Chapter 7:

SIGNIFICANT NONCASH ACTIVITIES

* Companies report noncash activities in either a
1. Separate schedule (bottom of the statement).
2. Separate note to the financial statements.
 Examples include:
 Direct issuance of common stock to purchase assets.
 Conversion of bonds into common stock.
 Issuance of debt to purchase assets.
 Exchanges of plant assets.

1. Operating Activities: the cash effects of transactions that create revenues and expenses.
(Income Statement Items)
Cash inflows:
 From sale of goods or services.
 From interest received and dividends received.
Cash outflows:
 To suppliers for inventory.
 To employees for wages.
 To government for taxes.
 To lenders for interest.
 To others for expenses
2. Investing Activities: cash transactions that involve…..
a. The purchase or disposal of investments and property, plant, and equipment.
b. Lending money and collecting the loans.
(Long-Term Assets)
Cash inflows:
 From sale of property, plant, and equipment.
 From sale of investments in debt or equity securities of other entities.
 From collection of principal on loans to other entities.
Cash outflows:
 To purchase property, plant, and equipment.
 To purchase investments in debt or equity securities of other entities.
 To make loans to other entities.
3. Financing Activities:
a. Obtaining cash from issuing debt and repaying the amounts borrowed.
b. Obtaining cash from stockholders, repurchasing shares, and paying dividends.
(Long-Term Liabilities and Stockholders’ Equity)
Cash inflows:
 From sale of common stock.
 From issuance of debt (bonds and notes).
Cash outflows:
 To stockholders as dividends.
 To redeem long-term debt or reacquire capital stock (treasury stock)

7-18
a) B) I = 8%
Gap
PV of operating lease = 19720/1.09 + 18310/(1.09)^2 +
17580/ (1.09)^3 + 17370/ (1.09)^4
+ 13000/ (1.09)^5 + 13000/(1.09)^6
+ 13000/(1.09)^7 +13000/(1.09)^8
Limited
= 478/1.08 + 455/(1.08)^2 +
416/ (1.08)^3 + 373/ (1.08)^4 +
341/ (1.08)^5 + 333.5/(1.08)^6
+ 333.5/(1.08)^7
+333.5/(1.08)^8+333.5/(1.08)^9

= 3626 =2421
Liablities to asset =(2158+0+1019)/7564 =(1255+2897+946)/6972
ratio =42% =73%
LT debt to LT capital = 0/(0+4387) =2897/(2897+1874)
ratio =0 =61%

b) Capitalize financing lease  cộng với PV ở cả tử và mẫu

 Liablities to =(2158+0+1019 +3626) =(1255+2897+946+2421)/(6972+2421)
asset ratio /(7564 +3626)
=80%
=61%
LT debt to =( 0 + 3626 – =(2897 + 2421 –
LT capital (1069/1.08))/(0+4387+ (478/1.08))/(2897+1874+2421 -
ratio 3626 –(1069/1.08)) 478/1.08)
= 38% =72%
c) The results in requirement b) is less than those in requirement c)

9-14

a) Bank - Interest Revenue

- Cost:
 initial cost to set up loan
 Irrecoverable debt ( bad debt expense)
b) Travel - Commission Revenue
agent - Loss due to unexpected change from client
c) Sell - before season: Unearned Revenue
season - In matches: Revenue
ticket - Salaries expense
d) Sell - Sold, delivery customer: Revenue
wine - COGS
e) Sell - When the timber is harvested, delivery customer:
timber Revenue

f) Airline - Defer a portion of Revenue from fee – paying

Free ticket flight
 when  Recognize Revenue: at the time of free flight
accumulate
sufficient

