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ACTG 2011
Domenic Cianflone

ACTG 2011: FinancialAccounting: 1. Recognition; at what point in time do we assert this item exists; WHEN 2. Measurement; 3. Disclosure -Principles -Conventions Rules -Judgement Cost per dress: 350 Selling price: 1000 Flood: 50% off Repair damages: 150 Dry clean: 30 Lower of cost or net realizable value Net realizable value = 500 - 150 - 30 = 320 Write down expense. 30 Inventory. 30 Chapter 8: CapitalAssets CapitalAssets: Resources that contribute to earning revenue over more than one period by helping an entity produce, supply, support or make available the goods or services it offers to its customers. They are not bought and sold in the ordinary course of business Property, Plant and Equipment: Tangible assets used to produce or supply goods or services to customers, rented to customers or used for administrative purposes Intangible Assets: Capital assets without physical substance +: An intangible asset that arises when one business acquires another and pays more than the fair value of the net assets purchased Capitalized: When costs incurred to acquire an asset and get it ready for use are recorded on the balance sheet as an asset Methods of Costing: 1. Historical Cost: Original cost of the asset 2. Net Realizable Value: Estimated selling price of an asset after deducting selling costs 3. Replacement Cost: Estimated Cost of replacing an asset 4. Value in Use: Net present value of the cash flows the asset will generate or save over its life *Recoverable amount is the higher of value in use and net realizable value -If it is less than cost, write down is necessary to be reflected on the balance sheet Use present value and annuity factors to multiply value expected each year + residual value, if that is less than net realizable value then you must write down -If you can sell it now for more than you are saving, then sell it. If it saves you more money to keep it, keep it -If value in use (undiscounted) –projected value is less than carrying amount there is an impairment, then find NRV -If NRV is less than carrying amount, the asset is written down to NRV -Private Enterprise GAAP doesn’t have a value in use valuation, if undiscounted cash flows are less then carrying cost, it is compared to NRV and written down if NRV is less -If assets are not able to be separated from the rest of the business, the value in use figures may not be possible to ascertain -Most companies charge full years depreciation in the year of acquisition and none in the year of sale -An asset is always recorded at cost, purchase price, design and engineering, taxes, installation costs, legal costs and wages can be capitalized -Interest can be capitalized until an asset is ready for use, then it must be expensed this is most common for a building -If tax minimization is a goal it may expense all associated costs, or its income maximization is a goal it will capitalize more Betterment: Expenditure that are made to improve an existing capital asset Repairs or Maintenance: Expenditure enabling an asset to do what its designed to do Basket Purchases: Abundle of assets at a single price where the prices of individual assets won’t be known, raise the problem of how to allocate the total cost among the assets because they are accounted for differently and recorded separately -To minimize taxes a company could allocate greater cost to a building vs. land because it yields greater expenses Componentization: An IFRS requirement, when an item of property, plant and equipment is made up of parts or components for which different useful lives or depreciation methods are appropriate, IFRS requires each component to be accounted for separately, cost must be apportioned in a manner that is reflective of market values Depreciation: Process of allocating the cost of property, plant and equipment to expense Amortization: Allocating the cost of intangible assets to expense over time Depletion: Depreciation of natural resources Residual Value: The amount that would be received today from selling the asset if it was at the end of its useful life -IFRS says the cost – residual value should be depreciated in a systematic way -Capital assets are depreciated because of physical use and obsolescence Physical Use: The effects that passage of time, wear and tear, and exposure to the elements have on the capital asset’s ability to help earn revenue Obsolescence: Advances in technology and shifts in the business environment CarryingAmount: Cost – depreciation to date -Land does not depreciate because it has an infinite life Depreciation Methods: 1. Straight- Line. Cost - Residual Value/Estimated useful life 2. Accelerated (2x1/y)% x CarryingAmount 3. Usage-Based -Depreciation is the portion of the equipment’s cost that is matched to revenues earned during the period -No effect on cash flow -Can have economic consequences CapitalAssets XXX Cash XXX Depreciation Expense XXX Accumulated Depreciation XXX -Credit entry reduces the carrying amount of the equipment on the balance sheet Depreciation = Cost – Estimated