_ WN Rem epee gie Financial Reporting and Analysis 2022 CFA Level 1 Prepared by Eric Fu Commonwealth of Australia WARNING as been reproduced and communicated to you by or on behalf of the Navigator Union Pty Ltd in accordance with section 113P of the Copyright Act 1968 (Act). ‘may be subject to copyright under the Act. by you may be the subject of copyright protect2 AB Ren Rreehtite, Financial Reporting and Analysis 2022 CFALevel1 Prepared By: Eric Fu CFAFRM CPA Topic Weightings in CFA Level 1 Session NO. Study Session 12 study Session 3-4 study Session 5-8 study Session 9-10 Study Session 11-12 study Session 13-14 Study Session 15 Study Session 18 study Session 17-18, Study Session 13 subject eighngs 555-8 Financial Reporting and Analysis Framework Pert: Accounting Basics arta. ‘Accounting Standards Financial Statement Pare: Analysis Applications F5 Introduction to Financial Statement Analysis R46 Financial Reporting Standards R17 Understanding income Statements 1S Understanding Balance sheets £19 Understanding Cash Flow Statements 20 Financial Analysis Techniques R21 Inventaries 222 Longetived Assets R23 Income Taxes 824 Non-curtent ables £25 Financial Reporting Quality 26 Applications of Financial Statement Analysis,Partt: Accounting Basics Part 1 - Accounting Basics 4 Standard-Seting Bodies & Regulatory Bodies 2.1.1 Measurement of Financial laments eciifinametl 2, 2ooube ety tem 2.1.3 Acca Aecunting 2.2.1.1 Balance Sheet 22:12Income Sinemet PreneiReP So armancas game! 22.43 cash low Statement Stern 2.2.14 Comprehensive income Statement 2.2.15 Statement of Changes in Equity 2.22 Financial Statements Relationshies 2.3 Basic Tranactions Accounting 2.4 Other Relevant Information 3 Fiancal Reporting, 3-1!AS8 Conceptual Framework Requirements 3.21255 General Requirements for Financial taternents 1 Standard-Setting Bodies & Regulatory Bodies + Standard-Setting Bodies: + professional organizations of accountants and auditors that establish financial reporting, standards Financial Accounting Standards Board (FASB) Sets U.S, GAAP ¥ International Accounting Standards Board (IASB) oP Sets IFRS 1 Regularly Authorities: + government agencies that have legal authority to enforce compliance with financial reporting standards Y the Securities and Exchange Commission (SEC) in the U.S, the Financial Service Authority (FSA) in the U.K. ¥ most national authorities belong to the International Organization of Secut Commissions (IOSCO)Part 1 - Accounting Basics 1 standard-sotting Gadles & Regulatory Bodies 2.1.1 Measurement of Financial Elements 2.2 Financial peperina alee 2-12 Double Entry System 2.1.3 Accrual Accounting 2.2.11 Balance sheet 2.2.1.2 income Statement 2 Financial Reporting 1.71 Five Financial ‘Mechanics 2.2 Financial Eee Financial 9.2.4.3 Cash Flow Statement ‘statements 2.2.1.4 Comprehensive Income Statement 2.2.15 Statement af Changes in Fauity 2.2.2 Financia Statomants Relationships 2,3 Basie Transactions Accounting 2.4 Other Relevant Information ‘Financial Reporting 3: 1AS® Conceptual Framework Requirements 3.2 456 Genera Requirements for Financial Statements 2.1.1 Measurement of Financial Elements > Historical cost + the amount originally paid for the asset y Amortized cost + historical cost adjusted for depreciation, amortization, depletion, and impairment, y Replacement cost (Current cost) + the amount the firm would have to pay today for the same asset Y Realizable value + the amount for which the firm could sell the asset \ Present value + the discounted value of the asset's expected future cash flows Fair value + the amount at which two parties in an arm'slength transaction would exchange the asset Example 1 (Measurement of Financial Elements) ‘The valuation technique under which assets are recorded at the amount that would be received in an orderly disposal is? A. current cost. B. present value. C. realizable value. Answer:Part 1 - Accounting Basics 1 Standard-Serting Bodies & Regulatory Bodies 2.1. Measurement of Financial Elements 2.1 nancial naganina yates 212 Double Entry System 2.1.3 Recwual Accounting 2.2.11 Balance Shoot 2.2.12 income statement 2 Financial Reporting 2.2.1 Five Financial ‘Mechanics 2.2 Financiel Satements Statements 22.14 Comprehensive income Statement 22.13 2h Flow Statement 22:15 Statement of Changesin Equity 2.22 Financial Statements elationshins 1.3 Basie Transactions Accounting 2.4 Other Relevant information ‘Financial Reporting 3-11AS8 Conceptual Framework Requirements 5,2 as General Requrements for Financial Statements 0 2.1.2 Double Entry System 7 Atransaction has to be recorded in at least two accounts » “Asset = Liability + Equity |» always hold Balance Sheet Income Statement Revenue Labilin y Expense Asset Net Income Equity Dividend Retained Earning a Part 1 - Accounting Basics 1 Standard Setting Bodies & Regulatory Bodies 2.1.1 Measurement of Fnancial Clements 2.3 Financial neeanamcil 21:2 Double Ene system 2.1.3 Accrual Accounting 2.2.1. Gslance Sheet 2.2.12 income Statement 2 Financial Reporting 2.2.1 Five Fnanciah ‘Mechanics 2.2 Fnancit statements Statements 2.2.13 Cash Flow Statement 2.2.1.4 Comprehensive income Statement 2.2.15 Statement of Changes in Eouity 2.2.2 Financial statements Relauenshioe 2.3 Basie Tansactions Accounting 2.4 Other Relevant information 3 financial Reporting 311AS8 Conceptual Framework Requirements 32S General Requirements for Financial Statements R2.1.3 Accrual Accounting > Cash Basis of accounting + revenues are recorded when cash is received, and expenses are recorded when cash is paid > Accrual Basis of accounting + recording revenues when eared and expenses as incurred 2.1.3 Four Important Accounts under Accrual Accounting * Unearned Revenue (Deferred Revenue) + cash received in advance + liability Prepaid Expense + cash paid in advance + asset Accrued Revenue (Accounts Receivable; Trade Receivable) + cash received in arrears + asset y Accrued Expense (Accounts Payable; Trade Payable; Wages Payable; Electricity Payable...) + cash paidin arrears + liabitty a Example 2 (Accrual Accounting) ‘On 30 April 2006, ERIC Ltd received a cash payment of $30,000 as a deposit on production of a custom machine to be delivered in August 2008, This transaction would most likely result in which of the following on 30 April 2006? A. No effect on liabilities. B. A decrease in assets of $30,000. . An increase in liabilities of $30,000. Answer: 15Part 1 - Account 1g Basics 1 Standard -sering Bodies & Regulatory Bodies 2.1.4 Measurement of Financial Elements 2.1 Financial repo benes B42 Double Ey Sytem 112.3 Accrual Accounting 2.2.1 Balance Sheet 2.2:.2 income Statement 2 Financial Reporting 2.2.1 Five Financial ‘Mechanics 2.2 Financiat Statements Statements 2.2.13 Cash low Statement 2.2.1.4 Comprehensive income Statement 2.2.1.8 Statement of Changes in Equity 2.22 Financial Statements Relationships 2.3 Batic Transactions Accounting 2.4.0ther Relevant information Financia Reporting 32 ASB Conceptual Frarnework Requirements 3.2 IASB General Requirements for Financial Statements 16 2.2 Financial Statements > Balance Sheet (R7=SiR#) + Asset = Liability + Eguity > Income Statement (HABE; RES) + Revenue ~ Expense = Net Income > Cash Flow Statement (SiH) + Operating Cash Flow + Investing Cash Flow + Financing Cash Flow = Total Cash Flow > Comprehensive Income Statement (SRAM; AISA) + (Revenue ~ Expense} + Other Comprehensive Income = Comprehensive Income > Statement of Changes in Equity (sr#restzatsen) v 2.2 Financial Statements ‘Measurement Figures Accounting Basis Balance Sheet financial position time point accrual basis Income Statement | financial performance | time period ‘accrual basis Cash Flow Statement | financial performance | time period cash basisExample 3 (Financial statements) A company's current financial position would best be evaluated using the A. balance sheet. B. income statement C. statement of cash flows. Answer: A 19 Example 4 (Financial Statements) A-company's profitability for a period would best be evaluated using the A, balance sheet. B. income statement. C. statement of cash flows. Answer: B 20 Part 2 - Accounting Ba 4 Standard-Settng Bodies & Regulatory Bodies 2.2. Measurement of Financial Elements 2.1 Financial neal, 242 Double Entry system 2.1.3 Accrual Aceounting 22:14 Balance Sheet 22.12 ncome S:atement 2 Financlal Reporting 2.2.1 Five Financial Mechanics 2.2 Financial Jems Enaneal 2 2.13 cash Flow Statement ‘Statements 2.2.14 Comprehensive income Statement 2.2.15 Statement of Changes in Equity 2.22 Financial Statements Relationships 2.3 Basic Tansactions Accounting 2.4 Other Relevant Information SFinaneisl Reporting 31 1AS8 Conceptual Framework Requirements 3 256 General Requicaments fr Financial Statements n2.2.1.1 Balance Sheet Financial Statement 1 > Balance Sheet + The balance sheet (also known as the statement of financial position or statement of financial condition) reports the firm's financial position at a point in time + The balance sheet consists of three elements: Y Asset @ are the resources controlled by the firm. ¥ Liability 4% are amounts owed to lenders and other creditors ¥ Equity (Shareholder’s equity; Owners’ equity) *% is the residual interest in the net assets of an entity that remains after deducting its liabilities. ‘Transactions are measured so that the fundamental accounting equation holds: ¥ Asset = Liability + Equity 2 2.2.1.1 Balance Sheet Financial Statement 1 * Balance Sheet + examples of assets: a | liquid securities with maturities of 90 days or less are considered cash equivalents le Current Asset ¥ |Inventory (Inv) (e1 year) ¥ Accounts Receivable (A/R) ¥ Prepaid Expenses (P/E) v (Property, Piant & Equipment (PPE; Tangible Assets) ¥ |intangible Assets | © economic resources of the firm that do not have a physical form, such as patents, trademarks, licenses, and goodwill ¥ Investment Property v Non-current Asset r (> Lyear) ” 2.2.1.1 Balance Sheet Financial Statement 1 Balance Sheet + examples of liabilities: v Accounts Payable (A/P) Lo. cuent obtty [<1 year) v "Bank Loan ) |, s long:term borrowings trom banks 4 Non-current Liabilt {Bond Payable yea) ” u2.2.1.1 Balance Sheet Financial Statement 1 > Balance Sheet + examples of equity: apital (Issued Capital; Contribute % common stock issued to shareholders > External Equity {etained Earning (R/E) + curmulative net income that has not been distributed as dividends b> internal Equity ther Comprehensive Income (OC!) 2» 2.2.1.1 Balance Sheet Financial Statement 1 + Balance Sheet Format {simple Version) Balance Sheet (2020.12.31) Liability Asset Equity 26 2.2.1.1 Balance Sheet Financial Statement 1 > Balance Sheet Format (Detailed Version} Balance Sheet (2020.12.31) Current Assets: Current Liability: cash Unearned Revenue Inventory Accounts Payable Accounts Receivable Non-Current Liatit Prepaid Expense ee eet Bark Loan Non-Current Assets Bond Payable Property, Plant & Equipment Intangible Assets Equity: Investment Property capital Financial Instruments Retained Earning Other Comprehensive income 2Part 1 - Accounting Basics 1 Standard:-Setting Bodies & Rogulatory Bodies 2.4.1 Measurement of Financial Elements 2.1 nancial recone ates 242 Double Entry sistem 2.1.3 Reerual Accounting 2.2.4.1 Balance Sheet 2.2.12 Income Statement 2 Financial Reporting 2.21 Five Financial ‘Mechanies 2.2 Financiat ‘Statements Statements 2.2.1.3 Cath Flow Statement 2.2.1.4 Comprehensive Income Statement 2.2.1.5 Statement of changes in Equity 2.2.2 financial Satements Relationships 2.3 Basie Transactions Accounting 2.8 Other Relevant infor tion 3.1 18S@ Conceptual Framework 3 Flnanclal Reporting Requirements 53.2 158 General Requirements for Financial Statements Pa 2.2.1.2 Income Statement Financiat Statement 2 > Income Statement + The income statement (also known as the statement of operations or the profit and loss statement) reports on the financial performance of the firm over a period of time + The elements of the income statement include: ¥ Revenue * are inflows from delivering or producing goods, rendering services, ot other activities that constitute the entity's ongoing major or central operations, ¥ Expenses % are outflows from detivering or producing goods ar services that constitute the entity's ongaing major or central operations. 