9-18
Company must pay 30 mil (signing) + 30 mil for 2014, 2015,2016
Expected construction costs = 10 mil (2014), 60mil (2015), 30 mil (2016)
a) Completed – contract method
GAAP
Revenue Expense Profit
2014 0 0 0
2015 0 0 0
2016 120 100 20
IFRS
Revenue Expense Profit
2014 10 10 0
2015 60 60 0
2016 50 30 20
total 120 100 20

b) Percentage- of- completion method

% completion Revenue Expense Profit
2014 10/100 = 10% 10% * 120 = 12 10 2
2015 (10+60)/100 = 70% 70% * 120 – 12 = 72 60 12
2016 100% 120 – 12 – 72 =36 30 6
Total 120 100 20
c) Installment method
Revenue (120) Interest Rev = 15,394 Expense (100) Interest expense = 18,783
Sale = 30,000 + 74,606 = Sale = 81,217
104,606

Revenue Expense Profit

2014 Interest Revenue = 7,460 Interest expense = 8,122 (52540 – 40793)-
Sales = (30,000+30,000) – Sales expense = (8122-7460)
7,460 =52,540 (52,540/104,606 )
*81,217 = 40,793 = 11,085
2015 Interest Revenue = 5,207 Interest expense = 7,934 (24793-19250)-
Sales = 24,793 Sale expense = (7934-5207)
 ( in Reduction in principal) (24,793/104,606)*81,217 =2816
(=30,000) =19250
2016 Interest Revenue = 2727 Interest expense = 2727 (27273-21175)-
Sales = 27,273 Sale expense = (2727-2727)
( in Reduction in principal (27,273/104,606)*81,217 =6098
=21,175
Total 104,606 81,216 20,000
(tinh phan sale) (tinh phan sale)

2-12
a) Approach 1  historical value, no care current market value, only care when sell
BS IS
1/1/2009 Land: +100,000 x
Cash : - 100,000
31/12/2009 x x
31/12/2010 xx x
31/12/2011 Cash: + 180,000 Gain on sale: 80,000
Land: -100,000
Retain Earnings : +80,000
b) Approach 2
BS IS
1/1/2009 Land: +100,000
Cash : - 100,000
31/12/2009 Land: +50,000
AOCI : +50,000
(unrealized G/L)
31/12/2010 Land: - 30,000
AOCI: - 30,000

31/12/2011 Land: -120,000 Gain on sale: 80,000

Cash: +180,000 =60+20
RE: +80,000
AOCI: -20,000

c) Approach 3
BS IS
1/1/2009 Land: +100,000
Cash : - 100,000
31/12/2009 Land: +50,000 Gain on sale: 50,000
Retain earnings: +50,000
 31/12/2010 Land: - 30,000 Loss on sale: 20,000
RE: - 30,000

31/12/2011 Land: -120,000 Gain on sale: 60,000

Cash: +180,000
RE: +60,000

d) Company acquired the land in 2009 : 100,000

Company sold the land in 2011 : 180,000
 Total effect on Net Income through the realization of the owners in the value of the
land bought and sold is $80,000
 3 methods recognize $80,000 in the different pattern overtime but total is the same
2-13
a) APPROACH 1: HISTORICAL
BS IS
31/12/2011 Notes Receivable: + 180,000 Gain on sale: 80,000
Land: -100,000
Retain Earnings : +80,000
31/12/2012 Cash: +100,939 Interest Revenue: 14,400
Note Receivable: - 86,539 (=100,930
– 14,400)
RE: +14,400

(bal NR= 180,000 – 86,539 = 93,461)

31/12/2013 Cash: + 100,939 Interest Revenue: 7478
Note Receivable: -93,461 (8% * (180,000-86,539))
RE: + 7478

(bal NR = 0)

b) APPROACH 3:
BS IS

31/12/2011 Note receivables: +180,000 Gain on sale: 80,000

Land: - 100,000
RE: +80,000
31/12/2012 Cash: +100,939 Interest Revenue: 14,400
RE: +14,400 (8% * 180,000)
Note Receivables: -86,539
(bal NR = 93,461)

RE: - 1,699 Loss : 1,699

Note Receivables: - 1,699 (93,461 – 91,762)
(bal NR = 91,762)
31/12/2013 Cash: +100,939 Interest revenue: 9177
RE: +9,177 ( 10% * 91,762 )
Note Receivable: -91,762

c) Cash outflow =100,000

Cash inflow = 100,939 * 2 = 201,878
 Total effect on Net Income through the realization of the owners in the value of the
land bought and sold is 101,878
 RE = 101,878 for 2 cases

