acct exam 2-inventory, tangible assets & depreciation, intangible assets and impairment, investments, debt, deferred taxes, equity&sharebased compensation, EPS

why do people use LIFO? FIFO? highest NI? lowest NI? lowest inv?

LIFo has lower taxes and cogs. current costs sitting in cog. better matching. FIFO is bet to replace inventory. highest NI: FIFO. lowest NI: LIFO. lowest inventory: LIFO.

stock dividends and stock splits: weigted avg outstanding common shares? 1/1: balance 100,000 shares 4/1: issued 50,000 shares 5/1: 2 for 1 stock split.

(100kx2) + (50kx(9/12)x2) = 275,000. 100k shares jan 1. 50k new shares. x2 for the stock split adjustment. another method: 100k x (3/12) x 2 ) +(150k x (9/12) x2) = 275,000

on may 5 matrix reacquired 3000 shares of its CS at $55 per share. how does this transaction impact the BS? on dec 5, matrix reissued 1,000 shares of the stock at $75 per share. how does this transaction impact the BS?

1) 3,000x55=165. cash dec by 165k. TS of 165k is recorded. this reduces owners equity. debit TS 165k credit cash 165k 2) cash increases by 75k (1000x75). TS dec by 55k (1000x55. what to do with difference of 20k (1000x(75-55))? the company bought its own stock LOW and sold it HIGH so the difference which feels like a gain is treated like a new capital contribution. so addtnl PIC is increased by 20k. JE: debit cash 75k, credit TS 55k, credit addtnl PIC 20k.

examples of temp differences- deferred tax asset DTA or liability? 1)Estimated warranty expenses are deducted in the current year for book purposes, but cannot be deducted for tax purposes until paid 2)Straight-line is used for book depreciation and MACRS (double declining balance) is used for tax depreciation. 3)Restructuring expenses are recognized for book purposes as incurred, but are not recognized for tax purposes until the cash is paid . 4) Estimated bad debt expense is deducted in the current year for book purposes, but cannot be deducted for tax purposes until deemed uncollectible. 5)Unearned revenue is recorded as a liability until it is "earned" for book purposes, but is recognized immediately as revenue for tax purposes. 6)Goodwill is tested for impairment annually, but for tax purposes is normally amortized over a 15 year period. What would this be considered in the first year of reported GW if there was no impairment?

1) DTA BI 100-10=90. Taxable Income =100. so this is an asset, taxable income > book income. Numbers are made up 2)DTL BI >TI 3)DTA Similar to 1st scenario 4) DTA Youre deducting from BI but TI stays same until you deem it uncollectible 5) DTA Liability for book, 6)DTL

1)why would a company consider constraining itself by signing a loan contract that includes debt covenants? 2)why would big lily bak desire to put debt covenants into the loan contract? 3)why are accounting numbers a good basis for definings a debt covenant provision? why a bad basis? 4)the debt covenant hypothesis is the claim that managers make strategic accounting choices in order to reduce the likelihood that their companies will violate debt covenants. how does the strategic accounting predicted by the debt covenant hypothesis differ from earnings management?

1) a debt covenant lowers the risk to the lender. lower risk leads to lower IRs. 2) protect themselves from borrower default. but why not just reflect increased risk in a higher IR? perhaps loan IRs are sticky and don't fully reflect risk. perhaps implications of risk on IRs get hard to quantify at higher risk levels. tradition. more feeling of control by the bank. 3) good: generated by a known, often audited, financial reporting system. transparency- easy to identify violations. bad: reported accounting numbers are open to management manipulation. 4)managing toward different targets such as current assets, interest bearing debt, operating CF, EBITDA. earnings management is managing towards net income. debt covenant hypothesis is these other 4.

1)Nokolaev Company has portfolio of available for sale securities AFS. total cash received from sale of AFS securities (reported in investing activities section of the 2009 SCF) was $6,050. what was the goal amount of realized gains during 2009? 2) nikolaev companys NI for 2009 was $3,000. what was nokolaevs comprehensive income for 2009? 3) ignoring dividends and interest, what economic return (unrealized + realized gain/loss) did nikolaev company earn on its available for sale AFS portfolio in 2009?

1) cost of securities sold: securtiy D 1500 + security E 1800= 3,300. proceeds of 6050 - 3300 cost = 2750 realized gain. 2) look at unrealized gain or loss. Market value- cost = 6900 market over cost in 2008. but in 2009 market value- cost= 5,000. so 6900-5000= 1900 unrealized holding loss in 2009. excess of market value over cost: goes from 6900 to 5000. this is a loss. represents a 1900 decrease in OCI other comprehensive income. 2009 comp income: 3000 NI - 1900 AFS decrease in OCI = $1,100 in comprehensive income for 2009. 3) realized gain of 2,750 - unrealized economic loss of 1,900= 850 economic gain. difference btwn end of year 2008 $15800 and end of year 2009 19,850 is a difference of $4,050 increase over the year. this is partially due to investment in a new security (bought security F in 2009) with 3200 appreciation which leaves us with 850 economic gain.

on jan 1 2004, matrix inc acquired 45% of the equity securities of apex inc for $1,350,000. on the acquisition date, apexs net assets had a fair value of $3,000,000. during 2004, apex paid cash dividends of $150,000 and reported NI of 1,750,000. 1)how would the investment in apex be reflected on the BS of matrix at dec 31, 2004? 2) how would the investment in apex be reflected in the 2004 income statement of matrix? 3) how would the investment in apex be reflected in the 2004 SCF?