28 2.2.1.2 Income Statement Financial Statement 2 » Income Statement + examples of revenue & expenses: ¥ Revenue (Sales; Sales Revenue) ¥ Cost of Goods Sold (COGS) ¥ Selling, General & Administration (SG&A) (Operating Expenses) ‘* includes such expenses as advertising, management salaries, rent, and utilities ¥ Depreciation Expenses (Dep Exp) ® the "using up” of tangible assets Amortization Expenses (Amort Exp) the "using up" of intangible assets ¥ Other Income/Expense + gains/losses that may not arise in the ordinary course of business Y Interest Expense (Int Exp) ¥ Tax Expense (Tax Exp) 302.2.1.2 Income Statement > Income Statement Format (simple Version) Financial Statement 2 Income Statement (2020.1.1 - 2020.22.32) Revenue - COGS (Cost of goods sold) = SGBA (Selling, general & administration) + Interest expense ~ Tax expense Net income 2.2.1.2 Income Statement > Income Statement Format (Detailed Version) + By Function (Multi-stepl: Income Statement 2020.11 - 2020.12.33) Revenue = c08s Gress profit SGBA ‘Operating profit +f Other income & expenses BIT (Earning before interest & tax) Interest expense EBT (Earning before tox) Tax expense ‘Net income a Financial Statement 2 + By Nature (single-step): Income Statement (2020.1.1 - 2020.12.31) Revenue - cogs +SG@A Dep Exp& Amor Exp ‘Operating profit ##- Other income & expenses EBIT (Earning before interest & tax) st expense EBT (Earning before tax) Tox expense Net income a Part 1 - Accounting Basics 1 Standard-Setting Bodies & Regulatory Bodies 2.2.1 Measurement of Financial Elements 2.1 Financial Reporting Basics 2.1.2 Double Entry System 21.3 Accra Accounting 2 Financtal Reporting ‘Mechanics 2.2 Financial Statements 2.2.12 Balance sheet 2.2.42 income Statement 2.2.1 Five Financial ‘Statements 2.2.1.8 Cash Flow Statement 2.2.14 Comprehensive income Statement 2.2.15 statement of Changes in Equity 2.2.2 Financia Statements Relationshice 2.3 Basic ranesctons Accounting 2.4 Other Relevant Information 3.1858 Conceptual Framework 32088 2 Financial Reporting Requirements a! Recuirements for Financial Statements 32.2.1.3 Cash Flow Statement Financial Statement 3 > Cash Flow Statement *+ The statement of cash flows reparts the company’s cash receipts and payments. + These cash flows are classified os follows: Operating Cash Flow (CFO) $ include the cash effects of transactions that involve the normal business of the tiem, ¥ Investing Cash Flow (CFI) 4 are those resulting from the acquisition or sale of property, plant, and ‘equipment; of a subsidiary or segment; of securities; and of investments in other firms. Y Financing Cash Flow (CFF) + are those resulting from issuance or retirement of the firm's debt and equity securities and include dividends paid to stockholders. 2.2.1.3 Cash Flow Statement Financial Statement 3 + Cash Flow Statement Format (Simple Version) Cash Flow Statement (2020.1.1- 2020.12.31) CFO (cash flow af operating) CFl {cash flow of investing) EF (cash flow of financing) Total cash flow + Beginning cash balance Ending cash balance 38 4 Standared-Serting Bodies & Regulatory Bodies 2.2.1 Measurement of financial Elements 2.3 Financial peel, 24.2 Bouble entry system 2.1.3 Accrual Accounting 2.2.1. Balance Sheet 2.2.1.2 income statement 2 Financtal Reporting 2.2.1 Five Financlal , sre Bere 2.2 Financial Jue nenel 22.1.3 cash Flow Statement Statements 2.2.1.6 Comprehensive Income Statement 2.21.5 statement of Changes in Equity 2.22 Financial Statements Relationships 2.3 Gatie Transactions Accounting 2 dother Ralevant information 3 Financtal Reporting 311858 Conceptual Framework Requirements 3,2 SB General Requirements fr Financial Statements 352.2.1.4 Comprehensive Income Statement Financial Statement & > Comprehensive income Statement + The statement of comprehensive income reports all changes in equity expect for shareholder transactions (e-g., issuing stock, repurchasing stock, and paying dividends), v ¥ the income statement can be combined with Other Comprehensive income (OCI) and presented as a single statement of comprehensive income alternatively, the income statement and the statement of comprehensive income can be presented separately a7 2.2.1.4 Comprehensive Income Statement Financial Statement & > Comprehensive Income Statement Format (Simple Version) 2.2.1.4 Comprehensive Income Statement (2020.1.1 - 2020.12.31) Revenue COGS (Cost of goods sold} SGBA (Selling, general & administration) Interest expense “Tax expense "Net income +/+ OC! (Other comprehensive income) Comprehensive Income 28 Comprehensive Income Statement Financial Statement 4 > Other Comprehensive income (OCI): + part of: + not part of: balance sheet (equity) + income statement comprehensive income statement + Oclelements: ‘441’ * Changes resulting from foreign currency translation Defined Benefit Plan (08 Plan} minimum pension liability adjustment Unrealized gain or loss from cash flow hedging derivatives, Unrealized gain or loss from available-for-sale securities, Revaluation Surplus (HFRS Only) 2Example 5 (comprehensive Income) The following information is from a company’s accounting records: | Revenues for the year 12,500 Total expenses for the year 10,000 Unrealized gains from available-for-sale 4,475 ‘Loss on foreign currency translation adjustments on a foreign subsidiary 325 Dividends paid 300) The company's total comprehensive income (in € millions) is closest to: A. 1,150, 8. 3,150 c. 3,650. Answer: C 7 Part 1 - Accounting Basics 1 Standatd-Seting Bodies & Regulatory Bodies 2.3 Measurement of financial ements 2.1 Financial pacar bangs BLE Double Entry Sustrm 21.3 Acer Acrounting 22.4.2 6alence Sheet © a b.aaincome statement 2 Financial Reporting 2.2.1 Five Financial Machanics 2.2 Financial ‘Statements Statements 2.2.14 Comprehensive income statement 2.2.13 Cash Flow Statement 2.2.2.5 Statement of Changes in Equity | 22.2 Financial statements Relaionshiae 2.3 Basie Transactions Accounting 2.4 other Relevant Information “a Financial Reporting, 3-11AS6 Conceptual Framework Requirements 3.2 IASB Genera! Reatiterents fo Financial Statements 41 2.2.1.5 Statement of Changes in Equity Financiol Statements + Statement of Changes in Equity + the statement of changes in equity reports the amounts and sources of changes in equity over a period of time 2Part 1 - Accounting Basics 1 standard-Seting Bodies & Regulatory Bodies 2.1.1 Messurerent of Financial Elements 2.1 Financial aeoorinatnes 242 00ube Ente System 2.2.3 Accrual Acounting 2.2.1. Balance Sheet 22:1. Income Statement 2 Financial Reporting 12.1 Five Financial ‘Mechanics 2.2 Financial ‘Statement? 2.2.13 Cath Flow Statement 2.2.14 Comprehensive Income 5 2.215 Stetement of Changes in Equity 2.2.2 Financial Statements Relationships 2.3 Basic Transactions Accounting 2.4 Other Relevant Information ‘a Financial Reporting 2 4/AS® Conceptual Framework Requirements 3.21468 General Requirements fo Financial Statements a 2.2.2 Financial Statements Relationships Assets = Liability «[Equity| [Equity}- capital + ending a/£ + OC! Ending R/€= Beginning R/E +[Net income]- Dividend [Net incame|= Revenue - Expense 4 Liability + Capital + OCI + Beg R/E + Revenue - Expense - Dividend froml/S Example 6 (Financial Statements Relationships) ‘An analyst has compiled the following information regarding ERIC Ltd: Liabilities at year-end $1,000 Contributed capital at year-end $500 Beginning retained earnings $600 Revenue during the year $5,000 Expenses during the year $4,300 There have been no distributions to owners, The analyst's most iikely estimate of total assets at year-end should be closest to: A. $2,100, B. $2,300 . $2,800 Answer: C 45Example 7 (Financial statements Rel ships) Ifa company reported fictitious revenue, it could try to cover up its fraud by: A, decreasing assets 8. increasing liabilities, C. creating a fictitious asset. Answer: € 4s Part 3 - Accounting Basics 1 Standard-Sexting Bodies & Regulatory Bodies 2.4.1 Measurement af financial Elements 2.1 Financial ‘ cca naNeA, 21.2 double Err sytem 2.3 Accral Accounting 22.2.1 Bslance Sheet 22.4.2ineome statement 2 Financial Reporting 22. foe Francs ht ‘mechanies 2.2Financil — Srrementz 222 3 Gash Flow Sutement Statements 2.2.14 Comprehensive income Statement 2.2.15 Statement of Changes Equity 22.2 Financ statements Rlationshi 23 bavie Transactions Accounting 2.4 Other Relevant Information 2 Financial Reporting, 31486 Conceptual Framework Requirements 3.2 1AS6 Ganeral Requirements for Financia Statements ” | 2.3.1 Basic Transactions Accounting - PPE Basie Accounting 2) Purchase PPE: b/s us Cash — pee» |} —__ a 2). Depreciation ys us PPE Dep Exp “e2.3.1 Basic Transactions Accounting - PPE 3) Impairment: B/s us PPE Impairment Loss 4). Sell PPE: B/S Cash + PPE - 49 2.3.1 Basic Transactions Accounting - PPE PPE Basie Accounting Example: 1) purchase a machine at $100 2}. depreciation of $20 3}, impairment of $30 4}, sell the machine at $45 so 2.3.2 Basic Transactions Accounting - Investment Property 41) Purchase Investment Property. B/s us cash = Investment | a Property * 2) Rent Income: B/S us cash + Rent Income stiestmnent Property | Bese Accounting | 2.3.2 Basic Transactions Accounting - Investment Property 3). Sell Investment Property: Bs us Cash * Gain/Loss on investment Investment |}-——— property sale Property 82 Tinvestment Property 2.3.2 Basic Transactions Accounting - Investment Property Investment Property Basic Accounting Example: 1) purchase an investment property at $60 2) rental income of $10 3) sell the investment property at $80 3 inwentory 2.3.3 Basic Transactions Accounting - Inventory | eas! 1) Purchase Inventory {Cash Purchase): B/S us Cash = 2) Sell Inventory (Credit Sale): b/s us AIR + Revenue a coss se2.3.3 Basic Transactions Accounting - Inventory basic Accounting | 3) Part of A/R becomes bad debt: b/s us AIR ~ Bad Debt Expense 4) Receive the remaining A/R: Cash AIR ss Basie Accounting 2.3.3 Basic Transactions Accounting - Inventory Inventory Basie Accounting Example: 1) purchase inventory of $30 0n cash 2) sell $10 worth of inventory on credit, contract price is $15 3) §2 of accounts receivable becomes bad debt 4) receive the remaining $13 accounts receivable from the customer 56 {Operating tasers} esc Ase 2.3.4 Basic Transactions Accounting - Operating Expenses 1). Incur Wages Payable: B/S us Wages xpense Payable * Wages Exp 2), Pay Wages Payable: e/s cash > ‘| Wages Poysbie 372.3.4 Basic Transactions Accounting - Operating Expenses Operating Expenses Basic Accounting Example: 41). incur wages payable of $20 2}, pay the wages payable 2.3.5 Basic Transactions Accounting - Bank Loan 4) Borrow Bank Loan: B/s. cash + | Bank Loan + 2) Incur interest Payable: B/s Interest Payable 2.3.5 Basic Transactions Accounting - Bank Loan 3) Pay interest Payable: B/s. Cash | Interest — Payable ee 4) Repay Bank Loan: B/S cash | Bank Loan — caning pence osc accounting | se [Rat ioan us Interest Expense Bank toon us2.3.5 Basic Transactions Accounting - Bank Loan Bank Loan Basie Accounting Example: 1). borrow bank loan of $500 2), incur interest payable of $50 3}. paythe interest payable 4)_repay the bank loan 2.3.6 Basic Transactions Accounting - Capital 4). Share Issuance: b/s cash + [capital + 2). Share Repurchase: B/s cash Capital — 2.3.6 Basic Transactions Accounting - Capital Capital Basic Accounting Example: 1) issue shares of $800 2). repurchase half of the shares {$400} us | Bosie Accounting 6 82 61 standard-Sering Bodies & Regulatory Bedles 2.41 Measurement of Financial Elements 2.1 Financial nae leg 222 Bouble Ente Systern 2.1.3 Accrual Acsounting 2.21.1 Balance Sheet 2.2.1.2 income Statement 2 Financial Reporting 2.2.1 Five Financial ‘Mechanics 2.2 financial Statements Statements 2.2.1. Cash Flow Statement 2.2.14 Comprehensive Income Statement 2.2.1.8 statement of changes in Equity 2.2.2 Financial Saternents Relationships 2.3 asic Transactions Accounting 2.4 Other Relevant Information 3 Financial Reporting 3-1 18SE Conceptual framework Requirements 32 as General Requirements for Financial Statements « 2.4 Other Relevant Information ~ 7 in Annual Reports: jancial Statements Notes (Footnotes) + Management's n and Analysis (MD8&.A; Management Commentary) + Auditor's Report + notin Annual Reports: + Proxy