How to calculate cash flow liquidity ratio?
(Cash+MarketableSecurities+OperatingCashFlow)/Current Liabilities
Cash flow adequacy ratio?
CFO/(CAPEX + Mandatory Debt Repayment + Dividends)
Dupont 2 basic formulas:
- Net Profit Margin X Total Asset Turnover = Return on Investmen
- Return on Investment X Financial Leverage = Return on Equity
How to calculate LCM inv value under US GAAP?
We compare cost to market value
- Cost given
- CEILING = NRV
- FLOOR = NRV - Normal Gross Profit Percentage
- COMPARE replacement cost (RC) to FLOOR and CEILING and use middle value (between the 3) as market value
- Compare market value to cost and select the lowest
Reversal of impairment losses: when are they allowed according to IFRS?
A reversal can occur if there is an indication that the factors that previously led to the impairment have changed.
Reversal of impairment losses: when are they allowed according to US GAAP?
Not allowed
Reversal of impairment losses: How does it show on income statement (IFRS…)?
Generally in other income line
That is revaluation?
Process of adjusting the carrying amount of an asset on the balance sheet to its current fair value
Revaluation: when are they allowed according to US GAAP?
Revaluation is not permitted under generally accepted accounting principles (GAAP), except for marketable securities.
Revaluation: when are they allowed according to IFRS?
Entities must perform revaluations with sufficient regularity so that the carrying amount of the asset does not differ materially from its fair value.
Revaluation: How does it show on income statement (IFRS…)?
- Decline in value: other expenses
- Gain in value (reversal of impairment loss part, so part to reach back initial value): Other Income
- Upwards revaluation in excess of original cost?: Included in revaluation surplus in Other Comprehensive Income
When do firms test for impairment (IFRS)
- Regular Tests for Certain Assets: Goodwill and intangible assets with indefinite useful lives must be tested for impairment at least annually, regardless of whether there is an indication of impairment.
- Indicator-Based Tests for Other Assets: For all other assets, impairment testing is required only if there are indicators that the asset may be impaired (e.g., significant declines in market value, adverse changes in technology or markets, evidence of obsolescence, or reduced economic performance).
When do firms test for impairment (US GAAP)
- Goodwill and Indefinite-Lived Intangibles: Similar to IFRS, goodwill and intangible assets with indefinite useful lives must be tested for impairment at least annually
- Long-Lived Assets (e.g., PP&E): For long-lived assets held for use, impairment testing is performed only when there are indicators of impairment. This includes significant adverse changes in the environment, legal factors, or operational conditions that suggest the carrying value may not be recoverable.
Straight line depreciation:
AnnualDepreciationExpense=
(CostofAsset−SalvageValue) / UsefulLifeinYears
Double declining balance:
- Compute the straight-line depreciation rate
- Double it
- Multiply this rate by the beginning book value each year (not the original cost minus salvage value, but the current carrying amount).
Note: Salvage value is not explicitly considered in the annual calculation. However, depreciation stops once the book value reaches the salvage value.
Units
- DepreciationperUnit =
(CostofAsset−SalvageValue) / TotalExpectedUnitsofProduction
- AnnualDepreciation =
DepreciationperUnit × UnitsUsedinthePeriod
