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152 Cards in this Set
- Front
- Back
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Percentage-of-Completion Method |
-Both IFRS and GAAP -both revenue and expense recognized as work is performed -measured by total cost incurred/total expected cost |
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Accounting Method When Firm Cannot Reliably Measure Outcome of Project |
IFRS -revenue recognized equal to the extent of contract costs -costs expensed when incurred -profit recognized only at completion GAAP -Completed Contract Method -if a loss is expected, must be realized immediately (both methods) |
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Completed Contract Method |
-used under GAAP when firm cannot reliably measure the outcome of a project -revenue, expense, and profit realized only when the contract is complete |
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Depreciable live and Salvage value |
-chosen by management and allow for income manipulation -no need to disclose unless estimates are changed -Change is put into effect in the current period and moving forward (prospectively) |
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Working Capital |
=Current assets - current liabilities |
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Asset Turnover |
=Sales or Revenue/Total Assets |
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Financial Leverage |
=average total assets/average total equity |
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Interest Coverage |
=EBIT/interest payments |
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Fixed Charge Coverage |
=(EBIT + lease payments)/(interest payments + lease payments) |
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Net Profit Margin |
=Net Income/Revenue |
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Gross Profits |
=Net sales-COGS |
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Operating Profits |
=EBIT=Gross Profit - operating expenses |
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Net Income |
=Earnings after taxes but before dividends |
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Total Capital |
=long term debt + short term debt + common + preferred equity = Total Assets |
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Gross Profit Margin |
=Gross Profit/Revenue |
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Operating Profit Margin |
=Operating Income/Revenue=EBIT/Revenue |
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Pretax Margin |
=EBT/revenue |
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Return on Assets |
=(Net Income + interest exp.(1-t))/Total Assets |
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Return on Equity |
=net income/average total Equity |
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Return on Common Equity |
=(net income-preferred dividends)/average common equity |
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Finance lease (Leesee) |
-(basically) a purchase of an asset financed with debt -lease liability = present value of the remaining lease payments -Finance lease expense = depreciation of the asset and interest on the loan (greater than operating in early years, less in later years) -payment is part interest (CFO) and part principal (CFF) |
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Operating Lease |
-basically rental payments -no asset or liability reported by leesee -reported as an expense and an operating outflow of cash |
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Finance Lease (lessor) |
-lease receivable created at the inception of the lease equal to the present value of the lease payments -lease payments treated as part interest income (CFO) and part principal reduction (CFI) |
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Deciding whether a lease is finance under each accounting Method |
IFRS -substantially all rights and risk of ownership transferred to the leesee GAAP -title of leased asset transferred to leesee at end of period -bargain purchase option exists -lease period 75% or more of asset's economic life -PV of lease payments is 90% or more of fair value -lessor capitalizes lease if finance lease, collectability reasonably certain, substantially completed performance |
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Sales Type Lease (Lessor) |
-recognizes gross profit at the inception and interest income over the lifetime |
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Direct Financing Lease (Lessor) |
-recognizes interest income only |
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Impairment of Long-Lived Assets under IFRS |
-must annually assess whether impairment of asset has occurred -may not use as a deduction until asset sold IMPAIRED IF -impaired when carrying value exceeds recoverable amount (greater of fair value less any selling costs and value in use) -value in use: present value of future cash flows IF IMPAIRED -must be written down to recoverable value on balance sheet, loss recognized in income statement -may be reversed only by original impairment loss |
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Impairments of Long-Lived Assets under U.S. GAAP |
-tested for impairment only when events and circumstances dictate -may not use as a deduction until asset sold IMPAIRED IF -carrying value greater than assets future UNDISCOUNTED cash flow stream IF IMPAIRED -written down to fair value OR DISCOUNTED future cash flows, loss recognized on income statement -reversal not allowed |
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If a firm uses WACC to discount risky projects... |
...overall risk of the firm's investment will rise over time. Will seem relatively more attractive than they are |
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Investment Property Accounting Method (IFRS vs. GAAP) |
GAAP -does not distinguish investment property from other kinds of long-lived assets IFRS -investment property if firm owns to specifically collect rental income -may use cost or fair value model -required to disclose which valuation they use |