Residual Value (DepreciableAmount) / Estimated Useful Life Accelerated Depreciation: Allocate more of the cost of a capital asset to expense in the early years of its life, makes sense when revenue generating ability is increased in earlier life Depreciation Expense = (Cost – Accumulated Depreciation) at the beginning of the period x Rate Usage-Based: If an asset’s consumption can be readily associated with its use and not to the passage of time or obsolescence, not appropriate for buildings or office equipment because there is no obvious unit of measurement Depreciation Expense = Number of Units Produced in the Period/Estimated number of units produced over an assets life -IFRS provides the option of valuing assets at market value if it can be measured reliably -Intangibles can be valued at market value if there is an active market for them Companies that adhere to IFRS are required to disclose -Measurement basis for determining the carrying amount -Depreciation method and useful lives of each major category of capital assets -Gross carrying amount accumulated depreciation at the beginning and end of the period -Areconciliation of the carrying amount at the beginning and end of the period -Depreciation expense IntangibleAssets: -Must be separately identifiable (be able to sell or license it) -Must have future benefits -The future benefits must be controlled by the entity -The cost must be measured reliably -Can be recognized if it represents a contractual or legal right -If these criteria are not met, an expense must be incurred Buy intangible asset Capitalize cost on balance sheet, amortize cost over its useful life to match to revenues Develop Intangible Asset  Expense costs as incurred, no matching to revenues -If the period of natural life is indefinite they are not amortized -When investments in knowledge are expensed, it violates the matching principle because they are not being matched to the future revenue they will help to earn -But Gross margin, profit margin, return on assets, return on equity are distorted as a result of intangibles Goodwill: The amount paid over and above the fair market value of the assets and liabilities of the purchased company Goodwill = Purchase Price – Fair Value of IdentifiableAssets and Liabilities Purchased Fair Value of IdentifiableAssets and Liabilities Purchased: Tangible and intangible assets and liabilities that can be specifically identified Sale of CapitalAssets: Cash XXX Accumulated Depreciation XXX Loss on Sale of Equipment XXX Equipment XXX Cash XXX Accumulation Depreciation XXX Gain on Disposal of Equipment XXX Equipment XXX RecoverableAmount: the greater of the net realizable value less cost to sell and value-in-use Writedown is: carrying amount – recoverable amount Under IFRS, writedowns can be reversed if the recoverable amount increases in a later period except writedowns of goodwill Loss Due To Impairment XXX Accumulated Depreciation XXX Cash Flow Statements: -Acapitalized expenditure appears in investing activity -An expensed expenditure appears in cash from operations Return onAssets: Net Income +After Tax Interest Expense/Average TotalAssets Tax Rate = Tax Expense/ Income before Taxes (Net Income + Tax Expense) Chapter 9: Liabilities Liabilities: Obligations to provide cash, goods or services to customer, suppliers, employees, governments, lenders and anyone else an entity owes something to; can be classified as current or long term IFRS Definition Liability: Liabilities are obligations arising from past transactions or economic events that require the sacrifice Current Liabilities: Demand Loans: Must be repaid whenever the lender requests repayment Line of Credit: Allows an entity to borrow up to a specified maximum amount whenever it requires the money only classified if money is actually borrowed -Employers withhold amounts from their employees pay for income taxes employment insurance and Canada or Quebec Pension Plans Accounts Payable: Amounts an entity owes to suppliers for goods and services Cash XXX Revenue XXX GST Payable GST Payable XXX Cash XXX -Canadian business pay tax on their income on both the federal and provincial governments -Pay instalments based on estimated tax they will owe at the end of the year -Must a tax return within six months of its fiscal year end -Dividends payable is an obligation to pay the corporation’s shareholders a dividend that has been declared Accrued Liabilities and Provision: When an entity incurs an expense with no external event such as receipt of an invoice to trigger recording, there is more uncertainty about timing and amount of the liability -Wages and salaries for employees unpaid at the end of a period -Interest costs incurred but not payable until a later period -Goods and Services acquired but not invoiced -Warranty Liability (provision) -Liabilities for affinity programs (Provision) -Liabilities to redeem coupons (provision) Unearned Revenue: When an entity receives cash in advance of providing goods or services, it has an obligation to provide those goods and services -Advance rent payments received by a property owner -Deposits for future goods and services -Tickets purchased for upcoming sporting events, concerts and the theatre -Gift cards Cash XXX Unearned Revenue XXX Unearned Revenue XXX Revenue XXX Gift cards and coupons and demand loans are classified as current liabilities to recognize the fact that they are due/can be redeemed at any time -IFRS states that current liabilities must be segregated by main class, detailed disclosure on provisions is required -Segregation of current and long-term -But they are allowed to be listed only by order of liquidity without classifying them as current or non-current Debt: Amounts borrowed and owed by an entity Collateral: Protection for the lenders should the borrower not repay the loan Variable Rate Loan: Varies with market conditions Fixed Rate Loan: Rate doesn’t change Bond: Aformal borrowing arrangement in which a borrower agrees to make periodic interest payments to lenders as well as repay the principal at a specified time in the future -Low risk because you know the cash stream, because it is marketable it can be liquidated, and the bondholder can pursue legal discourse if the bond issuer doesn’t pay 1. Calculate present value of interest payments and face value of the loan (using annuity table for for effective interest rate) 2. That is the amount that will be paid to the issuer (Cash) 3. The different is the discount or premium on the bond 4. The credit is the bond payable face value Debenture: Abond with no collateral provided to the lenders Mortgage: A loan that provides the borrower’s property as collateral Note Payable: Aformal obligation signed by the borrower, promising to repay a debt -Can be financed by debt or equity -Interest on debt is tax deductible, actual cost of borrowing is lower than stated by the interest rate -Debt is riskier because interest and principal payments have to made as specified in the loan agreement regardless of business Bonds: -Face Value: The amount the bondholder will receive when the bond matures -Maturity Date: The date on which the borrower has agreed to pay back the principal to the bondholders -Coupon Rate: The percentage of the face value the issuer pays to investors each period -Proceeds: The amount the issuer receives from the sale of the bond, determined by effective interest rate -Effective Interest Rate: The real or market rate of interest required by investors to invest in the bond -If coupon rate is lower than effective interest, the bond is sold at a discount and the proceeds are less than face value Interest Expense for the period = Carrying amount during the period x effective interest rate Discount amortization for the period = interest expense for the period – interest payment -If coupon rate is higher than effective interest, the bond is sold at a premium and the proceeds are greater than face value Callable Bond: The bond issuer has the option to repurchase the bond from investors at a time other than the maturity date. The feature is attractive to the issuer because if interest rates fall, the issuer can call the bond and make another issue at a lower interest rate. Not attractive to investors as they lose an investment paying a higher than market rate of interest Convertible Bond: May be exchanged by the investor for other securities of the issuing entity such as common stock Retractable Bond: Gives investors the option of cashing in the bond before the maturity date under certain conditions -Can impose restrictions on the issue, to reduce the investors risk and reduce the cost of borrowing -May prohibit the payment of dividends if retained earnings fall below a certain amount, a maximum debt to equity ratio, minimum current ratio Pricing of Bonds: Based on present value the bond will yield Selling Bonds at Face Value: Cash XXX Bonds XXX Interest ExpenseXXX Cash XXX Bonds XXX Cash XXX Derecognition: Occurs when a bond or other liability is removed from the balance sheet, the bond is retired by paying the principal to the investors Selling Bonds atADiscount: Cash XXX Bond Discount XXX Bond XXX -The carrying amount, the face value less the bond discount is the net present vale of bonds discounted using the effective interest rate Discount: When bonds are sold for less than their face value -The discount is thought of as interest that investors must receive to earn the effective rate of interest and represents compensation for the low coupon rate -To amortize the discount: straight line and effective interest method are used, over the life of the bond and becomes part of interest expense Interest Expense XXX Bond Discount XXX Cash XXX Selling Bonds at a Premium: Premium: The bonds are sold to investors for more than their face value Cash XXX Bond Premium XXX Long-term Debt XXX Interest ExpensXXX Bond Premium XXX Cash XXX Accruing Interest on Long-Term Debt: Interest ExpensXXX Interest PayableXXX Interest Expense XXX Interest PayablXXX Cash XXX Early Retirement of Debt: Bonds XXX Loss on Redemption of BonXXX Bond Discount XXX Cash XXX Letter of Credit: Guarantee from a bank that a customer will pay amounts owed to a seller Fair Value of Debt: