CFA 1 - FRA
What is the formula for the accelerated depreciation method double-declining balance (DDB) method?
(2/depreciable life in years)x book value at beginning of year x Note that salvage value is not in the formula for double-declining balance depreciation. However, once the carrying (book) value of the asset reaches the salvage value, no additional depreciation expense is recognized.
A company redeems $10,000,000 of bonds that it issued at par value for 101% of par or $10,100,000. In its statement of cash flows, the company will report this transaction as a:
10,100,000 CFF outflow. Cash paid to redeem a bond is classified as a cash flow from financing activities.
What are the steps to convert a balance sheet and income statement from LIFO to FIFO?
1) Subtract taxes on LIFO reserve from Cash (B/S) 2) Add LIFO reserve to inventories (B/S) 3) Add LIFO reserve (net of taxes) to retained earnings (B/S) 4) Subtract change in reserve to COGs (I/S) 5) Add (change in reserve x taxes) to taxes (I/S) Then you can adjust for ratios
A mechanism to discipline financial reporting quality for securities that trade in the United States that is not typically imposed on security issuers elsewhere is that:
A signed management statement about the effectiveness of the firm's internal controls is required by U.S. regulators for securities that trade in the U.S., but not elsewhere. The firm must provide a signed statement by the person responsible for preparing the financial statements, and financial statements must be audited by an independent party are required by securities regulators worldwide.
Inventory, cost of sales, and gross profit can be different under periodic and perpetual inventory systems if a firm uses which inventory cost method?
LIFO or weighted average cost, but not FIFO. The LIFO and weighted average cost methods can provide different values for inventory, cost of sales, and gross profit depending on whether the firm uses a periodic or perpetual inventory system. FIFO produces the same values from either a periodic or perpetual inventory system.
The revaluation model for investment property is permitted under:
neither IFRS nor U.S. GAAP. For long-lived assets classified as investment property, IFRS allows either the cost model or the fair value model. The revaluation model is permitted for long-lived assets that are not classified as investment property. U.S. GAAP only permits the cost model for valuation of long-lived assets and does not identify investment property as a specific subset of long-lived assets.
The most likely result of increasing the estimated useful life of a depreciable asset is that:
net profit margin will increase. The longer the estimated useful life of an asset, the lower the annual depreciation expense charged to operations. Lower depreciation expense results in higher net income, profit margins, and contributions to shareholder's equity.
Trade receivables are most commonly reported at:
net realizable value. Trade receivables are amounts owed to a company by its customers for products and services already delivered. They are typically reported at net realizable value, an approximation of fair value based on estimates of collectability.
In calculating the numerator for diluted earnings per share, the dividends on convertible preferred stock are:
Added to earnings available to common shareholders without an adjustment for taxes. Diluted EPS = [(Net income − Preferred dividends) + Convertible preferred dividends + (Convertible debt interest)(1 − t)] / [(Weighted average shares) + (Shares from conversion of conv. pfd shares) + (Shares from conversion of conv. debt) + (Shares issuable from stock options)]
What are some aggressive accounting choices?
Aggressive accounting choices are those that increase earnings, operating cash flows, or asset values in the current period. Classifying interest paid as an investing cash flow, rather than as an operating cash flow, results in higher CFO and lower CFI. The other choices are examples of conservative accounting choices because they decrease earnings in the current period.
Dubois Company bought land for company use five years ago for €2 million and presents its balance sheet value as €2.2 million. If the fair value of the land decreases to €1.8 million, Dubois will:
Because the land is valued above its historical cost on the balance sheet, Dubois is using the revaluation model. The land's revaluation up to €2.2 million would have been reflected in shareholders' equity with a revaluation surplus of €200,000. The decrease in fair value to €1.8 million will reduce the revaluation surplus to zero, and the amount of the writedown below historical cost (€2 million - €1.8 million = €200,000) will be recognized as a loss on Dubois's income statement. This loss, combined with the removal of the revaluation surplus, will decrease shareholders' equity by €400,000. Note that the land was purchased for company use and therefore would not be classified as investment property.