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Cost Model for Investment Property (IFRS) |
-Same as for PPE |
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Fair Value Model for Investment Property (IFRS) |
-revaluation above historical cost is recognized as a gain on the income statement (not as revaluation surplus) |
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General Categories of Formulas Used by Credit Rating Agencies to Determine Capacity of a Borrower to Repay Debt |
1. Scale and Diversification 2. Operational Efficiency 3. Margin Stability 4. Leverage |
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Diluted Securities |
-must test all potential dilutive securities, even if cannot be exercised yet -only included if dilutive -Convertible bonds interest(1-t)/new shares -pfd dividend/new shares -identify, test, and then make necessary adjustment to basic |
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net pension asset vs. net pension liability |
-if the fair value of the plan's assets is greater than the estimated pension obligation, the plan is said to be overfunded and the sponsoring firm records a net pension asset on the balance sheet |
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Defined Benefit Plan under IFRS |
-Three components make up the change in net pension asset or liability: service costs, net interest expense or income, remeasurements -pension expense = all service costs and interest expense or income (based on estimate of future obligation) -remeasurements recognized in other comprehensive income |
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service cost (defined benefit plan) |
= present value of additional benefits earned by an employee over the year |
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Net interest expense/income (defined benefit plan) |
-beginning value of net pension (liability/asset) multiplied by discount rate assumed when determining the present value of the pension obligation |
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Remeasurements (defined benefit plan) |
-actuarial gains or losses (change in assumptions) -difference between the actual return on plan assets and the return included in net interest expense or income -under IFRS, not amoritzed |
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Change in net pension asset or liability under U.S. GAAP |
PENSION EXPENSE -service costs, net interest expense, expected return on plan assets OTHER COMPREHENSIVE INCOME -past service costs (additional benefits awarded retroactively), and actuarial gains or losses (amortized to pension expense in GAAP) |
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Defined Contribution Plan |
pension expense = employer's contribution |
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Inventory under IFRS |
-lower of cost or net realizable value -if NRV less than carrying value, need to write down to NRV -under IFRS, may revalue it upward, only to extend that we have written down -may record any reversal as a reduction in the cost of sales for the period when the reversal occurs -usually done by a valuation allowance account though -EXCEPTION; if active market exists all the time, may report at fair value (commodities) |
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Inventory under GAAP |
-lower of cost or market -market usually equal to replacement cost, but cannot be greater than NRV or less than NRV minus a normal profit margin -may not reverse writedowns -EXCEPTION; if active market exists all the time, may report at fair value (commodities) |
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valuation allowance account |
-contra-asset account (not liability) -able to separate the original cost of inventory from the carrying value of the inventory -(U.S. GAAP) -Deferred tax asset and deferred tax liability not netted under U.S. GAAP |
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Classified Balance Sheet |
-both IFRS and GAAP require firms to separately report their current assets/liabilities and noncurrent assets/liabilities |
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Liquidity-based Format |
-IFRS -choose to do this if presentation more relevant and reliable (banking) -present assets and liabilities in the order of liquidity |
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Noncurrent asset |
-not be converted into cash or used up within one year or operating cycle -prepaid expense is a current asset |
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Current Liabilities |
-settlement expected during the normal operating cycle -settlement expected within one year -held primarily for trading purposes -not an unconditional right to defer settlement for more than one year |
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Accounts Receivable Reporting |
-at net realizable value, based on estimated bad debt expense -required to disclose significant concentrations of credit risk |
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Bad debt expense |
-increases allowance for doubtful accounts (contra-asset account) |
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Accrued Liabilities |
-expenses that have been recognized in the income statement but are not yet contractually due -expenses increase and a liability for accrued expenses increases |
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unearned revenue |
-cash collected in advance of provideing goods and services (revenue not yet recognized in income statement) -eg. magazine subscription -cash increases, and unearned revenue, a liability increases by the same amount |
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Held to maturity Securities Accounting |
-measured at amortized cost -amortized cost: original issue price minus any principal payments plus any amortized discount minus any impairment -unrealized gain/loss not recognized -subsequent changes in market value ignored -dividend and interest income and realized gains and losses reported in income statement |