Statement + Securities and Exchange Commission Filings (SEC Filings) 2.4.1 Other Relevant Information - Footnotes > Financial Statements Notes (Footnotes) + disclose information about the accounting methods & accounting estimates used to prepare the financial statements + accounting changes: ¥ accounting method change: Retrospective adjustment (in Footnotes) ¥ accounting estimate change: Prospective adjustment 662.4.2 Other Relevant information - MD&A. > Management's Discussion and Analysis (MD&A; Management Commentary) + a section in the annual reports where management discusses a variety of issues, including the nature of business, past results, and future outlook + material events and uncertainties that may affect the future 2.4.3 Other Relevant Information - Auditor’s Report > auc 1's Report + four auditor’ opinion on financial statements: ¥ Unqualified opinion {Unmodified opinion; Clean opinion) + free from material errors, fraud, or egal acts ¥ Qualified opinion “ if statements make any exceptions to the accounting principles, can issue Gualfied opinion and explain the exceptions ¥ adverse opinion + if not presented fairiy or not materially conforming with accounting standards ¥ Disclaimer of opinion % if the aucltoris unable to exoress an opinion e.g, in the case of a scope limitation), 2 disclaimer of opinion is issued + under U.S. GAAP, the auditors must express an opinion on the firm's 2.4.4 Other Relevant Information - Proxy Statement > Proxy Statement + issued to shareholders when there are matters that require a shareholder vote + providing information about the board members, managements, compensation and the issuance of stock options 6 62.4.5 Other Relevant Information - SEC Filings SEC Filings: + SEC filing requirements for publicly traded companies in the U.S. Y Form 10-K + annual financial statements ¥ Form 10- ‘quarterly financial statements V Form DEF-14A + proxy statements v Forma-k + material events relating to: significant assets acquisition and disposal + changes in management or corporate governance 7 Example 8 (other Relevant inform: mn) Accounting policies, methods, and e likely found in the: ates used in preparing financial statements are most A, auditor’s report. B_ management commentary. . notes to the financial statements. Answer: n Example 9 (other Relevant Information) Information about a company’s objectives, strategies, and significant risks would most likely be found in the: A. auditor's report B. management commentary. C. notes to the financial statements. Answer: B nExample 10 (auditor's opinions) What type of aut opinion is preferred when analysing financial statements? A. Qualified. 8. Adverse. C. Unqualified. Answer: € 3 Part 1 - Accounting Basics 1 sandar-Seting Bodie & Roglaory dies 2.4.1 Messrement of nani Berets eciyfarcel 12 poe Env stm 2.13 Accrual Acountng “2.2.12 Batance sheet 22.12 ncome Statement 2Financi Repo saanaay — PRFBEERIMCH 3.4 can flow Sateen Statements, 2.2.1.4 Comprehensive Income Statement 22.15 statement of Changes in Equity 22.2 bianca ttemens Flavors 2.3 basi Hansecioné Accounting 240th Relevant nfrmation a inancit Reportng 2.11489 enceptal Framework Requirements 3.2 IASB Genera Requirements for Financial Statements 1% 3.1 IASB Conceptual Framework Two qualitative characteristies 1) Relevance Underlying assumptions: 2) Faithful Representation ving + Accrual Bate 1 + Going Concern Four characteristics thot enhance Relevance & Faithful Representation a} Comparability Constraint: b) Verifiabitity + Cost & Benefit Trade-off Timeliness d) Understandability *3.1.1 Two Qualitative Characteristics > Relevance + Information is relevant if it would potentially affect or make a difference in user's decisions. Relevant information helps users of financial information to evaluate past, present, and future events, or to confirm or correct their past evaluations in a decision-making context + Materiality is an aspect of relevance. > Faithful Representation + Information that is faithfully representative is 2) Complete + all information necessary is depicted b) Neutral without bias Free from error no errors of commission or omission in the description of the economic phenomenon 3.1.2 Four Detailed Characteristics > Comparability * Financial statement presentation should be consistent among firms and across time periods. > Verifiability + independent observers, using the same methods, obtain similar results, > Timeliness + Information is available to decision makers before the information is stale. > Understandability + Users with 2 basic knowledge of business and accounting and who make a reasonable effort to study the financial statements should be able to readily understand the information the statements present. Useful information should not be omitted just because it is complicated, Example 11 (1As8 Conceptual Framework) Which of the following is least likely to be 3 general feature underlying the preparation of financial statements within the Internationa Financial Reporting Standards (IFRS) Conceptual Framework? A. Accrual basis B. Materiality, ©. Matching Answer: € ”Example 12 (1as8 conceptual Framework) Neutrality of information in the financial statements most closely contributes to which qualitative characteristic? A. Relevance, B. Understandability . Faithful representation. Answer: C ~» Example 13 (1438 conceptual Framework) The assumption that an entity will continue to operate for the foreseeable future is called A, accrual basis, B. comparability. . going concern. Answer: C Example 14 (1458 conceptual Framework) ‘The assumption that the effects of transactions and other events are recognized when they occur, not when the cash flows occur, is called: A. relevance. B. accrual basis, C. going concern, Answer: B aPart 4 - Accounting Basics 4 Standard-Settng Bodies & Regulatory Bodies 2.4.1 Mencurement af Financial Elements 2.1 Financial ; pot ates 2412 Bouble Entry System 2.1.3 Acerusl Aesounting 2.21.1 Balance Sheet 2.2.1.2 ‘acome Statement 2 Financial Reporting 2.2.1 Five Financial wen eeee 22 Financial {Exe Fireneil 22.1.3 cash Flow Statement Statements 2.2.14 Comprehansive Income Statement 2.2.1.5 stateme of changes in Equity 2.22 Financia Statements Relationships 2.3 asic Transactions Accounting 2.4 Other Relevant Information 3.1 ASB Conceptual Framework 3 Financial Reporting Requirements 5.2 1$8 General Requirements for Financial Statements w 3.2.1 IASB Required Financial Statements + IASB Required Financial Statements 1) Statement of financial position (Balance sheet) 2). Statement of comprehensive income (Comprehensive income statement) 3) Statement of changes in equity 48) Statement of cash flows 5) Footnotes a 3.2.2 IASB General Features for Financial Statements > Accrual basis of accounting *+ accrual basis of accounting is used to prepare the financial statements other than the statement of cash flows. > Going concern basis * the financial statements are based on the assumption that the firm will continue to. exist. > Fair presentation + faithfully representing the effects of the entity's transactions and events according to the standards for recognizing assets, liabilities, revenues, and expenses, > Comparative information + Comparative information for prior periods should be inekided unless 2 specific standard states otherwise,3.2.2 IASB General Features for Financial Statements > Materiality + the financial statements should be free of misstatements or omissions that could influence the decisions of users of financial statements. > Consistency + consistency between periods in how iten period amounts disclosed for comparison are presented and classified, with prior- > Aggregation + aggregation of similar items and separation of dissimilar items > No offsetting + no offsetting of assets against lcbilities or income against expenses unless a specific standard permits or requires it 8s 3.2.3 Structure and Contents of Financial Statements > Classified balance sheet + most entities should present 2 classified balance sheet showing current and non-current assets and liabilities. > Minimum information + minimum information is required on the face of each financial statement and in the notes. + for example, the balance sheet must show specific items, such as cash and cash ‘equivalents, plant, property and equipment, and inventories. Items listed on the face of the comprehensive income statement must include revenue, profit or loss, tax expense and finance costs, among others. 86Part 2: Accounting Standards Part 2- Accounting Standards 4 ane Sa Fama St tateacetion f2ah ion roe eis ~ i ict ee 4.1 Balance Sheet Format ~ Simple Version Balance Sheet Liability Asset Equity4.1 Bal: lance Sheet Format — Detailed Version Balance Sheet Current Assets: Current Liability: cash Unearned revenue Inventory Accounts payable Accounts receivable Prepaid expense Non-Current Liability: Bank loan Non-Current Assets Bond payable Property, plant & equipment Intangible assets Equity: Investment property Capital Financialinstruments Retained earning Other comprehensive income ot 4.1 Balance Sheet Format - Full Version Balance Sheet cash Bank overdraft nvencory LUrearned revenue (Defrred revenue) Accounts receivable jae eceovabieh ‘Aecourtspayabe tale payable) Jess lowance for doubt des Accrued expenses payable Prepaid expense foterest payable on Curent Resets Taxpavable Property pant & equipment (ert) ‘The current portion of long ter debt ess, Accurwlated deprecation ‘Nom Coren: Ladi Ione esses fankloan less, Accurlated amortization ord payable Investment property nance lease ability Fancialistramerts Pessiontabity Pension asets Letered ta ay (OTE) Deterod toe asset (018) Fauity aoital sued capital: Contibutedesptal: Common sock) fess, easy stock fetsinad earning ‘otner comprehensive income 2 4.1.1 Balance Sheet Items Examples > Property, plant & equipment (PPE) machine building > Intangible assets patents trademark copyright > Financial instruments held-to-maturity (HTM) trading-securities (T5) available-for-sale {AFS) 34.1.1 Balance Sheet Items Examples > Accrued expenses payable + wages payable + electricity payable + gaspayable + water payable + Other comprehensive income (OCI) + changes resulting from foreign currency translation + defined benefit plan (DB plan) minimum pension liability adjustment + unrealized gain or loss from cash flow hedging derivatives + unrealized gain or loss from available -for sale securities + revaluation surplus (HFRS only) oa 4.1.2 Contra Accounts Contra Accounts + a contra account is an account with a balance that is opposite of the normal balance for that account classification, + the use of a contra account allows company te report the original amount and also report 2a reduction so that the net amount will also be reported + Examples: Original Accounts Contra Accounts ‘Accounts receivables = ‘Allowance for doubtful debt PPE = ‘Accumulated depreciation Intangible assets Accumulated amortization 98 4.1.3 Current Portion of Long-term Debt > Current Portion of Long-term Debt: + refers to the section of a company's balance sheet that records the total amount of fong- term debt that must be paid within the current year %4.1.4 Additional Paid-in Capital > Capital (Issued Capit + includes two parts: Contributed Capital; Common Stock): ¥ Par value ¥ additional paid-in capital (APIC): +h proceeds from common stock sales in excess of par value * Port 2- Accounting Standards ‘ateanyncurny suapiint secu 22tanwiret ceonnon BENNIE \tewitio ~ interne esewe eee Getcacrs cen Beaten tse” 7 {ec cog Sete est 83 roar Ssaenoten tC onmtentonwece ve 4.2 Equity Accounting > Shave Issuance: Cash + Capital + > Share Repurchase: Capital4.2 Equity Accounting + Stock Dividend: + The distribution of additional shares to each shareholder in an amount proportional to ‘heir current number of shares. + fa 10% stock dividend is paid, the holder of 100 shares of stock would receive 10, additional shares. > Stock Split: + The division of each "oid! share into a specific number of "new" (post-split} shares + The holder of 100 shares wil have 200 shares after a 2-for-1 split, or 150 shares after a 3-for-2 split 00 4.2 Equity Accounting + Cash Dividend: B/S Cash — RE - +» Stock Dividend: B/s | RE 1 Capital + > Stock Split ays no change 10 Example 15 (equity Accounting) When a company buys shares of ts own stock to be held in treasury, it records a reduction in A both assets and liabilities, B. both assets and shareholders’ eq) C. assets and an increase in shareholders! equity. Answer: B a2Part 2- Accounting Standards pimamesatwtur dies Region 9 omacyctor Sezai Sg croc ie avout san Pee oe cea titan dene mateo pies ten teas ton samme 242400 tvaron {SFemionties 35 Soumin rt, 103 5.1 Income Statement Format - simple Version Income Statement Revenue COGS {Cost of goods sold) ~ SGBA (Selling, general & administration} Interest expense Tax expense Net income 5.1 Income Statement Format - Detailed Version Income Statement Income Statement (By Nature) {8y Function) Revenue’ Revenue cocs ~ Coss - SG8A Gross profit Dep Exp & Amort Exp =S68A ‘Operating profit, Operating profit 4h Other income & expenses 4/- Other income & expenses EBIT (Earning before interest & tax) Interest expense EBT (Earning before tax) Tax expense Net income EBIT (Earning before + Interest expense EBT (Earning before tax) Tax expense terest & tax) Net income 205.1 Income Statement Format ~ Full Version Income statement Income Statement (7 Norere) (7 Function) Fevenve [Sales Revenue (Stes) - Coss coss soRa Gross pratt = Dep Exo 8 Amort Ex» 568A Operating profit ‘Operating profit +f: Other income & expanses +h Othar income & expences ‘+H Gainor loss on PPE sale +1 Gam orosson PFE sale tnpalement 035 + Imoairment oss BIT (Earning before interest & a3), BIT (Corning before interest & tax) Intocast expense Ingerest expense EBT (Earning before tax) BT (Corning before a) ‘Net income fom continuing operation Tet income from continuing operation +f Income 0 oss From discontinued operation +/- Income or oss From discontinued operation ‘Net income (Profits Net pref) Tet income Profit, Net profit) 0s 5.1.1 Income Statement Items Examples > SG&A (Selling, General & Administration) + wages expense (salary expense} + rentexpense + electricity expense + gasexpense + water expense + marketing expense + R&D expense (research & development expense} > Other Income & Expenses + dividend income + interest income + rentincome 107 5.1.2 Income or Loss from Discontinued Operations Phase out Period: ny income or loss from discontinued operations during phase out period is reported separately in the income statement, net of tax, after income from continuing operations L n Measurement Date: Actual Disposal Date the date when the ‘company develops a formal plan for disposing of an operation 108,5.1.3 Non-Recurring Items 7 Non-Reeurring tems + items from prior years that are clearly not expected to continue inthe future periods, and are separately csclosed on the company’s income statement + examples: sain orlossonPPe sate . Vain J Unusual or infrequent item’ ¥ Income or loss from diseontinved operations 109 5.1.4 Net Revenue > Net Revenue + Revenue less adjustments for estimated returns and allowances is known as net revenue a Example 16 (Net Revenue} ERIC Lid had the following information related to the sale of its products during 2009, which was. its first year of business: Revenue $3,000,000, Returns of 4000s sold $100,000 Cosh collected $800,000 [ Cost of goods sold $700,000 Under the accrual basis of accounting, how much net revenue would be reported on ERIC Ltd's 2009 income statement? A. $200,000. B. $900,000. ©. $1,000,000. Answer: 8 uiPart 2 - Accounting Standards sicamy 32008 Roprg 8 Re Root “e ewenmes Sa a eeteder emer Sannarved one ag sa cee saci Caeaoon poomaon Hattsfenese praie —72ABeFaN 723 Lae te Steam aihames SAteewer seas Beta uanoton 152006 Acouing 12 5.2 Gross Revenue Reporting & Net Revenue Reporting > Gross Revenue Reporti + the selling company reports sales revenue and cost of goods sold separately > Net Revenue Reporting: + only the difference in sales and cost is reported + while profit is the same, sales are higher using gross revenue reporting. na Example 17 (Gross Reporting & Net Reporting of Revenue) ‘An e-commerce company sells hotel room nights on its website under agreement from a large number of major hotel chains. The hotel chains grant the company flexibility for the rooms they supply to the company's website and for the prices charged. These mejor chains bear the responsibility for providing all services once a customer books a room from the website. During the current year, the company received $5 million in payments from the sale of hotel rooms. The cost of these rooms was $4.5 million, which does not include $250,000 in direct selling costs. The e-commerce company’s cost of sales Is closest to: A, $4,750,000. B. $4,500,000. . $250,000. Answer: CPart 2- Accounting Standards 5.3.1 Revenue Recognition in 1/S > Revenue Recognition Criteria: + three conditions: cian Saberassoousog us ¥ the product has been delivered or the service has been rendered ¥ the seller is reasonably sure of collecting money Y the selling price is determined or determinable 5.3.2 Expenses Recognition in I/S > Expenses Recognition Criteria + matching principle: n6 ¥ expenses that directly related to revenue generation are recognized in the same period as the revenue ¥ without the matching principle: + companies can manipulate net income by recognizing reveriue earlier or delaying the expenses recognition a7Part2 - Accounting Standards te 0 yc 5.4 Earnings Per Share (EPS) > Earnings per share (EPS) 200mccgrior momeon EM saa a/stprne 1 Laon ee vaog kaon sated 22rd Acorn 2M eRe Me Ba0esr Ate as + EPS is one of the most commonly used corporate profitability performance measures for publicly-traded firms + PS is reported only for shores of common stock also known as ordinary stock} + two types of EPS: Y Basic EPS Y biluted EPS un Part 2 - Accounting Standards Veewmtvsnins EMORY S22 0eornatan iogtned —sPouhenent sean ROTM OTE 41 sien tn acre oP bananas 05.4.1 Basic EPS Net income ~ Preferred Stock Dividend Basic EPS = ~vreighted average Number of Common Shares Outstanding > Weighted average number of common share outstanding (WACSO) calculation: + New Issue weighted by time + Stock Dividend i not weighted by time {adjust the number of common share which exist before the stock dividend or split) a Example 18 (Weighted Average Number of Common Shares Outstanding Calculation) + LJan: 1,000 shares outstanding + Mar: new issue of 200 shares + Llun: 2-foret stock split + LJuk repurchase 100 shares + 1Sep: 20% stock dividend + 31Dec: year end Weighted Average Number of Common Shares Outstanding? Answer: 2,740 2 Example 19 (pasic €P5) For 2009, ERIC Ltd had net income of $1,000,000, At 1 January 2008, there were 1,000,000 shares outstanding, On 1 July 2009, the company issued 100,000 new shares for $20 per share, The company paid $200,000 in dividends to common shareholders. What is ERIC ttd’s basic earnings per share for 2009: A, $0.80. B. $0.91 c. $0.95. Answer: € 125Part2 - Accounting Standards ane te ta a2omeon — iaamiapme seed 2serdsecnrng, BAH westHo uate SSPndenbin (ounce, aa 5.4.2 Diluted EPS > Diluted EPS. + the basic EPS that would result if oll dilutive financial instruments were converted ¥ Convertible bond (Convertible debt) Y Convertible preferred stock ¥ Stock oations Y Warrants ns 5.4.2.1 ilutive Securities & Antidilutive Securities > Dilutive securities + stock options, warrants, convertible debt, or convertible preferred stock that would decrease basic EPS if exercised or converted to common stock > Antidilutive securities + convertible debt, or convertible preferred stock that would increase basic EPS if exercised or converted to common stack 1s5.4.2.2 Diluted EPS Calculation , la +] interest, sexe [ID WACSO +) shares, diluted EPS we Example 20 (oiluted Ps with Convertible Preferred Stock) ‘An analyst has gathered following information: + During 2020, ERIC Ltd reported net income of $115,600, and had 200,000 shares of common and 1,000 shares of preferred stock outstanding for the entire year. + ERIC Lia's 10%, $100 par value preferred-stock are each convertible to 40 shares of common stock ‘Assuming 40% tax rate, the 2020 diluted EPS is closest to: A, $0,392 8. $0,482. c, $0,512 Answer: B ne Example 21 (oituted €Ps with Convertible Debt) ‘An analyst has gathered following information: + During 2020, ERIC Ltd reported net income of $125,600, and had 200,000 shares of ‘common stock outstanding for the entire year. + ERIC Ltd also had 1,000 shares of 10%, par $100 preferred stock outstanding. ‘+ ERIC Ltd issued 600, $1,000 par, 7% bonds for $600,000. Each of these bonds is convertible to 100 shares of common stock Assuming 40% tax rate, the 2020 diluted EPS is closest to A. $0.701 B. $0.602. . $0,503. Answer: ¢ aaExample 22 (Diluted EPS with Conver le Preferred Stock & Convertible Debt) ‘An analyst has gathered following information: + During 2020, ERIC Ltd reported net income of $115,600, and had 200,000 shares of common and 1,000 shares of preferred stock outstanding for the entire year. + ERIC Ltd's 10%, $100 par value preferred-stock are each convertible to 40 shares of common stock + ERIC Ltd issued 600, $1,000 par, 7% bonds for $600,000. Each of these bonds is convertible 10 100 shares of common stock, Assuming 40% tax rate, the 2020 diluted EPS Is closest to: A. $0.469. 8. $0482, ©. $0.01, Answer: A 130 5.4.2.3 Treasury Stock Method > Treasury Stock Method: + Ifthe options or warrants are dilutive, use the treasury stack method ta calculate the number of shares used in the denominator. + The treasury stock method assumes that the funds received by the company from the exercise of the options would be used to hypothetically purchase shares of the company’s common stock in the market at the average market price during the year. + The net increase in the number of shares outstanding (the adjustment to the denominator) is the number of shares created by exercising the options less the number of shares hypothetically repurchased with the proceeds of exercise. Example 23 (oiluted EPS with Warrants/Stock Options) An analyst has gathered following information: + The net income is $10,000 for the year +The company has §,000 shares outstanding all year + The company also has 2000 outstanding warrants all year, convertible into one share each at $20 per share + The average stock price during the year is $30 The diluted EPS is closest to: A. $2.00. 8. $1.76. c. $167. Answer: B 132Part 2 -Accou Steers & ape Beater esterocasuatin Heine ‘Standards 2210 torcaey 11207 comoee 13 6.1 Cash Flow Statement Format - Simple Version Cash Flow Statement FO (cash flow of operating) CFI (cash flow of investing} CFF (cash flow of financing) Total cash flow + Beginning cash balance Ending cash balance 6.1 Cash Flow Statement Format — Full Version ne Cash Flow Statement (Assuming Diet Method & (15. GAAP) 0 (cash flow of operating: Cosh ceed from evtomers Cash poeta supplions Cash paso emolovees Cash pastor other operating expenses (Cash pas or intrest Cash pes ot income te (Ct cosh flow of investing ash pac for purchaco af sharon bond Cash received fom sale of shares Blonds Cash pa for purchase at equipment Cosh received from ale of equipment (CF (cashflow of fisacing). Cosh reseed from ssuance of shares & bonds Cash paid to repurchase shares & bonds Cash pai for dhidens Tota cashflow + Beginning cash balance Fading esh Balance 15sas cort S52 ree er Bening et es Repring Part 2 - Aecounting Standards cath tow carcecasusion Soon HR Spestc hve 1124 vue Met Bone sano Stamens 6 6.2 Cash Flow Types (U.S. GAAP) + Cash Flow from Operating Activities (CFO) + BEE + RAM + Interest Cash Flow from Investing Activities (CFI) + eRe RS + ARIA HIS + (BASBIARSEE > Cash Flow from Financing Activities (CFF) + BA + RIA TEES, + AIRY Dividend 7 6.2 Cash Flow Types (U.S. GAAP) Tox Tax Payment eo Interest Received cro ner Interest Payment cro Dividend Dividend Received CFO Dividend Payment oF Issue or Redeem of Shares&Bond (#%t ASAaSharesBond) CFF Share & a Purchase ar Sell of Shares8&Bond 15 cro, (§H33 RIAA eDH9SrareBeBond) AR ATM cr Loan made to others (2) i Bees, toot (EBA RE) Loon Principal received from loan made to others (BIAIEEE) FI Loan borrowed from others (@BIATBE cer siame | (asl) | Principal returned to others (#88 Ate) CFF 386.2 Cash Flow Types (IFRS & U.S. GAAP) Items Us. Gaar tras Interest Received cro FO or ch Interest Payment oo CFO or ce Dividend Received CFO CFO or CFI | Dividend Payment oF FO or CFF Tax Paid cro CFO, cH or CF Bonk overdraft cre Cash Equivalent 139 Example 24 (cash Flow Types) Which of the following is an exampie of a financing activity on the cash flow statement under US. Gaap? A, Payment of interest B. Receipt of dividends €. Payment of dividends. Answer: C 40 Example 25 (cash Flow Types) Interest paid is classified as an operating cash flow under A. US GAAP but may be classified as either operating or investing cash flows under IFRS. B. IFRS but may be classified as either operating or investing cash flows under US GAAP, . US GAAP but may be classified as either operating or financing cash flows under IFRS. Answer: C maExample 26 (cash Flow Types) ERIC Ltd recorded the following events in 2012: $0005 Purchase of securities for trading purposes 240) Proceeds from the sale of trading securities 300 Proceeds fram issuance of bonds Ey Purchase of 30% of the shares of an affliated company 25, (On the 2012 statement of cash flows, the company’s net cash flow from investing activities (in $0005) is closest to A. 275, 8, -215 ©. 