To adjust for operating leases before calculating financial statement ratios, what value should an analyst add to a firm's liabilities?
Before calculating ratios involving liabilities, an analyst should estimate the present value of operating lease obligations and add this value to the firm's liabilities.
In converting a statement of cash flows from the indirect to the direct method, which of the following adjustments should be made for a decrease in unearned revenue when calculating cash collected from customers, and for an inventory writedown (when market value is less than cost) when calculating cash payments to suppliers?
Beginning with net sales, calculating cash collected from customers requires the addition (subtraction) of any increase (decrease) in unearned revenue. Cash advances from customers represent unearned revenue and are not included in net sales, so any advances must be added to net sales in order to calculate cash collected. An inventory writedown, as a result of applying the lower of cost or market rule, will reduce ending inventory and increase COGS for the period. However, no cash flow is associated with the writedown, so COGS is reduced by the amount of the writedown in calculating cash paid to suppliers.
Is an acquisition of treasury stock or a loss from the write-down of inventory under the lower-of-cost-or-market rule included in comprehensive income?
Comprehensive income includes all transactions that affect shareholders' equity except transactions with shareholders. Thus, any transaction that affects net income would also affect comprehensive income. Since the inventory write-down is included in net income, it is part of comprehensive income. The acquisition of treasury stock is a transaction with shareholders; thus, it is not a part of comprehensive income.
What is a quick way to see if convertible debt is dilutive?
Convertible debt interst (1-t) / convertible debt shares If this per share amount is greater than basic EPS, the convertible debt is antidilutive, and the effects of conversion should not be included when calculating diluted EPS. If this per share amount is less than basic EPS, the convertible debt is dilutive, and the effects of conversion should be included in the calculation of diluted EPS.
The amortized cost of a trademark is least likely to appear on a firm's balance sheet if the trademark was:
Costs of developing a trademark are expensed in the period incurred. The value of a trademark can appear on the balance sheet if the trademark was purchased or obtained in a business acquisition.
For a firm financed with common stock and long-term fixed-rate debt, an analyst should most appropriately adjust which of the following items for a change in market interest rates?
Debt-to-equity ratio. For the purpose of analysis, the value of debt should be adjusted for a change in interest rates. This will change the debt-to-equity ratio.
Due to declining prices, Steffen Inc. has a LIFO reserve of -$20. Its income tax rate is 35%. If an analyst is converting Steffen's financial statements to a FIFO basis, which of the following adjustments is most appropriate?
Declining prices (negative LIFO reserve) would result in FIFO inventory being less than LIFO inventory. The balance sheet adjustment would decrease assets (inventory) by the $20 LIFO reserve. In addition, the analyst would increase cash by $7 ($20 LIFO reserve × 35% tax rate). To bring the accounting equation into balance, the analyst would decrease shareholders' equity by $13 [$20 LIFO reserve × (1 − 35% tax rate)].
Which of the following factors is least likely to cause a difference between a firm's effective tax rate and statutory rate?
Deductible expenses. Permanent tax differences such as tax credits, non-deductible expenses, and tax differences between capital gains and operating income give rise to differences in the effective and statutory tax rates.
How is CFF calculated?
Financing cash flows (CFF) are determined by measuring the cash flows occurring between the firm and its suppliers of capital. Cash flows between the firm and its creditors result from new borrowings (positive CFF) and debt principal repayments (negative CFF). Note that interest paid is technically a cash flow to creditors, but it is included in CFO under U.S. GAAP. Cash flows between the firm and its shareholders occur when equity is issued, shares are repurchased, or dividends are paid. CFF is the sum of these two measures: net cash flows from creditors = new borrowings − principal amounts repaid net cash flows from shareholders = new equity issued − share repurchases − cash dividends paid Cash dividends paid can be calculated from dividends declared and any changes in dividends payable.
