ACTG 3110 Study Guide - Midterm Guide: Weighted Arithmetic Mean, Comprehensive Income, Current Asset

ACTG 3110 Study Guide - Midterm Guide: Weighted Arithmetic Mean, Comprehensive Income, Current Asset

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ACTG 3110 Chapter Notes - Chapter 3: Income Statement, Comprehensive Income, Current Asset

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ACTG 3110 Lecture 1: ACTG 3110 MIDTERM

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Chapter 3: statements of income and comprehensive income. Economic income based on events approach rather than on completed transactions. Accounting income based largely on the transactions approach. Comprehensive income all changes to owners" equity that are not the result of transactions with the owners (shareholders) in their capacity as owners. Eliminate direct entries to shareholders" equity except those resulting from transactions with the actual shareholders. Differentiate between (1) those value changes recognized both in net assets and in income, and (2) those that are recognized in net assets but not in the year"s net income (unrealized) 2 categories of comprehensive income: net income, and other comprehensive income (oci) Statement of comprehensive income starts with revenue, goes down to profit (or loss), and then continues to items of oci. 2 different statements can also be made: income statement; or, statement of comprehensive income (sci) that starts with net income.

Common Size Income statement
	2017		2016
	$M	Percentage	$M	Percentage
Operating revenue	2319	100%	2375	100%
Operating expenses	-1666	-71.84%	-1725	-72.63%
Earnings before interest, tax, depreciation, amortisation,changes in fair value of hedges and other signifcant items(EBITDAF)	653	28.16%	650	27.37%
Depreciation and amortisation	-264	-11.38%	-236	-9.94%
Impairment of assets	-10	-0.43%	-4	-0.17%
Loss on sale of assets	-4	-0.17%	-1	-0.04%
Net change in fair value of electricity and other hedges	-76	-3.28%	-15	-0.63%
Operating profit	299	12.89%	402	16.93%
Finance Cost	79	3.41%	80	3.37%
Interest Income	2	0.09%	2	0.08%
Net change in fair value of treasury instruments	55	2.37%	-68	-2.86%
Net profit before tax	277	11.94%	256	10.78%
Income tax expense	-80	-3.45%	-71	-2.99%
Net proft after tax attributed to the shareholders of the parentcompany	197	8.50%	185	7.79%
Earnings per share (EPS) attributed to ordinary equityholders of the parent	cents		cents
Basic and diluted earnings per share	7.7	0.33%	7.2	0.30%

COMPREHENSIVE INCOME STATEMENT

2017

2016

Percentage

Net profit after tax

197

8.50%

185

7.79%

Other comprehensive income

Intems that will not be reclassifed to profit or loss

Asset revaluation

428

18.46%

889

37.43%

Defferred tax on the above item

-120

-5.17%

-248

-10.44%

Items that may be reclassified to profit or loss

308

641

Net gain on cash flow hedges

0.09%

Exchange differences arising from translation of foreignoperation

0.04%

-23

-0.97%

Income tax on the above items

0.13%

-23

-0.97%

Other comprehensive income for the year, net of tax

311

13.41%

618

26.02%

Total comprehensice income for the year, net of tax attributedto shareholders of parent company

508

21.91%

803

33.81%

BALANCE SHEET

	2017		2016
	$M	Percentage	$M	Percentage
Current Assets
Cash and cash equivalents	80	0.92%	118	1.38%
Trade receivables	260	3.00%	194	2.27%
Financial Instruments	59	0.68%	71	0.83%
Other assets	32	0.37%	23	0.27%
Total Current Assets	432	5.00%	406	5.00%
Non-current assets
Property, plant and equipment	7961	91.88%	7771	91.02%
Intangible assets	58	0.67%	47	0.55%
Deferred tax	43	0.50%	40	0.47%
Financial Instruments	172	1.98%	274	3.21%
Total non-current assets	8234	95.00%	8132	95.00%
Total assets	8665	100.00%	8538	100.00%
Current Liabilities
Payables and accuals	296	3.42%	205	2.40%
Employee entitlements	15	0.17%	15	0.18%
Current portion of termborrowings	170	1.96%	214	2.51%
Finance lease payable	1	0.01%	1	0.01%
Financial Instruments	67	0.77%	48	0.56%
Current tax payable	30	0.35%	30	0.35%
Total current Liabilities	579	6.68%	513	6.01%
Non-current liabilities
Term borrowings	1022	11.79%	1000	11.71%
Deferred tax	1710	19.73%	1617	18.94%
Provisions	9	0.10%	8	0.09%
Finance lease payable	46	0.53%	47	0.55%
Financial Instruments	124	1.43%	203	2.38%
Term payables	93	1.07%	100	1.17%
Total non-current liabilities	3004	34.67%	2975	34.84%
Total liabilities	3583	41.35%	3488	40.85%
Net assets	5082	58.65%	5050	59.15%
Shareholders' equity
Share capital	1598	18.44%	1597	18.70%
Reserves	3484	40.21%	3453	40.44%
Total shareholders' equity	5082	58.65%	5050	59.15%

