CFR Final Exam

Equation that connects LIFO and FIFO

(BB FIFO - LIFO bb) - (End FIFO - LIFO end) = (FIFO COGS - LIFO COGS)

Double declining balance equation and facts

(historical cost - accumulated dep) *2/useful life - no salvage value in equation but once book value gets to salvage value, no additional expense is recorded type of accelerated depreciation

Sum of the years digits method

(historical cost - salvage value) * (years remaining in life/sum of the years digits)

equation to get depreciation expense for units of production

(original price - salvage value)/life in output units *output units in the period

What is the difference between GAAP and IFRS regarding intangible long-lived assets?

- Accounting is similar - Difference between internally developed intangibles Research is expensed but development can be capitalized

What are the effects of the financial statement from finance leases?

- Asset and liability on the balance sheet (are only the same at the beginning) - separate accounts for interest expense and amortization expense on the IS - interest expense is in operating on CFS - principal reduction of liability is in financing section

When is a long-lived asset removed from the balance sheet and how do you record it?

- Assets are removed when the asset is sold, abandoned, or exchanged - You remove the carrying value (historical cost and accumulated depreciation) and the difference between the sale proceeds and the carrying value is recorded as a gain or loss

What is the difference between book income and taxable income?

- Book income is computed for financial reporting purposes and follows accrual-basis reporting - Taxable income is computed for tax compliance purposes and usually follows cash-basis accounting

What is the difference between GAAP and IFRS regarding impairments on intangible indefinite lived assets?

- Both assess qualitatively if it is necessary to perform a quantitative impairment test - GAAP: impairment loss = fair value - carrying value - IFRS: impairment loss = recoverable amount - carrying value - IFRS allows for reversals

What expenditures are capitalized after initial use of the asset?

- GAAP capitalizes expenditures that increase an assets usefulness when: - the useful life of the asset is extended - the capacity of the asset is increased - the efficiency of the asset is increased - referred to as "improvements" - GAAAP expenses ordinary repairs and maintenance

How is interest expense recorded with bonds issued at a discount?

- GAAP requires that the bond discount be allocated to interst expense on an effective interest basis You are doing discount amortization which is the process of spreading the discouint on bonds to increase interest expense over the life of the bond Interest Expense = bond payable book value * market interest rate Interest expense = bond face value * coupon rate the rest is credited to bond discount

Difference between IFRS and GAAP with inventory costing methods

- IFRS does not permit the use of LIFO - IFRS only uses LCNRV and it allows reversals to be reversed if the market recovers. GAAP does not allow this

How does earnings management occur with LIFO and periodic inventory method

- If earnings are significantly above target, managers will buy expensive inventory at the end of the period to reduce net income - If earnings are below target, managers might delay purchases until the next year to keep COGS low and net income high

How do you determine whether to capitalize or expense

- If the expenditure is expected to provide future economic benefits over multiple accounting periods, you capitalize as an asset - if the future economic benefit of the expenditure is unlikely or highly uncertain, you expense it

How are short-term leases accounted for?

- accounted as executory contracts - you do not book an asset or liability, but instead you expense payments over time

What is the accounting for held-to-maturity debt securities?

- accounted at amortized cost that adjusts for the amortization of premium or discount each period - interest income follows the effective interest method

When was the pooling of interests method used

- acquiring more than 90% of the voting common stock - consummation fo the transaction through an exchange of stock

What costs are included in inventory

- all costs required to obtain physical possession of the inventory and to make it saleable are capitalized as inventory and expensed when sold - Purchase costs (less discounts, returns, and rebates) - Sales taxes and Transportation paid by the buyer - Insurance costs - Preparation costs - Production costs that are included in making a finished good saleable (storage costs, raw materials, and labor/overhead STIPPP

Financial statement impacts from operating leases

- asset and liability on BS (asset and liability are the same at the end of the period - the total lease expense is reported as a single line called lease expense on the IS - the total cash outflow is included as an operating outflow

What qualitative information does the ASC 842 require be disclosed?

- basis for variable lease payments - renewal and purchase options - residual value guarantees - lease covenants - significant judgements and assumptions

What is the journal entry for floating-rate debt

- because all floating rate debt is issued at par, the accounting entries are simple (no bond discount or premium amounts) - so interest expense = cash interest payments

What is the difference on the financial statements when you capitalize?

- capitalizing delays the recognition of an expense in the income statement leading to higher net income in the current period and lower income later - it reduces the variability of net income because the expense is spread out over multiple periods BUT the total income is identical whether the expenditure is capitalized or expensed, it just affects the timing of the expense

What quantitative information does ASC 842 require be disclosed?

- cash flow, maturity, and present value information for both operating and finance leases - information about costs recognized in net income and amounts recognized in the statement of cash flows - weighted average discount rates and lease terms

How can managers use earnings management with valuation allowances

- could establish a valuation allowance in a good year to reduce earnings - in the future when earnings are lower, could reverse the allowance to increase earnings

What are two ways that managers can use debt to manage earnings?

- debt-for-debt-swaps: the company offersw investors the opportunity to exchange existing debt for new debt issued by the company - debt-for-equity: gives investotrs the opportunity t oexchange old debt for the company's common stock They generate gains on the income statement and favorable financial ratios

What is the difference between definite-lived and indefinite-lived intangible assets?

- definite lived are amortized over the expected useful life - indefinite lived are not amortized but tested at least annually for impairment

What are teh three ways taht investments in debt securities are classified as?

- held to maturity: securities that teh firm has both the intent and the ability to hold until maturity date - trading: securities that are part of an actively managed investment portfolio designed to achieve trading gains - available for sale: securities that do not qualify for trading or held to maturity

Why do companies use stock options?

