Financial Reporting Analysis:

IFRS
Requires component dep: ex machines with bldg.
Interest accrued during construct cap long liv asst
Investment prop: rental inc/held for capital appr
Disclose circumstances for write downs
Change in acctg principle restate all periods fin st
Cannot revaluate above deprecated cost
Interest payment operating or financing
Infrequent/unusual =expropriation
Ifrs allows enacted or substainacially enacted tax
Interest paid & div receivd operating or investing
Data collection: taking financial statements site visits and producing organized fin statements
GAP
Permits comp dep but does not require
Goodwill excess purchase price over fair value
Interest acrued during constr be capt long lvd ast
Issuance of stock+div pay are financing cash flow
Interest payment operating
Acquisitions, divestures, investments in joint are
investing cash flows
Bond coupon paid is operating
Bond discount paid at mat is financing
Chang actg principle restate all periods fin state
Extraordinary/infrequent/unusual=expropriation
Deferred taxes as enacted tax rate
Div receiv, interest paid operating cash
R&D are expensed

 Data analysis: adjusted financial statements: common size, ratios, graphs, forecast
 Analyzing interpret: use to answer the objective

-derivative instruments are recognized at fair market values on balance sheet

Cash flow earnings index: cashflow/NI greater than one means higher earnings supportable to its perf

-unrealized gains and losses for held for trading securities & are reported in the income statement but
unrealized gains and losses on available for sale securities are reported in other comprehensive income
, dividends from all investments should be included in pre tax income

 Held to maturity amortized cost on balance sheet, interest, realized g/l on income statement
 Actively traded securites reported on income statement
 Other comprehensive income: unrealized gains and losses on available for trade securities,
foreign currency translation, minimum pension liability adjustments, derivatives used for hedge

Financial statement analysis: use of information from a company fin statements to make economic deci

Financial report/standards : reports and presentations that company uses to show to investors, creditors
etc. Limit the range of presentation formats and accounting methods but do not require all firms to use
same format or methods.

FCFF: CFO + Int(1-tax rate) – fixed capital expenditures int=cash pid for interest

CFO + int ( 1- tax rate) – net borrowing

FIFO higher net income in higher inventory costs

Current liabilities: one year or companies operating cycle whichever is longer

Operating lease: does not require a liability to be recognized on balance sheet, debt to equity and debt
to assets are lower. Earnings before interest and taxes are lower in early years because expense.
  Lowers interest coverage ratio
 Finance lease lowers net income, higher debt to capital, lower roe
 Finance lease: princip portion outflow from financing, operating: entire payment CFO outflow

Interest capitalized vs expensed

 Capatilized is a financing outflow, expensed is an operating outflow

Adverse opinion not fairly presented

If Carrying value exceeds fair value good will is impaired

 GAAP: recoverability if CV> undiscounted cash mpaired write down to cv

 If

Permanent differences cause effective tax to be different than statutory tax

Standard setting bodies encourage direct, indirect shows methods of movement of cash

Income tax expense= taxapayable + (^DTL) – (^DTA)

 Using straight line dep for reporting and accelearated tax results in DTA
 Deffered tax assets gains that are taxable before they are cognized on income statements,
Deffered tax liabilities result from gains that are recognized in the income statement before they
are tax deductible.
 Deffered tax asset: losss that are recognized In the income statement before they are tax deudc
 Increase in tax rate increases both DTA and DTL
 Valuation allowances occur when probability of utilizing deffered tax assets is in doubt ,
deferred tax assets must be reduced by valuation allowances to reflect probability that they will
never be used
 Net income from municipal bonds is a permanent difference

Extraordinary item is reported net of tax, 40% tax , 12,000 extra/ .6 = 20,000 = prem-20k

FIFO – LIFO reserve

 To adjust cgs from lfo to fifo subtract change in lifo reserve over period

Proxy statement: contains info about management and board member compensation, conflicts of intrst

Inventory costs: allocation of fixed production overhead based on normal production is included in
inventory cost. No storage or shipping is included in inventory cost.

Supplementary schedules: show details of various business segments

Trade mark: if a company internaly develops, costs would be expensed vs capitalized

Diluted EPS: market price- exercise price/ market price x options

𝐸𝐵𝐼𝑇 𝐸𝐵𝐼𝑇+𝐿𝐸𝐴𝑆𝐸
𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝐶𝑜𝑣𝑒𝑟𝑎𝑔𝑒 𝑅𝑎𝑡𝑖𝑜 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑝𝑎𝑦𝑚𝑒𝑛𝑡𝑠 𝐹𝑖𝑥𝑒𝑑 𝑐ℎ𝑎𝑟𝑔𝑒 𝑐𝑜𝑣𝑒𝑟𝑎𝑔𝑒 𝑖𝑛𝑡𝑒𝑟𝑠𝑡+𝑙𝑒𝑎𝑠𝑒
  If differences between interest cov and fixed cov are large it means significant lease payments,
firms debt to equity ratios do not reflect these. Most appropriate is fixed interest cov.

Acruals: ex A company fails to accrue wages for December that will be paid in January, year end balance
sheet liabilities

 Over states net income and owner equities, liabilities understated. Expenses incurred already
 Accrued revenue is an asset , unearned revenue is a liability

Bonds

 Discount if market rate > coupon rate. Amortization of discount added to interest expense
making reported expense greater than coupon of 12 million (200 mill x 6%)

ENACTED??

LIFO Liquidation: causes old inventory to be sold that was accumulated at a lower costs, decreasing
COGS as a percentage of sales. Lower COGS as a percentage of sales will result in higher gross profit as a
percent of sales.

A decrease in a firms bond rating will increase the required yield on the debt and decrease market value.
A decrease in market value of debt will decreae the firms reported debt to asset ratio. A decrease in
balance sheet liabilities will increase equity as long as other assets are unchanged.

Working capital: current assets – current liabilities

Issuing common stock increases shareholders equity, dividends received are retained earnings, realized
gains are also net income,

Stumping questions:

Picket company reports on its financial statements for 2009

 2009 taxable income = $ 5000

 Deferred tax asset year end 2008= 2000
 Deferred tax liability year end 2008 = 1000
 2009 temporary differences creating deferred tax liabilities = 600
 2009 temporary tax differences creating deferred tax assets = $200

In 2009 the tax rate increases from 35% to 50% pickets income tax expense for 2009 is closest to?

1) Taxes payable 0.5 x 5000 = 2500

2) Deferred tax asset increase 0.5 x 200 = 100
3) Deferred tax liability increase 0.5 x 600 = 300
Adjustment of deferred tax asset (.5/.35) x 2000- 2000= 857 increase in tax rate increase asset
Adjustment of deferred tax liability 0.5/.35 x 1000-1000= 429
4) Income tax expense = 2,500 + (300 + 429) – (100 + 857) = 2, 272