What accounting standard allows inventory revaluations?
IFRS. U.S GAAP prohibits upward inventory revaluations (except in very limited circumstances which are beyond the scope of the Level I exam).
What is the treatment of Deferred tax liabilities for analytical purposes (assets/liabilities/equity?)
If deferred tax liabilities are expected to reverse in the future, they are best classified by an analyst as liabilities. If, however, they are not expected to reverse in the future, they are best classified as equity (DTL decreased and equity increased by the same amount). The key question is, "When or will the total deferred tax liability be reversed in the future?" In practice, the treatment of deferred taxes for analytical purposes varies. An analyst must decide on the appropriate treatment on a case-by-case basis.
In periods of rising prices and stable or increasing inventory quantities, using the LIFO method for inventory accounting compared to FIFO will result in:
In periods of rising prices and stable or increasing inventory quantities, the LIFO method will result in higher cost of sales, lower taxes, lower net income, lower inventory balances, lower working capital, and higher cash flows.
What defines income tax expense?
Income tax expense is defined as expense resulting from current period pretax income. It includes taxes payable and deferred income tax expense. Taxes payable are the amount of taxes due the government.
Which of the following items for a financial services company is least likely to be considered an operating item on the income statement?
Income tax expense. For a financial services company, interest income, interest expense, and financing expenses are likely considered operating activities. For both financial and nonfinancial companies, income tax expense is a non-operating item that is reported within "income from continuing operations" as opposed to "operating profit" as with the other answer choices. Therefore, of the three choices, income tax expense is least likely to be considered an operating item.
Christophe Inc. is an electronics manufacturing firm. It owns equipment with a tax basis of $800,000 and a carrying value of $600,000 as the result an impairment charge. It also has a tax loss carryforward of $300,000 that is expected to be utilized within the next year or two. The tax rate on these items is 40% but the tax rate will decrease to 35%. Which of the following is closest to the effect on the income statement of the change in tax rate?
Increase income tax expense by $25,000. The $200,000 difference between the tax base and the carrying value of the equipment gives rise to a deductible temporary difference that leads to a deferred tax asset (DTA) of $80,000 ($200,000 × 40%). The tax loss carryforward of $300,000 also leads to a DTA but for $120,000 ($300,000 × 40%). The decrease in the tax rate from 40% to 35% will reduce the DTA of the equipment by $10,000 ($200,000 × 5%). It will reduce the DTA of the tax loss carryforward by $15,000 ($300,000 × 5%). In total, the DTA will decrease by $25,000. The decrease in the value of the DTA will increase income tax expense by $25,000 in the period when the DTA is decreased.
What are the Investing Activities in the Cash Flow Classifications for U.S GAAP?
Inflows Sale proceeds from fixed assets Sale proceeds from debt and equity investments Principal received from loans made to others Outflows: Acquisition of fixed assets Acquisition of debt and equity investments Loans made to others
What are the Operating Activities in the Cash Flow Classifications for U.S GAAP?
Inflows: Cash collected from customers Interest and dividends received Sale proceeds from trading securities Outflows: Cash paid to employees and suppliers Cash paid for other expenses Acquisition of trading securities Interest paid on debt or leases Taxes paid Don't confuse dividends received and dividends paid. Under U.S. GAAP, dividends received are operating cash flows and dividends paid are financing cash flows.
What are the Financing Activities in the Cash Flow Classifications for U.S GAAP?
Inflows: Principal amounts of debt issued Proceeds from issuing stock Outflows: Principal paid on debt or leases Payments to reacquire stock Dividends paid to shareholders
How is CFI calculated?
Investing cash flows (CFI) are calculated by examining the change in the gross asset accounts that result from investing activities, such as property, plant, and equipment, intangible assets, and investment securities. Related accumulated depreciation or amortization accounts are ignored since they do not represent cash expenses.