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Trading Securities |
-debt and equity securities acquired with the intent to profit in the near term -reported on the balance sheet at fair value -unrealized gains and losses are recognized in the income statement -derivative instruments -dividend and interest income and realized gains and losses reported in income statement |
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Available -for-sale securities |
-not expected to be held to maturity or traded in the near future -reported on the balance sheet at fair value -unrealized gains and losses are reported in other comprehensive income as part of shareholder's equity -dividend and interest income and realized gains and losses reported in income statement |
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Accrued Revenue |
-firm provides goods or services before it receives cash payment -Revenue increases and accounts receivable increase |
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Prepaid Expenses |
-Firm pays cash ahead of time for an anticipate expense -cash decreases and prepaid expense (an asset) increases |
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Effective Interest Rate Method |
-IFRS, allowed under GAAP -under IFRS liability at sale = proceeds - issuance cost -ytm does not change over the life of the bond |
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Straight line method of valuing Bond |
-similar to that of depreciation expense -allowed under GAAP if not materially different |
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Ending Book Value for the year for a bond |
=beginning book value + interest expense - coupon -interest expense = beginning book value x ytm |
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Intangible Asset under IFRS |
-capable of being separated from the firm or arise from a contractual or legal right -controlled by the firm -expected to provide future economic benefits |
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unidentifiable intangible asset |
-cannot be purchased separately and may have an indefinite life -eg. Goodwill |
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Research and Development Costs under IFRS |
-research costs are expensed as incurred -development costs may be capitalized (firm must show intend to complete and sell asset) |
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Research and Development Costs under GAAP |
-research and development costs expensed as incurred |
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Software developments costs |
-under IFRS and GAAP -expensed as incurred until the product's technological feasibility has been established -then may be capitalized |
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Capitalized Costs |
-should capitalized all costs that provide a futre economic benefit -Cost of equipment (including freight and taxes), rebuilding, installation -expenditure usually reported as an outflow from investing |
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Expensed Costs |
-those that will not provide a future economic benefit -training, routine maintenance -usually reported as an outflow from operations |
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Purchased intangible asset accounting |
-initially reported on the balance sheet at cost, typically its fair value at acquisition |
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Goodwill Accounting |
-only goodwill created in business combination is capitalized on the balance sheet -internally generated goodwill expensed as incurred |
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component depreciation |
-useful life of each component is estimated and depreciation expense is computed separately for each -IFRS requires this, allowed by GAAP but seldom used |
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Intangible Asset with Finite life |
-amoritized vs. similar methods of depreciation -both standards will typically use straight line with 0 residual value |
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Intangible Asset with indefinite life |
-not amoritized tested for impairment annually -eg. trademark (indentifiable) |
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Revaluation Model of a long lived asset |
-IFRS, not GAAP -permits long-lived asset to be reported at its fair value, as long as an active market exists for the assets so its fair value can be reliably estimated -must choose same treatment of similar assets -loss or gain reported on income statement as asset revalued (gain to extent that it reverses a previous loss) -any gain over historical cost reported in shareholder's equity as revaluation surplus |
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Long-Lived asset under U.S. GAAP |
-generally reported on the balance sheet at depreciated cost |
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Long-Lived asset under IFRS |
-generally reported at depreciated cost, but may use the revaluation model |
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Retrospective Application |
-Restate all past periods presented in financial statements -required when there is a change in accounting principle -Prior period adjustment for error or incorrect method |
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Prospecitve application |
-apply to current and future periods, -change in accounting estimate (useful life or depreciation method) -typically does not change cash flow |
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Impairment of Intangible Assets with Indefinite Lives |
-not amoritized, rather they are tested for impairment annually -impairment loss recognized when carrying value exceeds fair value, not tax-deductible |
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Reclassification of long-lived assets held for use to held for sale |