1)1750,000 reported earnings x 45% ownership = 787,500 is our share of earnings. 150,000 dividends paid x 45% ownership = 67,500$ our share of dividends. create a t-account. ivnestment in apex inc. left side: investment 1,350,000 45% earnings 787,500. right side: 67,500 =45% dividends. (JE: debit cash 67,500, credit investment in apex of 67,500) comes to total reported amt on left side of 2,070,000. 1,350,000+787,500-67,500= eported amt of 2,070,000. this is our BS value 2)IS impact. income statement impact of 787,500 in income. je: debit investment in apex 787,500, credit revenue in investment 787,500. 3) CF impact. 2 impacts. investing section cash outflow of 1,350,000. (JE debit investment in apex 1,350,000 credit cash 1,350,000). dividends: operating section cash inflow of 67,500 (JE: debit cash 67,500, credit investment in apex 67,500).

matrix grants 4m shares of $1 par CS to employees under a restricted stock plan on 1/1/2008. the vesting period is 3 years. the shares are currently trading at $6 on the NYSE. what is the impact on the financial statements of the restricted stock awards on the grant date? how wil lthe restricted stock grants impact the BS and IS during each of the 3 years in the vesting period? what happens when the 4m shares vest in 3 years and become unrestricted?

1)no impact on grant date. 2)total comp exp= 4m shares x $6 unrestricted value = 24M /3= 8m annual comp exp. each year, IS charged 8m in comp exp. each year, an equity account on BS will be increased by 8M JE: debit comp exp 8m credit stock based comp exp 8m 3) the 24M that has been accrued in the equity section will we now reclassify on the BS as 24M in CS or addtnl PIC. JE: debit capital restricted stock, credit CS or CS addtnl PIC.

true or false: 1) unrealized gains/losses on trading securities are reflected in NI. 2) equity method accounting is used for all joint ventures. 3) unrealized gains/losses on equity method investments are ignored. 4) all AFS securities are reported on BS at their fair market value. 5) with equity method investments, the balance in the investment accounting increases when dividends are received from the investee. 6) with equity method investments, the IS is only impacted when the investment is sold for a gain/loss. 7) realized gains/losses on AFS securities are reflected in NI. 8) unrealized gains/losses on held to maturity HTM investments are ignored.

1)t 2)t 3)t 4)t- also tading securities reported at fair value 5)false- when dividends are received, they are decreasing that t-account. 6)false- IS is impacted when investment is sold for gain/loss. also impacted based on proportion share revenue received. 7) t- any realized gain/loss reflected in NI. unrealized gains/losses is where we have differences. 8) t

reacquired shares: weighted avg outstanding common shares? 1/1: balance 100k shares 4/1: issued 50k shares 5/1: repurchased shares 12k

100k + (50k x(9/12) - (12kx(8/12)=129,500. 100k shares jan1. 50k new shares. 12k treasury shares another method: 100k x(3/12) + (150kx(1/12)+(138kx(8/12) = 129,500.

determining interest expense: and JE denver co took out a 10% 3 yr note for 100,000$ on 1/1/ interest is paid semi annually in june and december.

100kx5% =5k every six month. or 10k annually. 1/1 debit cash 100k credit NP 100k 6/30 debit int exp 5k credit int pay or cash 5k 12/31 debit int exp 5k credit int pay or cash 5k

Sovran Financial reported NI of 154 million in 2016. CS: 1/1: 60 million common shares were outstanding. 3/1: 12 million new shares were sold. 6/17: 10% stock dividend was distributed (amt in millions) compute basic EPS.

154 m/ 77m = basic EPS of $2 per share. 60m shares x 1.1 x 12/12 + 12m shares x 1.1 x 10/12 = 77m. 1.1 incorporates 10% stock dividend 12 months outstanding

key calculations: 1pretax financial income= 2financial income subject to tax= 3taxable income= 4total tax expense= 5current tax expense= 6deferred tax expense= 7net income= 8effective tax rate=

1revs-expenses from the book 2pretax financial income adjusted for permanent differences 3financial income subject to tax adjusted for temp differences. 4financial income subject to tax x statutory rate. 5taxable income x statutory rate 6temp diff x stautotry rate= total tax expense -current tax expense. 7pretax icome-total tax expense 8total tax expense / pretax financial income

convertible securities impact on EPS

2 types: convertible PS and convertible debt. calculate EPS as if all convertible securities (debt or equity) were converted into shares of CS. we assume the conversion took place at the beginning of the period or the date of issuance if later. convertibles have both a numerator and denominator impact on the EPS (options only have denominator impact)

5) what are the possible lender responses to a debt covenant violation by a borrower? 6)what are the pros and cons of a tight debt covenant? 7) in the real world, how frequent are debt covenant violations? one loan in two? one in five? 8) which industry has highest debt covenant violations?

5) termination of the agreement, demand immediate repayment, increased collateral, increased IR, addtnl covenants, waiver of the violation, 6) riasons for tight covenant: have more violations, early warning signal, receive new info when financial condition deteriorates. cons: more work on the lender to monitor, may lose the loan to another lender. 7) around 41% of the time 8) by industry: trade/wholesale. agriculture. manufacturing. services.

NRV=

=net realizable value. selling price of the product in ordinary course of business- reasonably predicted costs of completion, disposal ,and transportation (commissions, shipping, etc). the NET amount a company expects to realie from the sale of the inventory.

how to calc EI? how to calc Gross Margin? goodwill= BV> fair value= FCF>BV= BV>FCF=

BI+purch-COGS=EI. sales-cogs=Gross Profit Margin goodwill=purchase price - fair value of net assets (assets -liabilities). impaired. not impaired. impaired

how does debt impact the financial statements?

BS: portion paid off in the next year is in current liabilities. the rest is in long term liabilities. IS: interest expense is recognize in each period. CFS: cash paid for interest impacts operating activities. cash paid for principle impacts financing activities.

are deferred tax liabilities negative? DTA?

DTL positive, DTA negative

what is a tax loss carry-forward?

If a company reports a taxable loss in a certain year, IRS rules allow the company to claim a refund of income taxes paid on taxable income in prior years. If no such income exists, the company is able to carry forward these tax losses and offset them against taxable income earned in subsequent years. Thus, a tax loss carryforward represents a potential reduction in taxable income in future years, leading to reduced taxes in those years.

types of debt and provider

NP: provider: banks/financail institutions. BP: provider: investors.

determining market cost:

Organize the information that will always be given. Calculate the "ceiling" and the "floor" If the replacement cost is between the ceiling and floor, then use the replacement cost as the market cost. If the replacement cost is lower than the floor, use the floor as the market cost. If the replacement cost is higher than the ceiling, use the ceiling as the market cost.

who requires companies to provide tax disclosure that lists the DTA and DTl? all of the action is in _____ bc benign depreciation differences account for the vast majority of DTL.