Capitalized interest costs are typically reported in the cash flow statement as an outflow from:
Investing. Capitalized interest costs are reported as CFI on the statement of cash flows, as they are treated as part of the cost of the constructed capital asset.
What is the fixed charge coverage ratio?
Net income + Income Tax Expense + Interest Expense + Lease Payments / Interest Payments + Lease Payments
In estimating pro forma cash flows for a company, analysts typically hold which of the following factors constant?
Noncash working capital as a percentage of sales. To estimate pro forma cash flows, the analyst must make assumptions about future sources and uses of cash. The most important of these will be increases in working capital, capital expenditures on new fixed assets, issuance or repayments of debt, and issuance or repurchase of stock. A typical assumption is that noncash working capital will remain constant as a percentage of sales.
Under IFRS, deferred tax assets and deferred tax liabilities are classified on the balance sheet as:
Noncurrent items. Under IFRS, deferred tax assets and liabilities are classified as noncurrent. Under U.S. GAAP, deferred tax items may be current or noncurrent, depending on how the underlying asset or liability is classified.
Under U.S GAAP, interest paid is most likely included in what section of the cash flow statement?
Operating CF only. Interest paid must be categorized as an operating cash flow activity under US GAAP, although it can be categorized as either an operating or financing cash flow activity under IFRS.
According to the standards for revenue recognition, a promise to transfer a distinct good or service is most accurately described as a:
Performance obligation. Performance obligations within a contract are defined as promises to transfer distinct goods or services.
What are profitability ratios and some key examples:
Profitability ratios measure the overall performance of the firm relative to revenues, assets, equity, and capital. Net profit margin = net income/revenue Gross profit margin (sales - cogs) gross profit / revenue Return on assets = net income/avg total assets Pretax margin = EBT/Revenue
What is an alternative way to calculate net profit margin?
ROA / Asset Turnover
What is the Dupont formula for ROE?
ROE = Tax burden × Interest burden × EBIT margin × Total asset turnover × Leverage Net income/Average shareholders' equity = (Net income/ EBT) × (EBT/EBIT) × (EBIT/Revenue) × (Revenue/Average total assets) × (Average total assets/ Average shareholders' equity)
What is the interest coverage ration?
Ratio that helps determine the firm's ability to repay its debt obligations. Int Coverage = EBIT / Interest Payments The lower this ratio, the more likely it is that the firm will have difficulty meeting its debt payments.
What are solvency ratios and some key examples:
Solvency ratios measure a firm's financial leverage and ability to meet its long-term obligations. Solvency ratios include various debt ratios that are based on the balance sheet and coverage ratios that are based on the income statement. Debt-to-equity = total debt/total shareholder equity financial leverage = avg total assets / avg total equity interest coverage = EBIT / interest payments
What are the steps to calculating CFO under the indirect method?
Step 1: Begin with net income. Step 2: Add or subtract changes to balance sheet operating accounts as follows: Increases in the operating asset accounts (uses of cash) are subtracted, while decreases (sources of cash) are added. Increases in the operating liability accounts (sources of cash) are added, while decreases (uses of cash) are subtracted. Step 3: Add back all noncash charges to income (such as depreciation and amortization) and subtract all noncash components of revenue. Step 4: Subtract gains or add losses that resulted from financing or investing cash flows (such as gains from sale of land).
A company purchased a new pizza oven for $12,676. It will work for 5 years and has no salvage value. The tax rate is 41%, and annual revenues are constant at $7,192. For financial reporting, the straight-line depreciation method is used, but for tax purposes depreciation is 35% of original cost in years 1 and 2 and the remaining 30% in Year 3. For this question ignore all expenses other than depreciation. What is the tax payable for year one?
Tax payable for year 1 is = [$7,192 − ($12,676 × 0.35)] × 0.41 = $1,130.
Deferred tax items should be measured based on the:
Tax rate that will apply when the temporary difference reverses. Measurement of deferred tax items is based on the tax rate that will apply when the temporary difference reverses. In some cases this may depend on how a temporary difference is settled, which determines whether a capital gains tax rate or income tax rate will apply.
