Professional Documents
Culture Documents
Statement
Analysis
K.R. Subramanyam
Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
4-2
4
CHAPTER
4-3
Asset Introduction
Classification
Current
Current (Short-term)
(Short-term) Noncurrent
Noncurrent (Long-
(Long-
Assets
Assets term)
term) Assets
Assets
Resources
Resourcesor orclaims
claimsto to Resources
Resourcesor orclaims
claimstoto
resources
resourcesthat
thatare
are resources
resourcesthat
thatare
are
expected
expectedto tobe
besold,
sold, expected
expectedtotoyield
yield
collected,
collected, or
orused
used within
within benefits
benefitsthat
thatextend
extend
one
oneyear
yearor
orthe
theoperating
operating beyond
beyondone
oneyear
yearor orthe
the
cycle,
cycle, whichever
whicheveris is operating
operatingcycle,
cycle,
longer.
longer. whichever
whicheverisislonger.
longer.
4-4
Asset Introduction
Classification
Current
Current (Short-term)
(Short-term) Noncurrent
Noncurrent (Long-
(Long-
Assets
Assets term)
term) Assets
Assets
Cash
Cash&&Equivalents
Equivalents Fixed
FixedAssets
Assets
Accounts
AccountsReceivables
Receivables Intangible
Intangible
Inventory
Inventory Deferred
Deferredcharges
charges
Prepaid
PrepaidExpenses
Expenses
4-5
•• Companies
Companiesrisk
riskaareduction
reductionin
inliquidity
liquidityshould
shouldthe
the
market
marketvalue
valueof
ofshort-term
short-terminvestments
investmentsdecline.
decline.
••Cash
Cashand
andcash
cashequivalents
equivalentsare
aresometimes
sometimesrequired
required
to
tobe
bemaintained
maintainedas
as compensating
compensatingbalances
balancesto
tosupport
support
existing
existingborrowing
borrowingarrangements
arrangementsororasascollateral
collateral for
for
indebtedness.
indebtedness.
4-8
Management
Management estimates
estimates the
the allowance
allowance for
for
uncollectibles
uncollectibles based
based on
on experience,
experience, customer
customer
fortunes,
fortunes, economy
economy andand industry
industry expectations,
expectations,
and
and collection
collection policies
policies
4-10
Analysis of Prepaids
Two
Twoanalysis
analysisissues:
issues:
(1)
(1) For
Forreasons
reasonsof
ofexpediency,
expediency,noncurrent
noncurrentprepaids
prepaidssometimes
sometimes
are
areincluded
includedamong
amongprepaid
prepaidexpenses
expensesclassified
classifiedas
ascurrent--
current--
when
whentheir
theirmagnitude
magnitudeis
islarge,
large,they
theywarrant
warrantscrutiny
scrutiny
(2)
(2)Any
Anysubstantial
substantialchanges
changesin
inprepaid
prepaidexpenses
expenseswarrant
warrant
scrutiny
scrutiny
4-13
Inventories
Definitions
Inventories are goods held for sale, or goods
acquired (or in process of being readied) for
sale, as part of a company’s normal
operations
Expensing treats inventory costs like period
costs—costs are reported in the period when
incurred (Example – Office supplies)
Capitalizing treats inventory costs like product
costs—costs are capitalized as an asset and
subsequently charged against future
period(s) revenues benefiting
from their sale (Example – Direct labor)
4-14
Inventories
Inventory Costing Method
Inventories
First-In, First-Out (FIFO)
Oldest
Oldest Costs
Costs of
of Goods
Goods
Costs
Costs Sold
Sold
Recent
Recent Ending
Ending
Costs
Costs Inventory
Inventory
4-16
Inventories
Recent
Recent Costs
Costs of
of
Costs
Costs Goods
Goods Sold
Sold
Oldest
Oldest Ending
Ending
Costs
Costs Inventory
Inventory
4-17
Inventories
Average Cost
When
When aa unit
unit is
is sold,
sold, the
the
average
average costcost of
of each
each
unit
unit in
in inventory
inventory isis
assigned
assigned to to cost
cost of
of
goods
goods sold.
sold.
Cost of Units
Goods ÷ available on
Available for the date of
Sale sale
4-18
Inventories
Illustration of Costing Methods
Inventory
InventoryononJanuary
January1,1,Year
Year22 40
40@@$500
$500 $$20,000
20,000
Inventories
Inventoriespurchased
purchased
during
duringthe
theyear
year 60
60@@$600
$600 36,000
36,000
Cost
CostofofGoods
Goodsavailable
available
for
forsale
sale 100
100units
units $$56,000
56,000
Note:
Note:30
30units
unitsare
aresold
soldin
inYear
Year22for
for$800
$800each
eachfor
fortotal
total
Revenue
Revenueof of$24,000
$24,000
4-19
Inventories
Illustration of Costing Methods
Beginning
Beginning Net
Net Cost
Costof
of Ending
Ending
Inventory
Inventory ++ Purchases
Purchases == Goods
GoodsSold
Sold ++ Inventory
Inventory
FIFO
FIFO $20,000
$20,000 ++ $36,000
$36,000 == $15,000
$15,000 ++ $41,000
$41,000
LIFO
LIFO $20,000
$20,000 ++ $36,000
$36,000 == $18,000
$18,000 ++ $38,000
$38,000
Average
Average $20,000
$20,000 ++ $36,000
$36,000 == $16,800
$16,800 ++ $39,200
$39,200
Assume
Assumesales
salesof
of$35,000
$35,000for
forthe
theperiod—then
period—thengross
grossprofit
profitunder
undereach
each
method
methodis:
is:
Sales
Sales –– Cost
Costof
ofGoods
GoodsSold
Sold == Gross
GrossProfit
Profit
FIFO
FIFO $24,000
$24,000 ---- 15,000
15,000 == $9,000
$9,000
LIFO
LIFO $24,000
$24,000 ---- 18,000
18,000 == $6,000
$6,000
Average
Average $24,000
$24,000 ---- 16,800
16,800 == $7,200
$7,200
4-20
Inventories
LIFO Liquidations
(1)
(1)Companies
Companiesmaintain
maintainLIFO
LIFO inventories
inventoriesin
inseparate
separate
cost
costpools.
