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L1 flash cards financial reporting (ss9)
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L1 flash cards financial reporting (ss9) L1 flash cards financial reporting (ss9) Presentation Transcript

  • Costs Included in Inventories• Product Costs- Cost of purchase- Conversion costsStudy Session 9, Reading 29Costs Recognized as Expenses• Period Costs- Abnormal costs- Storage costs- Selling costs
  • • There are 3 methods used to value inventory in financial reports(permitted by IFRS and US GAAP):1) Specific identification2) First-in, first-out (FIFO)3) Weighted average costStudy Session 9, Reading 29
  • • The weighted average cost per unit is calculated as:Total cost of goods available for sale / Total units available for saleStudy Session 9, Reading 29
  • • Impact on Cost of Sales• Ending Inventory• Gross ProfitStudy Session 9, Reading 29
  • There are two types of inventory accounting systems:• Perpetual - the inventory account is continuously updated andpurchases and sales of goods are directly recorded in the inventoryaccount as they occur.• Periodic - the quantity of inventory is determined periodically.Study Session 9, Reading 29
  • • Under IFRS, inventory is valued at the lower of cost and netrealisable value (NRV).• Under US GAAP, inventory is valued at lower of cost and marketvalue.Study Session 9, Reading 29
  • • A company has to disclose the accounting policies related toinventory in its financial statements.• Under both IFRS and US GAAP, there should be consistency ininventory accounting policies.Study Session 9, Reading 29
  • The choice of the inventory valuation method affects:• Sales• Gross profit• Net income• Inventories• Current assets and total assetsStudy Session 9, Reading 29
  • Major ratios used to measure the efficiency of inventorymanagement are:• Inventory turnover• Days of inventory on hand• Gross profit marginStudy Session 9, Reading 29
  • • Capitalised costs are shown as outflows from investing activitiesin the cash flow statement.• Expensed costs reduce net income and operating cash flow forthe reporting period by the after-tax expenditure amount.• Expensed costs do not result in increase in assets amount in thebalance sheetStudy Session 9, Reading 30
  • • Intangible assets do not have any physical existence• The process of accounting for intangible assets differs dependingon the methods of acquisition- purchased- internally developed- acquired in a business combinationStudy Session 9, Reading 30
  • • There are 3 main methods used to calculate depreciationexpense:1) The straight line method2) The accelerated method of depreciation3) The units-of-production methodStudy Session 9, Reading 30
  • • Straight line method - the depreciable cost is divided by theestimated useful life of the asset.• Declining balance method - depreciation is calculated as somepercentage of the carrying amounts of these assets.• Units-of-production method - determined by dividing depreciablecost by the estimated productive capacity over the life of the asset.Study Session 9, Reading 30
  • • Methods for the amortisation are:1) Straight line method2) Accelerated methods3) Units of production methodStudy Session 9, Reading 30
  • • Straight Line Method - the amortisation expense for each year iscalculated as the book value of the intangible asset, less theresidual value, divided by estimated useful life of the asset.• Accelerated and units of production methods - amortisation iscalculated in the same way as depreciation of long-lived tangibleassets.Study Session 9, Reading 30
  • • Used as an alternative to the cost model• Permitted under IFRS but not under US GAAP• Can be used if the fair value of assets can be measured reliablyStudy Session 9, Reading 30
  • Study Session 9, Reading 30• Impairment losses reduce the carrying amount of an asset onthe balance sheet, and also reduce net income.• An impairment loss is a non-cash item and hence does notaffect cash flows from operations.• Intangible assets with a finite life are tested for possibleimpairments when a significant event indicates the need totest.
  • • An asset is derecognised when it is disposed of, or when it isexpected that no future benefits will accrue from either use or saleof the asset.• The gain or loss is reported in the income statement as:- a separate line item if the amount is material.- as a component of other gains and losses if the amount isnot material.Study Session 9, Reading 30
  • • Disclosures related the depreciation or amortisation of tangibleand intangible assets help analysts in understanding changesduring the reporting period and the effect on financialperformance.Study Session 9, Reading 30
  • • Under IFRS, investment properties can be valued either by the costmodel or the fair value model.• The cost model used to value an investment property is identical tothe cost model for property, plant and equipment.Study Session 9, Reading 30
  • • Accounting profit - earnings before taxes reported in financialstatements• Taxable income - earnings that is subject to income tax.• Accounting profit and taxable income may differ because accountingprofit is computed in accordance with accounting standards, andtaxable income is calculated according to tax laws.Study Session 9, Reading 31
  • • When taxable income is higher than accounting profit, the excesstax paid for income tax is expected to be recovered in future periods.• When taxable income is lower than accounting profit, the lowerincome tax paid is expected to be caught up in future periodsStudy Session 9, Reading 31
  • • The tax base of an asset or liability is the amount attributed tothat asset for tax purposes.• The tax base of a liability is the carrying amount of theliability, less amount that can be deducted in the future for taxpurposes.Study Session 9, Reading 31
  • • Current taxes payable (or recoverable) are calculated on the basis ofthe tax rate that is applicable at the date of the balance sheet.• Deferred taxes are calculated on the basis of the tax rate that will beapplicable at the time of realisation of the asset or payment of theliability.Study Session 9, Reading 31
