Book 3 - Financial Statement Analysis, Corporate Issuer

Warrant conversion:

(Currency mount issued/Par value) * bonds per warrant * shares

Straight line interest

(Sum of coupon payments - Amortization difference)/period

Common size analysis:

Based on Revenue for income statement

Bad debt expense:

An expense of the period, based on a company's estimate of the percentage of credit sales in the period, for which cash will ultimately not be collected. The allowance for bad debts is a contra asset account, which is netted against the asset accounts receivable.

Financial leverage ratio (when referenced directly)

Asset/Equity

Component method of depreciation:

Breaking down depreciated item into separate items.

Net income

Change in retained earning + dividends

Classified balance sheet:

Classifies assets and liabilities as current or non-current

Average remaining useful life of asset (how much is left) :

PPE/depreciation expense

Weighted average of shares (in a year)

Sum of shares outstanding at different periods, weighted by how long that period lasted.

Deferred tax liabilities:

The amount of taxes a company has "underpaid" which will be made up in the future.

Capitalizing:

Creates an asset and removes the expense from the income statement.

Return on capital

EBIT/Avg capital

Comprehensive income:

Net Income + Other Comprehensive income

Barter transactions:

Barter is an alternative method of trading where goods and services are exchanged directly for one another without using money as an intermediary. · These difficult to value properly and may result in bias in revenue recognition

LIFO Reserves:

· COGS(FIFO) = COGS(LIFO) - Change in LIFO Reserves · Inventory (FIFO) = Inventory (LIFO) + LIFO reserve

Inventory Valuation Methods: FIFO

· First in, first out. · COGS: Uses oldest prices · Ending inventory: Uses most recent prices

Do not include

· Transportation to bring business to customers · Abnormal waste · Non-production related storage

Poor reporting quality:

· Use of non-standard measures. · Not explaining significant changes. · Excluding things without good reason. · Unusual items that are likely to appear frequently should not be considered, not removed.

Amortization difference

(Face value - Present Value)

Investment property accounting disclosures

(Only IFRS has rules on it): Cost model disclosures: · Fair value · Useful life Fair value model disclosures: · Fair value · Fair value Method · Change in carrying amounts of investment property (impairment loss)

DSO:

(Receivable/Revenue) * 365 · Since this is how much of the revenue we are still waiting on, if DSO is increasing this might mean that revenues are being recognized prematurely.

Common-size cash flow statement:

A common-size cash flow statement is to show each line item on the cash flow statement as a percentage of net revenue.

Inventory turnover ratio

COGS/(Average inventory)

Cash recognition examples

Cash paid to suppliers = Cogs + inventory difference + payable difference Cash received from customers = Revenues - difference in receivables Cash from Equipment = gain/loss + equipment(beginning + capex - end) + depreciation(beginning + expense - end)

PPE Item components:

Costs of an item should only include what is directly necessary for that item and need for it to be ready to use. Training does not count.

Current ratio

Current assets/ Current liabilities

Interest coverage ratio

EBIT/Interest · Make note of the use of EBIT. This means that changes in taxes do not affect this ratio.

EBIT Margin

EBIT/Revenue

Top-down analysis

Involves identifying attractive geographical segments and/or industry segments, from which the investor chooses the most attractive investments.

Bottom-up analysis:

Involves selection of specific investments from all companies within a specified investment universe.

Goodwill:

Measured as the difference between the purchase price paid for an acquisition and the fair value of the acquired. · Goodwill is not amortized but is tested for impairment annually. · Means an acquisition happened.

Return on Assets

Net profit margin × Total asset turnover

Operating, Financial and Investment Activities

Operating: Activities Include the company's day-to-day activities that create revenues, such as selling inventory and providing services, and other activities not classified as investing or financing. · Trading is considered an operating activity Investing: Activities include purchasing and selling long-term assets and other investments. Financing: Activities include obtaining or repaying capital, such as equity and long-term debt.

Effective Interest expense

PV * market rate

Net revenue (notes)

Remove returns or allowances.

Debt Extinguishment (Definitions):

Repaying debt. · Purchase of debt securities: Actual amount paid toward debt. · Gain on debt extinguishment: Gain due to market value change.

Taxable temporary differences:

Result in a future taxable amount, a deferred tax liability.

Deductible temporary differences:

Results in a decrease to future taxable amount, a deferred tax asset.

