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How do we find the operating cycle?
Length of the operating cycle is determined by # days' sales in inventory plus avg. collection period (NOT # days' purchases in AP)
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Find # days' sales in inventory:
Annual inventory turnover = COGS / avg inventory; 365/Inv turnover = # days' sales in inventory
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Avg Collection period:
AR turnover = Sales/avg AR; 365/AR turnover = Avg. collection period
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inventory turnover =
COGS / avg inventory --> how much inventory have we sold vs.
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Be *sure* to check:
Time of year of financial statements! Answer *the question*, not "a reasonable question", FORMAT to see pos/neg clearly!, Don't mess up counting months!
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Cash paid for inventory
= cogs + increase in inventory - AP increase
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How to treat R & D?
US & World: Capitalize R; Us regular: Expense D; US software & World: Capitalize D. R is initial Research. D is later stage development/feasibility.
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How to choose between expense & capitalization?
Capitalize costs that are expected to benefit future periods.
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What are the D/C for PPE & Acc Depreciation?
PPE is Debit for positive balance. Accumulated depreciation offsets gross PPE, therefore increase w/ Credit.
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Outflow/inflow? Prepaid +/-, Payable +/-, Receivable +/-
Prepaid outflow/inflow; Payable inflow/outflow; Receivable outflow/inflow
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True/False: Loss from sale of PPE is Operating CF.
Tricky, b/c the cash from sale of PPE is Investment CF, however, need to adjust NI by gain/loss reflected therein.
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What is free cash flow?
Operating net cashflow (usually positive) + investment net cash flow (usually negative)
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Which CF statement includes interest from financing/investments?
Operating (per FASB ruling)
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For MicroStrategy, why should board favor restatement of earnings?
Ethical, Good crisis management, good character/transparency mean lower cost of capital
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Revenue recognition:
Is work done, is cash collected/reasonably collectible?
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When should Brad Co. recognize ship rev? (spec, gen)
Proportionately over construction period in this specific case--though general answer is when cust takes possession.
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Rec Rev if Unsigned sales agreement but have already delivered product?
Need written policy; Must follow; (reduces strategic timing)
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Rec Rev if Sold w/ liberal return policy & 0% financing?
No side agreements that negate transfer of ownership
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Rec Rev if finished product for specific customer?
No revenue before phys delivery. EXCEPT: cust request in writing
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Rec Rev if Health Club annual non-ref upfront fee?
No front loading. EXCEPT: sequential delivery of separately-saleable components.
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When to recognize refundable membership fee revenue?
No service revenue until refund period ends. EXCEPT: Substantial (2+ yrs) history allowing reliable estimate of refunds.
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Can internet company recognize full revenue from a drop-ship arrangement?
No gross accounting, has to be net--i.e., commission revenue.
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With FIFO/LIFO, what happens to: COGS/Inventory/Profits?
FIFO: lower COGS, higher inventory, higher profits. LIFO is higher COGS, lower inventory, lower profits
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LIFO conformity -- what is the most common inventory method used for Financials? For taxes?
Tricky--This is one method that MUST be same for both. LIFO is preferred for tax bens.
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How to compute LIFO reserve?
LIFO layers show value in inventory. Subtract inventory recorded $ from replacement cost of units * current price. This represents an unrealized gain on holdings
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What number to use for double-declining balance?
double the pct of straight-line & apply to remaining book value, NOT depreciable cost
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What is the impairment procedure?
First, see if non-discounted CFs are > book value. Then impair to mkt value.
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What is debt ratio?
Total liabilities/total assets--don't confuse w/d/e ratio
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Op lease to capital lease: don't forget:
Add to both assets & liabilities!
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How can I get tricked by bad debt EXPENSE?
by not inculcating existing bad debts into calculation--thus 18% of AR is bad but 2% already accounted for--need to only do the 16%
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How can I be tricked by Depreciation useful life estimate adjustments?
Look for TOTAL useful life adjustments vs. RELATIVE useful life--i.e., years remaining vs. years total.
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How can I be tricked w/PV calculations?
Look for # of periods--Draw it out!!
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How to calculate impairment loss w/o mkt price?
PV of the future cashflows
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How to calculate bond interest?
Calculate mkt rate of interest on issue value, then add interest (non-coupon) & recalculate next period
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How can I be tricked on cash collected w/ pcts of other months?
By forgetting current month Cash!
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Contingent Accounting for gains/losses?
Gains: PROBABLE recognize if estimable, REAS POSSIBLE: disclose, but be careful, REMOTE: nothing; Losses: PROB recognize if estimable, else disclose; R POSS: Disclose; REMOTE: no recog unless guarantee--then disclose in note
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Contingencies
Items not fully resolved at the time of financial statement preparation. (e.g., lawsuits, environmental cleanup)
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Expensing vs. Capitalizing issues
Advertising, Research, Software development, oil exploration, etc.
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What are the two most significant operating items?
Employee Compensation (pension liabilities) & income taxes (deferred income tax liabilities)
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What is the "intrinsic value method"?
For stock options, this is an accounting valuation that focuses on the value of the option on issue date--i.e., almost always nothing
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What is the fair value method?
Estimating the probable value of the options and expensing them as compensation.
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Defined contribution
Pension plan where employee bears risk--company merely promises to pay certain amount into fund. Simple accounting.
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Defined benefit
Pension plan where company assumes risk--guarantees a certain payout to pensioner. Accounting complex, but must be Matched.
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What is a PBO?
Projected Benefit Obligation, the present value of the future projected benefit--i.e., the amount needed to invest today in order to pay out in the future.
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How to calculate net pension liability/asset?
PBO - fair value of plan assets = difference which if PBO > plan assets, is a liability; otherwise a "net pension asset"
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3 primary components of pension expense?
Interest cost, Service cost, and Return on pension fund assets.
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Service cost?
Impact of an extra year of service to the calculation, results in an increase in the pension expense.
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How to account for Return on pension fund assets?
Use expected return in order to smooth out impact of market fluctuations.
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On Income statement, Plan Assets (+) & PBO (-) are affected by…
+ return on assets, -benefits paid; & -service costs, -interest costs, + benefits paid p 488
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On CF statement, Plan Assets & PBO are affected by…
+ Contributions & nothing
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Underfunded pensions have "Net pension …"
Liabilities
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a. What is the subject of FASB Statement No. 106?
The non-reporting of retiree healthcare obligations
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b. After FASB Statement No. 106 was implemented, managers blamed some negative consequences on the FASB. What were those negative consequences?
Scrapping retiree healthcare plans.
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The Different types of inventory?
Raw Materials, Work in Process, Finished Goods--including all incremental labor, overhead, etc. that went into each stage
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