EVA

Question 1

who launched EVA and when

Answer 1

stern stewart and co in 1989

Question 2

Why do accounting standards apply conservative principles to uncertainty

Answer 2

as to not overstate the assets and earnings

Question 3

what is an example of unconditional conservatism practices 1

Answer 3

research and development outlays
- accounting custom to expense and deduct from revenue an asset and amortise it gradually. the effect of expensing is to understate the companies true value
ie high tech companies and similar examples for advertising and marketing costs

Question 4

What is an example of unconditional conservatism practices 2

Answer 4

Deferred tax provisions - arise from temporary differences between accounting and taxable profit

the accounting custom is to recognise future obligations as an expense and overstate the costs

Question 5

whats the difference between accounting and taxable profit

Answer 5

Temporary differences - the period in which the revenues and expenses are recognised for accounting purposes is different from the period in which these revenues and expenses are treated as taxable income or allowable deduction for tax purposes

Permanent differences - one allows to recognise revenues or expenses but the other doesn’t

Question 6

what are examples of conditional conservatism practices

Answer 6

Lower of cost and market - an asset is listed either at carrying amount of original cost or at market value whichever is lower

Doubtful debt - risk of non-payment
Charge increase provision to IS as expenditure and reduce value of receivables by full amount of provision
overstate the costs as it is not real

Impairment accounting

Question 7

What is IFRS 16

Answer 7

Lessee accounting

Single lessee accounting model on all leases and are treated as the purchase of an asset on a financial basis

Question 8

Why would you manipulate earnings

Answer 8

• Accounting-based debt covenants
• Management compensation
• Tax considerations
• Regulatory considerations
• Capital market considerations
• stakeholder considerations
• competitive considerations

Question 9

what is big bath accounting

Answer 9

moving as many expenses as possible from future periods into the current period, so few expenses can be taken in this year

Question 10

What is cookie jar reserves

Answer 10

stash accruals in cookie jars during the good times and reach into them when you need them in the bad times

Question 11

What is the formula for EVA

Answer 11

EVA = NOPATt-TCC

Question 12

What are two ways you can calculate total capital charge

Answer 12

TCC = sum (each capital*each cost of capital)
TCC = Total capital * WACC

Question 13

How do you calculate beginning amount EVA

Answer 13

EVAt=NOPATt-TCC^t-1

Question 14

How do you calculate ending amount EVA

Answer 14

EVAt = NOPATt-TCCt

Question 15

How do you calculate average amount EVA

Answer 15

EVAt= NOPATt - [(TCC^t-1+TCCt)/2]

Question 16

how do you calculate the capital charge

Answer 16

Capital * cost of capital *(1-tax rate) + …. and so on

Question 17

How do you calculate WACC capital charge

Answer 17

WACC = Capital/total capital * cost of capital * (1-tax rate) and so on

Question 18

How would you calculate EVA considering both financial and accounting anomalies

Answer 18

EVAt = Adjusted NOPATt - Sum(C%*adjusted TC^t-1)

Question 19

What is the ACCA for accounting adj - R&d, advertising and staff training

Answer 19

Expenditure on promotional activities, research and development and employee training should be capitalised. If they have been treated as an expense in the income statement, they should be added back to . profit, and added to capital employed in the year which the expenses were incurred

Question 20

What is the ACCA adj for depreciation

Answer 20

the depreciation charge is added back to the profit, and instead of a charge for economic depreciation is made. economic depreciation reflects the true change in value of the assets during the period, unlike accounting depreciation. If no detail is given on economic depreciation then candidates should assume that accounting depreciation represents a reasonable approximation for it

Question 21

what are the three factors to consider for depreciation

Answer 21

1. Useful life
2. Residual value
3. Depreciation method

Question 22

what is the ACCA accounting adjustment for allowances for doubtful debts, deferred tax

Answer 22

Items such as provisions, allowances for doubtful debts, deferred tax provisions and allowances for inventory should be added back to capital employed, since these represent over-prudence on the part of financial accountants, and this understates the true value of capital employed. Any expenses or income recognised in the income statement in respect of movements in such items should also be removed from NOPAT

Question 23

holding other variables constant how would you increase EVA using ROCE

Answer 23

Increase it

Question 24

holding other variables constant how would you increase EVA using WACC

Answer 24

Decrease it

Question 25

holding other variables constant how would you increase EVA using investments

Answer 25

ROE-WACC > 0

Question 26

holding other variables constant how would you increase EVA using divestment projects

Answer 26

ROE - WACC < 0

Question 27

What are the limitations of EVA

Answer 27

• Adjustments can become cumbersome
• No GAAP to rule accounting adj, so its hard to compare other companies with EVA
• Although it makes a number of accounting adj to accounting data, it’s impossible to include the value of all assets or to judge how rapidly they depreciate
• Difficult to estimate C%
• It is an absolute measure, so hard to compare across firms with different size ie >ROCE
• BS does not show current market value of the firms assets