Inventories/LT assets/taxes Flashcards Preview

CFA Level 1: FR & A > Inventories/LT assets/taxes > Flashcards

Flashcards in Inventories/LT assets/taxes Deck (70)
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0
Q

Double declining balance depreciation method

A

= (Orig cost - prev deprec) • 2 / dep life

1
Q

Deferred Tax Liability calculation

A

= [(pretax income - depreciation) - (taxable income - depreciation)] • tax rate + prev yr DTL

3
Q

Units of production depreciation method

A

= (orig cost - salvage val)

(Output units in period)/(life in output)

4
Q

pretax income

A

income before income tax expense on the income statement

5
Q

taxable income

A

income subject to tax as reported on the tax return

6
Q

taxes payable

A

tax liability based on taxable income, as shown on the tax return

7
Q

income tax paid

A

actual cash outflow for taxes paid during the current period

8
Q

tax loss carryforwards

A

losses that could not be deducted on the tax return in the current period but may be used to reduce taxable income and taxes payable in future periods

9
Q

income tax expense

A
noncash income statement item that includes:
\+ cash tax expense
\+ increase in DTL
- decrease in DTL
- increase in DTA
\+ decrease in DTA
10
Q

deferred income tax expense

A

excess of income tax expense over taxes payable

11
Q

valuation allowance

A

a contra account that reduces a deferred tax asset for the probability that it will not be realized under US GAAP

12
Q

Deferred Tax Asset

A

taxable income (tax return) > pretax income (fin stmt)

revenues recognized prior to recording on financial statement

expenses for financial reporting are reported prior to recognizing them as deductible expense for tax

13
Q

Deferred Tax Liability

A

taxable income (tax return) < pretax income (fin stmt)

expected to result in future cash outflows

depreciation expense on income statement is less than depreciation expense on tax return

14
Q

LIFO v FIFO on Income Statement

A

Under LIFO…

COGS - higher
EBT - lower
TAXES - lower
NET INCOME - lower

15
Q

LIFO v FIFO on Balance Sheet

A

Under LIFO…

Inventories - lower
working capital - lower
R/E - lower

16
Q

LIFO v FIFO in Cash Flows

A

Under LIFO….

CFO is higher

17
Q

product costs

A

capitalized under inventories on the balance sheet

  • purchase costs less trade discounts and rebates
  • conversion costs incl labor and overhead
  • other costs necessary to bring inventory to present location and condition
18
Q

period costs

A

expensed in period incurred

  • abnormal waste of materials, labor, overheads
  • storage costs
  • administrative overhead
  • selling costs
19
Q

COGS

A

= beginning inventory
+ purchases
- ending inventory

20
Q

periodic inventory system

A

inventory values and COGS are determined at the end of the accounting period

21
Q

perpetual inventory system

A

inventory values and COGS are updated continuously

22
Q

Capitalization v. Expensing

A

Capitalizing produces….

lower income variability
higher profitability early on
lower profitability later
the same cash flows
higher CFO
lower CFI
lower debt/equity ratio
23
Q

straight-line depreciation

A

= (cost - salvage value) / useful life

24
Q

double declining balance depreciation

A

= (cost - accumulated deprecation) x 2/useful life

more to write-off means less taxable income at first

25
Q

unites of production depreciation method

A

depreciation =

cost - salv) x (units prod/hrs wkd) / (total units/hrs

26
Q

intangibles not capitalized under US GAAP

A

R&D
advertising
software development to est. feasibility

27
Q

intangibles capitalized under US GAAP

A

purchased patents, copyrights, franchises, licenses, brands, trademarks
direct response advertising
goodwill arising from transactions
software development costs once feasibility is established

28
Q

Impairment Recognition US GAAP

A
  1. recoverability test: carrying value > undiscounted cash flow from asset’s use and disposal
  2. loss measurement: loss = carrying value - fair market value (or PV of CFs)
29
Q

Impairment Recognition IFRS

A

compare carrying value to either:
fair value - selling costs
value in use

30
Q

Inventory cost flow and rising prices

A

FIFO provides an artificially low value of COGS

LIFO provides an artificially low value of ending inventory

31
Q

In an inflationary environment, LIFO is higher for:

A

COGS and CFO

Inventory turnover

32
Q

Assuming inflation, FIFO produces higher:

A

Inventory balances
Current ratio
Working capital
Current assets

33
Q

Capitalizing costs

A

Reported as asset on balance sheet

Involves depreciating or amortizing assets cost over useful life

Capitalize if future economic benefit

34
Q

capitalization of expenses creates

A

an asset

35
Q

capitalization of leases creates

A

an asset and a liability

36
Q

change in a an accounting estimate such as useful life or salvage value is..

