ACCT 5161 - Quiz 2

When is a stock split usually done?

A stock split is usually done by companies that have seen their share price increase too high and are not comparable to competitors The primary motive is to make shares seem more affordable to small investors The underlying value of the company has not chnaged Usually initially boosts demand and drives up prices

How often must indefinite-lived intangible assets be evaluated for impairment?

At least annually

Average Useful Life equals

Average Gross PPE divided by SL Depreciation

Advantages of share buybacks

Buybacks may offer the greatest potential return to shareholders (more than expansion or acquisitions) Sends a strong signal that shares are undervalued Gives the company cash later on to grow their operations, etc.

When Reissuing Treasury Stock at higher price

DR Cash for amount sold CR Treasury Stock CR APIC for Profit

Examples of temporary differences

Depreciation Expense, bad debt expense, warranty expense, prepaid expenses, deferred revenues

Aging Method

Estimates the dollar amount of uncollectable receivables by classifying receivables into different age groups

What are the 3 main stages of development for ASC350?

Expense = preliminary project stage development costs Capitalize = costs and time related to the application development stage Expense = Post-implementation stage activities related to training and maintenance

True or False: GAAP allows for impairment reversal if the fair value recovers?

False

True or false: a stock split affects financial statements.

False

Intangible Long-Lived Assets:

Generally. acquired intangible assets are carried at amortized cost Capitalized intangible assets can only be impaired With internally developed intangibles, research costs are expenses but some development expenditures may be capitalized

Net Sales Revenue equals

Gross Sales Revenue less sales discounts and sales returns and allowances

Net realizable value of accounts receivables equals

Gross amount owed less estimated uncollectible and estimated returns and allowances

When else should intangible assets be tested for impairment?

If there is a deterioration in the business climate or a significant decline in the fair market value of the asset.

What causes the LIFO Reserve?

LIFO inventory on balance sheet frequently include old inventory layers, causing LIFO ending inventory to be much lower than FIFO ending inventory amounts.

How are Accounts Receivable typically reflected on the balance sheet?

Net Receivable Value

Asset Impairment

Occurs when the carrying value of a long-term asset exceeds its fair value.

What are the two methods of estimating uncollectible AR?

Percentage of Sales Method or Aging Method (percentage of Accounts Receivable Method)

How could an analyst improve the comparability between two companies with different depreciation methods?

Standardize the average useful life.

Disadvantages of Share buybacks

Stocks can still go down after a buyback program Buybacks that use borrowed money are risky Can weaken a company's ability to weather an economic crisis May just be temporarily boosting EPS but not increasing fundamental value Better uses of excess cash may actually be undertaking acquisitions or paying cash dividends

Some development expenditures may be capitalized under IFRS if the following are demonstrated:

Technical feasibility Ability to use or sell asset How the intangible asset will generate probable future economic benefits

What is the LIFO Reserve?

The difference between the LIFO and FIFO ending inventory amounts

In a stock split

The number of shares outstanding will increase (which will then decrease EPS) the company must reduce par value of stock proportionally with current 10-K

How does a LIFO liquidation inflate profits?

The older (cheaper) costs are matched with the current revenues.

What two things must be estimated for Accounts Receivable?

Uncollectible Accounts & Returns and Allowances

When do Deferred tax assets occur?

When a company's recorded income tax expense is lower than cash taxes paid

When does a LIFO liquidation occur?

When a company, using the LIFO inventory valutation method, sells old (cheaper) inventory (sells more than it purchases)

When do Deferred Tax Liabilities occur?

When the cash tax payment is lower than the book tax expense for financial reporting purposes

What is a stock split?

an issue of new shares in a company to existing shareholders in proportion to their current holdings.

FIFO Advantage

ending inventory consists of the most recently acquired costs

Percentage of Sales Method

estimates the amount of bad debt expense based on the amount of credit sales during the period

LIFO Advantage

matches the most recently incurred cost against revenue (keep in mind the LIFO conformity rule)

Impairment Loss

net book value - fair value

LIFO Disadvantage

the LIFO inventory amount does not approximate replacement cost

Returns and Allowances

the amount expected from reductions in the amount owed.

Uncollectible Accounts

the amount expected to be uncollectible due to customers being unable to pay

FIFO Disadvantage

the current costs of the inventory are not being matched with current revenues

Why is there a difference between Book Income and Taxable Income?

there is a temporary timing difference that results when a revenue (gain) or expense (loss) enters book income in one period, but affects taxable income in a different period. These differences usually reverse themselves but need to be taken into account due to the matching principle.