Gross profit

Revenue - COGS

Coefficient of variation

Stdv/avg value

Effective rate:

The market rate at the time of issuance. · Normally does not change year to year · If the rate of issuing is close to the effective rate, the carrying value shouldn't change year to year.

Lease accounting:

IFRS: Finance and operating leases: · Amortization expense = PV/Periods · The lessee records a lease payable liability and a ROU asset equal to the PV. · The principal repayment is a cash outflow under financing activities. · Interest expense is under either operating or financing activities. · Interest expense and amortization expense are reported on the income statement. GAAP: Operating lease: · Amortization expense = Par - (PV * interest) · Lease expense is an operating expense on the income statement, it includes lease liability and amortization expense. · The lease payment is reported as a cash outflow under operating activities on the statement of cash flows Finance lease: · The finance lease accounting model is identical to the lessee accounting model for IFRS.

Intangible assets disclosures

IFRS: Finite · The useful lives, or the depreciation rate · Amortization methods · Gross carrying amounts (Amount of disposals) · Accumulated amortization · Where amortization is included on the income statement · Impairment loss Indefinite · Gross carrying amounts · Why it is considered to have an indefinite life Legal · Restrictions on title and pledges as security of intangible assets · Contractual agreements to acquire intangible assets are required. If the revaluation model is used: · The date of revaluation · Details of how the fair value was obtained · The carrying amount under the cost model · The revaluation surplus must be disclosed. GAAP: · Gross carrying amounts · Accumulated amortization · Aggregate amortization expense for the period · Estimated amortization expense for the next five fiscal years.

Intangible Assets Reporting (GAAP, IFRS)

IFRS: · Allows companies to report intangible assets using either a cost model or a revaluation model. · Must be in development phase. GAAP: · Only the cost model. Overall: · Internally created identifiable intangibles are expensed rather than reported on the balance sheet.

Impairment loss disclosures:

IFRS: · Amounts of impairment losses and reversals · The reason for the impairment · The location in the financial statements · The types of assets affected US GAAP: · Amounts of impairment loss (There are no reversals) · The reason for the impairment · The location in the financial statements · Description of the impaired asset · Fair value valuation method

Accounting (IFRS, GAAP)

IFRS: · Interest received may be classified either as an operating activity or as an investing activity · Interest paid may be classified as either an operating activity or financing activity GAAP: Everything GAAP is operating, except dividends paid. They are financing. · Interest received and interest paid are reported as operating activities · Dividends received are always reported as operating activities · Dividends paid are always reported as financing activities

PPE disclosures:

IFRS: · The measurement bases · The depreciation method · The useful lives, or the depreciation rate · Gross carrying amounts (Amount of disposals) · Accumulated amortization · Impairment loss If the revaluation model was used: · The date of revaluation · Details of how the fair value was obtained · The carrying amount under the cost model · The revaluation surplus must be disclosed. Legal · Disclosure on restrictions on title and pledges as security of PPE · Contractual agreements to acquire PPE GAAP: · The depreciation expense for the period · The balances of major classes of depreciable assets · Accumulated depreciation by major classes or in total · A general description of the depreciation method

Impairment on PPE (IFRS, GAAP)

· IFRS: Compare carrying value to (fair value - cost to sell) and PV. If carrying value is lower than them, the higher of those becomes the carrying value. If the original carrying value is higher, the difference is recorded as a loss. In the case of profit, it goes to comprehensive income, and on the balance sheet on equity under revaluation surplus. If higher of the comparisons happens to decrease later on, then the comprehensive income and revaluation surplus should decrease as well. If the loss continues beyond that, record the remaining loss as a loss in income. Similarly, in the case of loss record directly to loss of income, but if the loss is reversed completely record to comprehensive income and revolution surplus. · GAAP: Compare carrying value to undiscounted future cashflows. If original carrying amount is more, change to fair value. The difference between original carrying value and fair value is a loss. There are no reversals.

Inventories (IFRS, GAAP)

· IFRS: Inventories are carried at the lower of historical cost or net realizable value. · GAAP: Inventories are carried at the lower of historical cost, net realizable value, or market value.

Permanent differences:

· Income or expense items not allowed by tax legislation, and · Tax credits for some expenditures that directly reduce taxes.

Inventory Valuation Methods: LIFO

· Last in, first out. · COGS: Uses most recent prices · Ending inventory: Uses oldest prices

Perpetual vs periodic inventory:

· Perpetual inventory: A system of continuous inventory system. · Periodic inventory: A static system of inventory system, determining value afterwards.

