Training the Street Accounting- Final Exam
equity or book value = firms GAAP VALUE ON THE BALANCE SHEET ; does NOT equal firms market or enterprise value
BOOK VALUE = (common stock + pref stock - treasury stock + noncontrolling interests + APIC) these accts are called contributed capital +/- earned capital, or retained earnings and other direct gains and losses
Fair Value Hierarchy
The fair value hierarchy provides insight into the priority of valuation techniques that are used to determine fair value. The fair value hierarchy is divided into three broad levels. Fair Value Hierarchy Level 1: quoted prices in active markets like common stock on NYSE Level 2: Inputs other than quoted prices included in Level 1 that are observable for the asset or liability either directly or through corroboration with observable data. Level 3: Unobservable inputs (for example, a company's own data or assumptions). this is the most iffy. (ex: a DCF) Level 1 is the most reliable because it is based on quoted prices, like a closing stock price in the Wall Street Journal. Level 2 is the next most reliable and would rely on evaluating similar assets or liabilities in active markets. At the least-reliable level, Level 3, much judgment is needed based on the best information available to arrive at a relevant and reliable fair value measurement.
apic
additional paid in capital ; apic is contributed capital that is NOT common stock, preferred stock, treasury stock, or noncontrolling interests ; residual of the residual
APIC pg 82
additional paid in capital ; remember this is the entry for the capital above par value
sg&a
all operating expenses that arent cogs ; costs to support revenue but not part of the custopers purchase (rent/property related, depreciation & amor, payroll related, parketing, other)
when is revenue recognized
as the entity satisfies its performance obligations ; aka when the goods and services are transferred to the customers
cash conversion cycle
average time to pay for inventory, sell inventory and/or services, and collect cash (cash->inventory->a/p->sale-> cash) when u add in A/r after sale and before cash it makes the cycle longer
why would you buy back shares (treasury stock) pg 83 ; also shows share retirement
because eps or ROE can look better
cogs pg 102 (sometimes called COS cost of service)
beginning inven + purchases of inven (raw and freight in) + direct and indirect labor + production overhead including depreciation and amortization from manufacturing = cost of goods available for sale - ending inventory - cogs
equity is the firms ___ value
book value . an investor gives money to a firm and the firm gives value back the the investor in stock price increase *hopefully)
demand notes
callable by creditor anytime
retained earnings
captures revenue
accounts recievable
claim to case
REDO pg 54 if time
current asets
REDO pg 42 + 43
debt and equity journal entries redo
debt investments (assets)
debt of another firm or entity ; firm chooses 1 of three accounting methods based on investers ability and intent to hold the investment (trading= fair value w normal expenses; AFS uses fair value and AOCI; htm uses amortized cost and is n/a)
accrual accounting
economic measurement is not equal to cash flow (in other words we dont record when cash is physically moving, just the effects in accrual)
Interest paid - where is it found
end of cf statement and in the footnotes
matching principle/ accrual accounting (expenses)
entities match the expense with the revenue; its not an expense until its sold. example is inventory on the bal sheet until revenue is earned (like when the person uses the gift card)
Matching Principle/ accrual accounting (revenues)
entities match the revenues with the period when it is earned ; example, gift cards. when you buy a gift card, the accounts receivable increases, and its matched with deferred revenue (liability!) on the balance sheet until it is earned
equity investments (assets) ; what are they, how much control ; how are they valued ; where do gains and losses go
equity of another firm (public and private); assumes <20% of influence over the investee ; Fair value through net income ; all gains and losses go in p&l in income statement, typically in other net below operating income
True or False: The accounting for investments of 20% or less in the stock of public and private firms is the same under US GAAP and IFRS.
false: Correct! The accounting for investments of 20% or less in the stock of public and private firms is NOT the same under US GAAP and IFRS. Be sure to read a firm's disclosures of its accounting for investments when comparing the income statements of US vs. international firms.
historical cost
firm records the amount of the transaction
long term investments
four categories 1) long term portion of investments in debt and eq 2) items held for speculation 3) special funds set aside 4) unconsolidated companies all are usually listed on bal sheet after current assets
liabilities overview
future sacrifices of economic benefits of an entity as a result of past transactions or events (current and noncurrent, us has no specific sequence, ifrs has a specific order country specific)
above or below the line pg 97
gaap doesnt have a long notion of above and below the line ; OPERATING IS ABOVE , below is not operating ; interest income can go above sometimes, dividends can sometimes be above
pg 76
good liabilities exersize - are they liabilities or not
inventory
goods TO BE SOLD to customers, they arend sold yet so they are still an asset
net AR
gross ar-allowance for uncollectable accounts
if intangible asset is not consumed
has to be tested annually for impairment
FV Level 3 observality
if an observable input has >10% impact on fair value, then it must be level 3
expenditure of cash- does it have a future benefit?
if yes- then capitalize! record as an asset on bal sheet and expense on income statement in a future period. if no, then expense! record the expense on the come statmeent in the current period
key assumptions for lifo and fifo
ignore the actual flow and movement of physical inventory, and costs usually rise over time
what does increasing a/r signal
increase in revenue and or a slowing of collections
other current assets
individually immaterial current assets ; they dont individually meet the threshold of >5% current assets ; if they exceed 5% then it needs its own line item ; examples are non-trade recievables, deposits, and prepaid expenses
what are some omissions (items not on the balance sheet)
intangible assets like Brand; purchase commitments, like coke's commitment to buy sugar, off balance sheet commitments and contingencies
pg 43 equity investments as assets
journal entries practice!