US GAAP. deferred tax assets DTA

Fezzig Company sells six products identified with the letters A through F. For each product, the selling price per unit is $1.00, selling expenses are $0.20 per unit, and the normal profit is 25% of sales, or $0.25 per unit. What is the ceiling for the market price of inventory? What is the floor for the market price inventory?

What is the ceiling for the market price of inventory? Selling Profit - Exp 1-.20=.80 ceiling What is the floor for the market price inventory? Ceiling - profit 1-.20-.25=.55

deferred tax asset valuation allowance

a deferred tax asset only has value if there will be future taxable income to reduce. A valuation allowance account is required when it is more likely than not that some portion of the deferred tax asset will not be realized. The deferred tax asset is then reported at its net realizable value. "allowance" - similar to other contra-asset accounts that offset probable assets

is there an economic difference btwn owning 50% of a company and owning 50.1% of that company? acctg difference btwn owning 50 and 50.1 % of that company?

acctg difference : either consolidating or doing equity method of acctg. economic difference: potentially, depends on what types of decisions can/can't be made. acctg standards are influencing business settings here.

convertible preferred stock

add preferred dividends back onto numerator of EPS. recall that we subtracted these out of the numerator in the basic EPS calc. numerator basic EPS= NI - preferred dividends. numerator diluted EPS= NI-preferred dividends +preferred dividends. this cancels to zero. so numerator diluted EPS=NI compute the max number of shares realizable on the conversion and add this number to denominator of EPS.

debt covenants (negative, positive)

agreemnts btwn a company and creditor. that company can't breach. negative covenants: company receiving money can't do certain things). prohibition on mergers, addtnl borrowing, dividends. positive covenants: have to do certain things, maintain certain finical ratios. (do these things!) maintain certain financial ratios, provide audited financial statements, assets used as collateral, etc do managers make decisions to avoid violating covenants?

share based compensation why do firms give employees compensation in form of stock and options?

aim of share based comp is to align interest of managers with interest of shareholders. tying manager comp to stock performance provides incentive for manager to act in best interest of the shareholders.

step 1 of tangible assets: do they depreciate?

all costs incurred to bring the asset into use. acquisition cost of fixed assets. this is step 1: acquire costs. land= punch price + commissions + taxes + land preparation costs + title fees + legal fees - proceeds from salvage. does not depreciate. land improvements= costs of improving the land for use (fences, parking lots). depreciates. buildings= construction costs + construction financing costs + closing costs + commissions + remodeling. depreciates. equipment= purhc price + freight in + installment costs + testing + sales tax. depreciates. recurring annual fee is not included in cost of an asset, its considered an expense.

predicting bankruptcy using ratios to asses risk

altman z-sscore: <=2.675 company will go bankrupt. greater will not go bankrupt. how accurate was alt mans sample? 95% accuracy. total prediction error increases as you lengthen the bankruptcy horizon.

matrix financial statement includes the following: 2m shares of PS, 8%, 50 par, cum, convertible into 4m shares of CS. basic EPS for matrix is $1.85. incremental effect of the PS conversion:

antidilutive convertible security example. 2mx8%x50= 8m/4m= $2.00 > $1.85. PS: add back preferred dividend preference of 8million which is 2m x8%x50$. divided by additional convertible shares of 4m. so greater so anti dilutive, in which case you can ignore these types of securities.

how many sets of books do larger US corps keep?

at least three book collections: financial reporting (bs, scf, is). required by GAAP. tax reporting: recordings must be kept of many difft jurisdictions (cities, states, countries). managerial info systems (control, evaluation, planning)

the max number of shares of capital stock that can be issued to the public. issued vs unissued shares outstanding vs treasury shares

authorized shares. issued: authorized shares of stock that have been distributed to the shareholders. (outstanding vs treasury) outstanding: issued shared owned by stockholders. treasury: issued shared that have been reacquired by the corporation. unissued: stock shares that have never been distributed to stockholders

different lenders have access to different sets of info...

banks and financial institutions: have access to public and private info. this allows them to refine their credit analysis. public debt investors: have access to public info only.

carbondale enterprises reported following: 200k shares of CS issued and outstanding at 12/31/2015. on 7/1/2014 carbondale issued a 10% stock dividend. unexercised stock options to purchase 40k shares of CS (adjusted for the 2014 stock dividend) at 20 per share were outstanding the beginning and end of 2014. the avg market price of carbon dales CS (adjusted for the stock dividend) was 25 per share during 2014. NI for the year ended 12/31/2015 was $1,100,000. calculate basic and diluted EPS

basic EPS: NI 1.1m / 200k shares x 1.1 stock dividend = basic EPS of $5.00 diluted: NI 1.1m / (200k shares x 1.1 stock dividend) option impact:potential shares=40k shares cash proceeds = 40kx20=800k. shares repurchased= 800k/25=32k. share increase= 40k-32k=8k difference of potential shares - shares repurchased, add this 8000 to denominator. so diluted EPS=$4.82 diluted must be lower than basic eps to report these securities as diluted**

digistore reported following: 400k shares of 20 par CS. 40k shares of 100 par, 6% convertible PS outstanding for the entire year ended 12/31/2014. each share of PS is convertible into 5 shares of CS. calculate basic and diluted EPS

basic EPS: NI 1.86m - preferred dividends 240k / 400k common shares = 3.60$. diluted EPS= 1.68m NI, ignore preferred dividends. / 400,000 + (40,000x5) = diluted EPS of $2.80 convertible preferred stock impact: numerator=ignore the dividend. denomenator= each preferred share is converted in 5 common shares. diluted is lower than basic so you can report this as basic

wondrous co reported following: issued at par 50,000 at 4% bonds convertible, in total, into 5,000 shares of CS. throughout the year, wondrous has 6,000 shares of CS outstanding. NI = 4,000 tax rate is 40%. calculate basic and diluted EPS.