-because management intends to sell it, the asset is tested for impairment -at this point, no longer amoritzed -impaired if its carrying value exceeds is net realizable value -if impaired, the asset is written down to net realizable value and the loss is recognized on the income statement -loss can be reversed under IFRS AND GAAP but only by original impairment |
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Capitalized Interest |
-GAAP and IFRS -when a firm constructs an asset for its own use the interest that accrues during the construction period is required to be capitalized as part of the asset's cost (to accurately measure the cost of the asset) -under IFRS, income earned by temporarily investing borrowed funds reduces the interest that is eligible for capitalization (no such for GAAP) -reported in cash flow statement as an outflow from investing activities -not reported as interest expense, interest cost allocated to the income statement through depreciation for assets held for use or COGS for assets held for sale |
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Decrecognition |
-when assets are sold, exchanged, or abandoned - |
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When a long lived asset is sold... |
...asset removed from the balance sheet and the difference between sale proceeds and the carrying value of the asset is reported as a gain or loss in the income statement -carrying value is equal to original cost minus accumulated depreciateion and any impairment charges |
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If a long-lived asset is abandoned... |
-carrying value removed from balance sheet and loss of that amount is recognized in the income statement |
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If a long-lived asset is exchanged... |
...gain or loss computed by comparing the carrying value of the new asset with the fair value of the old asset
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Disclosures for Tangible and Intangible Assets under US GAAP |
-Carrying values for each asset class -accumulated depreciation and amortization -title restrictions and assets pledged as collateral -for impaired assets, the loss amount and the circumstances that caused the loss -for revalued assets (IFRS), the revaluation date, how fair value was determined, and the carrying value using the historical cost model |
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Installment sale (GAAP) |
-occurs when a firm finances a sale and payments are expected to be received over an extended period of time
-if collectability is certain, revenue recognized using normal method -if uncertain, use installment method if highly uncertain, use cost recovery method -typically used only for sale of real estate |
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Installment Method |
-profit is recognized as cash is collected -profit is equal to the cash collected during the period multiplied by the total expected profit as a percentage of sales |
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Cost recovery Method |
-profit recognized when cash collected exceeds costs incurred |
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Discontinued Operations |
-management has decided to dispose of, but either has not yet done so, or has disposed of in the current year after the operation had generate income or losses -must be physically and operationally distinct from the rest of the company -any income from discontinued operations is reported separately in the income statement, net of tax, after income from continuing operations from the date the desicion to dispose of the operation is made |
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Unusual or Infrequent Items |
-reported before tax and above income from continuing operations -items include: --Gain or loss from disposal of a business segment or assets --gain or loss from sale of investment subsidiary --provisions for environment remediation --impairments --integration of expense for recently acquired |
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Extraordinary Items |
-both unusual and infrequent -reported below income from continuing operations, net of tax under U.S. GAAP, but this treatment is not allowed under IFRS |
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Comprehensive Income |
-sum of net income and other comprehensive income -change in stockholder's equity that does not related to transactions |
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Valuation allowance for Taxes |
-contra-asset account, reduces DTA, increase in income tax expense, will decrease net income |
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Tax-Loss Carryforward |
-when you have losses that you can't take in a current year, you can carry them forward -will create a deferred tax asset, increase net income |
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Taxes payable |
-tax liability on the balance sheet cause by taxable income |
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Income Tax Paid |
-actual cash flow for income taxes |
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Tax Base |
-net amount of assets or liability used for tax reporting purposes |
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Accounting Profit |
-Pretax financial income based on financial accounting standards (EBT) |
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Income Tax Expense |
=taxes payable + Change in DTL - Change in DTA |
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Deferred Tax Liability |
-created when income tax expense(income statement) is greater than taxes payable(tax return) due to temporary differences |
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Deferred Tax Asset |
-created when taxes payable(tax return) are greater than income tax expense(income statement) due to temporary diferences -post-employment benefits, warranty expense, tax loss carryforward (things you cannot deduct until expensed) -will reverse when recognize revenue along with tax expense in future period (matching principal) -held net of valuation allowance |