6-18
a) Adjust when using earnings to forecast future profitability
 Gain on sale
Amount : 465 (comparing to Net Income with 890)  this amount is material
Gain on sale is more likely to be one- time event
 This amount will exclude from the analysis
 Extraordinary loss
The amount is 17 million  this is immaterial
It is more likely to be One – time event
 This amount will exclude from analysis
b) Adjustment in part a
 Year 2010 Year 2011
Net income as reported 890 478
Adjustments
Deduct: Gain on sale (465)
Add: Extraordinary loss 17
Tax effect 465*35% = 163
Net income as adjusted 588 495

(net tax  khong phai cong TAX nguoc lai)

Year 2010 Year 2011 Year 2012
reported 890 478 834
adjusted 588 495 834

c) Effect change:
Before: Selling and administration expense: decrease
After: Sales revenue: decrease
 Net income: no effect
Old method New method
Promotional cost: reduced S & A expense Promotional cost: reduced Revenue
 More appropriate treatment

YEAR 11 Old method New method

Sales 8821 + 610 = 9431 8821
S&A expense 1955+ 610 = 2565 1955
S&A expense / Sales 27% 22%
New method has less S&A expense / sales than old method  New method looks better when
seeing. However, old method is more appropriate treatment.

d) Common – size income statement as reported

Year 12 Year 11 Year 10
Sales 100% 100% 100%
Gain on sale of 5.2%
branded product line

COGS -64.6% -66.7% -65%

S&A expense -18.5% -22.2% -21%
Interest income 0.3% 0.3% 0.3%
Interest expense -3.1% -3.8% -3%
Other income -0.5% 0.01% -0.3%
( expense)
 Income before
income taxes and
cumulative
Effect of Accounting 13.6% 7.6% 16.4%
Changes
Income tax expense -4.7% -2% -6.4%
Income before 8.8% 5.6% 10%
extraordinary item
Extraordinanry loss -0.2%
(net of taxes)
Net income 8.8% 5.4% 10%-

e) Common – size income statement as adjusted

Year 12 Year 11 Year 10
Sales 100% 100% 100%
COGS -64.6% -66.7% -65%
S&A expense -18.5% -22.2% -21%
Interest income 0.3% 0.3% 0.3%
Interest expense -3.1% -3.8% -3%
Other income -0.5% 0.01% -0.3%
( expense)
Income before
income taxes and
cumulative
Effect of Accounting 13.6% 7.6% 16.4%
Changes
Income tax expense -4.7% -2% -6.4%
Income before 8.8% 5.6% 10%
extraordinary item
Net income 8.8% 5.6% 6.6%

After adjustments, profitability of year 2010 decreased dramatically and that of year 2011
increased a little but that of year 2012 is no effect.

6-19
a) Appropriate treatment when forcasting future earnings
(1) Goodwill impairment
In year 2008, goodwill impairment is 252,664 that is greater dramatically than net loss (-
4115 ) the amount of goodwill impairment is material
It depends on credit market and level of construction.
 If they are getting better, goodwill will not be likely to recognize impairment loss in the
future.  impairment is one- time event  it will excluded from the analysis
If they are getting worse, goodwill will be likely to recognize impairment loss in the
future.  impairment happens again  it will included from the analysis