Using the following financial ratiosfor 2016 and 2017 periods, and other associated

information available in the publicdomain, assess the financial health of MEL from the

view of an investor.

Liquidity ratios

b) Asset management efficiencyratios

c) Profitability ratios

d) Market ratios

Assume you are a banker evaluating aloan request from Meridian Energy Limited

(MEL) for $220 million. ConsideringMELâs recent earnings announcements and

earnings forecast updates, what wouldbe your concerns in deciding on approval or

denial of the loan request? Use thecompanyâs capital structure ratios for 2016 and 2017

in your explanation.

apricotwallaby871

Case 10-1

Swisscom AG, the principal provider of telecommunications inSwitzerland, prepares consolidated financial statements inaccordance with IFRS. Until 2007, Swisscom also reconciled its netincome and stockholdersâ equity to US GAAP. Swisscom consolidatedfinancial statements from a recent annual report are presented intheir original format in Column 1 of the following worksheet. Note27, Differences between IFRS and GAAP, which includes Swisscomâs USGAAP reconciliation, also is provided.

Required

Use the information in Note 27 to restate Swisscomâsconsolidated financial statements in accordance with US GAAP. Beginby constructing debit/credit entries for each reconciliation item,and then post these entries to columns 2 and 3 in the worksheetsprovided.

Calculate each of the following ratios under both IFRS and GAAPand determine the percentage differences between them, using IFRSratios as the base:

Net income/net revenue

Operating income/net revenues

Operating income/total assets

Net income/shareholdersâ equity

Operating income/total shareholdersâ equity

Current assets/current liabilities

Total liabilities/total shareholdersâ equity

Which of these ratios is most (least) affected by the accountingstandards used?

Worksheet for theRestatement of Swisscom's Financial Statements from IFRS to USGAAP
		Reconciling	Adjustment
	IFRS	DR	CR	US GAAP
Consolidated Statement of Operations

Net revenue	9,842
Capitalized cost and changes ininventory	277
Total	10,119
Goods and services purchased	1,666
Personnel expenses	2,584
Other operating expenses	2,090
Depreciation and amortization	1,739
Restructuring charges	1,726
Total operating expenses	9,805
Operating income	314
Interest expense	(428)
Financial income	25
Income(loss) before incometaxes and equity in net loss of affiliated companies	(89)
Income tax expense	1
Income(loss) before equity innet loss of affiliated companies	(90)
Equity in net loss of affiliatedcompanies	(325)
Net income(loss)	(415)

Consolidated Retained EarningsStatement
Retained earnings, 1/1	(151)
Net loss	(415)
Profit distribution declared	(1,282)
Conversion of loan payable to equity	3,200
Retained earnings, 12/31	1,352


Assets
Current assets
Cash and equivalents	256
Securities available for sale	51
Trade accounts receivable	2,052
Inventories	169
Other current assets	34
Total current assets	2,562

Noncurrent assets
Property, plant and equipment	11,453
Investments	1,238
Other noncurrent assets	220
Total noncurrent assets	12,911
Total assets	15,473

Current liabilities
Short-term debt	1,178
Trade accounts payable	889
Accrued pension cost	789
Other current liabilities	2,213
Total current liabilities	5,069
Long-term liabilities
Long-term debt	6,200
Finance lease obligation	439
Accrued pension cost	1,488
Accrued liabilities	709
Other long-term liabilities	338
Total long-term liabilities	9,174
Total liabilities	14,243

Shareholders' equity
Retained earnings	1,352
Unrealized market valueadjustment on securities available for sale	39
Cumulative translation adjustment	(161)
Total shareholders' equity	1,230
Total liabilities and shareholders'equity	15,473

27. Differences between IFRS and GAAP

The consolidated financial statements of Swisscom have beenprepared in accordance with IFRS, which differ in certain respectsfrom GAAP in the US. Application of US GAAP would have affected thebalance sheet and net income (loss) to the extent described below.A description of the material differences between IFRS and GAAP asthey relate to Swisscom are discussed in further detail below.

