better to estimate firm's solvency(debt ratio, debt-equity ratio)?

Back 95

FIFO since it produce higher inventory level that are more relevant.

Front 96

Reasons that why LIFO reserve might decline:

Back 96

1.Invent. quantity is falling
2.prices are falling

Front 97

The principles of Lower of cost or matket method(LCM):

Back 97

Under normal case, inventories are record under historical cost even if market value is higher. However, if market value or replacement cost is lower than historical cost, a writedown is required.



http://www.investopedia.com/terms/l/lowerofcostandmarketmethod.asp

Front 98

The range where replacement cost of inventory must fall into:

Back 98

the replacement cost must fall within the selling priceor net realized value(higher end) and the selling price minus normal profit margin

Front 99

2 main charactoristics of long-term asset:

Back 99

1.are used in production process
2.have useful life greater than one year

Front 100

3 main categories of long-term asset:

Back 100

1.tangible asset
2.natural resources
3.intangible asset

Front 101

problems with sraight line depriciation method

Back 101

1.Actual cost are normally higher than it stated due to higher repair and maintainance expense
2.An increasing rate of return is realized under this method due to lower value of asset with constant output

Front 102

the sum of the year's digits(SYD) method in depriciation equation

Back 102

Depreciation in year x = (original cost - salvage value) x (n-x+1) / SYD

Front 103

An easy way to calculate SYD

Back 103

n(n+1) / 2

Front 104

3 ways to change depreciation method:

Back 104

1.change in method in new assets.
2.change in method in exisiting assets.
3.change in depreciable live or salvage values.

Front 105

changes occur in depreciation change in existing assets:

Back 105

1.shown effect on past results.
2.existing depreciation will change.
3.because it changes account principle, effect of cumulative change on past income will be shown net of tax on income statement.
4.estimated future income will be revised.

Front 106

changes will occur when changing depreciable live or salvage value:

Back 106

1.current income
2.estimated future income

note: past income will not be revised as account principle hasn't changed.

Front 107

If a firm change from accelerated to straight line depreciation method to all asset, what will happen to financial statement?

Back 107

1.increase net income
2.no change in income from continuing operations

Front 108

If a firm change from accelerated to straight line depreciation method to new assets, what will happen to financial statement?

Back 108

nothing

Front 109

If a firm change from accelerated to straight line depreciation method, what will happen to depreciation expense?

Back 109

decrease

Front 110

If a firm change from accelerated to straight line depreciation method to all asset, what will happen to net income from continuing operations ?

Back 110

increase

Front 111

If a firm change from accelerated to straight line depreciation method to all asset, what will happen to ROA and ROE?

Back 111

increase due to increase in net income.

note: asset and equity also increase, but the ratio still increase due to larger in income

Front 112

3 calculations that are useful in quality of fixed assets:

Back 112

1.average age
2.relative age
3.average depreciable life.

Front 113

Deprication: average age equation:

Back 113

accumulative depreciation / depreciation expense

Front 114

the importance of using average age is that:

Back 114

1.it helps identify older, less-efficient assets, which may make the firm less competitive.
2.an analyst can estimate when major capital expenditures will be required,which will help the analyst forecast when the firm will face significant financing requirements.

Front 115

Depreciation: relative age, or average age as a percentage of deprecialbe life equation:

Back 115

accumiulated depreciation / ending gross investment

Note: it is more accurate when straight-line depreciation is used.

Front 116

average depreciable life equation:

Back 116

ending gross investment / depreciation expense

Front 117

Recverability test: under what circumstances is an asset considered impaired?

Back 117

When the carry value(asset cost less accumulated depreciation) is more than the undiscounted cash flow from the asset's use and disposal.

Front 118

Loss measurement of impaired long-live asset.

Back 118

the relevant portion of tis booke value should be immediately recognized as a loss on the income statement.

Front 119

What is the fair value of asset retirement obligations(ARO)?

Back 119

either the market value of the liability or the expect cash flow necessary to retire the liability if market value can't be recognized.