basic eps= 4,000 numerator / 6,000 in CS outstanding weighted avg = $0.66 diluted: 4,000 + (50,000x4%x(1-.4))/6000+5,000 = $0.47 per share convertible PS impact: numerator: add back interest expense, net of tax shield. denominator: add new shares. 47 lower than 66 so we report this diluted amount.

options, rights, and warrants effect on EPS. use what method?

calculate EPS as if all "in the money" shares associated with options, rights, and warrants have been exercised. we assume the options were exercised at the beginning of the year or when the options were issued if later. options have a denominator impact only!! use treasury stock method: assumes that hypothetical proceeds from the exercise of options are used to purchase treasury shares at the avg market price for the period. this method usually results in a net increase in shares included in the denominator of the calculation of diluted EPS bc the market price is generally higher than the exercise price of the options 4 step process: 1)determine new shares from hypothetical exercise of all options 2) determine cash proceeds from hypothetical option exercises (# of options x strike price) 3)determine the # shares that would be reacquired using the cash proceeds from the hypothetical option exercises (cash proceeds / avg market price). 4) increase the diluted EPS denominator by the difference btwn the total # shares from hypothetical exercises and the # shares from hypothetical repurchases.

matrix repurchased public debt securities with a face value of 680,000 by paying 650,000 in the open market. the bonds had an unamtorized discount of 21,000. determine the amount of any gain/loss on the repurchase:

carry value of bonds= 680k-21k unamortized discount= 659k. cash paid to repurchase bonds= -650k/ difference = 9k. is this a gain or loss? gain. carrying value is 659 but we only had to pay 650.

supply of credit-lenders

commerical banks: may have better knowledge of a firm, but are constrained in the amt of risk they can assume. non-bank financial institutions and private debt: credit unions, insurance companies, supplement banks to provide specific needs. also, investment bankers may broker private debt placement. public debt markets: requires that a firm have the size, financial strength, and credibility to bypass the banking sector. firms issue either commercial paper or bonds. sellers who provide financing: (catch all) suppliers typically extend very short term financing to buyers, but may occasionally grant a loan.

stock dividends and stock splits

common shares issued as part of stock dividends or stock splits are treated retroactively. all shares outstanding prior to the stock dividend or stock split date are adjusted. for comparative IS prior year EPS should also be adjusted to reflect the stock split or stock dividend.

share repurchases. definition. why?

companies buys its own shares in the open market. why? distribute excess cash to shareholders. managers feel the stock price is undervalued. reduce shares outstanding to inc EPS. distribute shares to employees in stock option plans. issue shares as stock dividend. for use in mergers and acquisitions. regardless of the reasons for repurchasing shares of stock, companies can account for the repurchase in either of the follow way: the shares can be formally retired, or they can be accounted for as treasury shares repurcahse and retire: when shares are repurchased and formally retired, we reduce the same capital accounts that were increased when the shares were issued- CS or PS, and addtnl pic. cash goes down, CS goes down. cash and CS decrease. repurcahse and hold in treasury: stock issued by a company and then repurchased by the company, but not retired. TS reduces SHE on the BS (contra equity account). no voting rights, no divined rights. debit TS credit cash

public debt repurchases

companies can go into the market and buy back their own public debt securities. like any investors, the company must repurchase the debt at the current market price. a realized gain/loss is recognized for the difference btwn the carrying value of the debt and the cash paid to repurchase the debt (the fair market value). repurchasing the debt will retire the debt. repurchasing debt effectively retires the debt.

goodwill impairment

compare fair value of reporting unit with carrying value. for it to be impaired, fair value is lower than carrying(book) value. if fair value is lower than books, then its impaired.

antidilutive convertible securities

compare the incremental effect of the conversion (calculated as a fraction) with the EPS calculation without conversion. if the incremental effect is higher than EPS without conversion, than the impact is anti dilutive and the conversion should be ignored.

asset impairment for intangible assets that we amortize

compute BV of the tangible/intangible asset. estimate undercounted sum of future cash flows the asset is expected to generate. if sum of cash flows is greater than the BV, do nothing. the asset is not impaired. if sum of cash flows is less than the book value, the asset is impaired and write the tangible asset down to its fair value.

convertible debt

compute what NI would've been without the interest expense. add (interest expense x (1-tax rate) to the numerator of EPS. compute the max number of shares realizable on conversion. add this to the denominator of EPS.

diluted EPS

considers dilution of earnings that arises from potential common shareholders (options and warrants, convertible bonds, convertible PS). basic EPS= (NI-preferred dividends)/weighted avg shares outstanding. diluted EPS= basic EPS - impact of convertibles - impacts of options, warrants, and other dilutive securities.

3 major componenets of equity

contributed capital: CS+PS-Treasury Stock TS retained earnings: "earned capital" accumulated OCI other comprehensive income. (inc and dec in equity due to market prices)

in 2009, matrix has 10% 5m face amount bonds outstanding which are convertible into 2m shares of CS. assume a tax rate of 40%.

convertible debt security. 1) increase in numerator= 5m x10%x(1-40%)=300,000. 2) increae in denominator= 2,000,000

denver co issues 10% 3 yr bonds with 100k fv. semi annually. market rate =12%. premium or discount bond?

coupon rate < market rate, so bond issued at discount. fv=100k, n=3x2=6, i=12% market rate/2 omts. pmt= 5k. pv=95,083. JE: debit cash 95,083. debit discount BP 4,917. credit BP 100,000. bc we still have to repay entire amt at end of period.

two types of securities

debt securities 1)held to maturity: amortized cost. unrealized holding gains or losses not recognized. other income effects: interest when earned, gains and losses from sale. 2)trading securities (investment securities we purchase with intent to take advantage of short term price changes). valued at fair value. ***unrealized holding gain or loss is recognized in net income. other income effects: interest when earned, gains and losses from sale. 3)available for sale (purchased for safety reasons). valued at fair value.*** unrealized holding gains or losses recognized as other comprehensive income and as separate component of SHE. interest when earned, gains and losses from sale. equity securities 1)trading- measured at fair value. unrealized holding gains or losses recognized in NI. other income effects: dividends declass, gains and losses from sale. 2)equity method- holdings less than 20%: ---- holdings between 20-50%: valued at equity, unrealized holding gains or losses not recognized. proportionate share of investees NI. holdings more than 50%: valuation at consolidation. unrealized holding gains or losses not recognized. other income effects not applicable.

debt/equity hybrid securities. give one reason why companies issue bonds that can be converted into equity and why an investor would purchase a bond with an equity feature.

debt securities that include an equity option.