  • • Income Tax payable is calculated by applying the applicable tax rateto taxable income.• Income Tax Expense is calculated by adding income tax payable andthe change in deferred tax assets and liabilities.Study Session 9, Reading 31
  • • If income tax rates increase, deferred tax assets and liabilities alsoincrease.• A decrease in tax rates results in a decrease in deferred tax assetsand liabilities.• These changes affect financial statements and the ratios that arederived from the accounts of deferred tax assets, liabilities, andincome tax expense.Study Session 9, Reading 31
  • • Temporary tax differences can be categorized as:1) taxable temporary differences2) deductible temporary differences.• The effective tax rate is calculated as:Income Tax Expenses Accounting Profit of Pre-tax IncomeStudy Session 9, Reading 31
  • • Temporary differences may arise because of differences in thetax base and carrying amount of assets and liabilities.Study Session 9, Reading 31
  • • Permanent differences generally include expenses and incomethat are not allowed under tax laws and tax credits forexpenditures that reduce tax paid directly.Study Session 9, Reading 31
  • • A Valuation Allowance is created to reduce deferred tax assets• The creation of a valuation allowance reduces the deferred taxassets and income of the period in which the valuation allowance iscreated.Study Session 9, Reading 31
  • • Two types of future cash payments are promised to bond holders:1) The face value of the bond2) Periodic interest paymentsStudy Session 9, Reading 32
  • •The market interest rate on bonds is the rate demanded by buyers ofthe bonds• If the coupon rate is higher than the market rate, the market valueof the bond will be higher than the face value.• If the coupon rate is lower than the market rate, the market valuewill be less than the face value.Study Session 9, Reading 32
  • • The issue price of a bond is calculated as the present value of futurecash payments.• The value of zero coupon bonds is the present value of the principalpayment.• Zero-coupon bond (bonds which have no coupons) are issued at adiscount to face value.Study Session 9, Reading 32
  • • Methods used for amortising the premium or discount are the:1) Effective Interest Rate Method2) Straight-line MethodStudy Session 9, Reading 32
  • • Under IFRS, interest payments can be shown as outflow either inoperating activities or financial activities.• Under US GAAP, interest payment are reported as cash outflowfrom operating activities.Study Session 9, Reading 32
  • • Bonds issued may remain outstanding until maturity or may beredeemed before maturity either by calling them (in case the case of acallable bond) or by purchasing in the open market.• Unamortised debt issuance costs are written off at the time ofredemption as they are included in the gain or loss on debtextinguishment.Study Session 9, Reading 32
  • • Debt Covenants are included to protect the interest of bondholdersby putting some restrictions on the activities of borrowers.• Debt Covenants also help borrowers reduce the cost of debt as theylower the risk for creditors.Study Session 9, Reading 32
  • • Affirmative covenants - require certain action by the borrowers.• Negative covenants - restrict borrowers from taking certainactions.Study Session 9, Reading 32
  • • Non Current Liability - the total amount of long term debt due afterone year.• Current Liability - the Portion of long term debt repayable withinnext twelve months.Study Session 9, Reading 32
  • • Provides cheap financing to the lessee and requires little or no downpayment• Can reduce taxable income• In a better position to bear the risk associated with the assets andenjoys economies of scale• Can offer attractive lease terms to the lesseeStudy Session 9, Reading 32
  • • Finance leases can be considered purchases of the asset by thelessee (buyer) directly financed by lessor (seller).• An operating lease can be thought of as a rental agreement thatallows the lessee to use the asset for a period of time.Study Session 9, Reading 32
  • –ownership is transferred at the end of the lease.–lessee is given the option to purchase the leased assets cheaply.–lease term is more than 75% of the useful life of the asset.–present value of lease payment is at least 90% of the fair value ofthe leased asset.Study Session 9, Reading 32
  • Initial Recognition and Measurement by the Lessee• The lessee reports the leased assets and leases payable in itsbalance sheet.• The initial value at which the leased asset and lease payable isshown is the lower of:–the fair value of leased asset.–the present value of future lease payments.Study Session 9, Reading 32
  • • Direct Financing Lease - the present value of lease is equal to thecarrying value of the asset.• Sales-type lease - the present value of the lease payments is morethan the carrying amount of the leased asset.Study Session 9, Reading 32
  • Finance Lease: Reporting and Accounting by the Lessee• The interest expense on the debt and the depreciation expense isreported in the income statement.Operating Lease: Reporting and Accounting by the Lessee• During the period of use, lease expenses are reported in the incomestatement.Study Session 9, Reading 32
  • • Interest revenue on the lease receivable is reported in the incomestatement over the life of the lease.Operating Leases: Reporting and Accounting by Lessor• Leased assets are reported in the balance sheet.• Lease revenue is shown in the income statement when earned.Study Session 9, Reading 32
  • • Defined Contribution Plan - the agreed upon amount contributed tothe pension plan each period is called the pension expense.• Defined Benefit Plan - the future amounts to be paid to theemployees are estimated and discounted to the present value todetermine the pension obligation.Study Session 9, Reading 32
  • • Presentation under IFRS• Presentation under GAAP• Extensive disclosures related to pension expenses are made in thenotes to the financial statements.Study Session 9, Reading 32
  • Leverage Ratios••••Study Session 9, Reading 32
  • ••Study Session 9, Reading 32