- help align employee's interests with the interests of owners - many start-up high growth companies are cash starved and cannot afford to pay competitive cash salaries

When recording amortization expense for a finance lease, what do you use for the useful life?

- if criteria 1,2 are met, useful asset's life - if 3,4,5 are met, use the lease's life

What can the lower of cost or net realizable value (LCNRV) be applied to?

- individual inventory items - classes of inventory - the inventory as a whole

What are additionaly consolidation issues?

- intercompany receivables and payables are eliminated against each other in consolidating the balance sheet because when the firm is viewed as a single entity, it cannot ower itself money - good will must be assessed annually to determine if an impairment is necessary

Why do we use historical cost?

- it is VERIFIABLE so it is less subject to manipulation and inaccuracy - the selling price is not often readily available

When does perpetual and periodic yield the same result? When doesn't it?

- it yields the same ending inventory when FIFO is used - it yields a different result when LIFO or weighted average is used

What are the 3 ways to invest in equity?

- minority passive investment (<20%), the investing company cannot influence the operating decisions of the investors; investment is part of a portfolio managed to return a profit - minority active investment (20 - 50% of ownership): investing company takes a more active role and makes improvements to the investee company's operations - controlling interest (>50% ownership): investing company can unilaterally dictate policy

Why do companies raise capital through preferred dividends rather than debt

- missing preferred dividends payments do not trigger bankruptcy making them less risky - companies with a history of operating losses usually do not pay income taxes so debt would not have tax advantages - preferred stock is treated like equity on income statements and if they have to meet certain D/E ratios

Characteristics of perpetual inventory system

- more complicated and usually more expensive - better management control; including control over stock outs and shrinkage - used for low volume, high unit cost items (cars)

How do most firms use perpetual/periodic

- most firms keep a perpetual inventory but if they use LIFO or weighted average. they will record a journal entry at the end to true up ending inventory and COGS

What are some characteristics of preferred stock?

- must be paid in full before a cash distribution to common shareholders (cumulative), no voting rights, gets paid first is firm goes bust - not contractual obligations

What are the financial impacts of ST leases?

- no asset or liability on BS - ST lease expense is cash payment on IS - Cash outflow is included in the operating cash outflows

How are available for sale debt securities accounted for?

- presented at fair value requiring an ajustment at each balance sheet date - uses Effective interest method to record interest expense - but the difference is that you adjust the amortized cost at each balance sheet datee to fait value using the fair vlaue adjustment (reported as part of OCI)

Why do analysts compute the average useful life of PPE within an industry?

- provides a benchmark of what peer firms estiamate as average useful life ( can tell you something about earnings management) - allows analysts to re-calculate depreciation expense to compare to companies as if they used the same useful life

Characteristics of periodic inventory system?

- reduced record keeping - Less management control; there is no way to determine the extent of inventory losses (shrinkage) - Used when inventory volumes are high and per-unit costs are low

When do DTA's occur?

- revenues being recognized later for book - expenses being reognized earlier for book

What are the differences in recording a sale, abandonement, and exchange?

- sale: gain/loss is equal to amount of difference between carrying value and sale proceeds - abandonement: no proceeds, all loss and carrying value - exchange: gain/loss is equal to the difference between the carrying value of the old and fair value of the old asset

What are the reasons why a firm would reacquire their own common stock

- shares are needed for stock option redemptions - management believes the shares are undervalued - avoid hostile takeover - distribute surplus cash to shareholders so that the shareholders don't have to pay income tax, and instead pay capital gains tax - increase EPS

What is the difference between the journal entries for stock dividends and stock splits

- stock dividends require a JE but it is just a redistribution of amounts within the equity section Small stock dividends (shares outstanding increases by less than 25%): the market value of the distributed shares is transferred from retained earnings to common stock to common stock (par value * shares) and APIC ((market value - par value)*shares) Large stock dividends (shares outstanding increase by more than 25% or 25%): the par value of the shares is transferred from retained earnings to common stock and APIC remains the same - stock splits do not require a JE

Characteristics of 3 depreciation methods?

- straight line: economic benefits expire evenly over time - accelerated: economic benefits are more valuable in early years - Units of production: economic benefits are based on usage not time

What is income tax expense and what is it made up of?

- the expense in the income statement - Is made up of current tax expense and deferred tax expense

What are the financial effects of using a finance lease verus operating/short-term leases?

- the expenses are the same but finance lease expenses are accelerated - ratios using pre-tax income or net income are worse under finance leases for the early years of the lease the accelerated lease expense of finance leases is why many lessees prefer to use the operating lese method - also assets are lower under finance leases while the liability amount is the same

What are the limits to historical cost?

- the net book value does not reflect the expected future benefit (market value) - expected benefits of the asset may increase over time and GAAP does not prohibit upward adjustments of long-lived assets - Does not reflect replacement costs or present values (makes the comparison of old and new firms difficult)

WHat is the journal entry when the credit risk of a bond increases

- the value of the debt has decreased in the market d FVA for bonds x c unrealized holding gain for bonds x

How are long-term leases accounted for?

- they are accounted as right-of-use contracts where the accounting looks like the lessee has acquired a long-lived asset and you recognize a non-current asset on the balance sheet and non-current liability on the balance sheet

Which interest rate is used when determining the present value of the lease

- use the implicit interest rate on the lease 2. If the implicit interest rate is not known, use the incremental borrowing rate for a similar asset

How are securities that are trading debt accounted for

- very similar to available for sale securities, except that FVA adjustments are recognized through net income as gains/losses instead of through OCI - the sale does not have to move from OCI to net income, you just have to get the FVA account to 0

What are the acquisition method steps for a consiolidated income statement?