Front 120

effects on financial statement of SFAS 143 ARO:

Back 120

1.fixed asset and liabilities reported on the balance sheet will increase
2.net income will be lower of the additional depreciation of the asset and the accretion of the liability.The accretion will increase each year.

Front 121

What is the effect of SFAS 143 on Asset turnover?

Back 121

decrease due to increase in fix asset and liability.

Front 122

What is the effect of SFAS 143 on Liability-to-equity ratio?

Back 122

increase due to increase in liability and decrease in net income and retain earnings.

Front 123

What is the effect of SFAS 143 on return on asset?

Back 123

decrease due to decrease in net income and increase in asset.

Front 124

What is the effect of SFAS 143 on interest coverage?

Back 124

decrease due to decrease in EBIT and increase in interest expense due to accretion of ARO liability.

Front 125

Should past income be changed if a firm change its depriable life or savage value?

Back 125

NOp....

Front 126

should the current and future income estimations be changed if a firm change its depreciable life or salvage value of the fixed asset?

Back 126

yeh....

Front 127

issues that arises in capitalization include:

Back 127

1.which conponenents of cost are capitalized
2.what method should be determine the amount capitalized.

Front 128

For analysis purpose, "assets" represent:

Back 128

1.intial investment outlay
2.firms represent "wealth"
3.input of production

Front 129

Is marchinery acquired under an operating lease an asset in balance sheet? how about in secuirity analysis?

Back 129

not an asset in balance sheet but should be a asset under security analysis.

Front 130

should the amount of capitalized expenses be added to assets?

Back 130

yes.

Front 131

Should the cash flow of capitalization be treated as CFO,CFI or CFF?

Back 131

CFI.

Front 132

will capitalizing expenses increase equity? how?

Back 132

yes. by increasing net income and retained earnings in the current period.

Front 133

will capitalizing expenses increase equity? how?

Back 133

yes. by increasing net income and retained earnings in the current period.

Front 134

how the income variability differs b/w capilized and expense?

Back 134

capitalizing: smooth
cost: greater viariance in reported income

Front 135

How is the profitability of capitalized expense Vs one-time cost during the early year?

Back 135

capitalizing will have greater income.

Front 136

How is the profitability of capitalized expense Vs one-time cost during the later year?

Back 136

capitalizing will have lower income due to continuing depreciation, and assets will be higher by the capitalized amount.

Front 137

How is the cash flow of capitalized expense Vs one-time cost?

Back 137

as capitalization wil be classified as CFI outflow, CFO will be higher and CFI will be lower.

Front 138

How is the cash flow from CFO of capitalized expense Vs one-time cost ?

Back 138

bigger since cash flow from capitalization is consider CFI,we have bigger CFO but lower CFI

Front 139

How is the leverage ratio(debt to asset, debt to equity) of capitalized expense Vs one-time cost?

Back 139

better for capitalized expense since bigger retain earnings enlarge the asset and equity.

Front 140

effects of capitalize interest on interest expense and net income

Back 140

interest expense decreased and net income increased (see note p 161 book 3)

Front 141

effects of capitalized interest on interest expense and net income

Back 141

interest expense decreased and net income increased (see note p 161 book 3)

Front 142

effects of capitalized interest on interest expense and net income

Back 142

interest expense decreased and net income increased (see note p 161 book 3)

Front 143

effects of capitalize interest on interest expense and net income

Back 143

interest expense decreased and net income increased (see note p 161 book 3)

Front 144

effects of capitalize interest on interest expense and net income

Back 144

interest expense decreased and net income increased (see note p 161 book 3)

Front 145

effects of capitalized interest on CFI and CFO

Back 145

since capitalized interest in counted in CFI(while other interest is counted in CFO), CFO is overstated and CFI is understated.

Front 146

how to adjust the distortion of classification of cash flows.

Back 146

Adding the capitalized interest back to CFI and deducting it with other interest payment from the CFO.