Permanent and Temporary Differences The company reported pretax financial income in its income statement of $50,000. Among the items included in the computation of pretax financial income were the following: Interest revenue from municipal bonds $10,000 Nondeductible expenses (fines) 17,000 Warranty expense (no warranties were actually provided) 8,000 The income tax rate is 30%. Compute the following: (1) financial income subject to tax, (2) taxable income, (3) Total income tax expense, (4) current income tax expense, (5) deferred income tax expense, (6) net income, and (7) effective tax rate. IS and BS presentation

deferred tax assets. pretax financial income 50k +- perm differences: munis -10k, nondeduct exp 17k. =financial income subject to tax 57k. +- temp differences warranty 8k. =taxable income(this year) 65k. 57kx30%=17,100 total tax expense. 8kx30%= -2400 deferred tax expense (always make negative around deferred tax assets). 65kx30%=19,500 current tax expense. IS: pretax financial income 50k income tax expense: current 65kx30%=19,500 deferred 8kx30%= -2400 total income tax expense 17,100 net income 50k-17100=32900. (effective tax rate 17100/50k=34.2%. BS: assets deferred tax asset 2400 liabiliities income tax payable 19500

how to calc depreciation? how to calc DTL or DTA?

depr=book-taxes. tax>book=DTl

what do we depreciate? what do we amortize? what do we check for impairment?

depreciate tangible assets (PPE). amortize intangible assets (except goodwill and intangibles with indefinite useful lives). check for impairment: all assets, both tangible and intangible.

LIFO reserve: ex: LIFO 20 (old costs are on BS) FIFO 35 (current replacement costs are on BS) LIFO reserve:

difference between ending inventory computed using FIFO (reflecting current replacement costs) and LIFO ending inventory. lifo reserve: unrealized holding gain of $15.

dilutive vs antidilutive securities:

dilutive= the effect of the exercise or conversion of potential common shares decreases EPS. (all the past examples), so report these dilutive securities. antidilutive= the effect of the exercise or conversion of potential common shares increases EPS. we ignore antidilutive seuciritesi in the calculation of diluted EPS. potential common shares not included in diluted EPS bc they are anti dilutive should be disclosed in the notes to the financial statements.

bonds are typically issued at.... depending on market conditions.

discount/premium face value: coupon stated IR = market IR discount: coupon IR < market IR. premium: coupon IR > market IR

step 3 of tangible assets

disposing/selling of equipment. how should a disposal impact the financial statements? balance sheet effect JE: you are getting rid/scrapping of an asset.. loss on disposal of asset. Debit Acc Dep of the asset (original price-BV) Credit Asset Debit loss on disposal of asset (this balances JE). net PPE decreases, and RE decreases. income statement effect? loss on disposal. cash flow effect? no direct CF effect at this point. gain on sale of asset JE: balance sheet effect? Debit cash Debit Acc Dep- asset. Credit gain on sale of asset. Credit asset. income statement effecT? gain on sale of PPE. cash flow effect? investing CF.

deferred tax liability from accelerated depreciation: expected tax on income ___ but _____ from taxation bc of an accelerated depreciation income tax ______

earned but temp shielded from taxation. income tax deduction. the implicit baseline is financial accounting depreciation, usually straight line

basic earnings per share

earnings abailable to the owners (common shareholders) for each share of stock outstanding. ignores any potential common shares which might arise from convertible securities (these are included in diluted EPS. (NI (after tax) - preferred dividends ) / weighted avg outstanding CS*** need to memorize this equation for test. preferred dividends are non-voting, they are more like debt. and we want to know whats available to companies owners. weighted avg outstanding CS: how to calc? 1/1- balanced. 100,000 # shares. 4/1-issued 50,000 shares 10/1- issued 10,000 shares. 100,000 + (50,000 x (9/12) + (10,000 x (3/12) = 140,000 100k shares at 1/1. 50k new shares. 9/12 bc otustanding for 9 months. 10k new shares. 3/12 bc oct nov dec outstanding for 3 months. another approach: 100k x (3/12) + 150k x (6/12) + 160k x (3/12) = 140,000

tangible assets- examples. two types.

examples: inventory, car, property, plant, equipment PPE non depreciable assets- land (property). does not depreciate over time, no limited useful life. depreciable assets: plant and equipment. depreciates over time, has a limited life. allocate the cost of the asset over its useful life. steps 1-4: acquire costs depreciate it sell/dispose check for impairment- how to handle impairment if asset becomes impaired

inventory cost flow assumptions. 3/23: purchase 10kilos of rice for $4 each. 11/17: purchase 10kilos of rice for $9 each. 12/31: sell 10 kilos rice for $10 each. how much did kyoto make?

fifo: 100-40=60. lifo: 100-90=10. ave:100-65=35.

examples of permanent book-tax differences.*** premium payments and fines due to violations of the law municipal bonds fines restructuring charge R&D credits premiums paid for life insurance policies of key execs muni bonds domestic manufacturing deduction life insurance proceeds on the death of a key exec political contribution a portion of dividends received from other companies disallowed meals and entertainment targeted jobs credits (hiring veterans, former convicts)

fines, premium, restructuring charge, political contribution: positive. muni bonds" negative. income that is never taxed: income from municipal(city) bonds. life insurance proceeds on the death of a key exec. a portion of dividends received from other companies. so these show up in book income but not tax incomes.. .same with other bullets. make these items negative. expenses that are never deducted for tax purposes: political contributions. disallowed meals and entertainment. premiums paid for life insurance policies of key execs. payments and fines due to violations of the law. restructuring chargers. make these items positive. tax credits/deductions: targeted jobs credits (hiring veterans, former convicts). R&D credits. domestic manufacturing deduction. permanent differences impact your financial income subject to tax.