Poor earnings quality:

· Poor profitability · Reliance on unsustainable sources of income

Causes of accounting profit-taxable income discrepancies:

· Recognizing period differences. · Recognizing differences. · Differences in carrying amount and tax base. · Deductibility differences. · Periods tax loss might reduce later tax bases · Adjustments differences

Depreciation methods:

· Straight line: (Original cost - residual)/Periods · Double: Calculate to be double of a straight line adjusting each year. · Units of production: ((Original cost - residual)/Total Units) * Amount of Units in period

Deferred taxes and assets (IFRS, GAAP)

· The creation of a deferred tax asset arising from negative goodwill is not allowed. US GAAP: · A deferred account is not recognized for unamortizable goodwill. IFRS: · A deferred tax account is not recognized for goodwill arising in a business combination. · IFRS allows deferred tax account if they are not a business combination and do not affect accounting profit or taxable profit at the time of the transaction.

Finance lease terms:

· The lease transfers ownership of the underlying asset to the lessee. · The lessee has an option to purchase the underlying asset and is reasonably certain it will do so. · The lease term is for a major part of the asset's useful life. · The present value of the sum of the lease payments equals or exceeds substantially all of the fair value of the asset. · The underlying asset has no alternative use to the lessor.

Accounting Notes:

· Under an operating lease the lessor keeps ownership of the asset so, the underlying asset remains on the lessor's balance sheet. · Beginning with fiscal year 2019, lessees report a ROU asset and a lease liability for all leases longer than one year. An exception under IFRS exists for leases when the underlying asset is of low value. · A sales-type lease records revenue at the time of sale equal to the value of the leased asset. · In a direct financing lease, only interest income is reported as earned. · In an operating lease, revenue from lease receipts is reported when collected.

Debt Extinguishment (Function):

· When a company's finances go out of whack, they will be able to repurchase their own debt at a lower price, since the risk of them being unable to pay the full amount is too high for the bond holders. This is a real gain on the income statement. · Gain is determined by Carrying amount - Face value. · A call price of 104, means that the price to recall the bonds is 104% of face value. This will cause a larger loss for the repurchaser than if the bonds were at par.

Carrying amount:

The value in the books of what you have. If you owe it, it's a liability. If you have it, it's an asset. If you just expense it, it's probably neither.

Antidilutive stocks:

Their inclusion in the computation would result in an EPS higher than the company's basic EPS.

Intangible assets Capitalizing (IFRS)

Under IFRS, for intangible assets expenses are only capitalized after the necessary conditions are met. The conditions are that: · Assets must be identifiable · Under the control of the company · Expected to generate future economic benefits

Tradable securities

Unrealized gains for tradable securities go directly in income.

Bond Value/Carrying Amount:

Use bond button. It's the Price. Market rate is yield. · To get values at the end of year (same as early next year), just subtract 1 from N. You can do this for more than 1 year.

Deferred income:

When a company receives payment in advance of delivery of the goods and services associated with the payment. · Does not see change in income until received. · Record increase in the asset Cash and an increase in the liability Deferred Revenues. · Due taxes, decrease in the asset Cash and an increase in the asset Deferred Tax Assets.

Trailing 12 Month earnings:

Year - Previous year period + Current year period

Segment reporting requirements:

· A lot of information on profit and loss, revenue, and such (distinguish external) · Assets and liabilities · Interest, depreciation, · Cost of PPE and intangible assets · How the segment is identified · Types of products and services sold.

Bond Accounting:

· Bonds issued are recorded as both a liability and a financing inflow. · Under GAAP expenses incurred while issuing bonds are recorded as an asset and amortized to the related expense. Under IFRS they are a liability and the related cashflow are financing activities.

Liquidity ratios:

· Cash ratio: (Cash + cash equivalents)/Current liabilities · Quick ratio: (Cash + cash equivalents + AR)/Current liabilities · Current ratio: Current Assets/Current liabilities · Defensive interval ratio: (Cash + cash equivalents + AR)/Daily cash expenditures

Inventory Valuation Methods: Specific Identification

· Cost is sales is calculated by the actual units used in each period * their actual purchase prices · Ending inventory is calculated in the same way

Inventory Valuation Methods: Weighted Average

· Cost of sales and ending inventory are calculated via a weighted average, using the amount of units purchased (not the units sold) * their price at the time of purchase. · Adjust weighted average to time range specified.