Front 147

effects of capitalized interest on interest coverage ratios(EBIT / interest expense)

Back 147

greater in capitalization period since interest expense decreases greater than depreciation increases.
smaller in the subsequent period since the depreciation increases in the following period.

Front 148

When should the capitalizaion of interest inccur ?

Back 148

in the construction period.

Front 149

how to measure the value of capitalized interest if the borrowing is not identical?

Back 149

Use the weight-average interest rate on outstanding debt(up to the aboumt invested in the project)

Front 150

Should the Research and Development Cost (R&D) be capitalized or treated as expense?

Back 150

Expense under US GAAP.
note: development cost may be capitalized under IAS 9

Front 151

Should the patents and copyrights be capitalized or treated as expense?

Back 151

expense except the registration fee(treated as R&D)if it is generated internally. If it is purchased fully from other firm, all cost are capitalized.

Front 152

Should the Franchises and license be capitalized or treated as expense?

Back 152

the cost of purchasing it can be capitalized.

Front 153

Should the Brands and trademarks Cost be capitalized or treated as expense?

Back 153

can be capitalized if it is purchased. However, if it is generated internally, it is treated as expense.

Front 154

Should the Advertising Cost be capitalized or treated as expense?

Back 154

expense since the sales generated from it is hard to identify.

Front 155

Should the Goodwill be capitalized or treated as expense?

Back 155

The US and most other GAAP limit the recognition of goodwill to causes where it i acquired in purchase method transactions.

Front 156

Should the Advertising Cost be capitalized or treated as expense?

Back 156

expense since the sales generated from it is hard to identify.For direct-response advertising, the cost can be capitalized.

Front 157

Should the software development Cost be capitalized or treated as expense?

Back 157

If it is for sale, the cost of evaluation of technology and economic feasibility is treated as expense, subsequent cost may be treated as inventory.If it is for internal use, the cost of after technological feasibility evaluation should be capitalized.

Front 158

What might be implied if a firm shift its operating to financing liabilities?

Back 158

the firm may encounter a liquidity crisis, as reduced access to trade credit results in increased reliance on borrowing.

Front 159

What part of cash flow does periodic interest payment affect?

Back 159

CFO

Front 160

What part of cash flow does repayment of principle affect?

Back 160

CFF

Front 161

what kind of rate does the balance sheet liabilities use to represent the present value of the remaining cash payments?

Back 161

market interest rate.

Front 162

What kind of rate is used in calculating the book value of the liabilities.

Back 162

the market rate at the time the bonds are issued.

Front 163

How is (greater or smaller)the interest expense compare with the coupon payment for the bond issued at premium?

Back 163

interest expense less than coupon payment.

Front 164

How is (greater or smaller)the interest expense compare with the coupon payment for the bond issued at discount?

Back 164

interest expense will be larger than coupon payment.

Front 165

Criteria to meet capital lease:

Back 165

1.The title of the asset is transfered to leasee at the end of the last leas period.
2.A bargain purchase option exist.
3.have lease period of 75% or more of the asset's lifetime.
4.The present value of the lease payment is 90% or more of the asset's value.

Front 166

Reasons for leasing asset instead of purchasing:

Back 166

1.the period of use compared to the useful life is short.
2.the lessor may be better to resell the asset.
3.the lessee may not want the risk of resale the asset.
4.If the lessor has more market power, it may maximize the profit by leasing assets and maintain more control of its use.
5.Assets less specialized to the firm are more likely to be leased.(office space..)
6.there may be risk reduction to the firm from leasing when firms have highly correlated value over time.

Front 167

Operating VS Capital lease, which one has more operating income?

Back 167

Capital lease, as the interest expense is not included in operating expense.

Front 168

Operating VS Capital lease, which one has greater turnover rate?

Back 168

Operating lease, as assets are smaller under this method.

Front 169

For operating lease, where is the lease payment recognized in cash flow?

Back 169

All payment is treated as CFO outflow

Front 170

For capital lease, where is the lease payment recognized in cash flow?

Back 170

the interest expense goes to CFO, whereas the principle payment goes to CFF.