inflation

general rise in price levels. most commonly measured by CPI consumer price index. over past 40 yrs inflation avg 40%

debt: advantages and disadvatanges.

good: interest tax shield and management incentive alignment. bad: no payment fliexiblity. restrictive covenants. foregone investment opportunities. the ugly: potential default and bankruptcy.

antidilutive options: if the strike price of the options is ____ than the average market price of the stock for the year, the security is anti dilutive and we would not assume _______ are exercised.

greater the options. strike price > market price ----> ignore

historic cost vs market cost

historic: this one is easy. it is simply what the company historically paid. market: the cost to replace the item today, constrained by a valuation ceiling and floor. for LIFO, compare historic and market and take lower value.

how is "cost" determined? what are unrealized gains and unrealized losses? what is the recorded basis? what does this disclosure tell us about the performance on microsofts long term investments?

historical cost: original purchase price of the investment. unrealized gains= amount the security has appreciated above historic cost. loss: amount security fell below historic cost. fair value of investment at that time. fair value > historic cost which is a good thing. winning situation. microsoft has lots of investments, little debt, and investmensts>costs which is all good things.

amortization of intangible assets

if the useful life of the intangible asset is determinable, we amortize the cost over the lesser of the useful life or legal life. if the useful life is not determinable, we do not amortize the cost, but we monitor it for impairment. straight line amortization is used.

why the difference btwn income tax expense reported and income taxes paid?

income tax expense is based on reported financial accounting income whereas the amount of cash paid for income taxes is dictated by the applicable govt tax law. book means financial accounting.

asset impairment for intangible assets that we do NOT amortize

intangible assets that are not amortized. simple comparison of the BV to the fair value. if the fair value is less than the BV, the asset is deemed to be impaired and we write it down to the fair value. use same logic for trademark as goodwill. is this an intangible asset that we amortize it? if we don't amortize it, compare BV and fair value.

land cost: building cost: machine cost:

land: cost+demolition-salvage building: architect cost + contractor machine: ignore freight cost

inventory costing methods:

lifo,fifo, weighted avg. must be consistent application of method.

common liquidity and solvency ratios:

liquidity: current ratio= ca/cl quick ratio= cash+mkt securities+Ar / cl. solvency: liabilities to equity= tl /she. lt debt to equity: lt debt +current portion lt debt/she

the cost of inventory on the BS should be the lower/higher value of ____

lower value of historical cost

the cost of inventory on the BC should be the higher/lower value of ______

lower value of historical cost or the net realizable value.

goodwill

money you paid over and above whatever the company was originally worth. punch price - fair value of net assets = goodwill. when you say net assets, you need to subtract out the fair value of your liabilities to get fair value of net assets. in which statement goes goodwill appear? balance sheet. BS will change annually, it is checked for downward revaluation (impairment) only. if this is the case, you need to write it down. can balance go up? yes. if you buy another company. another merger/acquisition. JE: debit assets credit cash credit liabilities bedit goodwill (this entry evens out JE)

Universal Communications grants 5 million of its $1 par common shares to certain key executives at January 1, 2011. The shares are subject to forfeiture if employment is terminated within 4 years. Shares have a current price of $12 per share journal entry? total compensation expense?

no JE. total comp expense: 12x5m=60m. fair value per shared shares awarded=total comp. total comp allocated to expense over 4 year service period. so 60m/4years= 15m per year.

on 1/1/2008 matrix grants options that permit employees to purchase 5m shares of $1 par CS within the next 10 years, but not before 12/31/2009 (2 year vesting period). the strike price is the market price at the grant date of 25 per share. the black scholes value of the options is $7 per share. what is the impact on the financial statements of the stock option grants on the grant date of 1/1/2008? how will stock option grants impact BS and IS during each of the 2 years in vesting period? what happens when options are exercised by the employees?

no impact on grant date. total comp exp= 5m options x 7 black scholes value=35m / 2 year vesting period= 17.5m each year IS will be charged with 17.5 million in comp exp and BS equity account increased by 17.5m suppose 2m options are exervices with market price 35 per share. cash received=2m options x 25 strike=50m. decrease PIC stock options 2mx7=14m/ icrease CS 64 m (this is just a plug)

financial reporting same as tax reporting?

no. financial/book reporting: GAAP and or IFRS is the set of rules for preparing financial statements. rule makers: FASB and/or IASB goals: comparability, reliability, consistency. tax reporting: internal rev code is set of rules for preparing tax returns. rule makers: congress. goals: revenue, social welfare. book income will never equal tax income. bc there are two difft sets of rules and rule makers for each. financial statement income tax expense does not equal IRS income taxes payable.

EPS

number that is reported most frequently in the media and receives by far the most attention by investors. regulators impose standards to ensure the comparability of EPS across companies and across time. EPS= earnings/ # shares outstanding. this number can be challenging.

on 12/31/08, matrix reports following: CS 200m shares outstanding PS (100 par, 9% cum) 3m shares outstanding 2009: 3/1: matrix purchased 24m shares of CS as TS 7/1: matrix issued 5% CS dividend 10/1: 4m treasury shares were sold. NI: 150m 1)calculate basic EPS

numerator 150m - (100x9%x3m) denominator: (200mx1.05)-(24mx10/12x1.05) + (4mx(3/12)) 24m of CS as TS for 10/12 months. don't apply stock dividend to this portion. =0.65$

LIFO liquidation

older costs are in those lifo layers, so expenses go down which increases income.

the demand for credit- borrowers. most companies demand credit for..

operating: to cushion cyclical operating needs, investing: to purchase new equipment and property, financing: stock repurchases, debt maturity payments.