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permanent difference in pre-tax accounting income |
-difference between taxable income and pretax income that will not reverse in the future -caused by revenue that is not taxable, expenses that are not deductible, or tax credits taht result in a direct reduction of taxes |
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Direct Method for Cash Flow from Operations |
-each item of the accrual based income statement is converted into cash receipts or cash payments |
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Indirect Method for Cash Flows from Operations |
-NI converted to operating cash flow by making adjustments fro transactions that affect net income but are not cash transactions 1. Begin with net income 2. Subtract gains or add losses that resulted from financing/investing 3. add back all noncash charges 4. Add or subtract changes to the balance sheet operating accounts |
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Direct Method Disclosures |
-U.S. GAAP adjustments necessary to reconcile net income to cash flow from operating activities -no required under IFRS |
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Cash Flow Statement Disclosures |
IFRS -payments for interest and taxes must be disclosed separately in the cash flow statement under either method - GAAP -payments for interest and taxes can be reported in the cash flow statement or disclosed in the footnotes -non-cash investing and financing |
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Free cash flow to the firm |
-cash flow available to all investors, both equity owners and debt holders =NI + NCC + [Int x (1-taxrate)] - FCINv - WCInv =CFO + [Int x (1-tax rate)] - FCInv -NCC = noncash charges (eg. depreciation) -FCInv = fixed capital investment (Cash spent on buying assets - cash received for selling assets)u -WCInv - working capital investment -interest expense is added back as available to stockholders AND debtholders -under ifrs, if interest is CFF, don't add back to income; if dividends paid are CFO, add them back to income |
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Free Cash Flow to Equity |
-cash flow that would b available for distribution to common shareholders =CFO - FCInv + net borrowing -net borrowing = debt issued - debt repaid -issuing equity does not create free cash flow! |
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Statement of Comprehensive Income |
-reports all changes in equity except for shareholder transactions =common stock + retained earnings + other comprehensive income |
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Statement of Changes in Equity |
-reports the amounts and sources of changes in equity investors' investment in the firm over a period of time |
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Financial Statement Footnotes |
-accounting methods -legal actions against the firm -acquisition and business disposals -debt repayment schedules and terms -management assumptions and estimates -off-balance sheet commitments and contingencies (lease payments) |
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Management's Commentary |
-future capital needs -ability to meet those needs -effects of inflation and changing prices if material -accounting policies that require significant judgement by management |
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Net reporting |
-recognize revenue net of related expenses (more conservative) |
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Gross reporting |
-recognize revenue separately from expenses related to generating revenue |
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Auditor's Disclaimer of Opinion |
-unable to express an opinion about the financial statements |
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Unqualified Opinion |
-clean -financial statements fairly conform with accounting principles, reasonable assurance of no material errors |
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Qualified Opinion |
-presented fairly, but make exceptions to accounting principles; details in auditor's report |
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adverse opinion |
-firm has not presented financial statements fairly |
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Owner's Equity |
=Beginning Balance + Net Stock Issuance + Net Income - Distribution (Dividends) + Anything not included in net income -Dividends paid do not have a net effect on Equity (decrease dividends declared and cash) |
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general ledger |
-sorts the entries in the general journal by account |
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General Journal |
-listing of all the journal entries in order of their dates |
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initial / adjusted trial balance |
-shows balances in each account/may need adjusting -balances from adjusted trial balance are presented in the financial statements |
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How adjustments in tax effect deferred tax asset and deferred tax liability |
-adjust deferred tax items and income tax expense -increase deferred tax liability and deferred tax asset by relative change in tax rate (new - initial/initial) |
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Treasury Stock |
-Value of own shares that have been repurchased -acts as a contra account |
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Solvency ratios for a firm with significant lease obligations |
-debt ratios should include liabilities for both capital leases and operating leases (treat as if capital leases) -add to liabilities and long-lived assets |
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Repurchase of shares to offset incentive stock options |
-treated as part of employee compensation -should treat as a CFO outflow |
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Stock screening with ratios |