285, Answer: A ma Part 2 - Accounting Standards 6.3 Cash Flow Calculation 3 Sources needed to prepare Cash Flow Statement: 1) Balance Sheet (current year & last year) 2}. Income Statement (current year} 3) Additional Information ‘tal eeceton 12205 opr 143Part 2 - Accounting Standards denon Stone Meapiiie HLtpraicertonne 2Aearmon setae tomeon UMC traesagmenn rene Tato £25 hls Ane 8 208F Acoming 15 6.3.1 Direct Method & Indirect Method for CFO. Y ‘Only for Operating Cash Flow (No Difference for Investing and Financing Cash Flaw) > Same result under 2 methods Y Direct Method is encouraged under both U.S. GAAP & IFRS. US.GAAPK, S887 Direct Method, 2#lFootnotesshisEIndirect Method (FRSBBE NER, HFlexble) ue 6.3.1 Three Rules for CFO Calculation > Cash FlowSiEf (Inflow: + Outflo eg +Revenue -COGS } -DAsset =~ (ending - beginning) + Aliability = + {ending - beginning) + UBIEFATS Non-Cash, Non-Operating 825385840 e.g. Depreciation {Non-Cash} G/Lon PPE sale (Non-Operating) a76.3.1.1 CFO Calculation (Direct Method) Taasser us |* Beene BSS ie Ta necountsRecewable Customer + Revenue (Sales} + AUnearned Revenue ~ainventory Supplier cocs + A Accounts Payable employee = aPrepaid Expense ~ SG&A (Operating Expenses) | _ + A Wages(Salaries) Payable (Operating Expense) + A Accrued Expenses Payable Bondholder Interest Expense + Ainterest Payable Government = Tax Expense: +O Tax Payable uaa Example 27 (Direct Method CFO) ERIC gathered the following information: Balance Sheet 2008 | 2010 | Incomestatement | 2009 | 2010 ‘Accounts receivable 732 | 683 [Netsales 2458 | 2546 Tnventory 38.0 | 478 [Costofgoods sold 1683 | 1759 ‘Accounts payable 203 | 28 Sased only on the information above, the company’s 2010 statement of cash flaws in the direct format would include amounts (in $ milions) for cash received from customers and cash paid to suppliers, respectively, that are closest to: cash received from customers cash paid to suppliers 209.7 169.7 8 259.5 1745, 259.5 182.1 Answer: C ua Example 28 (virect Method CFO) ERIC Lee reported interest expense of $19 million and taxes of $6 million. Interest payable. increased by $3 million, and taxes payable decreased by $4 million over the periad. How much cash did the company pay for interest and toxes? ‘A. $22 milion for interest and $10 million for taxes. 8. $16 million for interest and $2 million for taxes. . $16 million for interest and $10 million for taxes. Answer: C 180Example 29 (Direct Method CFO) The foilowing anual financial data are available for a company: $ millions ginning interest payable 304 Cash paid for interest 108.3 |_Ending interest payable 84.5 Interest expense for the year is closest to: AT16 8.97.4 ©. 1092 Answer: B 151 6.3.1.2 CFO Calculation (Indirect Method) Net income Step 4: adjust non-cash items > + Depreci jon expense Amortization expense Step 2: adjust non-operating items = Gain on PPE sale Loss on PPE sale | norma: Accounts receivable Ha tnventery ‘+a Accounts payable Step 3: adjust 8/5 items » 12 6.3.1.2 CFO Calculation (Indirect Method) + Indirect Method CFO Simplified Formula: CFO = NI + Dep & Amort exp ~ Gain on PPE sale + Loss on PPE sale —AA/R-Atnv+4A/P 153Example 30 (in: sct Method CFO! } ERIC gathered the following information from a company’s 2010 financial statements (in $ millions}? 2009 | 2010 Retained earnings t20 | 145 ‘Accounts receivable as] 48 Inventory as | a8 Accounts payable 36 23 in 2010, the company deciared and paid cash dividends of $10 million and recorded depreciation expense in the amount of $25 million. The company’s 2010 cash flow from operations (in $ millions} was closest to: As b. a. cn Answer: part2- Accounting Standards seas steet Stimanecerien smononece 5.1 rene Ststemene Foust Aimpiied 2 Suborant 9.2.2 Deweriation dearer epee Scone sme Re sie, = aE 6.3.2 CFI Calculation 1 CFI Typet: Buy or Sell Financial instruments (Available-for-sale & Held-to-maturity) CFl=—A Asset + Fl = ~4 Available for-sale CF =~ 4 Held-to-maturity 136.6.3.2 CFI Calculation > CFI Type2: Purchase or Sell PPE + Cash used to purchase PPE (Capital Expenditure): PPEs + Purchase ~ Disposal BV ~ Depreciation Expense = PPE: a CFI (cash outflow) + Cash received when sell PPE: PPE: + Purchase — Disposal BV ~ Depreciation Expense = PPE: * Selling Brice = Disposal BV + Gain on PPE Sale ~ Loss on PPE Sule CFI (cash inflow) as? Example 31 (cFt calculation - Purchase PPE] ERIC Ltd's balance sheet shows net equipment balance of $40 million at the beginning of 2010, and $60 million at the end of 2030, The income statement shows depreciation expense of $8 million in 2020. During 2010, the company sold an equipment with original cost of $8 million and accumulated depreciation of $3 milion. The capital expenditure in 2010 is closet to: A. $21 million. 8. $28 million, ¢. $33 million. Answer: € 158 Example 32 (ci calculation - sell PE) ERIC Ltd reported a loss on the sale of equiprnent of $2 million in 2010, In addition, the company’s income statement shows depreciation expense of $8 million The cash flow statement shows capital expenditure of $10 milion, all of which was for the purchase of new equipment. How much cash did the company receive from the equipment sale: Balance Sheet Item 12/31/2008 32/31/2010 Equipment $100 milion $105 million Accumulated depreciation {$49 million) ($46 million) Net Equipment $60 million 359 milion A. $1 million. 8. $2 million C. $3 million Answer: A 159Part2 - Accounting Standards Atala See aut courte, Hoterart 63 cath ow Caledon 8326 caesior $2268 cesston 7A conan Steen 6.3.3 CFF Calculation + CFI Typel: Issue or Repurchase Shares Issue or Repurchase Bonds Borrow or Repay Bank Loan cre cre +A Liability +A Equity + CFF = +4 Bond Payable CFF = +4 Bank Loan CFF = + A Capital sepa GFF = + A Additional paid-in capital 15.150 Teor oe oaton seer acouese 150 ast Example 33 (CFF Calculation - Isue of Repurchase Shares) Using the following information from the comparative balance sheets jin millions), what should the company report in the financing section of the statement of cash flows in 2010: Balance Sheet Item 12/31/2009 12/31/2010 Common stock $100) $102 ‘Addittonal paid-in capital $100 $140 Retained earnings $100) $115 Total stockholders’ equity $300) $357 A. Issuance of common stock of $42 mi B, Issuance of commen stock ef $40 million ©. Issuance of comman steck of $38 million Answer: A 1626.3.3 CFF Calculation > CFI Type2: Dividend Paid CEF (cash outfiow) 163 Example 34 (cf Calculation - Dividend Paid) ERIC Led reported net income of $25 million. Using the following information from the comparative balance sheets {in millions}, what should the company report in the financing section of the statement of cash flows in 2010: Golance Sheet Kem [ wfaifacos 32/31/2030 Retained earnings i) suis A. Dividends paid of $10 million B. Dividends paid of $20 milion C. Dividends paid of $40 million Answer: A 16a Part2 - Accounting Standards 222 D0pecros s2rer cation ismson, 2 2WSaee0xn aan eta tae nae rnin 72S 23 Seay 25 rays Aine Baa.FO teadcr S200 dswartng 1657.1.4 Common-Si e Income > Caleulation: each income statement item 7.1.2 Common-Size Balance Sheet +» Calculation: “each balunce sheet item Total asset 166 Statement Vs | Common-size 6) ys.) Revenwe 1,000 100% coss 20% ‘Gross Profi 600 80% ‘Operating Expense 3 eer 650 65% [Interest Expense 30 Ey eer 600 60%, Tex expense 200) 20% Net income 400 40% 8/5 | Common-Sie 8/5 (8) (a) [current Asset 200 20% Non Current Asset 300 30% Total Assets 3,000 100% Corrent tiabiity 100] 10% Non-Corrent liability 709] 70% Equity _ 200 20% Total Liability & Equity 3,000 100% 7.1.3 Common-Size Cash Flow Statement + Calculation Method 1: “each cash flow statement item + Calculation Method 2: cash outflow _ Total cash outflow cash inflow. Total cash inflow 16? 168Which is an appropriate method of preparing a common-size cash flow statement? A. Show each item of revenue and expense as a percentage of net revenue. B. Show each line item on the cash flow statement as a percentage of net revenue. . Show each line item on the cash flow statement as a percentage of total cash outflows Answer: B 159 Part 2 - Accounting Standards keahting $2 eHow Tas reesei 11a captoaearbgeoe Seton otal tconon 2 Lopeaig tate Bae one s209%anaceuerg 70 7.2 Five Categories of Ratios > Profitability ratio + ability 10 generate profit ty ratio + efficiency in using assets to generate revenue > Liquidity ratio + ability t0 pay short-term debt + Solvency ratio + ability 10 pay long-term debt > Valuation ratio + analysis for investment in common equity amPart2- Accounting Standards Sut sattecpion 5.2Grss te Repeat Rec Renae a Wemweres ga sree voces pane T8#aoAminie 723 9u sacnsaecrent eAImetertndion 9 SgDugcenion ‘33 oBmonascsring an 7.2.1 Profitability Ratio + ‘Profit! / Net revenue + Gross profit margin = + Operating profit margin eer + Pretax margin = yerrsvenue” + Net profit margin = —_——Mt 7.2.4 Profitability Ratio + Profit’ / Capital + Return on Asset (ROA) = + Return on Equity (ROE) Gross profit Net revenue cor Wetrevenue Wetrevenue” ML Ni +interest (2-0) “average total assets 3 Nt ROA> ———____ ‘average total assets “Geerage totalequty + Return on Common Equity = —ML=Breferes Suidend esi + Return on Total Capital = —rerage total copter waPart 2- Accounting Standards anaes 7.2.2 Activity Ratio > Tumover = Net revenue / ‘assets’ + Total asset turnover + Fixed asset turnover + Working capital turnover = Net revenue average total assets Net revenue. ‘average fixed assets 1H AoidevedTatmeccor tsmensonnun 12250PUNLO8 15208 Pn ccornng vs Net revenue __ average working capital ¥ working capital = current assets ~ current liabilities vs 7.2.2 Activity Ratio | Inventory aie NP coss Netreverue Purchase Inver trrover= cS | peceabestmnover= MSE | papas rumen =U | laventery period = est Doge) inventory turnover (ait Days) Collection period = Payment period = ——*> __ (wy Daye) 98 | Operating eyele = lnventory period + Collection period | Cash conversion este = Inventory period + Collection period - Payment ered {Wot operating evele) v7Part2 - Accounting Standards Pinot |S ewran arn cnn Sabena ccamnne 1B Ou pee Repteise 13 Gp cttear Seer DP Lcammnie Sine oe sel 122005 boon sami TRROANe —723.Ugey Rao sansa 725 veuronrare tated LsaendAccnpng, B22ECCH Rte tered a ret ntl ae Hopman ae Bare Late 7.2.3 Liquidity Ratio > Liquic ity Ratio current asset Current ratio = irene Habiity iasemmnacnnne v8 cash + marketable securities + receivables current asset ~ inventory ‘current lability = current Tability + Quick ratio ht marketable securit current lability + Cash ratio = es cash+ marketable securities + receivables ‘average dally expenditures + Defensive interval vs are 2 - Accounting Standards tame sien, {2 re est stoptnat settee, 22th Sym Sacre ay 200 meee Deanne sie tats womgon EE 220s reson 2 ipates yes 2 nonetacons bme preg 7HIMSAie 7 cg 2 Sameer SA tvenom Ant 8 LEO iqidioh Esu035 00S a07.2.4 Solvency Ratio > beverage + bebi-to-ecuty aioe 2 + Debt-to-capital ratic + Debt-to-assets ratio: + Financial leverage = 7.2.4 