pools.
(2)
(2)When
Wheninventory
inventoryquantities
quantitiesare
arereduced,
reduced, each
eachcost
cost
layer
layeris
ismatched
matchedagainst
againstcurrent
currentselling
sellingprices.
prices.
(3)
(3)In
Inperiods
periodsof
ofrising
risingprices,
prices, dipping
dippinginto
intolower
lowercost
cost
layers
layerscan
caninflate
inflateprofits.
profits.
4-22
Inventories
Analyzing Inventories—Restatement of LIFO to
FIFO
Three
Threestep
stepprocess:
process:
(1)
(1) Reported
ReportedLIFO
LIFO Inventory
Inventory++ LIFO
LIFO reserve
reserve
(2)
(2) Deferred
Deferredtax
taxpayable
payable++[LIFO
[LIFO reserve
reservexxTax
Taxrate]
rate]
(3)
(3) Retained
Retainedearnings
earnings++ [LIFO
[LIFO reserve
reservexx(1-Tax
(1-Taxrate)]
rate)]
LIFO
LIFO reserve
reserve is
isthe
theamount
amountbybywhich
whichcurrent
currentcost
cost
exceeds
exceedsreported
reportedcost
costof
ofLIFO
LIFO
inventories
inventories
4-23
For
Foraacost
costto
tobe
becapitalized,
capitalized,ititmust
mustmeet
meeteach
eachof
ofthe
thefollowing
followingcriteria:
criteria:
••ItItmust
mustarise
arisefrom
fromaa
past
pasttransaction
transactionororevent
event
••ItItmust
mustyield
yieldidentifiable
identifiableand
and
reasonably
reasonablyprobable
probablefuture
futurebenefits
benefits
••ItItmust
mustallow
allowowner
owner(restrictive)
(restrictive)
control
controlover
overfuture
futurebenefits
benefits
4-25
Allocation
Allocation—process
Allocation—processof ofperiodically
periodicallyexpensing
expensingaadeferred
deferred
cost
cost(asset)
(asset)to
toone
oneor
ormore
morefuture
futureexpected
expectedbenefit
benefitperiods;
periods;
determined
determinedbybybenefit
benefitperiod,
period,salvage
salvagevalue,
value,and
andallocation
allocation
method
method
Terminology
Terminology
•• Depreciation
Depreciationfor
fortangible
tangiblefixed
fixed
assets
assets
•• Amortization
Amortizationfor
forintangible
intangibleassets
assets
•• Depletion
Depletionfor
fornatural
naturalresources
resources
4-26
Two
Twodistortions
distortionsarise
arisefrom
fromimpairment:
impairment:
•• Conservative
Conservativebiases
biasesdistort
distort
long-lived
long-livedasset
assetvaluation
valuation
because
becauseassets
assetsare
arewritten
written
down
downbutbutnot
notwritten
writtenupup
••Large
Largetransitory
transitoryeffects
effectsfrom
from
recognizing
recognizingasset
assetimpairments
impairments
distort
distortnet
netincome.
income.
4-27
Plant Assets
Tangible
Plant Assets
Purchase All
price expenditures
needed to
Acquisition prepare the
cost asset for its
intended use
Plant Assets
Valuation Analysis
Plant Assets
Depreciation
Depreciation is the process of allocating the
cost of a plant asset to expense in the
accounting periods benefiting from its use.
(Unused) (Used)
4-31
Plant Assets
Plant Assets
Straight-Line Method
SL
4-33
Plant Assets
Double-Declining-Balance Method
Step 1:
Straight-line 100 %
depreciation rate = Useful life
Step 2:
Double-declining- Straight-line
balance rate = 2 × depreciation rate
Step 3:
Depreciation Double-declining- Beginning period
expense = balance rate × book value
Plant Assets
Intangible Assets
Noncurrent
Noncurrentassets
assets Often
Oftenprovide
provide
without
withoutphysical
physical exclusive
exclusiverights
rights
substance.
substance. or
orprivileges.
privileges.
Intangible
Assets
Usually
Usuallyacquired
acquired
Useful
Usefullife
lifeis
is for
foroperational
operational
often
oftendifficult
difficult use.
use.
to
todetermine.
determine.
4-36
Intangible Assets
Accounting for Intangible Assets
Intangible Assets
Analyzing Intangibles and Goodwill