1) Amortize the portion of the excess acquisition value attributed to separately identifiable assets and liabilities not having an indefinite life. 2) Subtract that portion of subsidiary's earnings assigned to noncontrolling interests to arrive at net income attributable to the parent's shareholders (equal to [subsidiary's net income - excess costs from step 1] x non-controlling ownership percentage). 3) Eliminate the parent's account for "investment income equity method" combining the parent's income statement with the subsidiary's income statement will already reflect this investment income 4) If there are intercompany sales between the parent and subsidiary, eliminate the amounts from sales and cost of goods sold.

Steps for tangible asset/amortizable intangible asset impairment testing?

1) assess whether events or circumstnace raise the possibility of asset impairment 2) compare the carrrying amount of the asset to the undiscounted future net cash flows expected from the use or disposal of the asset 3) If carrying value > undiscounted cash flows, calculate impairment loss (impairment loss is the difference between the carrying value and the fair value)

What are the steps to make a consolidated balance sheet?

1) eliminate the subsidiary's equity accounts (common stock, additional paid-in capital, and equity), because the subsidiary's equity accounts already are reflected in the parent's equity section 2) eliminate the parent's asset account for "investment in subsidiary". Combining the parent's assets and liabilities with the fair value of the sub's will reflect this investment. 3) if the acquisition is for less than 100% ownership, create an equity account called "non controlling interest" which is equal to the fair value of the non-controlling interest not-acquired 4) Recognize all of the subsidiary's assets and liability accounts to fair value. The adjustment is for the full 100% fari value of the subsidiary;s assets and liabilities 5) Recognize any acquired identifiable assets (identifiable intangibles are all intangible assets other than goodwill) of the subsidiary at fair value even if those intangibleswere previously off the balance sheet (internally developed assets) 6) if the imputed fair value of the subsidiary (consideration paid plus the value of non-controllling interest) is greater than the fair value of the subsidiary's identifiable net assets, allocate the excess to goodwill. If the imputed fair value of teh subsidiary is less than the fair value of the subsidiary's net assets, then the shortfall is recorded as a gain on the consolidated income statement CARINBIG

Steps for indefinite-lived intangible impairment testing

1) firm first assesses qualitative factors to determine whether it is necessary to perform a quantitative impairment test (if management believes that it is more likely (75%) than not that an indefinite-lived intangible asset has been impaired, then it must go to the second step) 2) Perform a quantitative assessment by calculating the fair value of the intangible asset (impairment loss is the difference between carrying value and fair value)

When do DTL's occur?

1) revenues being recognized earlier for book than tax 2) expenses being recognized later for book than tax

5 criteria for finance lease (if it meets any of the criteria, it is a finance lease)

1. lease transfers ownership of the asset 2. lease grants an option to purchase (bargain purchase option) 3. the lease term is for a major part of the remaining economic life (75%) 4. The present value of the lease payments and residual value exceeds 90% of the fair value 5. the underlying asset is of specialized nature that it has no alternative use to the lessor at the end of the lease

When did the aquisition method start being used?

2009

What is the stated rate used for?

AKA coupon rate, contract rate, or nominal value - the interest rate specified on a bond, and the rate used to compute the bond's periodic cash interest payment

What is included in historical cost?

All costs needed to prepare the asset for its intended use - purchase price - sales taxes - legal fees - transportation costs - realty fees - installation and preparation costs

What is the problem with extinguising debt

At maturity, the fair value will equal the book value which will equal the par value BUT when debt is retired early, the difference between amortized historical cost and fair value on the debt will generate a gain or loss

What is the grant date fair value measure and how does it relate to accounting for options?

At the grant date of options, companies must assign a fair value to options. and the grant date compensation cost is recognized as an expense on a straight-line basis over the vesting period (the time when the options arer granted and the first available exercise date)

Equation for EPS when there are no convertible securities and no stock options or warrants outstanding

Basic EPS = (net income - preferred dividends)/(weighted average number of common shares outstanding)

What happens when there is a change to enacted tax rates?

Because income tax expense includes changes in DTL and DTA, a change to enacted tax rates will affect income tax expense in the YEAR THE RATE IS ENACTED (even if the new rate does not take effect until some point in the future)

Equation to calculate COGS

Beginning Inventory + inventory purchases = Goods available for sale Goods available for sale - ending inventory = COGS

What are the two ways that GAAP permits debt conversions

Book value method: records the newly issued stock at the boook value of debt retired Market value method: records the newly issued shares at their current market value

When you go from LIFO to FIFO, what happens to gross margin

COGS under LIFO is higher than COGS under FIFO, so gross margin will be higher under FIFO

What is the journal entry to record "amortization" for operating leases

DIFFERENT THAN FINANCE LEASES d lease expense (cash - lease expense) c right of use asset - operating " " This "amortization" expense increases each year because the lease expense using the effective interest method decreases each year

What is the equation for DTA

DTA = future taxable amount * tax rate future taxable amount of asset = carrying value carrying value of liability = tax base of liability tax rate = the enacted tax rate at the time the reversal is expected to occur

What is the equation for DTL

DTL = future taxable amount * tax rate future taxable amount = carrying value of asset - tax base of asset carrying value = the value the asset is reported on the financial statement net of depreciation and amortization tax base = the amount in the future as the economic benefits of the asset are realized

What is not included in historical cost?

Does not include costs that do not get the asset ready for use - employee training costs on how to use the asset - repair and maintenance costs

What are the two circumstances that allow companies to opt for fair value accounting for liabilities?

