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Corporate Financial Reporting > Session 4 > Flashcards

Session 4 Flashcards

1
Q

Working Capital

A

Current Assets - Current Liabilities

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2
Q

What does NRV stand for?

A

Net Realizable Value

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3
Q

Operating Cycle

A

A/R Collection Period + Inv Holding Period - A/P days held

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4
Q

Footnote one or two

A

Summary of Significant Accounting Policies

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5
Q

What makes something a cash equivalent?

A

Maturity of 90 days or less, it’s highly liquid meaning it has to have a market for it.

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6
Q

Define Net Realizable Value

A

Sellers expect that some buyers will not be able to pay their account when they come due and will not be able to collect on all accoundts owed to them.

For A/R, it is the net amount the seller expects to collect.

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7
Q

Aging Analytis

A

Each customer’s account balance is categorized by number of days or months the invoices have remained outstanding.

Based on prior experience or other available statistics, bad debt percentages are applied to each of these categorized amounts, with larger percentages applied to older accounts.

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8
Q

% of sales approach for Allowance for Uncollectible Accounts

A

Based from the I/S. Don’t care about the invoice balances. Instead the company estimates a historical rate of uncollectible sales.

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9
Q

Allowance for Uncollectible Accounts

A

Set aside fund for bad debts

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10
Q

Three ways to determine Allowance for Uncollectible Accounts

A

Direct W/O (Write Off) - GAAP only ok if materially different

% of sales

% of receivables

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11
Q

% of receivables approach for Allowance for Uncollectible Accounts

A

From the B/S. Have to consider balance in allowance account.

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12
Q

Where do companies disclose the amount of allowance for uncollectible accounts?

A

Face of B/S or in the notes.

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13
Q

What is another name for Allowance for Uncollectible Accounts?

A

Allowance for doubtful accounts

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14
Q

What is the effect of a write-off on net income

A

No current effect in new period. Net accounts receivable are unchanged. However, the income effect occurred in the pervious period (when the expense was recognized)

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15
Q

What is the effect of a write-off on total assets?

A

No effect

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16
Q

What is the effect of bad debt recognition on total assets?

A

Has an effect. Goes down.

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17
Q

What account is sometimes used to shift income from one year to another?

A

Allowance for Uncollectible Accounts.

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18
Q

How can a company shift income from one year to another?

A

Overstimate the bad debt expense for current year - expense is increased in the income statement, thus decreasing current period income.

In one or more future periods, when actual write-offs are less than provisioned earlier, it can then decrase the bad debt expense of that period to make up for overestimation from earlier period.

This increases income in one or more subsequent periods.

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19
Q

Cookie Jar Accounting

A

Company uses generous reserves from good years against losses that might be incurred in bad years

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20
Q

Income smoothing

A

earlings are understated in good years and overstated in bad years.

Just another flavor of cookie jar accounting

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21
Q

Dynamic Provisioning

A

Euphemism for cookie jar accounting

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22
Q

Accounting for an allowance workflow

A

Start with beginning allowance for uncollectible accounts
Add: Bad debt expense/provision for bad debts
Less: write-offs of accounts receivable
Equals: Ending allowance for uncollectible accounts

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23
Q

ART

A

Accounts Receivable Turnover

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24
Q

Accounts Receivable Turnover equation

A

Sales / Average A/R (net)

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25
Q

What does Accounts Receivable Turnover reveal?

A

How many times receivables have been collected for the period.

More turns == A/R being turned quicker, which is better.

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26
Q

Average Collection Period equation

A

A/R (net) / Average Daily Sales

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27
Q

Approximate Days in Collection Period equation

A

365 / ART

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28
Q

Name the two lines that A/R is sometimes reported as

A

Bad debt expense and A/R

If you add the two numbers together you will get the net A/R

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29
Q

How are inventory costs reported?

A

Reported on B/S or transferred to the I/S as an expense (cost of goods sold) to match against sales revenues.

30
Q

WIP

A

Work in Process

31
Q

What are the three types of manufacturer inventory?

A

Raw materials
Work in process
Finished goods

32
Q

Work in Process

A

Unfinished items for products in a production process.

33
Q

What costs do Work in Process and finished goods contain?

A

Raw materials (transferred in from raw materials)
Labor
Overhead

34
Q

What is gross profit also known as?

A

Gross Margin

35
Q

Gross profit calculation

A

(net) Sales revenue
- Cost of Goods Sold
= Gross Profit

36
Q

Explain what happens to inventories when they are used up or sold

A

Their costs are transferred from the B/S to the income statement as Costs of Goods Sold.

37
Q

Costs of Goods Sold computation

A 
Beginning Inventory
\+ Inventory purchases and/or production
= Cost of Goods Available for Sale (GAS)
- Ending inventory (current period B/S)
= Cost of Goods Sold
38
Q

Explain how Cost of Goods Available for Sale can be determined

A

Top down, as:
Beginning inventory
+ Inventory purchases and/or production

or

Bottom up, as:
Ending inventory (current period B/S)
+ Cost of Goods Sold

39
Q

GAS

A

Cost of Goods Available for Sale

40
Q

How can we compute purchases?