What inventory expenses are included?
The costs to include in inventories are all costs of purchase, costs of conversion, and other costs incurred in bringing the inventories to their present location and condition. It does not include abnormal waste costs or storage of finished product.
What is the difference between reporting CFO from the direct method vs the indirect method?
The direct method of presenting a firm's statement of cash flows shows only cash payments and cash receipts over the period. The sum of these inflows and outflows is the company's CFO. The indirect method begins with net income and is adjusted for differences between accounting items and acutal cash receipts and cash disbursements. Depreciation is added back, and must subtract gains on the disposal of assets.
What is the formula for gross profit margin and operating profit margin?
The gross profit margin is the ratio of gross profit (sales less cost of goods sold) to sales: Gross Profit Margin = Gross Profit / Revenue The operating profit margin is the ratio of operating profit (gross profit less selling, general, and administrative expenses) to sales. Operating profit is also referred to as earnings before interest and taxes (EBIT): Op Profit Margin = operating income/revenue or EBIT / revenue
Which of the following is least likely to be disclosed in the financial statements of a bond issuer?
The market rate on the balance sheet date is not typically disclosed. The amount of principal scheduled to be repaid over the next five years and collateral pledged (if any) are generally included in the footnotes to the financial statements.
How is interest expense calculated, and what is the method called?
The method is called the effective interest rate method, where interest expense is equal to the book value of the bond liability at the beginning of the period, multiplied by the bond's yield at issuance. For a premium bond, interest expense is less than the coupon payment (yield < coupon rate). The difference between interest expense and the coupon payment is the amortization of the premium. The premium amortization is subtracted each period from the bond liability on the balance sheet. Thus, interest expense will decrease over time as the bond liability decreases. For a discount bond, interest expense is greater than the coupon payment (yield > coupon rate). The difference between interest expense and the coupon payment is the amortization of the discount. The amortization of the discount each period is added to the bond liability on the balance sheet. Therefore, interest expense will increase over time as the bond liability increases. The effective interest rate method of amortizing a discount or premium is required under IFRS. Under U.S. GAAP, the effective interest rate method is preferred, but the straight-line method is allowed if the results are not materially different (Similar to depreciation).
What is the trick to calculating CFO?
There are many ways to think about these calculations and lots of sources and uses and pluses and minuses to keep track of. It's easier if you use a "+" sign for net sales and a "-" sign for cost of goods sold and other cash expenses used as the starting points. Doing so will allow you to consistently follow the rule that an increase in assets or decrease in liabilities is a use of cash and a decrease in assets or an increase in liabilities is a source. We'll use this approach in the answer to the example. Remember, sources are always + and uses are always -
What are the steps to convert indirect to the direct method of presentation of cash flow?
There are two major sections in CFO under the direct method: cash inflows (receipts) and cash outflows (payments). he general principle here is to adjust each income statement item for its corresponding balance sheet accounts and to eliminate noncash and nonoperating transactions. Cash collections from customers: Begin with net sales from the income statement. Subtract (add) any increase (decrease) in the accounts receivable balance as reported in the indirect method. If the company has sold more on credit than has been collected from customers, accounts receivable will increase and cash collections will be less than net sales. Add (subtract) an increase (decrease) in unearned revenue. Unearned revenue includes cash advances from customers. Cash received from customers when the goods or services have yet to be delivered is not included in net sales, so the advances must be added to net sales in order to calculate cash collections. Cash payments to suppliers: Begin with cost of goods sold (COGS) as reported in the income statement. If depreciation and/or amortization have been included in COGS (they increase COGS), these noncash expenses must be added back when computing the cash paid to suppliers. Reduce (increase) COGS by any increase (decrease) in the accounts payable balance as reported in the indirect method. If payables have increased, then more was spent on credit purchases during the period than was paid on existing payables, so cash payments are reduced by the amount of the increase in payables. Add (subtract) any increase (decrease) in the inventory balance as disclosed in the indirect method. Increases in inventory are not included in COGS for the period but still represent the purchase of inputs, so they increase cash paid to suppliers. Subtract an inventory write-off that occurred during the period. An inventory write-off, as a result of applying the lower of cost or market rule, will reduce ending inventory and increase COGS for the period. However, no cash flow is associated with the write-off.