Valued at present value of the cash payments to investors, discounted using the effective interest rate on the date the bond was issued Decrease in market value Bond XXX Gain on decrease in market value of long term debt/Other comprehenXXXe income -Not required to report gains and losses under IFRS Lease: Acontract in which one entity, the lessee agrees to pay another entity, the lessor a fee for the use of an asset Lessee: The entity that leases an asset from its owner Lessor: The entity that leases assets it owns to other entities -An entity doesn’t have to obtain separate financing for the purchase -Allows for 100% financing -Leases can provide flexibility to lessees -Leasing is attractive because certain assets are used continuously Off Balance Sheet Financing: When an entity incurs an obligation without reporting a liability on its balance sheet Finance/Capital Lease: Transfers the risks and rewards of ownership to the lessee -It is likely the lessee will get ownership of the asset by the end of the lease - The lease term is long enough that the lessee receives most of the economic benefits of the asset -The present value of the lease payments is equal to most of the fair value of the leased asset Operating Lease: If the risks and rewards of ownership aren’t transferred to the lessee but are retained by the lessor -Off-balance sheet finance -Lessee doesn’t record the leased assets or the associated liability on balance sheet, instead they record an expense and lessor recognizes revenue Assets under capital leaseXXX Lease liability XXX Depreciation Expense XXX Accumulated Depreciation XXX Interest Expense XXX Lease Liability XXX Cash XXX Lease Expense XXX Cash XXX Pension: Income provided after retirement, provided to Canadians by employers, government, RRSPs and pension plans Defined Contribution Plant: The employer makes contributions to the plan as specified in the pension agreement with the employees Pension Expense XXX Cash XXX Pension liability XXX Defined benefit plan: The employer promises to provide employees with specified benefits in each year they are retired Depends on: -The number of years employees will work for employer -The number of employees who will qualify for benefits -The age at which employees will retire -The number of employees who will die before they retire -The salary employees will earn in the year or years on which the pension is based -The number of years employees will live after retirement -The return the money in the pension fund will earn Contingent Liabilities: Apossible obligation whose existence has to be confirmed by a future event beyond the control of the entity -An obligation with uncertainties about the probability that payment will be made or about the amount of the payment -Disclosed in the notes Commitment: Acontractual agreement to enter into a future transaction -Committing the entity to future purchases of goods or services -Not reported in financial statements Subsequent Event: An economic event that occurs after an entity’s year-end but before the financial statements are released to stakeholders -Events that provide information about circumstances that existed at the year-end -Events that happened after the end of the period -Acustomer files for bankruptcy -Sale of inventory after year end period -Settlement of a lawsuit at year end Debt-to-Equity: Ameasure fo the amount of debt relative to equity an entity uses for financing -Entity’s risk and ability to carry more debt Capital structure: Used to describe how an entity is financed , the amount of debt and equity an entity has Debt-to-Equity ratio = Total liabilities/Total shareholder’s equity Interest Coverage Ratio: Measures an entity’s ability to meet its fixed financing charges, indicates how easily an entity can meet its interest payments from its current income Interest coverage ration = Net income + Interest Expense + Income tax expense / Interest expense Debt is Cheap: 1. Less risky for the lender, so it requires less return 2. Tax effect of lending, interest tax deductible Chapter 10: Owner’s Equity Shareholders equity is divided into categories: 1. Share capital: Money and other assets from the purchase of shares by shareholders directly from the corporation , direct investments by shareholders 2. Contributed surplus: Captures equity transactions not included in other categories 3. Retained earnings: Accumulated earnings not distributed to shareholders, indirect investment by shareholders 4. Accumulated other comprehensive income: Reported as other comprehensive income Limited Partnerships: Provide limited liability protection to some partners Limited partners: Have the same limited liability as they would if the entity was a corporation, not personally liable for the debts and obligations of the partnership General Partners: Don’t have limited liability and are liable for all debts and obligations of the partnership, must have at least one general partner Limited Liability Partnership: An ordinary partnership where partners aren’t personally liable for claims ag
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