Either: 1. the liabilities are actively managed on a fair value basis as part of the company's documented risk management or investment strategy 2. fair value accounting eliminates or significantly reduces the mismatch that arises when different measurement bases are used for related financial instruments

What equation do analysts use to estimate the average useful life used to compute depreciation expense in order to improve comparisons of profitability of firms?

Estimated Average Useful life for a company = average gross PP&E/Depreciation Expense

How to connect FIFO and LIFO COGS

FIFO COGS - LIFO COGS = Prior year LIFO reserve - Current Year LIFO reserve OR FIFO COGS = LIFO COGS - change in LIFO reserve Makes sense because FIFO COGS is lower and LIFO reserve is (FIFO - LIFO) so subtracting that difference from LIFO COGS will yield a lower COGS (FIFO)

how to go from LIFO end inv to FIFO end inv

FIFO end inv = LIFO end inv + LIFO reserve

How to get FIFO net income

FIFO net income = LIFO net income + change in lifo reserve(1-t)

What is the difference between LIFO and FIFO regarding expense and net income/taxes

FIFO produces a lower COGS and yields a higher net income/tax LIFO produces a higher COGS and yields a lower net income/tax

How to get FIFO tax provision

FIFO tax provision = LIFO tax provision + change LIFO reserve(1-t) Can get tax savings by doing change in LIFO reserve(1-t)

With increasing costs, what yields a higher value of inventory LIFO or FIFO?

FIFO yields a higher inventory while LIFO yields a lower inventory value (in decreasing costs, the difference between COGS, income, taxes, and inventory is reverse)

Which costing method provides the most useful measure of ending inventory and COGS

FIFO yields the most useful measure of ending inventory but the least useful measure of COGS (ending inventory is made up of the most recent costs. but cogs is made up of past costs) LIFO yields the most useful measure of COGS but the least useful measure of ending inventory (ending inventory is made up of past costs, but COGS is made up of recent costs)

Is it harder to elect the fair value option under GAAP or IFRS?

Fair value option is harder to elect under IFRS than under US

How does GAAP protect against decreases in credit quality leading to unrealized gains in net income?

GAAP does not allow unrealized holding gains caused by an increase in credit risk to increase net income, instead, it increases other comprehensize income - On the other hand if credit worthiness changes due to macro-economic conditions, it allows for it to be fed through net income

What is the difference in how GAAP and IFRS shows a negative balance in RE?

GAAP: "retained earnings deficit" or "accumulated deficit" IFRS: "accumulated losses" GAAP: A, L, SE IFRS: A,SE,L

Difference between GAAP and IFRS regarding impairments for tangible assets

GAAP: impairment occurs only if carrying amount is greater than the undiscounted cash flows and the loss is computed by doing carrying fair value - fair value IFRS: impairment ofccurs if the carrying value exceeds the recoverable amount and the loss is computed by recoverable amount - carrying value

What is the difference between GAAP and IFRS on tangible long-lived assets?

GAAP: measures intangible long-lived assets using depreciated historical cost IFRS: allows two different models 1. cost method (same as GAAP) 2. Revaluation method - Asset is carried at a revalued amount reflecting fair market value at the revaluation date (the amount of the write-up is credited to an owner's equity account called Revaluation surplus which does not increase net income, but increases stockholder equity)

What is the difference between GAAP and IFRS on the basis of redeemable preferred stock?

GAAP: most PS is reported as SE unless it is mandatorily redeemable IFRS: mostly reported as a liability even if redemption is not mandatory

What is the difference between IFRS and GAAP regarding long-term leases?

IFRS only has finance leases

What is the difference between the interest rate used for convertible bonds between GAAP and IFRS?

IFRS requires that debt and equity option are recorded separately. So, you use the similar rate 12% for debt GAAP requires that it is just debt so you use the 2%

Other differences between GAAP and IFRS

IFRS triggers more frequent but smaller impairments IFRS allows reversals of previously recognized impairment losses (reversals increase net income)

What is a deferred tax asset valuation allowance

If a firm is never profitable, it might not be able to use its DTAs, so GAAP requires firms to assess the likelihood that deferred tax assets may not be fully realized in future periods - It must be more than 50% chance that taxable income will be sufficient to use the DTA. - if it is more likely than not that some portion of the benefit will not be realized, than a deferred tax asset valuation allowance is required

What is imputed interest and how do you solve for it?

If installment notes for noncurrent monetary liabilities do not mention an interest rate, an interest rate must be imputed PV of liability = payment amount * present value of annuity factor interest expense = book value of liability at the beginning of the period * imputed interest rate

When interest is capitalized, when does it go into depreciation expense vs. when does ti go into COGS?

If the asset is held for use it goes through depreciation expense If the asset is held for sale, it goes through COGS.

how does LIFO reserve affect the current ratio?

If you add in the LIFO reserve to assets, it results in a higher current ratio. Because FIFO has a higher inventory so when you convert from LIFO to FIFO the current account increases

What happens to inventory turnover when you go from LIFO to FIFO

Inventory turn = COGS/Av inventory when you go from LIFO to FIFO, COGS decreases which means that ending inventory increases, so you inventory turnover will decrease dramatically

When the market rate changes and the fair value option is elected, what happens to the market value/fair value of the bonds?