(2) Discounted operations

Discounted operations show effect event from 2006 to 2008 and it is material in 2008
Business change in its strategy is one – time event
Effect of discounted operations is not persistent and it will end in short time
 Discounted operations will exclude from the analysis
(3) Loss (gain) on sale of PPE and business (net)
It happens in 3 years. These amount is more active with big change
 It will include from this analysis
Year 2008 Year 2007 Year 2006
Total revenue 100% 100% 100%
Cost of revenue 79.5% 71.43%
SG&A 9.4% 8.7%
Goodwill Impairment 6.9% - -
Loss (gain) on sale of -2.6% -1.76% -0.17%
PPE and business
(net)
Other operating -0.01%
(income) expense, net
Total operating 93.2%
expenses, net
Operating earnings 6.8%
Other income -0.12%
(expense), net
Interest income 0.1%
Interest expense -4.7%
Earnings from 2.06%
continuing operations
before taxes
Provision for income -2.1%
taxes
Earnings from -0.05%
continuing operations
Discontinued
operations (note2)
Loss from results of -0.11% -0.58% -0.5%
discounted operations
Income tax benefit 0.04%
Loss on discounted -0.07%
operations, net of
income taxes
Net earnings (loss) -0.11%

8-15
a) Average total depreciation life assets (AVERAGE LIFE)
Average cost
Residual value = 0  useful life =
Depreciationexpense
Newmarket Monsanto Olin
Average cost (752 + 777) / 2= (4611+4604)/2= (1796+1826)/2=
765.5 4607.5 1811
Depreciation 27 328 72
expense
Useful life 28.3 14 25.2

b) Average age to date of depreciation asset at the end of year

Accumulated depreciation = D.E * number of years used
ending Accumulated depreciation
 Age =
Depreciationexpense

Newmarket Monsanto Olin

Ending A.D 611 2517 1348
D.E 27 328 72
Age 22.6 7.7 18.7

Relative age to 22.6/28.3 7.7/14 18.7/25.2

useful life = 80% =55% =74%

c) Depreciation expense for tax purposes

Newmarket Monsanto Olin

D.E as reported 27 328 72
Difference (9-13)/35% (256-267)/35% (96-83)/35%
=( end DTL – beg = -11 = -31 = 37
DTL) / tax rate
D.E as adjusted 16 297 109
d) Net income for tax purpose
Newmarket Monsanto Olin
Net income for 33 267 55
reporting
Add: D.E for 27* (1-35%) = 18 238* (1-35%) = 213 72*(1-35%) = 47
reporting (net of
tax)
Less: D.E for tax 16*(1-35%) = 10 297*(1-35%) = 193 109*(1-35%) = 71
(net of tax)
Net income for tax 41 287 31

e) PPE (net) at the end of year if used accelerated (tax reporting)

Newmarket Monsanto Olin

PPE for reporting 777 4604 1826
Less: Accelarated

f) the difference in average total life of the assets of NewMarket Corporation and Olin
Corporation relative to the assets of Monsanto Company
- New market and Olin have relatively long asset life as compared to Monsanto
 Factors that can explain longer depreciable life include:
+ New market and Olin might have greater proportion of assets with long useful life
(plant, building) in PPE as compared to Monsanto
+ New market and Olin might choose to estimate longer useful life for their assets
g) the older average age for depreciable assets of NewMarket Corporation and Olin
Corporation relative to Monsanto Company
the reason may explain the difference:
+ New Market and Olin might have greater proportion of assets with long useful life
( plant, building) in PPE as compared to Monsanto (as in the previous part)
+New market and Olin may delay the acquisition and replacement of asset

8-16
Scenario1: LONG LIVED ASSETS
Cost = 2,000,000
Carrying amount = 1,200,000
Pmt= 160,000 per year, 12 years, 10%
Similar machine sell = 1,000,000
 Selling cost = 50,000
 US. GAAP
Carrying amount = 1,200,000
Undiscounted future cash flow of machine = 160,000 *12 = 1,920,000
 Carrying amount < Undiscounted future CF
 No impairment under US GAAP
 IFRS
lease
Scenario 2: GOODWILL
a) Amount goodwill impairment?