LIFO layers: over time, creation of lifo layers can result in a substantial difference between the _______ and the ________. this difference is called the ______. LIFO results in "layers" of inventory being created each year that ___ are more than _____ (when inventory _____). as prices are ______, you create LIFO layers. LIFO layers:

over time, creation of lifo layers can result in a substantial difference between the current market value (replacement cost) of inventory and the reported LIFO costs of inventory on BS. this difference is called the LIFO reserve. LIFO results in "layers" of inventory being created each year that purchases/production are more than sales (when inventory grows). as prices are rising, you create LIFO layers. LIFO layers: when you purchase/produce more than you sell...this creates the LIFO reserve.

equity method of accounting:

ownership greater than 20% but less than or equal to 50%. the investor doesn't include separate financial items for the investee. rather, the investor reports its investment in the investee in a single investment account. this is a "one-line consolidation" single investment account on the BS. the balance in this investment start at the amount paid (at cost). the balance is increased/decreased for the investors share of the investees net income/loss. the balance is decreased for the investors share of the investees dividend payments. equity method investment t account: left side: 1)investment cost. initial amount paid. 2) proportionate share of investees profits. increased goes on left side, decreased goes on right side. right side: 1) dividends received from the investee. 2) proportionate share of investees losses.

legal lives of intangibles

patent: right to use, make, sell product. legal life of 20 yrs copyright: right to reproduce and sell published work. legal life= life of creator + 70 years. franchise: right to do business in a certain geographic area. legal life= as defined by the contract. trademark: right to display a word, slogan symbol, or emblem that distinctively identifies a company, product, service. legal life 10 years, but can be easily renewed for an indefinite number of 10 yr periods. do not amortize!! monitor for impairment. goodwill: occurs when one company buys another company. difference btwn purchase price and FMV of net assets. no useful life, no legal life. do not amortize!! monitor for impairment. legal life and useful life will be given on test. i need to know to ***use smaller of the two items. know what type of asset it is when determining impairment.

book-tax differences

permanent differences: the financial accounting number will not be taxed. this inc/dec the effective tax rate by decreasing or increasing pre-tax financial income subject to tax. temporary differences: timing difference btwn when the number hits the financial statements vs the tax return. creates deferred tax asset (future tax deductions) and deferred tax liabilities (future tax outlays). book income> tax income = deferred tax liability (future tax outlays) book income < tax income = future deductible tax asset (future tax deductions)

in 2009, matrix has 10m CS options outstanding with strike price of $15. avg market price of stock was 25. potential common shares? cash proceeds? shares reacquired? increase in diluted EPS denominator?

potential Common shares=10m cash proceeds= 10m x 15= 150m shares reacquired= 150m/25=6m increase in diluted EPS denominator= 10m-6m=4m

tax template:

pretax financial income +- permanent differences =financial income subject to tax +- temp differences =tax income (this year) financial income subject to tax x statutory rate=total tax expense. temp differences x statutory tax rate= deferred tax expense. taxable income this year x statutory rate= current tax expense.

intangible assets: examples

rights, info, relationships, people. ex: patent, goodwill, character rights (marvels character rights) lack physical substance. provide future economic benefit (such as generating revenue intangibles have value. when to recognize intangible assets on balance sheet? internally generated intangibles are off BS. purchased intangibles are on balance sheet. why on income statement? bc if internally cerated its expensed through R&D.

what types of investments are included in short term investments? what factor might explain microsofts high level of investment in these securities? what types of investments are included in equity and other investments line item?

short term investments made up of commercial paper, US govt agency securities, CDs, lots of short term investments. large % of these is for liquidity and financial flexibility purposes. debt securities, CS and warrants, PS, other investments.

two types of credit risk:

short term liquidity risk: the near term ability to generate cash to service working capital needs and debt service requirements. will the firm be able to fund operations and pay off suppliers and providers of short term debt. long term solvency risk: the longer term ability to generate cash internally or from external sources to satisfy plant capacity (capital expenditures) and debt repayment needs.

capital structure: simple vs complex structure

simple: CS, no potentially dilutive securities. complex: includes securities that could dilute earnings per common share. dilutive means ability to influence the EPS in a downward direction.

step 2 of tangible assets.

step 2: depreciation. common depreciation methods: 1)straightline- easiest method. dep exp= (cost of asset- salvage/residual value) / # years useful life. salvage value= worth at end of life. salvage and # years are estimates and biased by management. 2)double declining balance DDB: accelerated method. more cost is allocated to the earlier years. calc straight line rate, multiple by 2. multiply beginning book value by DDB rate, stop depreciating when you hit the salvage value. 3)units of production: activity based method. dep exp= ((cost-salvage value)/total # unites in assets life) x # units produced this year. BV=cost-acc dep.

types of share-based plans -2

stock award plans (restricted stock): firm gives employees shares. comp expense associated w a share of restricted stock is the MARKET PRICE AT the grant date of an unrestricted share of the same stock. we need to find out fair value of the comp then expense this over the period services are performed. service period aka vesting period. stock option plans: firm gives employees the option to purchase shares. the fair value of the option is estimated and recorded as comp exp over service period for which participants receive the options, usually from date of grant to when the options become exercisablel (the vesting date) debate: historically options were valued at their intrinsic value measured as the difference btwn current market price and stock price. so if companies issued options with a strike price equal to the current market price, the intrinsic value is zero and NO comp exp was recorded (managers like that. does this seem like proper accounting? regulators caved and only encouraged firms to recognize the fair value of the options as comp exp. only two companies, boeing and winn dixie did so. there are big dollars here. fall of enron lead regulators to revisit this issue. accounting objective of these plans is to record fair value of the comp expense over periods its performed. expense the fair value of compensation over periods the employees perform the services.

step 4 of tangible assets.

tangible asset impairment (property and equipment). for assets that we depreciate or for intangible assets that we amortize. events can occur after the purchase of an asset that impairs/limits its value and require an immediate write down. when we test an asset for possible impairment, we also review the original useful life and residual value assumptions and make adjustments as needed. tangible asset impairment is not commonly seen. four steps: compute BV of tangible/intangible asset. estimate undercounted sum of future cash flows the asset is expected to generate. if sum of CFs is greater than BV, do nothing. the asset is not impaired. bc it brings you more money than its worth. if sums of CFs is less than BV, the asset is impaired and write the tangible asset down to its fair value.

what are some ways companies keep their effective tax rates down? 64% of all parent companies are incorporated where? why?

tax deductions and tax credits delaware. companies win here bc you aren't paying the taxes. delaware state loses bc they are losing their state tax revenue.

temporary differences will do what in future?

temp differences will reverse in one or more future periods. either... financial income>taxable income -> future taxable amounts -> deferred tax liability. or financial income<taxable income -> future deductible ants -> deferred tax asset.

term bonds serial bonds secured bonds unsecured bonds convertible callable

term bonds- entire principal due at once. most common serial: at various dates secured by collateral or assets unsecured can be converted into common stock borrower/issuer can redeem prior to maturity.