What is the formula to depreciate assets under the units-of-production method?
This method is based on usage rather than time, and is higher in periods of high usage. Units-of-production depreciation= [(original cost - salvage value)/life in output units]×output units in the period The units-of-production method applied to natural resources is referred to as depletion.
In an increasing price environment, an analyst who wants to consider tax effects when converting a LIFO firm's balance sheet to a FIFO basis is most likely to decrease the LIFO firm's:
To adjust a LIFO firm's financial statements to a FIFO basis including tax effects, an analyst should increase inventory by the LIFO reserve, decrease cash by (LIFO reserve × tax rate), and increase retained earnings by [LIFO reserve × (1 - tax rate)].
How do you calculate total comprehensive income?
Total comprehensive income = Net income + Other comprehensive income Net Income = Revenues - Expenses. Other comprehensive income includes gains or losses on available-for-sale (AFS) securities and translation adjustments on foreign subsidiaries.
How are trading securities, held to maturity, and available-for-sale securities treated under U.S. GAAP?
Trading securities: any unrealized gains and losses during the period are reported on the income statement. Held to maturity: Reported at amortized cost on the balance sheet (not fair value), Therefore, unrealized gains and losses are not reported on either the income statement or as other comprehensive income. Available-for-sale securities: Unrealized gains and losses on available-for-sale securities are reported as other comprehensive income, not on the income statement.
Listed equity securities held as assets that do not convey significant influence in the investee company must be reported at fair value through profit and loss under:
U.S. GAAP only. U.S. GAAP categorizes equity investment without significant control as trading securities, reported at fair value with profit and loss reported on the income statement. Under IFRS, firms can report equity securities in this manner, but may elect at the time of purchase to report an equity security at fair value through other comprehensive income.
For a lessor that reports under U.S. GAAP, a lease is classified as an operating lease if:
Under U.S. GAAP accounting standards for lessors, a lease is classified as an operating lease if it cannot be classified as either a sales-type lease or direct financing lease. If ownership risks are substantially transferred to the lessee and collection of the payments is reasonably assured, the lessor classifies the lease as a sales-type lease. If ownership risks are not substantially transferred, but a third party guarantees the residual value of the asset and the sum of the lease payments and the residual value is at least equal to the fair value of the asset, the lessor classifies the lease as a direct financing lease.
When analyzing profitability ratios, which inventory accounting method is preferred?
Using LIFO cost of goods sold (COGS) gives a more accurate measure of future earnings because the LIFO COGS is more representative of the current cost of product sold as compared to using FIFO therefore net income will be more accurately represented.
Explain the effects of a change in tax rate:
When the tax rate decreases: Deferred tax liability: down, Income tax down Deferred tax asset: down, Income tax exp up When tax rate increases: Deferred tax liability: up, income tax expense up Deferred tax asset: up, income tax expense down net effect depends on relative sizes of DTL and DTA
LIFO ending inventory can be adjusted to a FIFO basis by:
adding the LIFO reserve. LIFO ending inventory can be adjusted to a FIFO basis by adding the LIFO reserve, which a firm using LIFO must disclose in the notes to its financial statements.
Under US GAAP, for reporting periods after 15 December 2015, unusual or infrequent items are shown on the income statement separately below cont'd ops, below discounted ops, or as part of continuing ops?
as part of continuing operations. Under US GAAP, material items that are unusual or infrequent and that are both as of reporting periods beginning after 15 December 2015 are shown as part of a company's continuing operations but are presented separately.