Solvency Ratio > Coverage + Interest coverage = + Fixed charge coverage = Est THterest expense 81 EBIT + lease payments “Thterest expense + lease payments 182 Part 2 - Accounting Standards 5.2 ra tearing et Re Repning PUtemmon sae diy Ufa Soe soe 12228 aowanth Satowaunonng, 21MIN rt cettod {8 200Renacom og 1837.2.5 Valuation Ratio > Price Multiples Price per share * PIE “earnings per share Price per share Book value per share + Pht Price per share PIS= ~S3hos per share” - —_Price per share PICF = Cash fiow per share Example 36 (Ratio Analysis) ‘Which ratio would @ company most likely use to measure its ability to meet short-term ‘obligations? A. Current ratio. B, Payables turnover. €. Gross profit margin, Answer: A Example 37 (Ratio Analysis) Data for a firm are presented in the following table. The current ratio for the firm's industry is 3.2. aad 18s Based on the current ratio, the firm's liquidity compared with the industry is best described as being: [As of 31 December E thousands cash 200 ‘Accounts receivable 350 Inventory 3.250 Accounts payable 300) Taxes payable 200 Installment lean payable, due in three equal annual sayments on 30 lune 600) A, higher 8. equivalent. ©. lower. Answer € 186Part 2 - Accounting Standards Sheas ton bow Weonkaln sta sereren 6170 caataan Store apo oe Tatatednio 723 vende cA mamevaransy SALUD Re Beamon ics enes 28 7.3.1 DuPont Analysis (3-part approach) DuPont 3-part Approach Netincome | Sales * ROE sales * “Assets t | Net profit Total Financial margin asset leverage turnever *+ Dupont analysis is not for the purpose of computing ROE, but for the purpose of decomposing the known ROE 183, 7.3.2 DuPont Analysis (5-part approach) > DuPont 5-part Approach Netincome . EBT | EBIT . Sales | Assets ROE = ar EeIT * “Sales * “Assets “Equity | | | t Tex Interest Operating Total_—_‘Financial burden burden profit, = asset_—_leverage | \ margin turnover v higher tax burden + lower tax rate higher interest burden -> lower interest rate ¥ lower tax burden -> higher taxrate lower interest burden “> higher interest rate 188Part2- Accounting Standards 3 amore boone ogi Siesctrs 7.4 Sustainable Growth Rate > sustainable Growth Rate: g=ROEX RR = ROE x (1 - Payout Ratio) = ROE x (1 ors = ROEX (A epg) “RR Retention Rate + DPS: Dividend Per Share + EPS: Earning Per Share Example 38 (Ratio Analysis) ‘The following financial data is available for a company: usouRoy — aawsapoean Blgerurscewang 180 wa Return on assets (ROA) 48% Total asset turnover 192 Financial leverage 1, Dividend payout ratio 481% ‘The company's sustainable growth rate is losest to A 4.00%. 8. 4.40%, ©. 4.78%, Answer: B 192Part 2 - Accounting Standards 8.1 Inventory Initial Recognition ivrenns 22205 heron 133g em ney alan 133 Ready for sale a vORuNo Product Cost (Inventory Cost) [purchase price 1+ Trade discounts and rebates | + Conversion costs i Capitalize fas ‘Inventory’ on the B/S) Period Cost Storage costs, Administrative overhead Abnormal waste Selling costs Expense fas ‘SG&A’ on the I/S) oe A company incurs the following costs related to its inventory during the year, the amount charged to inventory cost [in millions) is closest to: Cost ¥ millions Purchase price 100,000, ‘ade discounts 5,000 Import duties 20,000, Shipping of raw materials to manufacturing facility 10,000) Manufacturing canversion costs 50,000) [Abnormal costs a5 a result of waste material 8,000 Storage cost of finished goods prior to shipping to customers. 2,000 A, ¥175,000. B. ¥185,000, ¢. ¥17,000. Answer A 135Part2 - Accounting Standards 8.2 Inventory Write-down > Under IFRS: + IF Inventory carrying amount (Inventory cost) > ‘NAY’, the inventory should be written down to 'NRV’ on the B/S, and the /oss is recognized in the 1/5 as ‘COGS’ NAV (Net Realizable Value) = Selling price ~ Selling costs 1221 yar 1a Sayer aajeet 122 ae Meco ts zomrin acuntog 135 + Reverse of write-down is allowed (cannot exceed original value) > Under U.S. GAAP: + If Inventory carrying amount (Inventory cost) > ‘Market’, the inventory should be written down to ‘Market’ on the 8/5, and the loss is recognized in the i/S as ‘COGS’ replacement cost (RC) > NAV. Peron NAV rerlcerent cost RC) < NAV ove Tt martin Mat NRV- normal profit margin, NRV— normal profit margin < RC < NRV Panter replacement cost + Reverse of write-down is not allowed Example 40 (inventory write-down) The following information relates to ERIC Ltd: original cost $210 estimated selling price $225 estimated selling cost $22 replacement cost $197 normal profit margin. S12 a7 ‘What are the per unit carrying value of ERIC Ltd's inventory under IFRS & U.S. GAAP? HERS Us. GAAP $203 $197 $203 $210 $197 $210 Answer: A 198Example 41 (Reverse of inventory Write-down) Erie's Used Book Store prepares its financial statements in accordance with IFRS. Inventory was purchased for £1 million and later marked down to £550,000. One of the books, however, was later discovered to be a rare collectible item, and the inventory is now worth an estimated £3 million. The inventory is most likely reported on the balance sheet at: A. £550,000. 8. €1,000,000. ¢. £3,000,000 Answer: B 139 Example 42 (Reverse of Inventory Write-down) ERIC Ltd purchased inventory and later wrote it down. The current net realisable value is higher than the value when written down. ERIC Ltd's inventory balance will most likely be: A. higher if it complies with IFRS. B. higher if it complies with US GAAP, C. the same under US GAAP and IFRS. Answer: A 200 Example 43 (Inventory Write-down Financial Statements Impact) ERIC Led wrote down the value of its inventory in 200? and reversed the write-down in 2008. Compared to the ratios that would have been calculated if the write-down had never occurred, ERIC Ltd reported 2007 A. current ratio was tao high. B. gross margin was too high. . inventory turnover was too high. Answer: CPart 2 - Accounting Standards 12 seis 8.3.1 Inventory Cost Flow Assumption avin 22 apttaer Emme Eeapese 3 2yan Sorte tat 2 lotdered teen Tea ene Acouin Saotemacnntne 202 > Since cost of purchasing or producing inventory will change over time, companies must select a cost flow assumption to allocate the inventory cost to the income statement (COGS) and the balance sheet (ending inventory) when selling inventory. 1 The selection of inventory cost flow assumptions is accounting method » Four Cost flow assumptions: + Specific identification (S!) + Firstin, first-out (FIFO) + Lastin, first-out (LIFO) ¥ “LIFO is not allowed under IFRS + Weighted average (WA) 8.3.1 Inventory Cost Flow Assumption 202 first to be sold 7 cos Ending Inventory Method Assumpti tion consist of consist of The items first FIFO More recent jus.caae signs) | Purchased are the First purchased trrcheses The items last purchased are the first to be sold UFO (US. GAAP only) Last purchased Earliest purchases wa tems sold are a mix (us.caap eens) | of purchases Average cost of all items Average cost of all 2088.3.2.1 FIFO & LIFO Comparison 1 + FIFO: provides the most useful estimate of Inventory value on the 8/S + UFO: provides the most useful estimate af COGS on the /S 205 8.3.2.2 FIFO & LIFO Comparison 2 In periods of rising prices: hems uo | FIFO Items uro | Fro coss higher | lower Gross Profit Margin | lower | higher err lower | higher Net Profit Margin | lower | higher us Tax Expense lower | higher Current Ratio | lower | higher Ratio Net income lower | bigher D/A Ratio higher | lower Inventory ower | higher D/E Ratio higher | lower Bs Current asset | lower | higher Inventory Turnover | higher | lower Working Capital | lower | higher 206 Example 44 (inventory Cost Flow Assumption) ERIC Ltd uses the FIFO method, and JACK Lid uses the LIFO method. Compared to the cost of replacing the inventory, during periods of rising prices, the cost of sales reported by A. ERIC is too low. B. JACK is too low. C. JACK is too high. Answer: A 27Example 45 (inventory Cost Flow Assumption) Compared to using the waighted average cost method to account for inventory, during a period in which prices are generally rising, the current ratio of a company using the FiFO method would most fikely be: A. lower. 8. higher. . dependent upon the interaction with accounts payable. Answer: B 8 8.3.3 Change of Cost Flow Assumption > Inventory Cost Flow Assumption Changes: + from other methods to UFO Prospective adjustment + other changes Retrospective adjustment 209 8.3.4 Perpetual & Periodic System > Perpetual ventory System * inventory value and COGS are updated continuously t + inventory purchased and sold is recorded | directly in iventory i * a purchase account is not necessary band ‘Same results for Specific identification + FIFO Different results for: % Weighted average > Periodic inventory System: | #uFo + inventory value and COGS are determined at the end of an accounting period + need a purchase account 210Example 46 (cost Flow Assumption; Perpetual & Periodic system) dian Beginning Inventory 2units @ $2 each Zan Purchase 3 units @ $3 each azian | sale S.units 13 an Purchase S units @ $5 each asian | Sale 3 units Calculate COGS & ending inventory using the perpetual & periodic systems under: + FIFO + UFO + Weighted Average Method Part2 - Accounting Standards ace Sen nent gtateh twetay 8.4.1 LIFO Reserve + UFO reserve nz + The difference between the reported LIFO inventory carrying amount and the inventory amount that wauld have been reported if the FIFO method had been used. + UFO reserve 7 LIFO to FIFO Conversion: + Inv +LIFO Reserve = Inv + COGS | - 4 UFO Reserve = COGS ¢ + NIL +A LIFO Reserve x {1-t) = Nig + R/E, + UFO Reserve x (1-t) = R/Ey IFO inventory ~ LIFO inventory a3Example 47 (.iFo Reserve) ERIC Ltd uses LIFO inventory valuation and has 3 40 percent marginal tax rate. The company reports an increase in the LIFO reserve of $5,000 for the year. If ERIC Ltd had used FIFO instead of UFO, the amount reported for A. net income would be $3,000 higher. B. net income would be $5,000 higher. C. cost of goods sald would be $3,000 higher. Answer: A na Part2 - Accounting Standards DeeRdedron Sees Fein psa weneneet 82a fou roe shemtiy 13a eet eacacvnain Eepmee” Gta rarsgereanete A veto Aaa 942 LF0 uation 1S Pomona 5 Def atk ns 8.4.2 LIFO Liquidation > UFO liquidation + ALIFO liquidation incurs when purchased volume is less than sales volume. Or the decrease in the volume or quantity of inventory. + In this case, the prices for goods being sold are no longer recent prices. + Under LIFO fiquidation, and if price is rising. ¥ COGS does nat reflect current costs ¥-LIFO reserve may decline ¥ An analyst should adjust COGS for decrease in LIFO reserve ae8.4.2 LIFO Liquidation > Consequence of LiFO Liquidation + COGS decrease + net income increase + the high net income is not sustainable > Identifying LIFO Liquidation: + Inventory quantity decrease + Inventory amount on B/S decrease + UFO reserve decrease a7 Part 2 - Accounting Standards = rinand ——zeandecouny 22a mt fienty Seven ow ates NOS tne NOE IE ane cag ‘s2eaheeneowrtne 28 9.1 Long-Lived Assets Initial Recognition + Purchase price + Tox (stamp duty, tariff) I + Installation + Testing Capitalize (as ‘PPE’ on the B/S) + Delivery, freight and insurance Ready for use Repair Maintenance Expense (as ‘SGBA’ on the i/S} | + staff training [+ Asset enhancement costs tab Capitalize fas ‘PPE’ on the B/S) 219Part 2 Accounting Standards Siete tenets uontind s2sammm Lotro inare PESTER Resre Be Ree * ett Saver ates Seerscacsnen Sawer setae apnea Wenworet 23 Garon sedis mromeon E222 Wsaoooaas BAtewenrare hei 9 0 uguidsner 1S Penson Plan 5 Us Plan Acrourng 20 9.2.1 PPE Impairment > Under IFRS: + IF PPE carrying amount > ‘Recoverable Amount’, the PPE should be written down to ‘Recoverable Amount’ on the 8/5, and the loss is recognized in the 1/5 as ‘impairment Loss’ ¥ Recoverable Amount = Max ( Fair Value ~ Cost to sell, Value in Use ) + discounted future cash flows generated by the PPE + Reverse of write-down is allowed (cannot exceed original value), except ‘goodwill 9.2.1 PPE Impairment > Under U.S. GAAP: + IFPPE carrying amount > ‘Undiscounted future cash flows generated by the PPE’, the PPE should be written down to ‘Fair Value’ or ‘Discounted future cash flows by the PPE’ on the B/S, and the loss is recognized in the I/S as ‘Impairment Loss’ ¥ Sept: impairment Test PPE carrying amount > Undiscounted future cash flows ¥ Step2: Loss Measurement + Fair Value + Discounted future cash flows (Value in use} + Reverse of write-down is not allowed, except ‘held-for-sale PPE” 22Example 48 (PPE impairment) ERIC Lid has @ machine with following information: Item Description $ Thousands Carrying value amount 36,000 Undiscounted expected future cash flows 38,000 Present value of expected future cash flows 32,000 Fair value if sole 34,000 Costs to sell 4,000 ‘Which of the following statements is most accurate? The machine is impaired under A. IFRS only. B. both IFRS and US GAAP. C. US GAAP only, Answer: A 9.2.1.1 PPE Impairment Financial Statements Impact 23 PPE Impairment Effects Assets decrease Equity decrease of increase o/A increase Current net income, ROA, ROE decrease Future depreciation expense cecrease Future net income, ROA, ROE increase Future total asset turnover pe increase Cash flows no effect, 9.2.1.1 PPE Impairment Financial Statements Impact naa First yeor Subsequent years Impairment bad impact g00d impact Reverse of Impairment good impact bad impact nsPart 2 - Accounting Standards 1:2 reas opr 8 to pe arate TRIMORMSH 77 DU Rate 9.2.2.1 Depreciation > Depreciation Definition: 5220eprcation 12g Soe 12280 speach ss2 berm Aur g 226 + The Systematic Allocation of the Depreciable Amount of an asset as an expense over the Useful Life of an asset > Terminologies in Depreciation: + Depreciation expense (Amortization expense) ¥ current year depreciation Y an expense an l/s + Accumulated depreciation (Accumulated amortization) current & previous years toto! depreciation Y a contra account an B/S + Depreciable amount Y depreciable amount riginal cost residual value 9.2.2.2 Depreciation Estimation & Depreciation Method > 3 Estimations in Depreciation Calculating Process: + Useful Life + Residual Value > 3 Depreciation Methods: + Straight tine ¥ e.g, building, table, chair Pattern of flow of benefits over the useful life + Double-Declining Balance (DDB); Diminishing Value Method; Accelerated Depreciation Y @, computer, printer + Units of Production Y eg. car ne9.2.2.3 Depreciation Calculation > Straight Line Method Deprecistion expense = (cost ~ residual value) / useful life > Double-Dec! ing Balance Method (0D8) Step1: Depreciation rate per year = 2 / useful life ‘Step2: Depreciation expense = carrying amount x depreciation rate per year (GEORG ILEFTTNEY Residual value , HWS Depreciation expense) of Production Method Step: Depreciation rate per unit = {cost ~ residual value) / total units Step2: Depreciation expens lepreciation rate per unit x units for the year 2s Example 49 (Depreciation Calculation) Cost: $100, Residual Value: $20, Useful Life: § Years Production: + Year 1: 100 units + Year 2: 300 units + Year 3: 200 units + Year 4: 100 units + Year 5: 100 units Use 3 methods to calculate depreciation expense for each year 20 9.2.2.4 Depreciation Financial Statements impact 1 The estimate of useful life & residual volue: + Longer useful life =} Lower depreciation expense m™} Higher net income + Higher residual value9.2.2.4 Depreciation Financial Statements Impact > The choice of depreciation methods: (impacts in early years) Straight tine Double-Declining Balance Depreciation expense lower higher Net income higher lower ROA higher lower ROE higher lower Assets higher Tower equity higher lower Total asset turnover lower higher Cash flow same same 22 Example 50 (Depreciation Financial Statements impact) Which of the following will cause a company to show a lower amount of amortization of intangible ‘assets in the first year after acquisition? A. Ahigher residual value. B. A higher amortization rate. ©. A shorter useful life. Answer: A a3 9.2.2.5 U.S. GAAP & IFRS Difference in Depreciation © Difference : Residual value change + US. GAAP: allowed to adjust the estimated residual value downward only + ERS: allowed to acjust the estimated residual value either upward or downward + Difference 2: Component depreciation + US. GAAP: rarely used + TERS: required to use 2aPart 2 - Accounting Standards aroce THORS 7 Vy ane dieacyerstcrmes PAS Shae 2 $c decsanes Seeman Arata pO gud sSPeawontn camino 2s 9.2.3 Cost Model; Fair Value Model; Revaluation Model > How to choose among three models: ! PPE (Tangible Assets) cost model us.caae | intangible assets cost roel 1 Investment Property [ Cost Model | ee (Tangible sets) | Cost Model; Revaluation Model wns intangible assets Cost Model; Revakoton Model Investment Property Cost Model ; Fair value ‘Model 28 9.2.3 Cost Model; Fair Value Model; Revaluation Model > Year-end measurement under three models: Meosurement | Fair value change Cost Model | historical cost | not recorded FairValue Model | fairvalue | record as gain orloss on the /5 + fair value change below historical cost > record as gain or loss on the /S Revaluation Model | fair value. Fair value change above historical cost > record as OCI on the B/S (6/5 > Equity > OC1-> Revaluation Surplus) 2Example 51 (Revaluation Model) RIC Ltd uses revaluation model. One of the machines was purchased for 2,500,000 Mexican pesos (MXN} at the beginning of the fiscal year ended 31 March 2010, As of 31 March 2010, the machine has a fair value of MXN 3,000,000. Should ERIC Ltd show a profit for the revaluation of ‘the machine? A. Yes. B, No, because this revaluation is recorded directly in equity. C. No, because value increases resulting from revaluation can never be recognized as a profit Answer: 8 238 Example 52 (Fair Value Model) Ifa company uses the fair value model to value investment property, changes in the fair value of the asset are least likely to affect: A. net income B. net operating income. . other comprehensive income. Answer: ¢ ne 9.2.3.1 Revaluation Financial Statements Impact Upward revaluation financial statements impact + First Year ¥ Higher Asset ¥ Higher Equity ¥ Lower Leverage Ratio (A/E; D/E) Y Higher Comprehensive income + Subsequent Years Y Higher Depreciation Expense ¥ Lower Net Income ¥ Lower Profitability ¥ Lower ROA ¥ Lower ROE 2409.2.3.1 Revaluation Financial Statements Impact First year Subsequent years Upward revaluation good impact bod impact Downward revaluation bad impact good impact a Part2- Accounting Standards - deunnne S200 on pee eae 2 conmo: Sibi en Semcon ct - 1 penegiane diaries seman ins Ear afarn "Srenioton earn nag wm 9.3 Derecognition of Long-Lived Assets 1» Sale of Long-lived Assets: 2 gain or loss on the sale of an asset is recorded on the income statement ¥ the gain or loss on the sale of longrlived assets is computed as the sales proceeds rminus the carrying amount of the asset at the time of sale aaa5.3 Roane prs esa Part2- Accounting Standards Mepiaton 22 Salo Rae Te tia Receton 1228 ¥sAson Rsanscesinest dope sun fare 10.1 Financial Instruments Initial Recognition © Three categories of financial instruments: us. gaar vrs shat ecmanuanye “aarured a Cont or category 1 ‘Held-t sturity” (HTM) ‘Amortized Cost” category 2 reading secures (1) a Five “gon snuaabetor same “yeosued at Fir Value trough tegory 3 ‘Available-for-sale” (AFS) Other Comprehensive Income”10.2 Financial Instruments Subsequent Measurement > Year-end measurement: Fair value change ‘Measurement (Unrealized gain or loss) Held-to-maturity | amortized cost | not recorded fair value record as gain/loss on the I/S record as OCI on the B/S | avatabieforssle | forvatue (o/s eguty > 0c > reclined genom avalable forsale} eae eoees See Rorine fame ETN 13.2 Cras Rey Reaortirg B Net Rev Repartng foes — 92.3Tee Models Simone 5S heart apn Bogen 98 dewegsion sa pscacamon — SAEEHEEDS 10 omc Cash Faw Toes Aneapiaiie acon sats Tnnnnon RIOR naadssopn vim Mommnn ante Se ee swe Ee aes sarecorey orate 10.3 Derecognition of Financial Instruments + Sole of Financial instruments (Realized gain or lass): 248 + again or loss on the sale of an asset is recorded on the income statement aPart 2 - Accounting Standards S2eveydcourte S52 Goss ReeRepeirg a a Rao stangiied 925s: sneer beengnan ateapialie 112 Gotlaeorteeoe 10.4 Financial Instruments Summary mie 230 Subsequent | Subsequent Fair value change Derecognition | Measurement | (Unrealized gain or loss} (Realized gain or oss} Held-to-maturity | (Measured ateost or | amortized cost | not recorded record as gain/toss on the /s | amortized cost) Trading securities (Measured atfairvalue | fair value ‘through profit and loss) record 3s gain/loss on the I/S record as gain/loss on the 1/5 Available-for-sale (Measured at far value through other ! comprehensive income) fair value record as OCI on the 8/5 recard as gain/loss on the i/5 Example 53 (Financial instruments] Ea For financial assets classified as trading securities, how are unrealized gains and losses reflected in shareholders’ equity? A. They are not recognized B. They flow through income into retained earnings. C. They are a component of accumulated other comprehensive income. Answer: a 32Example 54 (Financial instruments) For financial assets classified as available for sale, how are unrealized gains and losses reflected in shareholders’ equity? A, They are not recognized. B. They flow through retained earnings. ©. They are # component of accumulated other comprehensive income. Answer: C Bs Example 55 (Financial instruments) For financial assets classified as held to maturity, how are unrealized gains and losses reflected in shareholders’ equity? A. They are not recognized, B. They flow through retained earnings. C. They are a component of accumulated other comprehensive income. Answer: A 258 Part 2 - Accounting Standards canst O27 OW Eee » 2.1 cape or epee eateercainknen rokeen HI tpsAnvon Da common se Aains eon 121281540 Damosninis Salaun Rae 2S ceape ager Seino miss 5 uoLinsden Sterna Sopris ke 25511.1 Capitalize or Expense > Two ways to treat an expenditure (cash outflow) + Method 1: Capit ¥ capitalize as an asset on the 8/5 + Method 2: Expense ¥ recognize as.an expenses in the 1/S > Impact on the Cash flow statement: + Capitalized expenditures are classified as -CFI the asset you capitalized today will be expensed in the future ~ ¥ exception: capitalized inventory costs are classified as -CFO + Bxpensed expenditures are classified as -CFO 255 Part 2- Accounting Standards ceunnoy Choon noviaice 7 11.2.1 Capitalize & Expense - Inventory Ready for sale Product Cost (Inventory Cost) Purchase price | + Trade discounts and rebates + Delivery, freight and insurance + Conversion costs Copitotize {as ‘aventory’ on the B/S) Storage costs + Adm + Selling costs, 1221 us A 12 nae Ta roe Ta Pte 18208? cunts ast ative overhead + Abnormal waste 4 Expense [as ‘SG&A’ on the 1/5) 25811.2.2 Capitalize & Expense - PPE Ready for use + Purchase price [+ Repair : Tax (stamp duty, tariff) Ls Maintenance => —_ Expense Delivery, freight and insurance fe staff taining (as ‘SG&A’ on the 1/5) Installation i i Capitalize Fy Ta 1 resting (as ‘PPE’ on the B/S) Copitaiize (as ‘PPE’ on the 8/5) 259 11.2.3 Capitalize & Expense - interest During Construction + Interest Accrued During Construction (EP ILEVFG#FB) + Accounting tethod: Y Capitalize, treat as purchasing PPE, and classify a8 -CF1 + Analyst's View: ¥ Expense, treat a5 normal Interest Expense, and classify as -CFO 280 11.2.4 Capitalize & Expense — Intangible Assets + Intangible Assets Definition: + long-term assets without physical substance > 3 Types of Intangible Assets: + Identifiable intangible assets + Unidentifiable intangible assets + Internally Generated intangible assets 26111.2.4 Capitalize & Expense — Intangible Assets Identifiable intangible assets + intangible assets can be purchased separately Y + examples: ¥ Patents ¥ Trademarks ¥ Copyright + expenditures on identifiable intangible assets = copitalized 262 11.2.4 Capitalize & Expense — intangible Assets > Unidentifiable intangible assets + intangible assets cannot be purchased separately + examples ¥ Goodwill + weROF A + expenditures on Unidentifiable intangible assets = capitalized consideration {acquisition price) Riisituaty AS] feir value C5864) 263 11.2.4 Capitalize & Expense — intangible Assets > Internally Generated intangible assets + research and development + examples: Y Research (SEA) Development (rei5F#) + expenditures