FV of Vineyard reporting unit 31/12/2014 1800,000

Carrying value of Vineyard reporting unit
31/12/2014
Identifiable assets 1500,000
Goodwill 400,000 1,900,000

Carrying value of reporting unit > FV  indication of goodwill impairment

FV of Vineyard reporting unit as 1800,000

31/12/2014
Less: FV of Vineyard identifiable asset 1500,000
31/12/2014
Implied goodwill as 31/12/2014 300,000

 Goodwill impairment = 400,000 – 300,000 = 100,000

b) Goodwill reflected in FS
Asset = Liabilities + equity
Goodwill: -100,000 Impairment loss: -100,000

8-17
a) Reflect changes in FS
Initial acquisition cost (2013) = 150,000
asset = +equity
liabilities
31/12/13 Land: +10,000 AOCI (Revaluation Surplus): +10,000
FV = 160,000
31/12/14 Land: - 5,000 AOCI (Revaluation Surplus) : -5000
 FV= 155,000
31/12/15 Land: -15,000 AOCI (Revaluation Surplus) : -5000
FV = 140,000 Unrealized Loss (IS) : -10,000
31/12/16 Land: +5000 Unrealized Gain (IS): +5000
FV=145,000
If 31/12/16 Land: +15,000 Unrealized Gain (IS): +10,000
FV = 155,000 AOCI (Revaluation Surplus): +5000

b) Building , 10 years of end in 2013, upward to 160,000 D.E in 2013 ?

Asset =Liabilities +Equity

31/12/13 Building: +10,000 AOCI: +10,000
AD: +16,000 DE: +16,000
AOCI: -1000 = 10,000/10yrs
RE: +1,000

8-18

a) Effect of the change in market value of investment

Asset =Liabilitie +Equity
s
31/12/2006 AFS investment: AOCI (unrealized holding
+379,204 Gain/ loss on AFS) (BS):
=2324826 - 1945622 + 379,204 (2)

No effect in IS (1)

b) Trading securities

Asset =Liabilitie +Equity

s
31/12/2006 Trading securities: unrealized holding Gain/
+379,204 loss (IS): + 379,204 (1)
=2324826 - 1945622

c) The value of investment on BS does not differ upon the intention to hold the
securities.
Investment (trading or AFS) is recognized at Fair value on the BS

*lien quan đến INTEREST EXPENSE

Interest expense = Actual Interest – Capital interest
Eg: Total interest = 5% * 3m = 150,000 = actual interest
Capitalized interest = 5% * 1m = 50,000  used for finance construction
Interest expense = 150,000 – 50,000 = 100,000

1-11
Inventory Non inventory
4,7,10
Allstate, HSBS, Kelly

R& D (manufacturing) Non R & D (non – manufacturing)

 5,12,1,2 4,7,10
Meck, P&G, Dupont, HP 3,6,8,11,9

financial Non- financial

*) 5,12,1,2
+) Highest R & D amount (2) is Meck
+ HP outsources manufacturing  lowest PPE  (12)
+ P&G (sx tiep thi nhieu dong sp tieu dung) spend more on Selling expense and have a
higher Gross margin  (5)
 (1) is Dupont
*) 4,7,10
+) Allstate (insurance company) : high level of cash and high level of ST
debt/payable (4)
+) HSBC (bank) : high level of liability (ST, LT), lower level of cash compared with
insurance Compnay, high level of Receivable  (10)
 (7) is Kelly
*3,8,6,11,9: A& F, Best Buy, Pacific, Omnicon
+ 3, 9 have no selling and Administration  Pacific and Omnicon
(3): high level of PPE  Pacific ( Nang luong)
(9) : low level of PPE  Omnicon (dv)
+8,6,11 have S & A expense
(11): lowest inventory and highest PPE  Mc Donald’s
A & F : higher gross margin, higher S & A expense  (8)
(6)  Best Buy

1-13

R&D Non R & D

1,3,4,7 2,5,6
Wyeth, Amgen, Mylan, Johnson
 Patent protection need highest Profit margin, lowest COGS  Amgen, Wyeth 3, 4
Amgen needs higher profit margin, higher R & D, lower COGS than Wyeth
 (3) Amgen, (4) Wyeth
Johnson needs higher P.M, higher Selling expense than Mylan (1) Johnson, (7) Mylan
 2,5,6:
+ (5): low inventory, high PPE  Covance
+ Walgreen (retailer) have a higher PPE than Cardinal health  (6) Walgreen, (2)
cardinal health.