A company has issued new 3-year bonds at par in each of the last five years. On the company's balance sheet, principal due on its bonds will appear as:
both current and long-term liabilities. Bonds that will mature in the next year will appear on the balance sheet as "current portion of long-term debt," which is a current liability. Bonds that will mature later than the next year will appear as long-term debt.
The best description of a classified statement of financial position is one that:
distinguishes between current and non-current assets and liabilities. Classified statements of financial position distinguish between current and non-current assets and liabilities. Classified statements are required under International Financial Reporting Standards unless a liquidity-based presentation provides more relevant and reliable information.
Mammoth, Inc. reports under U.S. GAAP. Mammoth has begun a long-term project to develop inventory control software for external sale. On its financial statements, Mammoth should:
expense all costs of this project until technological feasibility has been established. Under IFRS and U.S. GAAP, costs of developing software are expensed until technological feasibility is established, and capitalized after technological feasibility has been established.
An IFRS-reporting airline leases a new airplane from its manufacturer for ten years. For financial reporting, the airline:
must record an asset and a liability on its balance sheet. IFRS requires an asset and a liability to be recorded on the lessee's balance sheet, unless the lease is short-term or for a low-value asset. The lessor classifies a lease as finance or operating under IFRS.
A firm has a debt-to-equity ratio of 0.50 and debt equal to $35 million. The firm acquires new equipment with a 3-year operating lease that has a present value of lease payments of $12 million. The most appropriate analyst treatment of this operating lease will:
increase the debt-to-equity ratio to 0.67. The most appropriate analyst adjustment for an operating lease is to add the present value of lease payments to the firm's assets and long-term debt (leaving equity unchanged). Shareholders' equity = $35 million / 0.5 = $70 million. This will result in a debt-to-equity ratio of ($35 million + $12 million) / $70 million = 0.6714.
A significant increase in days payables above historical levels is most likely associated with:
low quality of the cash flow statement. A significant increase in days payables may indicate that payables have been "stretched" (not paid or paid more slowly), which increases operating cash flow in an unsustainable manner and calls the quality of the reported cash flow values into question. Stretching payables does not affect earnings because the related expenses were recognized in the period incurred. An increase in days payables will decrease net working capital, other things equal.
The effect of an inventory writedown on a firm's return on assets (ROA) is most accurately described as:
lower ROA in the current period and higher ROA in later periods. Writing down inventory to net realizable value decreases both net income and total assets in the period of the writedown. Because net income is most likely less than assets, the result in the period is a decrease in ROA. In later periods, lower-valued inventory will decrease COGS and increase net income. Combined with a lower value of total assets, this will increase ROA.
The non-controlling or minority interests found in the equity section of the balance sheet are best described as the equity interests:
of minority shareholders in subsidiaries that have been consolidated. Non-controlling interests found in the equity section represent the equity interests of minority shareholders in non-wholly-owned subsidiaries that have been consolidated.
LIFO liquidation may result when:
purchases are less than goods sold. For LIFO companies, when more goods are sold than are purchased during a period, the goods held in opening inventory are in included in COGS. This will result in LIFO liquidation.
A regional jet manufacturer delivers 20 regional jets to an airline under long-term leases. The lease terms are for 15 years with annual payments of $5 million per plane; the first payment is due on delivery. The airline leasing the jets is responsible for all maintenance and operating costs. If the company that manufactures and leases the jets prepares its financial statements according to US GAAP the leases will most likely be classified as:
sales-type leases. It appears the risks and benefits of ownership of the jets has been transferred to the lessee as it is responsible for all maintenance and operating costs. Therefore, under US GAAP the leases should be classified as sales-type leases.
What is the formula to calculate the tax expense?
tax exepense = tax payable + change in DTL - change in DTA
For a long-term lease, the amount recorded initially by the lessee as a liability will most likely equal:
the present value of the minimum lease payments. With a finance lease, both an asset and liability are reported on the lessee's balance sheet, equal to the present value of the promised lease payments.
