Presentation on theme: "Intermediate Accounting October 19th, 2010"— Presentation transcript:
1 Intermediate Accounting October 19th, 2010 General Course QuestionsQuestions before Quiz Chapters 4, 17 & 22Income Statement, Statement of RE and Comprehensive Income (Non-recurring items, Intra period Tax Allocation & EPS) Changes in Accounting Estimates, Error Corrections, Changes in Accounting PrinciplesReview the Balance Sheet using today’s homework5. Assignments for Thursday, October 21st:A. Chapter 5 Balance Sheet & Statement of Cash FlowsB. Chapter 23 Statement of Cash Flows6. Return Discussion Questions #3 Earnings Management
2 Chapter 5 Balance SheetFinancial Position at a particular point in timeIFRS vs. US GAAPIFRS requires presentation of 2 years of balance sheet dataUS GAAPPublic companies, 2 years B/S (SEC)Private companies, only 1 year B/S requiredGenerally listed in order of liquidityClassified as “Current” or “Non-Current”.
3 Balance Sheet: Classification AssetsLiabilities and EquityCurrent AssetsLong-term investmentsProperty, plant, and equipmentIntangible assetsOther assetsCurrent liabilitiesLong-term debtOwners’ equity Capital stockAdd’l paid-in cap.Retained earningsAccumulated OtherComp. Income(Treasury Stock)Question 6, ex 3, Prob. 1
4 Balance Sheet: Usefulness The balance sheet provides information:Evaluating Capital structure – financing by creditors/investorsAnalyzing an enterprise’s:Liquidity (sufficient resources for day-to-day operations)Current Ratio, Quick Ratio, Working CapitalSolvency (ability to pay debts as they mature – more long-run)Lower solvency = higher debtFinancial flexibility (ability to respond to threats or take advantage of opportunities)Effectiveness in using assets employedInventory and Receivables turnoverProfitability with rates of return (in combination with the I/S)ROEROAQuestion 1 & 3
5 Types of Ratios Type What is measured Examples Liquidity ratios Short-term ability topay maturingobligationsCurrent ratioQuick assets ratioCoverage/Capital StructureSolvency ratiosDegree of protection forlong-term creditors andinvestorsDebt to total assetsTimes interest earnedActivity ratiosEffectiveness in usingassets employedReceivables turnoverInventory turnoverTotal Asset TurnoverProfitabilityratiosDegree of success orfailure for a givenperiodRate of return on assetsReturn on equityEarnings per share
6 Financial Statement Analysis Benchmarks:TrendsPeersScaling:RatiosCommon size financial statementsLimitations: Must compare apples to applesNature of accountingAccounting choicesEconomic conditions and business model differences
7 Balance Sheet: Limitations Is the B/S appropriate for valuing a company?Most assets and liabilities are stated at historical cost.Judgments and estimates are used in determining many of the items.The balance sheet does not report items that can not be objectively determined.It does not report information regarding certain off-balance sheet financing.Need to be able to reliably measure and controlHuman Resources, Litigation exposure, Research and Development, Intellectual capital,Question 7 & 8
8 Balance Sheet – Current Assets Asset CategoryGeneral Valuation RuleCash & Cash EquivalentsFair Market valueMarketable Securities or Short term InvestmentsTrading (Gains or Losses in Income)AVS (Gains or Losses in Equity)Accounts ReceivableNet realizable value (estimated amount collectible)InventoryLower of cost or market (cost measured using a variety of methods, LIFO, FIFO)Prepaid ExpensesHistorical costChapter 5 question 11 where should AVS securities be on the B/S
9 Balance Sheet – “Current Assets” CashGenerally any monies available “on demand.”Cash equivalents - short-term highly liquid investments that mature within three months or less.Restrictions or commitments must be disclosed.Illustration 5-3
10 Investments of < 20% Held-to-maturity: (current or non-current) Record debt securities at amortized cost, don’t revalue“Fair value” or “Mark to Market”Trading: (current)Debt & equities intended to sell.Revalue annually to Fair Value in B/S. Unrealized holding gains and losses in incomeAvailable for Sale: (current or noncurrent)All others (debt or equity)Revalue annually to Fair Value in B/S. Unrealized holding gains and losses in OCI and equity (AOCI)question 11
11 Investments of < 20% Issues with Fair Value Method How is “fair value” determined?Level 1: active marketLevel 2: observable market data other than quoted market priceLevel 3: determined only through “unobservable inputs” and prices based on internal models or estimatesClassification of Trading vs. AFSDividends received:DR Cash CR Dividend Income