Front 171

Operating VS Capital lease, which one has more CFO?

Back 171

Capital lease, as for operating lease the whole payment is treated as CFO outflow, where under capital lease only the interest payment are treated as so.

Front 172

Definition:taxable income

Back 172

income subject to tax based on tax return

Front 173

Definition: Taxes payable

Back 173

the tax liability on the balance sheet caused by taxable income. this is also known as current tax expense, but do not confuse this with income tax expense.

Front 174

Definition: income tax paid

Back 174

Actual cash flow for income taxes, including payments or refunds for other years.

Front 175

definiton: income tax expense

Back 175

the expense recognized on the income statement that includes taxes payable and deferred income tax expense.it is important to note that income tax exp. is composed of taxes payabole + noncash items such as change in deferred tax assets and liabilities (DTA and DTL)

Front 176

equation: Income tax expense

Back 176

Income tax expense = taxes payable + delta DTL - delta DTA

Front 177

definition: deferred tax expense

Back 177

the difference b/w taxes payable and income tax expense. this results form changes in deferred tax assets and liabilities.

Front 178

Deferred tax assets

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Balance sheet amounts that result from an excess of taxes pyable over income tax expense that are expected to be recovered from future operations.

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Definition: Deferred liability.

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Balance sheet amounts that result from an excess of income tax expense over taxes payable that are expected to result in future cash outflows. Deferred tax liabilities are created when more expense is applied to the tax return relative to the income statement (eg. more depreciation).This results in lower taxable income and lower taxes paypable on the tax return relative to the pretax income and tax expense that are shown on the income statement.

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How deferred tax liability created?

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it is created whnen income or expense item is treated differently on financial statements than it is on the company's tax returns, and that difference results in greater tax expense on the financial statements than tax payable on the tax return.

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What is the mos common source of deferred liability?

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different depreciatio methoc used in on tax return and income statement

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how deferred tax asset are created?

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when income and expense are treated differently on income statement and tax return, and such a difference make tax payable smaller on income statement than on tax return.

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definition: temporary differences in tax

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differences taxable and pretax incomes that will reverse in future years.

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how do the temporary differences created in current liability?

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installment sales method differences in tax and income statement creates it.

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how are the temporary differences created in long-term liability?

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differnces in depreciation methods b/w tax and financial statements.

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how do the temporary differences created in current asset?

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it is created by deferred tax assets due to warrenty expense that can't recognized in tax return.

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how are the temporary differences created in long-term asset?

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when post-retirement benefits expense in pretax income exceeds that allowed for a deduction on tax returns.

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how are the temporary differences created in equity?

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when gains or losses from carrying marketable securities at market value are deferred tax adjustments to stockholders' equity.

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Definition： permanent differences in tax

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differences in taxable and pretax incomes that will not reverse

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equation: reported effective tax rate

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RET = income tax expense / pretax income

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equation: reported effective tax rate

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RET = income tax expense / pretax income

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do permanent differences result in deferred tax liabilities or assets?

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no.

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If the tax rate increases, and deferred tax liabilities exceed deferred tax assets, what will be the net impact on the tax expense, net income and equity?

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tax higher, net income and equity lower.

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If the tax rate decreases, and deferred tax liabilities exceed deferred tax assets, what will be the net impact on the tax expense, net income and equity?

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tax decrease, net income increase and equity increase.

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When should be revenue recognized?

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1.earning process is complete
2.cost ar reliabe
3.payment is assured.

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when to use sales basis method?

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1.earning process complete
2.revenure assured

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when to use Percetage-of-completion-method

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1. earning incomplete
2.cost estimatalbe
3.revenue assured.

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When to use Completed contract method

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1.earning imcompleted
2.cost unestimatable or revenue not assured

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When to use installment sales method

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1.earning completed
2.revenue not assured.

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when to us cost recovery method》

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1.earning complete
2.contingence of unknown cost exist.

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unusal or infrequent items
above or below the line?

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above

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extraordinary item : above or below the line?

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below

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discontinued income: above or below the line?

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below