CFA Level 1 Understanding Balance Sheets
4 amounts excluded from inventory costs
ABNORMAL amounts of WASTED materials ADMINISTRATIVE OVERHEAD SELLING COSTS STORAGE COSTS, unless essential to a further production process
What are some limitations of the balance sheet in financial analysis?
Assets are reported at historical cost, fair value, and amortized cost, so there might not be consistency with valuation Also, some assets and liability that do not appear on the balance sheet that have value (value of employees or reputation)
What are "other current assets?"
Assets that might not be material if shown separately Examples are prepaid expenses and deferred tax assets
What are current assets?
Assets that will likely be converted into cash or used up within one year or one operating cycle
How are financial liabilities reported on the balance sheet?
At amortized cost
Under IFRS, how is investment property reported?
At amortized cost (just like PPE) or the fair value method
How are available for sale securities reported on an income statement?
At fair value
Under GAAP, what value are inventories reported at?
At the lower of cost or market.
Under IFRS, what value are inventories reported at?
At the lower of cost or net realizable value Net realizable value is the selling price less any completion costs or disposal (selling) costs
What is the difference between authorized, issued, and outstanding shares?
Authorized: Number of shares that may be sold Issued: Number of shares that have actually been sold Outstanding: Issued shares MINUS treasury stock
Do the IFRS and GAAP both allow reporting using the cost model and revaluation model?
Both allowed under IFRS, only cost model allowed under GAAP
What are unidentifiable intangible assets?
CANNOT be acquired separately and may have an unlimited life (GOODWILL)
What are identifiable intangible assets?
Can be ACQUIRED SEPARATELY or are the result of RIGHTS OR PRIVILEGES conveyed to the owner (patents, trademarks, copyrights)
IFRS, R&D Development costs can be ________________ if either of these 3 criteria met: __________________
Capitalized CAT: Can use or sell Able to complete the project Technological feasibility
What is a deferred tax liability? This is good because
Created when the amount of income tax expense recognized in the income statement (to shareholders) is GREATER than taxes payable (internal). it maximizes income to shareholders but actually the company has deferred the liability and can invest the money now.
What are deferred tax assets?
Created when the amount of taxes payable exceeds the amount of income tax expense recognized in the income statement paid taxes early, or have paid too much tax, and is therefore entitled to some money back from the tax authorities.
What are trading securities?
Debt and equity securities acquired with the intent to profit over the near term
What are available for sale securities?
Debt and equity securities that are not expected to be held to maturity or traded in the near term
What are accrued liabilities?
Expenses that have been recognized on the income statement but are not actually contractually due Examples are taxes payable, interest payable, wages payable, and accrued warranty expense
How are financial assets such as trading securities, available for sale securities, and derivatives measured at?
Fair value (mark to market accounting)
Are all 3 costing methods (Average cost, FIFO, LIFO) permitted by IFRS and GAAP?
GAAP permits all 3 but IFRS does not permit LIFO
exit price
GAAP the price that would be received to sell an asset or paid to transfer a liability
What are financial assets measured at amortized cost known as?
Held to maturity securities (debt securities to be held to maturity)
net realizable value
IFRS The selling price less cost to sell
Under the cost model and under IFRS, what must be done to the asset if impaired?
IT must be written down to its recoverable amount and a loss is recognized in the income statement?
When should a financial statement item be recognized?
If a future economic benefit is PROBABLE and the item's value or cost can be measured reliably
What must PPE be tested for under the cost model?
Impairment
What is included in historical cost when talking about the cost model for reporting PPE?
Includes the purchase price plus any necessary costs to get the asset ready for use (delivery, installation costs)
Under the cost model, how is PPE (excluding land) reported?
It is reported at amortized cost (historical cost minus depreciation, amortization, depletion and impairment)
What does it mean when accounts receivable are reported at net realizable value?
Its value is based on BAD DEBT EXPENSE, which increases allowance for doubtful accounts (contra asset) (The value that can be realized)
Under the cost model and under GAAP, what must be done to the asset if impaired?
Loss recovery is not permitted under GAAP
What is noncontrolling interest?