It changes. So if the market rate increases, the fair value of the bonds will decrease because the credit risk has increased and investors will price that bond lower - an increase in credit risk (the fair value of bonds decreases) leads to an unrealized holding gain

how does a change in tax rate affect earnings

It depends on whether the rate increases or decreases, whether the firm has a net DTA or net DTL, and the magnitude of the deferred tax balance

What kind of account is the valuation allowance

It is a contra asset account that reduces the net book value of DTAs

How is dividend distribution governed>

It is governed by states, but most states have adopted the Revised Business Corporation Act - States that as long as the fair value of assets exceeds the fair value of liabilities after distribution, the company is considered solvent and its is legal

how to get goodwill

It is the excess fairt value over the identifiable net assets. So take the 400000/.8 = 500000 And how much higher it this than net identifiable assets include the patent and make sure it is NET (back out liabilities)

What is a net operating loss

It is when deductible expenses exceed taxable revenues and NOLs can be carried forward indefinitely and may be used to offset taxable income in subsequent years

What is specific identification inventory costing and what industries use it?

It is where you actually take out the specific item and price that is sold. Jewelry stores and automobiles use it

What is LIFO liquidation

It occurs when a company that uses the last-in, first-out (LIFO) inventory costing method liquidates its older LIFO inventory. A LIFO liquidation occurs when current sales exceed purchases, resulting in the liquidation of any inventory not sold in a previous period.

what else is the lifo reserve equal to/

LIFO reserve = FIFO end inv - LIFO end inv OR = cumulative difference in COGS over the life of the company using LIFO instead of FIFO

Which costing method appropriately matches revenues and expenses in both inflationairy and deflationairy periods?

LIFO unless lifo liquidation is a factor

What are the journal entries for short-term contracts?

Monthly d ST lease exp (annual payment) c accrued lease expense (annual payment) End of period d ST lease exp (monthly expense) d accrued lease expense (cash outlay - monthly exp) c cash (cash outlay)

are all intangible assets recorded on the balance sheet?

NO - externally acquired intangible assets are recorded on balance and amortized - internally developed intangible assets are exensed over time (R&D)

What is the equation for a DTA for NOL

NOL * enacted tax rate in the period NOL is expected to be used

Under GAAP, are recoveries of assets permitted?

No, cannot write an asset up once it has been impaired

Are unguaranteed residual values factored into the present value?

No, you only include guaranteed residual values

What are the two different methods for determining invenotry quantities?

Perpetual and periodic

Journal entry to retire the bonds at maturity

Same for all: d bonds payable for par value c cash par value

What is the journal entry at commencement for operating leases?

Same process as finance lease d Right-of-use asset - operating lease (PV of interest payments and any guaranteed residual) c Operating lease liability " "

What is the journal entry to record interest expense for operating leases

Similar to finance leases d lease expense (BB operating lease liability * implicit interest) d operating lease liability (cash - lease expense) c cash outlay (periodic cash outlay)

What is the difference between tangible assets and non-tangible assets?

Tangible assets have a physical substance (land, buildings, natural resources) or fixed assets Intangible assets are assets that lack a physical substance but still confer some rights to an owner (patents, copyrights, franchises, licenses, trademarks, goodwill)

What happens when lifo liquidation happens?

The older (usually lower) costs in the LIFO layers that are liquidated are matched against sales dollars are matched against higher sales dollars Results in an inflaated or illusaory profit margin which is considered low quality earnings

Can convertible debt be settled in cash?

There used to be a GAAP exception for convertible debt where the borrower has the right to pay some or all of the conversion value in cash rather than shares of stock But not anymore

What are bonds carried at if they are issued at par

They are carried at the par value until maturity

How can managers manipulate specific identification?

They can choose which items to sell also specific identification matches the physical flow of goods with revenue. But the objective of a costing method is to match revenues withe expenses

how is interest dealt with?

When a firm constructs an asset for its own use, the interest that accrues on debt during the construction period is capitalized as part of the asset's cost - Because it better matches the cost of the asset with the revenues generated by it.

When an asset is being held for sale, what happens with impairment

When assets are held for sale, the asset is tested for impairment. - It is reported at teh lower of book value or fair market calue minus costs to sell

What is the JE for a stock repurchase and retirement when they repurchase is for less than original issuance

When bought for a price lower than issuance price d common stock for par value d additional paid in capital residual c cash for what is was bought for

When do you have a gain on the retirement of debt?

When the carrying value>market fair value d bonds payable for carrying value c gain c cash for fair value

What is the difference between GAAP and IFRS regarding taxes

When the tax rate changes: GAAP = requires the tax law to be enacted; IFRS = requires the tax law to be substantially enacted Presentation of valuation allowances: GAAP = presents DTAs net of any valuation allowance; IFRS = reduces DTA amount directly and does not separately disclose the valuation allowances Presentation of DTA and DTL amounts: US Gap nets DTL and DTA amounts in the same jurisdiction; IFRS presents these separately without netting

what happens when the cost that you pay is higher than the book vlaue of their assets?

You have to amortize any excess that is attributable to separately identifiable assets and liabilities not having an indefinite life

What is Diluted EPS

a conservative measure of earnings to each common shareholder Diluted EPS = (basic numerator + income adjustments due to dilutive financial instruments)/(basic number of common shares outstanding +newly issuable shares due to dilutive financial instruments)

What is a lease?

a contract in which the lessor, the owner of the asset, conveys to the lessee the right to use the asset in exchange for a lease payment in installments

What is a permanent difference?

a difference between taxable income and pretax income that will not reverse in the future - occurs when the rev or expense is included only in book income or taxable income - doesn't create a DTL or DTA

What is a temporary difference ?

a difference between taxable income and pretax income that will reverse in the future - creates a DTL or DTA

What is a reversing temporary difference

a later period when book income is less or more than taxable income

What is an originating temporary difference?

a revenue or expense item that initially causes book income to be more or less than taxable income

How are minority passive equity investments accounted for?

accoutned for at fair value with changes accoutned for through net income

What is income tax paid?

actual cash flow for income taxes to taxing authorities including payments or refunds from other years