A

Purchases = -Beginning Inventory + Ending Inventory + Cost of Goods Sold

Purchases = Increase in Inventory Balance + Cost of Goods Sold

41
Q

What are the three inventory costing methods?

A

First In, First Out (FIFO)
Last in, First Out (LIFO)
Average Cost

42
Q

Explain First-In, First-Out

A

Assumes that the first units purchased are the first units sold

43
Q

FIFO

A

First-In, First-Out

44
Q

Explain Last-In, First-Out

A

Assumes that the last units purchased are the first to be sold.

45
Q

LIFO

A

Last-In, First-Out

46
Q

Explain Average Cost

A

Units are sold without regard to the order in which they are purchased. Instead, it computes Cost of Goods Sold and ending inventories as a simple weighted average.

47
Q

Explain the relationship between cost flow and physical flow

A

Cost flow does not relate to physical flow.

48
Q

Phantom profits

A

In periods of rising costs and prices, FIFO produces higher gross profits because lower cost inventories are matched against sales revenues at current market prices.

Gross profit becomes the sum of economic profit and and a holding gain.

49
Q

Inventory Costing Effects on the Balance Sheet

A

In periods of rising prices, using FIFO shows an inventory that better reflects current costs than if a firm used LIFO.

50
Q

LIFO Reserve

A

The difference between the inventory balance computed using FIFO and the inventory balance computed using LIFO.

51
Q

LIFO Liquidation

A

The reduction in inventory quantities when LIFO costing is used. Liquidation yields an increase in gross profits when prices are rising.

52
Q

Inventory Costing Effects on Income Statement

A

In periods of rising prices, and assuming that the company has not previously liquidated older layers of inventories, a firm using LIFO would yield lower operating profit than the same firm using FIFO.

Similarly, this firm would show an income that better reflects current costs that if the firm used FIFO.

53
Q

Lower-of-Cost-or-Market

A

Companies are required to write down the carrying amount of their inventories reported cost (using whatever adopted method they choose) on the currently shown balance sheet to their replacement cost (market), but only if the current balance sheet cost exceeds the replacement cost.

54
Q

LCM

A

Lower-of-Cost-or-Market

55
Q

Inventory Turnover calculation

A

Costs of Goods Sold / Average Inventory

Higher turns, lower days

56
Q

How long our stuff sits on the shelf (calculation)

A

365 / Inventory Turnover

57
Q

What line on the B/S makes up the largest long-term asset amount?

A

Property, Plant, and Equipment

58
Q

Popular depreciation methods

A 
Straight-line method (probably most popular)
Accelerated Methods (e.g. Double-declining-balance method)
59
Q

Book value

A

Also called net book value.

Cost
- Accumulated Depreciation
= Book Value

Don’t include salvage value

60
Q

Straight-line method

A

Depreciation expense is recognized evenly over the estimated useful life of the asset.

61
Q

Straight-line method calculation

A

(Cost - Estimated Salvage Value)
/ Estimated Useful Life
= Annual depreciation

62
Q

Insight into all depreciation methods

A

All depreciation methods leave the same salvage values

Total depreciation over asset life is identical for all methods.

63
Q

Comparison of Straight-line with Accelerated Depreciation

A

Accelerated has bulk of depreciation happening within the first few years.

Accelerated must first calculate straight line (but don’t include salvage in it!)
1/useful life

NBV x rate = Depreciation Expense

64
Q

Explain how asset sales gains or losses work

A

Reported on I/S “Net” as gain or loss.

Gain or loss on asset sale = Proceeds from sale - book value of asset sold

Proceeds > NBV = gain I/S
Proceeds

65
Q

How is an asset impairment determined?

A

(other than goodwill)

determined by comparing the sum of the expected future (undiscounted) cash flows generated by the asset with its book value.

If the expected future cash flows are less than the book value of the asset, the asset is judged to be impaired.

Companies must recognize a loss if the asset is deemed to be impaired.

When a company takes an impairment charge, assets are reduced by the amount of the write-down to the market value (fair value) of the asset and the loss is recognized in the income statement, which reduces current period income. (operating item).

66
Q

Explain how a change in accounting estimate for depreciation works

A

Applied prospectively (current and future periods) from date of adoption.

No cumulative effect adjustments or restatements of prior periods’ income statements made.

67
Q

PPE Turnover Calculation

A

Sales / Average PP&E Assets

68
Q

PPE Turnover

A

A main analysis of long-term assets involves their productivity.

What level of long-term assets is necessary to generated a dollar of revenue?

How capital intensive is the company?

69
Q

PPET

A

PP&E Turnover

70
Q

Percent Used Up calculation

A 
Accumulated Depreciation /
Acquisition cost (excluding land and construction in progress)

Corporate Financial Reporting (8 decks)

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