stmt of cash flow:
sources of funds vs. uses of funds
Source of funds:
- Depr./Liabilities UP (i.e. liabilities = financing)
- Asset DOWN (e.g. collect AR/reduce outstanding balance, sell cap. ass.)
Use of funds:
- Asset UP (e.g. buy PPE, sell goods/increase AR)
- Liabilities DOWN
cash flow hedges, FX transaction hedges:
what are they?
when to recognize gains/losses on revaluation?
hedges to minimize fluctuation in the cash flow values of forecasted transactions
gains/losses: recog. in comprehensive income, reclass to income when realized
GAAP vs. IFRS differences
- IFRS: no LIFO
- Impairment write downs:
- IFRS: single-step method (increased probability of a write-down)
- GAAP: 2 steps
- R&D
- IFRS: capitalize once certain criteria are met
- GAAP: expense as incurred
- Cash flow stmt
- GAAP: dividends received from investments= OPERATING ACTIVITY
- IFRS: dividends = INVESTING ACTIVITY
FV hedges:
what are they?
when to recognize gains/losses on revaluation?
these are derivatives designated as a hedge against fluctiaiton in the FV of a specific asset or liability on the balance sheet
- recog. in income, together with offsetting gains/losses of the hedged item
- per ASC Topic 815
recognize gains/losses on other derivatives (i.e. not hedging instruments)…
in current period income
income statement
- accts. on the income stmt. : measured over a specific span of time (i.e. title may say “…For the Year Ended 20XX”)
*
most useful method for external decision makers (best to assess historical activity and predict future earnings and cash flows)
?
Accrual-based income
stmt of cash flows: 3 categories
start with NI
- operating activities:
- ADD BACK Depr. Exps. (since it is a non-cash exps.0
- Changes in AR, AP, inventory, ops accruals (adjust up/down). Sources and uses of funds, calculated from changes in balance sheet accounts (from one period to the next), help populate the statement of cash flows. A decrease in a non-cash asset account or an increase in a liability account are funds sources, while an increase in an asset account or a decrease in a liability account is a use of fund
- Interest income rcvd. on investments (3rd party co’s bonds)
- investing - pertians to nonoperating assets
- buy (+ sell) capital assets
- liquidation/maturity of ST investments
- financing - related to strategic financing decisions
- repayment of debt
- dividends paid
- stock repo
- stock/equity issuances
- rcvd. principle repayment on investments (3rd party co’s bonds)
FX Translation accounting (pg 24 in book)
INCOMP.
SEE CARD FROM CPA DECK
Per Accounting Standards Codification (ASC) Topic 830
functional currency
the currency of the primary economic environment in which the entity operates (i.e. does the majority of its business)
- non-monetary items are already reported in the functional currency, and do not require translation into the functional currency
stmt of cash flows - general info
indicates firm’s ability to generate cash to repay fin. obligations and dividends to shareholders.
- esp. useful for investors, lenders, creditors, etc.
SEC authority relative to accounting standards
SEC’s philosophy is that the private sector retains the initiative for establishing and improving accounting standards. Therefore, the SEC relies on the FASB for this purpose. Financial Reporting Release No. 1 (FRR-1) recognizes accounting standards issued by the FASB as the authoritative standards for financial reporting.
FX translation acc’ting.
2-3 step process, and which rates for which items)?
1. Determine functional ccy of subsid.
- Translate foreign ccy fin stmts into subsid.’s functional ccy
- Monetary items (cash/readily converted)- @ CLOSING rate
- Nonmonetary items reported @ historical cost - rate @ transaction date
- Nonmonetary items reported @ FV- rate @ date of FV measurem’t.
- Translate functional ccy fin stmts of subsid. into parent’s reporting ccy
- Assets/liab- @ CLOSING rate
- Income and expenses- rate @ transaction date
Resulting exchange differences (translation gains/losses)= in OCI
4 basic principles underlying US GAAP
- measurement - most ass/liab @ historical cost; some mktable securities @ FV
- rev rec - (1) cash/claim rcvd in xchange for goods/svcs, (2) earnings process is substantially complete.
- expense recog (“matching”)
- full-disclosure
8 Qualitative characteristics/ general principles of acc’ting
- relevance - predictive value, confirmatory value, or both
- materiality
- faithful rep - (1) complete, (2) neutral, (3) free of errors
- comparability - w/ prior periods, and other firms in industry
- verifiability - neutral and unbiased
- timely - sufficient to influence decisions, within limits of reliability and completeness
- understandability - non-acc’tants w/ reasonable biz. knowledge
- completeness (cost constraint) - enough to be usable and reliable
5 different CPA audit opinions: list, explain
Standard Unqualified (unmodified)
Modified Unqualified (unqual. w/ Explanatory Paragraph) - immaterial exceptions
- info requires special emphasis
- change in auditor
- “going concern” mention
Qualified - material exceptions, fin stmts still “useful”
Adverse - material exceptions + fin stmts NOT reliable
Disclaimer - no opinion
- CPA lacks independence
- scope ;limitations
cash flow stmt: indirect method vs. direct method
- indirect - start w/ NI, adjust for impact of noncash transactions in period
- direct - report gross cash receipts/disbursements w/o examining any adjustments needed to calculate accrued NI