What is the difference between the current tax expense and deferred tax expense?

add them up to get the income tax expense - current tax expense is the amount of taxes paid to the taxing authority - deferred tax expense is the change in deferred tax assets and liabilities on temporary differences between accounting profit and taxable income

What happens if the cost of inventory never changes?

all 3 inventory methods would yield the same financial statement result

What is the presentation of DTA and DTLs on the balance sheet?

all DTAs and DTLs are recorded as noncurrent and are netted against each other and presented as a single amount

What are bonds carried at ?

amortized historical cost (bond at par less the bond idsount or bond at par plus the premium)

What is the treasury stock method?

assumes that the cash received from exercising the options or warrants is used to acquire already outstanding common shares in the market at teh average market price for the period

What is FIFO

assumes the oldest units available in invenotry are the first units that are sold (ending inventory on the FIFO basis always consists of the cost of the most recently acquired units)

What is the benefit of doing a joint venture?

avoid violating debt convenant that are tied to reported liability amounts

secured bonds

backed by collateral

debenture

backed only by the company's general credit

What is a DTL

balance sheet amounts that result from temporary difference that casuses accounting profit to be higher than taxable income Current year: accounting profit > taxable income; income tax expense > income taxes payable Reverse in the future: accounting profit < taxable income; income tax expense < income taxes payable creates future taxable amounts

What is a DTA?

balance sheet amounts that result from temporary differences that cause accounting profit to be lower than taxable income - current year: accounting profit < taxable income; income tax expense < income taxes payable - Reverse in future: accounting profit > taxable income; income tax expense > income taxes payable creates future deductible amounts

Among the different costing methods, what is different in bb inv, inv purch, end inv, and COGS?

bb inv diff, inv purh same, end inv. diff, COGS diff

how are joint ventures presented on the investing companies balance sheets?

both the investor companies create an asset on the balance sheet but are able to keep the liabilities of the joint venture off the balance sheet

What is the one exception with capitalizing R&D?

companies expense all R&D before the product meets technological feasibility - after technological feasibility, the additional R&D is capitalized and ceases when the product is available for sale

Difference between how current and noncurrent liabilities are shown on the balance sheet

current liabilities are shown at undiscounted due noncurrent liabilities are recorded at their present value when incurred

What does GAAP require the disclosure of regarding taxes

current vs. deferred portion of current periods income tax provision - detail underlying DTLs and DTAs - differences between EFR and statutory tax rate

What is the journal entry for amortization for finance leases

d Amortization expense - finance lease ((right of use asset at commencement - guaranted res value)/useful life) c accumulated amor - right of use asset - finance lease " " amortization expense is the same each year

What is the journal entry at the commencement date for finance leases

d Right-of-use asset - finance lease (PV of interest payments and any guaranteed residual) c finance lease liability " "

Journal entry to record a debt-for-debt swap

d bonds payable (old rate) c bonds payable (new rate) c gain on debt extinguishment (residual)

Journal entry for bonds issued at discount

d cash d bond discount c bonds payble full amount Bond discount is a contra-liability account - the discount will be amortized over the life of the bond so that the book value of the bond will be the same as the principal amount

Journal entry for bonds issued at par

d cash c bonds payable monthly interest expense d interest expense c accrual interest payable or cash

What is the JE for the sale of a minority passive equity investment

d cash d FVA just have to get it down to 0 c realized gain or could be debiting a loss is FVA is credited) c investment in company

What is the JE for when options are exercised?

d cash (# of shares * exercise price) d APIC (total that was put into APIC over the years) c common stock (par * shares) c paid in capital in excess of par (residual)

How to account for share issuance

d cash Market value of stock*# of shares issued c common stock par value * # of shars issued c additional paid in capital residual

What is the JE when treasury stock is reissued at a price lower than it was bought for?

d cash cost d additional paid in capital for t stock residual c treasury stock for original buying price No loss is recognized

What is the JE for sale of available for sale debt maturities?

d cash for sale price d FVA account (or credit, just have to get it down to 0) d loss on sale of bonds (could be gain difference between amortized cost and sale price) c investment in bonds (amortized cost) c OCI (could be debit, just have to get this account down to 0)

What does the journal entry look like for issuing a bond at a premium?

d cash for the higher than par c bond premium for the residual c bonds payable for the par value Bond premium is a liability account (premium will be amortized to zero during the bonds life)

What is the journal entry when treasury stock is reissued at a price higher than the company bought it for?

d cash what the company sold the shares for c treasury stock (cost that is was originally bought for) c additional paid in capital for T stock (residual) No gain is recognized

What is the JE for a stock repurchase and retirement when they repurchase for more than original issuance

d common stock par value d add paid in cap (original issuer price - par) d retained earnings for residual c cash for price repurchased for

What is the JE for issuing stock options and the current price is the same as the exercise price?

d compensation expense (fair value of option*#)/vesting period c APIC " "

How is conversion of convertible debt accounted for under the market value method

d convertible bonds BV d loss residual c common stock par value * shares c APIC (market value-par value) *shares

How is conversion of convertible debt accounted for under the book value method

d convertible bonds BV of debt c common stock par value * shares cc APIC residual

With minority axctive investments what is the JE for dividends?

d dividend receivable c investment in company

What do you record the equipment at? the total of the installment payments or the present value of payments? How is interest expense recorded

d equipment PV c note payable PV d interest expense (PV * imputed interest) d note payble (installment payment - interest expense) c cash (installment payment)

What accounts does an impairment loss affect?

d impairment loss c equipment

What is the JE for valuation allowances

d income tax expense c valuation allowance (this increases the contra asset account) If you reassess the ability to use the DTA, d valuation allowance c income tax expense