Reconciliation of net income (loss) from IFRS toGAAP

The following schedule illustrates the significant adjustmentsto reconcile net income (loss) in accordance with US GAAP to theamounts determined under IFRS, for the current year ended December31.

(CHF in millions)
Net income (loss) according toIFRS		(415)
US GAAP adjustments:
Capitalization of interest cost		8
Restructuring charges		205
Depreciation expense		-5
Capitalization of software		182
Restructuring charges byaffiliates		50
Net income according to GAAP		25

Reconciliation of shareholdersâ equity from IFRS toGAAP

The following is a reconciliation of the significant adjustmentsnecessary to reconcile shareholdersâ equity in accordance with USGAAP to the amounts determined under IFRS as at December 31 of thecurrent year.

(CHF in millions)
Shareholders' equity accordingto IFRS		1230
US GAAP adjustments:
Capitalization of interest cost		54
Restructuring charges		205
Depreciation expense		-5
Capitalization of software		475
Restructuring charges byaffiliates		50
Shareholders' equity accordingto GAAP		2009

Capitalization of interest cost

Swisscom expenses all interest costs as incurred. US GAAPrequires interest costs incurred during the construction ofproperty, plant and equipment to be capitalized. Under US GAAP,Swisscom would have capitalized CHF 13 million and amortized CHF 5million for the current year.

Restructuring charges

During the current year, Swisscom recognized under IFRSrestructuring charges totaling CHF 1726 million. The followingschedule illustrates adjustments necessary to reconcile thesecharges to amounts determined under US GAAP.

Restructuringcharges in accordance with IFRS
Personnel restructuringcharges		1326
Write-down of long-livedassets		316
Misc. restructuring charges		84
Total in accordance with IFRS		1726
Adjustments to restructuringcharges to accord with GAAP		(205)
Restructuring charges inaccordance with GAAP		1521

Reconciliation of restructuring charges
Restructuring chargesaccording to US GAAP consist of the following:
Personnel restructuringcharges		1228
Write-down of long-livedassets		209
Misc. restructuring charges		84
Restructuring charges inaccordance with GAAP		1521

Depreciation expense

Due to the difference in carrying value of long-lived assetsafter write-downs describe in (b), there is a difference in theamount of depreciation expense taken under IFRS and GAAP. Anadjustment is made for the current year to record an additional CHF5 million of depreciation under US GAAP.

Capitalization of software

Swisscom has expensed software costs as incurred. For US GAAPpurposes, external consultant costs incurred I the development ofsoftware for internal use has been capitalized. These costs arebeing amortized over a 3 year period. The capitalization ofsoftware costs accords with common practice in the UStelecommunications industry.

Swisscom has capitalized, as disclosed in the reconciliation ofnet income (loss) and shareholdersâ equity to US GAAP, CHF 220million and amortized CHF 37 million in the previous year andcapitalized CHF 370 million and amortized CHF 188 million in thecurrent year.

Restructuring charges of affiliates

During the current year, Swisscomâs share of personnel and otherrestructuring charges recorded by affiliates amounted to CHF 50million. These restructuring charges do not meet all therecognition criteria contained in EITF 94-3 and therefore cannot beexpensed in the current year, under US GAAP.

limeelk579

Question 25

Blossom Company received the following selected information fromits pension plan trustee concerning the operation of the companyâsdefined benefit pension plan for the year ended December 31,2017.

	January 1, 2017	December 31, 2017
Projected benefit obligation	$1,488,000	$1,514,000
Market-related and fair value of plan assets	809,000	1,135,900
Accumulated benefit obligation	1,600,000	1,718,800
Accumulated OCI (G/L)âNet gain	0	(198,800	)

The service cost component of pension expense for employee servicesrendered in the current year amounted to $76,000 and theamortization of prior service cost was $118,800. The companyâsactual funding (contributions) of the plan in 2017 amounted to$246,000. The expected return on plan assets and the actual ratewere both 10%; the interest/discount (settlement) rate was 10%.Accumulated other comprehensive income (PSC) had a balance of$1,188,000 on January 1, 2017. Assume no benefits paid in 2017.

Determine the amounts of the components of pension expense thatshould be recognized by the company in 2017. (Enteramounts that reduce pension expense with either a negative signpreceding the number e.g. -45 or parenthesis e.g.(45).)