12 Balance Sheet – Non Current Assets Asset CategoryGeneral Valuation RuleProperty, Plant, & EquipmentHistorical cost less accumulated depreciationLandHistorical cost, no depreciationLong-term InvestmentsHistorical cost, Market value, Equity methodOther Assets (Deferred Income Tax AssetUndiscounted sum of expected future tax benefitsIntangible AssetsBE 5-6Acquisition cost less amortization if acquired from external parties (usually zero if developed internally)
13 Long – Term Investments Generally consists of four types:SecuritiesFixed assetsSpecial fundsNonconsolidated subsidiaries or affiliated companies.e
14 Long – Term Investments Generally consists of four types:SecuritiesFixed assetsSpecial fundsNonconsolidated subsidiaries or affiliated companies.e
15 Long – Term Investments Securitiesbonds,stock, andlong-term notesFor marketable securities, management’s intent determines current or noncurrent classification.
16 Property, Plant and Equipment Assets of a durable nature used in the regular operations of the business.
17 Intangibles Lack physical substance and are not financial instruments. Limited life intangibles amortized.Indefinite-life intangibles tested for impairment.
18 Other AssetsThis section should include only unusual items sufficiently different from assets in the other categories.
19 LiabilitiesCurrent Liabilities: “Obligations that a company reasonably expects to liquidate either through the use of current assets or the creation of other current liabilities.”Long-Term Liabilities“Obligations that a company does not reasonably expect to liquidate within the normal operating cycle.”All covenants and restrictions must be disclosed.
20 Liabilities Short-term obligations: Long-term obligations: Accounts payable, accrued liabilities (examples?)Notes payable, Unearned RevenueCurrent portion of long-term debtLong-term obligations:obligations arising from specific financing situations (issuance of bonds, bank debt)obligations arising from ordinary business operations (pension obligations, capital leases, deferred income taxes)obligations that are contingent (product warranties for long-term items)Question 13
21 Balance Sheet - Liabilities Measurement of Liabilities uses a variety of techniques:Amount equal to actual future paymentThe present value of expected future paymentsSome future obligations are not reported on the balance sheet, but instead disclosed entirely in the notes to the financial statements.
22 Owners’ Equity Capital Stock Additional paid-in capital Par or stated value of the shares issuedAdditional paid-in capitalThe excess of amounts paid in over par valueRetained earningsUndistributed earningsAccumulated Other Comprehensive IncomeAnalogous to RE for Other Comprehensive IncomeTreasury Stock (contra Stockholders’ Equity)
24 Balance Sheet - Equity Measurement Amounts reported in these accounts represent the aggregate of transactions that occurred at various points in timeCommon Stock & Additional Paid in Capital will include proceeds from the sale of stock from inception to presentRetained Earnings will include the sum of Net Income from inception through current year less dividends paidNote that each year’s net income is expressed in that year’s dollars (i.e., monetary unit assumption)RE may be adjusted when purchase of Treasury Stock exceeds original iss
25 Balance Sheet Supplemental Information Reported Contingencies – material events that have an uncertain outcomeAccounting Policies – Explanations of the valuation methods used or the basic assumptions made concerning inventory valuations, depreciation, investment in subsidiaries, etc.Contractual Situations – Explanations of certain restrictions or covenants attached to specific assets or, more likely, liabilities.Fair Values – Disclosures of fair values for certain itemsSubsequent Events – Disclosure of material events or transactions that occur between the balance sheet date and its issuance date.Events that relate to conditions that existed as of the balance sheet date are incorporated into the balance sheet as if the subsequent information was known as of the balance sheet date.Events that relate to conditions that did not exist as of the balance sheet date are typically disclosed in the notes to the financial statements.Add some exercises here for balance sheet