What is the initial journal entry when you have a DTA

d income tax expense - current x d deferred tax asset y c income taxes payable x c income tax expense - deferred y

What is the reversal journal entry when you have a DTL

d income tax expense - current x d deferred tax liability y c income taxes payable x c income tax expense - deferred y

What is the reversal journal entry when you have a DTA

d income tax expense - current x d income tax expense - deferred y c income taxes payable x c DTA y

What is the initial journal entry when you have a DTL

d income taxes expense - current x d income tax expense - deffered y c income tax payable x c derred tax liability y

What is the journal entry for interest expense for finance leases

d interest expense (BB finance lease liability * implicit interest) d finance lease liability (cash payment - interest expense) c cash (periodic cash payment)

how is the investor's share of earnings accounted for JE

d investment in company (share * net income) c income from affliate

What is the JE for treasury stock repurchases

d treasury stock cost c cash cost

What is the JE to adjust the fair value

d unrelaized holding loss c FVA for minority passive investment could be switched if gain AGAIN FVA IS A CUMULATIVE account meaning that if you have a 1000 loss in fva in a previous year, and next year you have a fair value 3000 above, you have to credit 4000

What is the journal entry for LCNRV

debit COGS by the amount of difference Credit inventory by the amount of difference

What does the SEC require LIFO firms to do?

disclose the dollar magnitude of the difference between LIFO and FIFO inventory costs because LIFO inventory is much lower than FIFO

coupon rate<market rate coupon rate>market rate

discount premium

What is a periodic method

does not keep a running recrod of the dollar amount of inventory on hand

Why was the poolingmethod banned?

due to concerns that many transactions were structured to qualify as pooling of interest even though they were clearly acquisitions - at the time, goodwill was expensed over 40 years, so comapneis wanted to avoid the acqusitions

What are all the financial statement items that need to be adjusted to go from LIFO to FIFO

end inv, COGS, taxes, net income, retained earnings, cash

What is net realizable value in relation to inventory?

equals the estimated selling price of the inventory in the ordinary course of business less the reasonably predictable costs of completing, disposing of, and transporting the inventory (GAINS ARE NOT RECOGNIZED UNDER GAAP)

Expenses that cause DTAs

expenses incurred but not yet paid salaries payable rent payable utilities payable warranty payable bad debt expense loss recorded for impairment in period of writedown

What is floating rate debt and how can investors protect themselves with it

floating rate debt has a stated interest rate that fluctuates in tandem with some interest rate benchmark such as the LIBOR, so they can protect themselves from losses related to fluctuations in market interest rates

What is the difference between a finance lease and an operating lease?

in a finance lease, the lessee is able to control an asset and obtain it's benefits. (asset and liability are recognized with interest/amortization expense related to the right-of-use asset) In an operating lease, there is a transfer of control of the use of the asset but not the asset itself. the lessee does not obtain all of its benefits (asset and liability are on the balance sheet but you only recognize lease expense)

How to get income tax expense if there are permanent differences?

income tax expense = (pre-tax book income - permanent differences) * .21

What happens when there is a decrease in credit risk?

increase in liabilities and unrealized loss

What is the JE for held-to-maturity debt securities

initial JE is the same for all: d investment in Bonds fair value c cash Interest JE d cash (par value * stated rate) c interest income (debt receivable BV BB * effective yield at purchase) c investment in Bonds residual (amortization)

What is the JE for available for sale debt securities?

initial JE: d investment in bonds fair value c cash fair value Interest income JE: d cash (coupon*par value) c interest income (effective discount rate at purchase * fair value) c investment in bonds (residual) If FV > BV at end of period: d FVA difference between FV and BV c OCI If BV < FV at end of period, do the opposite THE FVA account is cumulative, so you to debit/credit all in the balance

How is the interest journal entry recorded for a bond issued at a premium

interest expense = bonds payable book value (higher value)*market interest rate cash = bond par value *coupon rate coupon amortization (AKA debit to bond premium) = the difference between interest expense and cash

What do permanent differences do to the Effective tax rate

it causes the ETR to differ from the statutory rate because ETR = income tax expense/pre-tax book income and the income tax expense will be different if there are permanent differences

What is the LIFO reserve

it is the dollar magnitude of the difference between LIFO and FIFO inventory costs

What is a perpetual method

keeps a running record of the amount of inventory on hand

What happened in 2019 regarding GAAP and IFRS?

less executory contacts (operating) and more goes on the balance sheet

What is limited liability and why is it attractive

makes investing incommon shares attractive because lathough potential gains from ownership are unlimited, the risk of loss is limited to the share purchase price

What are long-lived assets measured at?

measured at historical cost (original cost less accumulated depreciation)

How is convertible debt recorded initially?

must be recorded as debt only with no valule to the option privilege

What happens to Net income as a result of a LIFO liquidation?

net income will be dramatically higher, because the costs in the previous LIFO layers are usually lower are matched to the sales that are at higher current prices, but this is considered low quality earnings

What is a tangible asset

operating assets expected to yield their economic benefits over a period longer than one year

What is the JE for amortization of excess cost of company?

opposite of the equity method d investment income and a credit to the investment account

What are the different names for principal amount

par value, maturity value, or face value \

What is the difference between participating preferred stock and nonparticipating PS and which is more common

participating preferred shareholders share in profits above the declared dividend along with common shareholders nonparticipating preferred shareholders are entitled to receive only the stipulated dividends nonparticipating is more common