S corp reported NI of 154 million in 2016. CS: 1/1: 60m CS outstanding. 3/1: 12 m new shares were sold. 6/17: a 10% stock dividend was distributed. 10/1: 8m shares were reacquired as treasury stock

the only thing to do is subtract from denominator 8m x 3/12. these shares were each treasury stock for 3 out of the 12 months. so numerator is still 154 m / 60m shares x 1.1 x 12/12 + 12m shares x 10/12 x 1.1 - 8m treasury shares x 3/12 = 75m. so EPS - 154/75= 2.05

reacquired shares

the weighted avg number of shares is reduced by the number of reacquired shared, weighted by the # of months the shares were held in treasury and NOT outstanding.

yosef company paid $100 to purchase a portfolio of debt securities. yosef company intends to hold these securities for the foreseeable future, although they could be sold at any time if the need arises. dividends and interest received on the securities in the portfolio totaled $8 during the year. securities in the portfolio that were purchased for $20 were sold for 13. as of the end of the year, the portfolio is valued at 120. 1)at what amount will these securities be reported in the BS at end of year? 2)how much investment related income will be reported in the IS for the year?

these are available for sale securities. 1) AFS reported at fair value: $120. 2) dividend and interest revenue stays same at 8. realized loss stay same at 13-20= -7. total investment related income = 1. the $40 unrealized increase is reported as an increase in OCI other comprehensive income. main difference is figuring out where unrealized gain/loss is reported depending on if its AFS securities or trading securities.

harry company paid $100 to purchase a portfolio of debt and equity securities. harry company intends to actively manage this portfolio in order to make money on day to day price fluctuations. dividends and interest received on the securities in the portfolio totaled $8 during the year. securities in the portfolio that were purchases for $20 were sold for $13. as of the end of the year, the portfolio is valued at $120. at what amount will these securities be reported on the BS at the end of the year? how much investment related income will be reported in the IS for the year?

these are trading securities. actively manage: thinking about trading securities. BS: trading securities are reported at fair value: 120$. IS: dividend and interest rev: $8. realized loss: 13-20= -7$. unrealized gain: 120 fair value-80 remaining cost= $40. total invest related income= $41.

in 2009, matrix had 5m shares outstanding of 8%, 10 par, PS cumulative cum which can be converted into 3m common shares.

this is a convertible preferred stock 1) numerator= add back the dividend preference which was considered in the basic EPS calc (that is , we simply ignore the dividend preference). 5mx10x8%=4,000,000. 2)increase in denominator 3,000,000

bond issued at 10% and market rate is 8%

this is a premium bond. bS: BP of 105,242 JE: debit cash 105,242 credit BP 100,000 credit premium on BP 5,242. amortize premium on BP throughout the periods just like we did with the discount.

how are stock options valued?

through option pricing model: math models that estimate value based on.... strike price etc. one example is black scholes model. value of option will be given to us on theist.

short term investments ex:

treasury bills tbills, commercial paper, CDs. invest in these for financial flexibility or liquidity purposes. or to influence other companies decisions, control their decisions, quick growth, foothold in a new market, acquire particular expertise

under inflation and steady inventory levels, LIFO/FIFO yields lower/higher inventory/COGS on BS and lower higher..on IS prices/cost and time for LIFO/FIFO... lower/higher COGS on IS and lower/higher costs on BS

under inflation, LIFO yields lower inventory on BS and higher COGS on IS than FIFO. if FIFO is used, their BS would be higher. if FIFO is used, their COGS would be lower. there is no direct difference on SCF between the two methods. LIFO: lower inventory costs on BS, and as time and price/cost increase there higher COGS on IS. FIFO: opposite. lower COGS on IS. as price per cost and time increase, higher inventory costs on BS>

use this method to determine interest expense:

use coupon rate to determine cash payment. use the market rate to determine interest expense. use an amortization table to determine this. amortization table: period-interest expense- cash payment - discount amortization-carrying value. Ainterset expense: CVxmkt%. carrying valuex%. Bcash payment: FVxstat% Cdiscount amortization: C=A-B Dcarrying value: CV+C

when we own less than 20%... greater than 20%-less than 50%: more than 50%:

we have no significant influence. investing excess cash bc think value of security will increase, or to hedge risk. HTM held to maturity: investment reported at amortized cost (Debt only) TS trading securities: investment reported at fair value with unrealized holding gains and losses included in NI. AFS available for sale: investment reported at fair value with unrealized holding gains and losses excluded tom NI and reported in OCI other comprehensive income (debt only). significant influence. influence the operations of another company. ex: invest in a key supplier to have influence over suppliers decisions. equity method: investment cost adjusted for subsequent earnings and dividends of the investee. control over another company. consolidation: the financial statements of the investor and investee are consolidated as if they are a single company.

consolidation

when investor company owns more than 50% of the voting stock of the investee company. financial statements of investor and ivnestee company are combined as if they're a single company. BS: report all assets and liabilities of subsidiaries owned more than 50%. a non controlling (minority) interest equity item reps the percentage of net assets not owned by the parent company. IS: report all revs and expenses of subsidiaries more than 50%.a noncontrolling (minority) interest income item reps the percentage of subsidiary NI not owned by the parent company.