-to reduce stocks down to a manageable list for detailed analysis -identify firm characteristics -BUT specific industries are often overrepresented |
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Reporting Non-GAAP accounting measures |
-IFRS and GAAP -requires firms to define and explain the relevance of any non-GAAP measures and reconcile them to the most comparable IFRS (or GAAP) measure |
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Operating vs. Non-operating income |
-for nonfinancial firms, nonoperating transactions may result from investment income and financing expenses |
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Horizontal Common Size Statement |
-everything expressed as a percentage of base year amount |
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Earnings per share |
-earnings/weighted average shares outstanding (even reacquired) |
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Noncash investing and financing activities |
-not reported in the cash flow statement since they do not result in inflows or outflows -must be disclosed in either a footnote or supplemental schedule to the cash flow statement |
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Auditor's explanatory paragraph |
-material loss is probably but the amount cannot be reasonable estimated (eg. valuation of assets) -in absence of this, suggests there are no serious problems that require a close examination |
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proxy statement |
-issued to shareholders when there are matters that require a shareholder vote -election and qualifications of boardmembers -compensation, management qualifications, and issuance of stock option (conflicts of interest) |
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IAS Required Financial Statements |
-Balance Sheet -comprehensive Income -cash flow statement -statement of changes in owner's equity -explanatory notes |
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Main Differences between IASB and FASB |
-IASB lists income and expenses as performace elements, FASB lists revenue, expenses, gains, losses, and comprehensive income -minor differences in definition of assets -Firms that list their shares in the U.S.but do not reconcile with IFRS or GAAP must reconcile with GAAP (not needed for IFRS) |
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coherent financial reporting framework and its barriers |
-transparency, comprehensiveness, and consistency -barriers include issues of valuation, standard setting, and measurement |
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Public companies must diclose ___ on financial statements |
-likely impact of recently issued account standards |
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Effective Tax Rate |
=income tax expense/pretax income |
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IASB Requirements for Revenue |
-risk + reward -no continuing control -reliable revenue management -probably flow of economic benefits -cost can be measured reliably |
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FASB Revenue Recognition |
-recognized when it is realizable and earned |
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Installment Sale |
CAN BE RELIABLY ESTIMATED -PV of the installment payments is recognized ta time of sale -difference between installment payments and the discounted pv is recognized as interest over time CANNOT BE RELIABLY ESTIMATED -Cost Recovery Method |
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Barter |
IFRS Revenue = fair value of similar non-barter transactions with related parties U.S. GAAP Revenue = fair value only if the company has received cash payments historically (if not at carrying value of asset being exchanged) |
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Checking for dilution |
-Convertible Pref: divdends/new shares < basic -conv. debt: interest(1-t)/new shares < basic -Option & Warrants: avg. price > ex. price |
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Limitations of Balance Sheet Analysis |
-Mixed measurement conventions -Fair values may change after balance sheet date -Off-balance-sheet assets and liabilities (internally generated intangibles, operating leases) |
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Cash Flows From Investing |
-Purchase of PPE -Proceeds from sale of assets -Sale + purchase of intangibles -Purchase and sale of marketable securities -EXCLUDES trading securities (CFO) and cash equivalents |
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U.S. GAAP vs. IFRS Cash Flows |
-Interest Received: CFO; CFO or CFI
-Interest Paid: CFO; CFO or CFF -Dividends Received: CFO; CFO or CFI -Dividends Paid: CFF; CFO or CFF -Taxes Paid: CFO; Any -Bank Overdraft: CFF; Part of Cash |
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Direct Method |
Net Sales - change in AR + change in advance payments COGS - Change in inventory + change in AP Interest expense + interest payable = cash interest |
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Common Size Cash Flow Statement |
1. Show each item as a % of net revenue 2. Show inflows (outflows) as a % of total inflows (outflows) |
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Cash to Income Ratio |
-CFO/Operating Income -close to 1 tells us our earnings are of high quality |
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Inventory Disclosures |
-cost flow method -total carrying value of inventory -carrying value reported at fair value less selling costs -cost of inventory recognized as an expense -amount of inventory writedown -reversals of inventory writedowns -carrying value of inventory pledged as collateral |
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Change in Inventory Cost Flow Method |
-mostly made retrospectively -cumulative change is reported as an adjustment to beginning retained earnings -IFRS: demonstrate will provide more relevant info -GAAP: why change is preferable TO LIFO -applied prospectively -carrying value of inventory becomes first layer of inventory |