Pensions:

· Defined contribution pension plans: Company contributes an agreed-upon amount into the plan. · Defined benefit pension plans: Under a defined-benefit plan, a company makes promises of future benefits to be paid to the employee during retirement. · Companies report a net pension obligation equal to the PV of the pension obligation minus their pension assets. If the obligation is negative, and asset is recorded.

Valuation ratios:

· Dividend payout ratio = common share dividends/Net income attributable to common shares · Retention rate = (Net income from common shares - common share dividends)/Net income from common shares · Sustainable growth rate = Retention rate * ROE

Net income calculation:

Expected federal income tax expense/tax rate - income tax expense

Accrued expenses:

Expenses that have been recognized on a company's income statement but not yet been paid as of the balance sheet date.

Tax Burden

Pre-Tax income/Operating income

P/E ratio

Price/EPS

EPS

Income/Weighted average of shares (remember to look the times) · Remove preferred dividends from Income of basic EPS · Stock options increase the weighted average but not the income, since everything is used to buy back shares.

Inventory Liquidation:

Selling off inventory, typically at discount. IFRS · Disclosure of the amount of inventories recognized as an expense during the period. GAAP: · Disclosure of the amount of inventories recognized as an expense during the period · Disclosure of any material amount of income resulting from the liquidation of LIFO inventory

Goodwill:

An item acquired in a business combination and cannot be recognized as a tangible asset or identifiable intangible asset.

Average age of asset (how long it's existed) :

Accumulated depreciation/depreciation expense

Indirect method:

Shows how cash flow from operations can be obtained from reported net income as the result of a series of adjustments.

Direct method:

Shows the specific cash inflows and outflows that result in reported cash flow from operating activities.

Total useful life:

Age + remaining time

Shares possible to repurchase

Amount available - (Exercise price * amount available)/market price

Inventory write-downs:

Decreases inventory and increases COGS. IFRS: · The reversal of write-downs is required if net realizable value increases. · The inventory is reported at the lower of cost or net realizable value. GAAP: • Inventory is carried at the lower of cost or market value. • After a write-down, a new cost basis is determined, and additional revisions may only reduce the value further. • The reversal of write-downs is not permitted.

Investment property (Rules)

Defined under IFRS as property that is for the purpose of earning rentals or capital appreciation or both.

Free Cashflow to Equity:

FCFE = CFO - Capex + Net borrowing FCFE = CFO - Capex - Net debt repayment

Free Cashflow to the firm

FCFF = NI + NCC + Int(1 - Tax rate) - Capex - WCapex · NI = Net income · NCC = Non-cash charges · Int = Interest expense · Capex = Capital expenditures · WCapex = Working Capital expenditures FCFF = CFO + Int(1 - Tax rate) - Capex

Common size analysis (Balance sheet):

In Balance sheet show items as a percentage of assets. · Provides financial leverage in the form of debt/assets

Costs considered inventory

Include · Raw material · Direct labor · Overhead · Transportation to bring business to business · Normal waste · Production related storage Do not Include · Transportation to bring business to customers · Abnormal waste · Non-production related storage

Reported effective tax rate

Income tax expense ÷ Pretax income (accounting profit)

Other Comprehensive income:

Income that increases stockholders' equity but is not reflected as part of net income.

Financial assets:

Recorded as Cost or Amortized Cost: Hard to measure or held for a long time. Gain/loss recognized at maturity. · "Held-to-maturity" debt securities · Loans and notes receivable · Unquoted equity instruments Recorded as fair value through Other Comprehensive Income: Held for some time · "Available-for-sale" debt securities (US GAAP) · Debt securities (business involves collecting interest and principal, and selling the security) (IFRS) · Equity investments chosen by company (IFRS) Recorded as fair value on Income: Sold quickly · "Trading" debt securities (US GAAP) · All equity securities unless the investment gives the investor significant influence (US GAAP) · Everything else

Valuation allowance:

Reduces a company's deferred tax assets to the amount likely to be realized. · Taken when the company will likely fail to earn sufficient income to offset the deferred tax asset.

Asset turnover:

Revenue/Assets

Receivable turnover:

Revenue/Receivable

Impairment loss:

The amount by which the carrying amount of an asset or cash-generating unit exceeds its recoverable amount.

Carrying amount:

The original amount - the accumulated depreciation.