MINORITY SHAREHOLDERS' pro rata share of net assets of a subsidiary that is not wholly owned by the parent
What is market when describing the value at which inventories can be reported at?
Market is usually equal to replacement cost but cannot be greater than net realizable value or less than net realizable value less a normal profit margin
What is retail costing?
Measuring inventory at retail prices and then subtracting gross profit in order to determine cost
Are UNREALIZED GAINS AND LOSSES FOR AVAILABLE FOR SALE SECURITIES recognized on the income statement?
No they are not but they are reported in OTHER COMPREHENSIVE INCOME as part of shareholders' equity
What are notes payable?
Obligations in the form of promissory notes owed to creditors and lenders Can also be reported as noncurrent liabilities if their maturities are greater than one year
What is standard costing and which types of firms use this method?
Often used by manufacturing firms, involves assigning predetermined amounts of materials, labor, and overhead to goods produced
What is the revaluation model?
PPE is reported at fair value less accumulated depreciation
What is preferred stock?
Pay dividends have priority during liquidation
What is a liquidity based format?
Present asset and liabilities in the order of liquidity
What does it mean to capitalize a cost?
Record the item on the balance sheet instead of expensing it on the income statement
economic goodwill
SUBJECTIVE VALUE of the INTANGIBLE ADVANTAGES a company has over its competitors such as: an excellent reputation, strategic location, and business connections represented in its HIGHER MARKET VALUE (OVER BOOK VALUE) if the company were sold
What is a classified balance sheet?
Separates current and noncurrent assets and liabilities Required by both GAAP and IFRS
What is treasury stock?
Stock that has been reacquired by the issuing firm but not yet retired
What are the 2 models that PPE can be reported under?
The cost model or the revaluation model
What is goodwill?
The excess of purchase price over fair value of the identifiable net assets (A-L) acquired in a business transaction.
What is the recoverable amount of an asset?
The greater of fair value less selling costs OR value in use (present value of future cash flow stream of the asset)
How are identifiable intangible assets reported under IFRS and GAAP?
The same as PPE. Both can use the COST METHOD but only IFRS uses the REVALUATION METHOD too. The revaluation model can only be used if there is an ACTIVE MARKET for the intangible asset
What is an operating cycle?
The time it takes to purchase inventory, sell the product, and collect the cash
Under GAAP, how are intangible assets that are created internally (R&D) reported?
They are expensed as incurred
Under IFRS, how is R&D (internally created intangible asset) reported?
They are expensed as incurred but must separately identify research and development Must expense costs during research stage but can capitalize costs during development stage
How does a manufacturing firm treat inventory differently than other firms do?
They separately report inventory of raw materials, work in process, and finished goods
What is the only way goodwill can be created?
Through a purchase acquisition. Internally generated goodwill is expensed as incurred.
What is investment property?
Under IFRS: Assets that generate rental income or capital appreciation Under GAAP: No specific definition of investment property
When is an assed impaired?
When its carrying value exceeds its recoverable amount
Are unrealized gains and losses for trading securities/derivatives recognized on the income statement?
Yes
money received for products to be delivered in the future is recorded as 2. as the product is delivered...
an asset AND a liability cash becomes an asset obligation becomes liability called UNEARNED INCOME or UNEARNED REVENUE 2. revenue will be recognized and the liability will be reduced
when a company buys shares of its own stock to be held in treasury, it records a reduction in
both assets (cash spent) and shareholder's equity (fewer shares outstanding)
If net realizable value / market value falls below ______________, it must __________________
carrying amount WRITE DOWN the value of the inventory
original write-down is reversed if
in IFRS and in subsequent period INCREASED in value NOT ALLOWED in GAAP
Amortized cost
issue price minus ( any principal payments, plus any amortized discount or minus any amortized premium )
inventories are measure at IFRS GAAP
lower of cost & net realizable value lower of cost or market
for financial assets classified as trading securities, how are unrealized gains and losses reflected in shareholder's equity? because
they flow through income (REPORTED ON THE INCOME STATEMENT) into RETAINED EARNINGS will be recognized soon as opposed to held for maturity (which is held at amortized cost but not recognized)