what is required to determine the proper classification of debt securities
judgement
intangible assets
long lived assets that lack physical substance ; sometimes consumed like ppe , when that happens you use amortization expense (offset w accum depr) usually with striaght line method
pg 22
make sure to double check this somehow (brad?)
redo pg 28
matching with tif giftcard on cc using accrual accounting
product costs to ready an item for sale: (included in inventory)
materials, freight in, labor, production overhead
accounts recievable
money owed by customers on account
what is NRV
net realizable value is fair value, estimated selling prices less costs of completion, disposal, and transportation
can you use lifo on ifrs
no
do dividends change the income statement
no
is depreciation a cash asset
no
is restricted cash inclueded in "cash"
no ; its set aside for a specific purpose ancd can be a current or a noncurrent asset
does "cash" include overdrafts
no ; overdrafts are usually liabilities
example identifying inventory: if you sell a restaurant is that inventory for the restaruant?
no that would be ppe, the business sells food so that would be the inventory
do you depreciate construction in progress?
no, depreciation doesnt start until consumption of the asset (i.e. after construciton has finished(
nci
noncontrolling interests ; part of a subsidiary owned by third parties, sometimes called minority interest
REDO 63
noncurrent assets if time
current liability
obligations that a firm expects to satisfy with current assets or current liabilities MATURITY WITHIN ONE YEAR OR THE OPERATING CYCLE, WHICHEVER IS LONGER
retained earnings: earned capital pg 86
on a cumulative basis, earnings of net dividends declared *** not an indicator of liquidity or future performance ; ** net income-dividends = X and X + RE = total retained earnings
what are the three primary ways to fund assets
other liabilities (accounts payable accrued expenses and deffered revenue); debt (interest bearing liabilities) and equity (residual owners, high risk high reward)
where are interest and dividends recieved recorded for both debt and equity investments (assets)
p&l
lifo and fifo compare / comparison chart
page 48 "compare lifo vs. fifo"
REDO accts payable / accrued expenses
page 67 good guide
REDO deferred revenue journal entries
pg 68
long term debt bonds and notes
pg 73 good comparison chart
common stock and preferred stock comparison slide
pg 81 ; priority in liquidation and dividends are the starred rows
prepaid expenses or prepaid assets
prepaid to that firm enjoys a future benefit , usually current because firms dont usually pay for >1yr expenses
assets
probably economic benefits obtained or controlled by an entity as a result of past transactions or events ; US lists them in order of liquidity and IFRS has a specific order ; 5 general categories are current assets, long term investments, ppe, intangables, other
another name for income statment
profit and loss
what are inventory classifications
raw materials, work in process (wip), finished goods, materials and supplies
REDO pg 52 prepaid expenses journal entries
redo
two objectives of financial reporting
relevant and reliable
equity overview definition
residual interest in the assets of a firm after deducting liabilities "net assets" ownership in a firm
what is earned capital (net of returns)
retained earnings and other direct gains like aoci, gains and losses not reported on the income statement, and non cash
net income=
revs-expenses +/- other income (including gains and losses)
revenue
sales-returns (products and services have been delivered) "top line"
if a firm sells stock below par
stockholderhave undercapitalized the firm, you shouldnt do this ; **creditors have a claim on undercapitalized amount
two decreasing charge methods of depreciation
sum of the years and double declining balance
sum of the years equation
syd= (N x ( N+1))/ 2
what is owners contributed capital pg 80
the investor is giving money to the firm (common stock, preferred stock, treasury stock, noncontrolling interests, additional paid in capital
prepaid revenue share
this is like when google pays apple to be the default search engine on safari, in bankruptcy its pretty worthless
which of the 3 have impacts on earnings when there is an increase or decrease in the value of the bond ; trading , AFS, HTM?
trading , afs and htm do not
True or False: Under US GAAP, the market method (or FVTNI) applies to investments of 20% or less in the stock of both public and private firms.
true
ddb equation excel
use in excel ; make sure to do this for each year and then add them together
how is inventory valued on the balance sheet
valued at lower of cost or net realizeable value
QUESTION pg 50
what are answers
fair value
whatt the transaction is worth as of the balance sheet date, also known as "mark to market"
contractual offsets
when a co has an agreement to pull from another account in case of an overdraft
does inventory include product costs to ready an item for sale?
yes
is capex cash asset
yes
are prepaid expenses capitalized?
yes because they provide future benefits
is ppe at historical cost?
yes, also called capex
does historical cost = fair value
yes; but he said not to lose sleep over this
straight-line method of depreciation
(cost-salvage)/life of machine
what are the four cost methods for inventory (vary by industy/prefrence)
1) average cost: used for things like oil and gas, average cost of items puchased/manufactured during the period 2)specific identification: which is good for things like luxary goods because each item has its own cost, specialty retail and manufactuing 3) last in first out (LIFO): IS RARE OUTSIDE OF THE US BECAUSE IT IS PROHIBITED BY IFRS , this is a tax method 4) first in first out FIFO: this is great for perishables becaus the first ones you buy will go bad first so they need to be sold first
what are the two equity categories
1) owners contributed capital 2) earned capital net of returns
how does interest expense not equal interest paid
1) timing of payments to creditors (uses accrued expenses (liab) and int expense) 2) capitalized interest (included in ppe and int espense)
depreciaiton = ppe expense
**land is not consumed or depreciated** depreciation expense is offset by accumulated depreciation
substantial doubt
75% doubt a firm wont meet obligations
FVTNI = market method
Fair value through net income
allowance for uncollectable accounts
a contra asset on the balance sheet ; offset by an expense on the income statment , match collection expense with revenue
balance sheet
a firms assets and source of capital (liabilities and equity) at a single point in time