A

put into effect in the current period and prospectively

change in estimate is applied to assets book value and depreciation is calculated going forward with new estimate

previous periods are not affected by the change

37
Q

intangible assets with finite lives

A

reported on balance sheet at fair values and reduced by amortization

does not include internally developed intangible assets

38
Q

derecognition of long-lived assets

A

removed from balance sheet when sold, exchanged, or abandoned

39
Q

sale of long-lived asset

A

remove from balance sheet

difference between sale proceeds and carrying value is reported as gain/loss on income statement

40
Q

abandonment of long-lived asset

A

remove from balance sheet

no proceeds to report, recognize loss of carrying value in income statement

41
Q

exchange of long-lived asset

A

gain or loss is computed by comparing carrying value of old asset with fair value of old asset.

Carrying value of old asset is removed from balance sheet, and new asset is recorded at fair value

42
Q

carrying value

A

original cost less accumulated depreciation

43
Q

impairment

A

if carrying value > recoverable amount

write value down on balance sheet to recoverable amt
recognize impairment loss on income statement

44
Q

recoverable amount

A

greater of:

fair value less selling costs
value in use

45
Q

value in use

A

PV of future CF stream from continued use

46
Q

impairment under IFRS

A

measured annually

impairment loss may be reversed if value recovers in the future to the value of original carrying value

47
Q

impairment under US GAAP

A

tested only when events and circumstances indicate to

48
Q

asset revaluations under US GAAP

A

long-lived assets cannot be revalued upward except for held-for-sale assets

49
Q

asset revaluations under IFRS

A

assets may be revalued upward to fair value

gains from reversal are reported on income statement and excess gains are adjustment to equity as revaluation surplus

50
Q

investment property

A

IFRS only

property a firm holds for capital appreciation or to collect rental income

51
Q

coupon rate

A

stated rate used to calculate the coupon payment

recorded on cash flow statement

52
Q

effective interest rate

A
discount rate (IRR) that equates PV of future CFs with issue price
yield on bond when it's first issued (YTM)
53
Q

interest expense

A

= book value at beg of period * market rate at time of issuance (YTM)

recorded on income statement

54
Q

debt issuance effect on cash flow statement

A

CFO is reduced by coupon interest
CFF is increased by proceeds at issuance
CFF is decreased by principal paid at maturity

55
Q

effective interest rate method of amortization of premium/discount debt issuance

A

interest expense = YTM at issuance * beg balance sheet liability

amortization = interest expense - coupon interest

required under IFRS, preferred under US GAAP

56
Q

straight-line amortization of premium/discount debt issuance

A

annual amortization = (par value - issuance) / years

interest expense = coupon +/- amortization

permitted under US GAAP

57
Q

Issuance costs for debt under IFRS

A

deducted from initial bond liability

result is higher effective interest rate

58
Q

Issuance costs for debt under US GAAP

A

shown on balance sheet as prepaid expense (asset)
controversial b/c does not provide future economic benefit
amortized over bond’s life

59
Q

Capital Lease criteria for US GAAP

A
  1. title to leased asset is transferred to lessee at end of lease
  2. bargain purchase option exists
  3. lease period is at least 75% of asset’s economic life
  4. PV of lease payments is >= 90% of leased asset’s fair value
60
Q

Capital Lease criteria for IFRS

A

substantially all rights and risks of ownership are transferred

61
Q

with a finance lease assets and liabilities are

A

higher than with an operating lease

62
Q

with a finance lease net income is

A

lower in early years and higher in later years than with an operating lease

total net income is the same for both types of leases

63
Q

with a finance lease CFO is

A

higher than with an operating lease

64
Q

with a finance lease CFF is

A

lower than with an operating lease

65
Q

Lessor reporting of operating lease

A

report leased asset on balance sheet
recognize lease payment as rental income
recognize depreciation expense on asset

66
Q

Lessor reporting of finance lease

A

report lease receivable on balance sheet
recognize lease payment as part interest revenue and part return of capital
treat as either sales-type lease or direct financing lease

67
Q

sales-type lease

A

lessor is dealer or seller of leased equipment
at time of inception, lessor recognizes gross profit on sale
interest revenue recognized over period of lease

68
Q

direct financing lease

A

lessor is not dealer of leased equipment
no gross profit is recognized at time of lease inception
all profit is interest revenue recognized over period of lease

69
Q

total interest expense

A

= coupon pmts + discount interest

= coupon pmts + (face value - issue value)

70
Q

New Book Value

A

= beginning book value + interest expense - coupon pmt