Components of Pension Expense
Actual Return on Plan AssetsAmortization of Prior ServiceCostBenefits PaidContributions to PlanExpected Return on PlanAssetsInterest on Projected Benefit ObligationService Cost		$
Actual Return on Plan AssetsAmortization of Prior ServiceCostBenefits PaidContributions to PlanExpected Return on PlanAssetsInterest on Projected Benefit ObligationService Cost
Actual Return on Plan AssetsAmortization of Prior ServiceCostBenefits PaidContributions to PlanExpected Return on PlanAssetsInterest on Projected Benefit ObligationService Cost
Actual Return on Plan AssetsAmortization of Prior ServiceCostBenefits PaidContributions to PlanExpected Return on PlanAssetsInterest on Projected Benefit ObligationService Cost

SHOW LIST OF ACCOUNTS

Prepare the journal entry to record pension expense and theemployerâs contribution to the pension plan in 2017.(Credit account titles are automatically indented whenamount is entered. Do not indent manually. If no entry is required,select "No Entry" for the account titles and enter 0 for theamounts.)

Account Titles and Explanation	Debit	Credit





(To record pension expense and employerâs contribution)

SHOW LIST OF ACCOUNTS

Indicate the pension-related amounts that would be reported onthe income statement and the balance sheet for Blossom Company forthe year 2017.

Blossom Company
Income Statement (Partial)

December 31, 2017For the Year Ended December 31, 2017For theQuarter Ended December 31, 2017

DividendsExpensesNet Income / (Loss)Retained Earnings â January1, 2017Retained Earnings â December 31, 2017RevenuesTotalExpensesTotal Revenues

Amortization of PSC InterestExpense PensionExpense RentExpense Service Cost

Blossom Company Comprehensive Income Statement December 31, 2017For the Year Ended December 31, 2017For theQuarter Ended December 31, 2017
DividendsExpensesNet Income / (Loss)Retained Earnings â January1, 2017Retained Earnings â December 31, 2017RevenuesTotalExpensesTotal Revenues		$XXXX
Amortization of PSCComprehensive IncomeInterest ExpenseLiabilityGainPension ExpenseRent ExpenseService CostOther ComprehensiveIncome (Loss)
Amortization of PSC ComprehensiveIncome InterestExpense LiabilityGain PensionExpense RentExpense ServiceCost Other Comprehensive Income (Loss)	$
Amortization of PSC ComprehensiveIncome InterestExpense LiabilityGain PensionExpense RentExpense ServiceCost Other Comprehensive Income (Loss)

Amortization of PSCComprehensive IncomeInterest ExpenseLiabilityGainPension ExpenseRent ExpenseService CostOther ComprehensiveIncome (Loss)		$XXXX

orchidturtle354

Blossom Company
Balance Sheet (Partial)

December 31, 2017For the Year Ended December 31, 2017For theQuarter Ended December 31, 2017

Current AssetsLiabilitiesIntangible AssetsProperty, Plant andEquipmentStockholders' EquityTotal AssetsTotal Current AssetsTotalCurrent LiabilitiesTotal Intangible AssetsTotal LiabilitiesTotalLiabilities and Stockholders' EquityTotal Property, Plant andEquipmentTotal Stockholders' Equity

Accounts PayableAccounts ReceivableAccumulatedDepreciationAccumulated Other Comprehensive Income (G/L)AccumulatedOther Comprehensive Loss (G/L)Accumulated Other ComprehensiveIncome (PSC)Accumulated Other Comprehensive Loss (PSC)CommonStockPension LiabilityRetained Earnings

Current AssetsCurrent LiabilitiesIntangible AssetsLong-termInvestmentsLong-term LiabilitiesProperty, Plant andEquipmentStockholders' EquityTotal AssetsTotal Current AssetsTotalCurrent LiabilitiesTotal Intangible AssetsTotal LiabilitiesTotalLiabilities and Stockholders' EquityTotal Long-termInvestmentsTotal Long-term LiabilitiesTotal Property, Plant andEquipmentTotal Stockholders' Equity

Accounts PayableAccounts ReceivableAccumulatedDepreciationAccumulated Other Comprehensive Income (G/L)AccumulatedOther Comprehensive Loss (G/L)Accumulated Other ComprehensiveIncome (PSC)Accumulated Other Comprehensive Loss (PSC)CommonStockPension LiabilityRetained Earnings

Accounts PayableAccounts ReceivableAccumulatedDepreciationAccumulated Other Comprehensive Income (G/L)AccumulatedOther Comprehensive Loss (G/L)Accumulated Other ComprehensiveIncome (PSC)Accumulated Other Comprehensive Loss (PSC)CommonStockPension LiabilityRetained Earnings