How to get noncontrolling interest portion

pays 9 m for 80% 9/.8 = 11.25 m noncontrolling interest is 11.25 - 9 = 2.25m

What is the difference between a temporary difference and a permanent difference

permanent differences either never enter into taxable income or never enter into book income

prior to 2001, what method was used

pooling method`

What is mandatorily redeemable preferred stock

preferred stock that the compani is required to retire at some future date - usually 5-10 years - is recorded as a liability instead of in SE and dividends are recorded as interest expense

Expenses that cause DTLs

prepaid expenses straight line depreciation expense for books verus accelerated method for tax

What is LIFO

presumes that sales were made from the most recently acquired units (Ending inventory on the LIFO basis always consists of the cost of the earliest acquired units

From 2001 - 2008, what method was used

purchase method

What happens to intangible assets when there is a business combination?

purchase price is allocated to identifiable assets and liabilities of the acquired firm on a fair value basis - any remaining amount is recorded in goodwill

What is the valuation allowance

reduction of deferred tax assets based on the likelihood the DTA will not be realized - acts like an allowance for doubtful accounts and reduces the DTA to the amount that is more likely than not to be recognized

serial bonds

require periodic payment of interest and a portion of the principal

Examples of revenues that cause DTLs

revenue earned but not yet collected sales on account interest receivable dividends receivable

What is the LIFO conformity rule?

specifies that if LIFO is used for tax purposes, LIFO must also be used in external financial statements

What are the 3 depreciation methods?

straight-line, accelerated, units of production

What are some reasons why a company might want to retire debt early?

take advantage of lower interest rates; postpone scheduled principal repayments; eliminate a conversion feature attached to the debt; improve the company's mix of debt and equity capital; or earnings management using the "paper" gains from debt retirement

Market interest rate

the demanded rate of return by creditors for accepting risks related to a particular company's debt offering AKA yield or effective interest rate - this is the interest rate investors earn regardless of the coupon rate - this is the rate used to compute the present value of the principal and interest payments

What is the residual value of an asset in a lease?

the fair value at the end of the lease

What is the fair value option and does GAAP allow companies to elect to do it?

the fair value option changes the book value of the bonf and recognizes changes in value through net income as unrealized holding gains and losses - Yes GAAP allows firms to elect to the fair value option but it is irrevocable

What happens to fair value of the bond when rates change

the fair value will not equal the balance sheet value when interest rates change because the fair value of a bond at any point in time is the present value of principal and remaining cash interest payments calculated at the current market rate

What is the recoverable amount in IFRS impairments?

the higher of the asset's fair value (less costs to sell) and its value in use (discounted cash flows)

What happens if the guaranteed residual value is less than the actual fair value at the end of a lease

the lessee must pay the difference to the lessor

What is carrying value of a bond ?

the sum of its face value plus unamortized premium or the difference in its face value less unamortized discount.

What is income taxes payable?

the tax liability caused by taxable income that is owed to the taxing authorities and its equal to the current tax expense

what did the pooling of interests method do

the transaction was treated as if the two companeis joined together to become a new entity rather than one of the companies acquired the other and the financial statements were restated retroactively as if the two companies had always been one - there was no resetting of asset values or any recognition of goodwill

Howe are the financial statements of the parent and sub combined?

they are combined line by line using a process called consolidation

What does the accounting for NOLs look like

they are recognized at DTA

How did the purchase method treat acquisitions?

treated the transaction as an acquisition of one company by another, regardless of whether the consideration of paid in cash or stock - the step-up in values and recognition of goodwill only occured on the portion of the assets acquired (as opposed to the acquisition mehod that records the full 100%)

What is a problem with the acquisition method?

trend analysis can be difficult because old financial statements are not retroactively adjusted which can lead to distortions in growth rates

Examples of Revenues that cause DTAs

unearned revenue

How much of taxable income can be reduced from NOL carryforward?

up to 80%

mortgage bonds

use real estate as collateral for repayment of the loan

What fair values are used to consolidate?

use the fair value at the acquisition date

How are minority active investments accounted for ?

using the equity method - in subsequent periods the investment account (asset) is increased for the investor's pro-rata share of the investee's net income - dividends from the investee reduce the investment account (recorded as an increase to cash and a decresae to the investment account) (does not affect investment income because it would double count the investee's earnings)

4 inventory costing methods

weighted average, FIFO, LIFO, specific identification

What are the characteristics of treasury stock?

when a company buys back its own shares, the repurchased shares are are called treasury stock and have no voting rights, dividends, or other stockholder rights - it is a contra-equity account that is a reduction to total SE - recorded at cost (what the company paid to repurchase the shares

What is the timeframe for NOLs

when expenses>revenues, NOL is created and the DTA increases by that amount, deferred tax expense is reduced which decreases income tax expense for financial reporting purposes When the company becomes profitable, DTA decreases by the NOL amount used, deferred tax expense increases, which increases income tax expense

What does it mean to have controlling financial interest in a company

when one entity, directly or indirectly, owns more than 50 percent of the outstanding voting shares of another entity - investing company is the parent, investee is the subsidiary

What is consolidated net income attributable to parent company shareholders?

when the noncontrolling interests are subtracted from consolidated net income - net income attributable to noncontrolling shareholders is not an expense

When does tangible/amortizedable (definite-lived) intangible asset impairment occur?

whenever events rraise the possibility that an asset's carrying amount may not be recoverable

What is the LIFO - LCM method

you compare the cost vs three different measures of market: 1. replacement cost 2. NRV 3. NRV less normal profit margin you then chooose the middle of these three to see if you need to make and adjustment

What is the LCNRV

you look at the original cost of the inventory that it is recorded at and the NRV which is (estimated selling price - cost of completing, disposing, and transporting) Which ever is lower, is the one you use