on Research mb expensed. expenditures on Development capitalized 268Example 56 (capitalize & expense) ERIC itd has recently purchased and installed a new machine for its manufacturing plant. The company incurred the following costs: Purchase price $12,980, Freight and insurance $1,200 Installation $700 Testing $100 ‘Maintenance staff training costs $500 The total cast of the machine to be shown on ERIC Ltd's balance sheet is closest to: A. $14,180. B, $14,980, C. $15,480, answer: ws cee poses Sis base eaaiton . omen zum Taio a 15 tend ferntar 8 aston 12.1.1 Financial Reporting & Tax Reporting + REVEPHEISR: Financial Reporting (I155) & Tax Reporting (#23) + Financial Reporting: ¥ follows U.S, GAAP or IFRS ¥_ 8/5 ¢hE) amount Y “Carrying Amount’ or ‘Accounting Base’ + Tax Reporting (Tax Return}: ¥ follows Taxation Law ¥ B/S p89 amount Tax Base > DF TASHA 40 HISSHR AYALA Deferred Tax Issues (OTA or DT}, examples + Timing of revenue and expense recognition in the income statement and the tax return differ +P e.g. Unearned Revenue return or vice-verso + e.g. Impairment tose Certain revenues and expenses are recognized in the income statement but never on the tox + Assets or Liabilities have different carrying amounts or tox bases oF e.g. PPE & Depreciation 26712.1.2.1 Tax Reporting Terminology > Taxable income: + Income subject to tax based on the tax return, Y Taxes payable: + The tax liability on the balance sheet caused by taxable income. This is also known as current tax expense. Income tax paid: + The actual cash flow for income taxes including payments or refunds from other years. > Taxbas + Net amaunt of an asset or liability used for tax reporting purposes. > Tax loss carry forward: + Accurrent or past loss that can be used to reduce taxable income (thus, taxes payable) in the future. + Can result in a deferred tax asset. 268 12.1.2.2 Financial Reporting Terminology Y Accounting profit: ‘+ Pretax financial incame based on financial accounting standards, + Also known as income before tax and earnings before tax. > Income tax expense: + Expense recognized in the income statement that includes taxes payable and changes in deferred tax assets and liabilities (OTA and DTL) > Carrying value: + Net balance sheet value of an asset or liability, > Valuation allowance: + Reduction of deferred tax assets based on the Ikelinood the assets will not be realized. 269 12.1.3 Temporary Difference & Permanent Difference > Temporary difference + Difference will reverse v DTA ++ B/S amounts that result from an excess of tax payable over income tax expense that are expected to be recovered from future operations. ¥ pT “B/S amounts that result from an excess of income tax expense over taxes payable that are expected to resutt in future cash outflows. > Permanent difference + Difference will not reverse, thus no deferred tax issues 270Part 2 Accounting Standards Sirore, Sameer Rane 3 decean seaming ioe tontnn Meaghan stearate seutin est crncaatan Bene DISSE casoreanes enemas ft remy Saimeeney tenis 5 a urD Lgadater Bs PemmionPlem 35 205 Fan Accounting an 12.2.1 1/S Approach for DTA & DTL Tax Reporting! Financial Reporting Ws) ts) Tax payable |> Income Tox Expense sm HESS 3skSE mp EDTA i | Tax payable |< Income Tox Expense WEED m REX & RHEDTL ‘Actual Tox 2, 12.2.1.1 1/S Approach for DTA & DTL - Depreciation Example > Afirm may use different depreciation methods for: + Financial Reporting: straight-line Year! Your? Year. Yeurd ott serene fom $00 1200 4000 hw operas 380 0 20 ttiprecatonepente 20008 a0 wo caring been 00 0 = Zoo \ income tax expense (30%) 18t £20 ‘net income 3 350. 400 \ - ; Temporary +Tax Reporting: double-declining balance Difference Year! Your? Year Yeard ma / tevene toot 1200 1900, che egerses so 300 20 taxdepecaion oo 0 50 Tener 3 “0 9 1 payable 0) “st 198 5 rethcone nie 15 wa a-11/S Approach for DTA & DTL - Depreciation Example Income tax expense Tax payable Difference Deferred Tax (60+ 15 =) (75 - 30 =) (45-45 =) Liability 75 45 0 ma Example 57 (014 & oT1) ‘When accounting standards require recognition of an expense that is not permitted under tax laws, the result is a A, deferred tax liability 8. temporary difference. C. permanent difference. Answer: € Example 58 (oa & O71) Using the straight-line method of depreciation for reporting purposes and accelerated depreciation for tax purposes would most likely result in a: A, valuation allowance. B. deferred tax asset. C. temporary difference. Answer: C 26Example 59 (OTA & DTL) 4 company incurs a capital expenditure that may be amortized over five years for accounting purposes, but over four years for tax purposes. The company will most likely record. A. adeferred tax asset B. adeferred tax liability, C. no deferred tax asset or lability, pt ecu Standart “écashrow: daattansoa Began : 2 tae Crome 2 conan Se As hrabmaon 77ORBOE G23 5/ssooranch awveven annie BTID RON ssrondonton 28°F 8DBFe> - ms B42 uO Lgviation enPAn 15.208 Plan Accounting 78 12.2.2 B/S Approach for DTA & DTL > Identify Accounting base and Taxbase for every asset and liability item on B/S > Calculate the difference between two bases: + For assets: Y difference ~ accounting bose - tax base positive difference x tax rate 2 DTL + For Kabilities: negative difference X tax rate = DTA Y difference = (- accounting base) - (- tax base} ~ 2812.2.2.1 B/S Approach for DTA & DTL - Depreciation Example + PPE with original cost of $100, useful life of 5 years, residual value of 0 + taxrateis 303% + straight line depreciation for financiat reporting, double-deciining balance depreciation for tax reporting PPE: Accounting | | Tax Temporry |] tax ]_] om Base Base Difference Rate in 8/s Yeard 80 : 60 vo |x| sox [-| is Year 2 60 : 36 -| a fe] 30% =] 239 12.2.2.2 B/S Approach for DTA & DTL - Other Examples Item Accounting Base Tax Base Deferred Tax “PPE (Depreciation) Cost ~S.1. Dep ast 908 Dep on PPE (inpeitment) Cost impairment | Cost (Cash Basi) oA Asset RaD Zero {Expensed} Cost [Capitaliced) DIA, Invoiced Amount Accounts Recefvabie ae ATM | favoiced Amount om Unearned Revenue Cost (Accrual Basis} 2210 (Cash 6055) oma win Provision (Warranty) ably Estimated Cost zero) Restructuring Cost (Gcerual Basis) [cash Basis) om” Pension Liability (D8 Plan} other | Toros Carry Forward LA DESERTS oma 781 Example 60 (014 & ort) At the beginning of the year, a company purchased a fixed asset for $500,000 with no expected residual value. The company depreciates similar assets on a straight line basis aver 10 years, whereas the tax authorities allow declining balance depreciation at the rate of 15% per year. in both cases, the company takes a full year's depreciation in the first year and the tax rate is 40%. Which of the following statements concerning this asset at the end of the year is most accurate? A. The temporary difference is $25,000 B. The tax base is $500,000 C. The deferred tax asset is $10,000 Answer: A 282Example 61 (01a & ort) The following data are available for a company’s first year of operations: Metric £ Thousands Depreciation expense included in earnings before tax 4,500 Depreciation expense deductible for tax purposes 6,340 Corporate tax rate 25% The company’s end-of-year balance sheet will most likely include (in thousands) a deferred tax? A, asset of £73 B. lability of £733 ©. liability of £460 Answer: C aes Example 62 (oT & oT) FRIC Ltd has 2 buileing with a net carrying amount of $100,000 and a tax base of $120,000, The tax rate was 20% when the asset was purchased, but it is scheduled to be reduced to 17% this, year. Which of the following will the company most ikely report related to this building? A, Deferred tax liability: $600 33,400 C. Deferred tax asset: $4,000 B, Deferred tax asst Answer: B 2a Part2 - Accounting Standards sicone 3280S Rvfeping he Bes Soeree ne Sa sthenes Trees z20HHOL eateseopars 2a petee aa HOTAROT 125 pee Tn ere Pe mroy irr Con en Piven 3632 igcr Reng tieertny anny EEL Hone aBeamsenman ‘STOCIA DRM RantFO Uardnior 208A 2s12.3 Income Tax Expense & Tax Payable Income tax expense = Tax payable + ADTL - ADTA ‘Tax payable = Taxable income x Current tax rate a Example 63 (Income Tax Expense & Tax Payable) The following information is available about a company for its current fiscal year Accounting profit (earnings before taxes) $250,000 Tavable income $215,000 Taxrate 30% Income taxes paid in year $61,200 Deferred tax liability, start of year $82,400 Deferred tax liability, end of year $90,650 The income tax expense reported an the current year's statement of earings is closest te A, $69,450, 8B. $64,500. C. $72,750. Answers € a Part2- Accounting Standards feet rts ee simane _ $Betosbarhncey ert sees Steno srsceane strait canner | pate Taconite mie rroweon REO naawssonenes sAteventary Arama SA1LFO Rereve tS Panaan nan, T3406 PW" B08 Pan ' PELE desdion 2 20BPn Aout 2812.4 Tax Rate Change > If tax rate change, DTA/DTL changes: new DTA or DTL Example 64 (Tax Rate change) oid DTA or DTL old tax rate X new tax rate 29 Ifa company has a deferred tax asset reported on its statement of financial position and the tax authorities reduce the tax rate, which of the following statements is most accurate concerning the effect of the change? The existing deferred tax asset will: A. not be affected, B. increase in value. ©. decrease in value, Answer: C 20 Part2 - Accounting Standards Stauty ease sa reocainton severavacaas SSD RN 121 amon D2 a5zapcen nae ceccgnton 20112.5 Analyst's Adjustment > Analyst’s Adjustment of OTL Temporary difference is unlikely to be reversed DTListreated as equity Temporary difference is to be reversed DIL is treated as Habitity Reversal of temporary difference is uncertain DILis ignored 1 Analyst's Adjustiment of OTA + if temporary difference is <50% probability to be reversed, Valuation Allowance Is created to reduce the carrying amount of DTA. 292 Example 65 (Analyst’s Adjustment) Deferced tax lisbilties should be treated as equity when: A. they are not expected to reverse. 8, the timing of tax payments is uncertain, C. the amount of tax payments is uncertain Answer: A 292 Example 66 (analyst's adjustment) Analyste should treat deferred tax liabilities that are expected to reverse as: A. equity. B. C. neither liabilities nor equity. Answer: B 296Example 67 (analyst's Adjustment) When both the timing and amount of tax payments are uncertain, analysts should treat deferred tax liabilities as. A, equity. B. liabilities. C. neither liabilities nor equity. Answer: C 238 Part 2 - Accounting Standards $2 ols sanvren Anis 13.1.1 Bond Definition \ Bond Definition: 123s apr 236 + 8 finencial obligation of an entity that promises to pay a special sum of money at specified future dates > Two parties involved: + issuer + bondholder (bond investor) borrower fender 23713.1.2 Bond Terminology 1 Face Value (Par Value; Maturity Value) + is the amount of principal that will be paid to the bondholder at maturity. > Bond Price + is the current bond selling price, equals to the present value of the future cash flows of the bond. > Coupon Rate + is the interest rate stated in the bond that is used to calculate the coupon payments. > Market Rate (Effective Rate of Interest) “+ is the interest rate that equates the present value of the future cach flows of the band and, the issue price: > Coupon Payments ‘+ are the periodic interest payments to the bondholders and are calculated by multiplying the face value by the coupon rate. 298 13.1.3 Bond Valuation >» Method 1: Formula Coupon, | Coupons Coupony + Face Val Bo = Coupon , Coupon , ., Couponn + Face Value, nd Price =e eee aro 1» Method 2: Financial Calculator N= number of coupon payments VY = market rate = CPT: PV= Bond Price PMT = amount of each coupon payment FV = face value 299 13.1.4 Premium Bond, Discount Bond, Par Bond > At the date of issuance, the market rate of interest may be equal to, less than, or greater than the coupon rate + Premium Bond When the coupon rate is greater than the market rate, the bond isa premium bond (priced above face value} + Discount Bond “When the coupon rate is less than the market rate, the bond isa discount bond {priced below face value}. + Par Bond When tie coupon rate is equal to the market rate, the bond is a par bond (priced at face value} soo