acg3171 wilson- final

characteristic differences in cost leadership and product differentiation firms

Product Differentiation (macys)

Cost leadership (dollar general)- low prices/costs, lower profits, higher cogs

Recognize revenue when a product or service is delivered

Accrual

Recognize revenue when actual cash is exchanged

cash basis

High cash balances

Banks

High R&D expenses

Pharmaceutical, technology

High PPE

Hotels, cruise lines, airlines, manufacturers

Low inventory

service companies

Historical cost

land, intangibles, goodwill, prepayments

Adjusted Historical Cost

buildings, equipment, depreciable assets, intangibles with limited lives

Initial Present value

Investments in bonds held to maturity, long-term receivables & payables, noncurrent unearned revenue

Net realizable value

Short-term accounts or receivables, inventory

Fair value is concerned with what accounting information

relevance

Historic cost is concerned with what accounting information

objectivity

Permanent tax differences

fines & penalties, municipal bond income, life insurance on executives

Temporary tax differences

Differences in depreciation methods, warranty methods, prepaid revenues

Market Transaction

Recognize changes in value on BOTH balance sheet and income statement

OCI

Recognize in balance sheet, delay income statement recognition until it becomes a market transaction

Non- OCI

Recognize change on both income statement and balance sheet, even if there is not a market transaction

Assets

Cash, receivables, inventory, prepaid expenses, buildings/equipment, land, stocks/bonds, patents

Liabilities

Wages/accounts payable, interest tax payable, unearned revenue, current portion of long-term debt, long-term note payable, bond/mortgage payable

Equity

Preferred/common stock, earned capital, retained earnings, temporary gains/losses

Introductory life phase

Operations: high -

Investing: High -

Financing: High +

Growth life phase

Operations: varies (near 0)

Investing: -

Financing: +

Maturity Life phase

Operations: +

Investing: -

Financing: -

Decline

Operations: -

Investing: +

Financing: -

Calculating net changes in cash

Ignore net income, ADD investing and financing cash flows

Non-cash Current assets increases... (operating)

Subtract (increase in assets is subtracted)

Cash Increases.. (operating)

neither (not an adjustment)

Current liability... (operating)

Add (increase in liabilities)

If a long-term asset (PPE) increases...

No adjustment to cash flows in operating (subtracted in investing)

Changes in financing section includes

debt, equity, and dividends

Calculate Acquisition value of an asset

ex. 1,000 shares of $5 par value stock that traded for $20 on day of purchase

$1,000 x $20 = $20,000 (plus any setting up cost)

does not include licenses or insurance in setup cost

Calculate basic EPS

NI available/WA common shares outstanding

Calculate diluted EPS

NI available + Preferred dividends + Interest expense (1-T)/

WA common shares + (# bonds converted + other bonds converted from preferred to common)

Carrying value tables

Cash/int- face value x stated rate

Interest expense- carrying value x yield

Amortization- cash/int - interest expense

Carrying value- previous value + or - amortization

If stated < yield = add amortization

Calculate gain/loss on early retirement of bonds

Compare carrying value and how much paid to retire the bonds

Cash < carrying value- gain on difference

Calculate non controlling interest in income

(Net income x % not owned) - (Fair value of asset/life) x % not owned

calculate non controlling interest in net assets

(Acq cost/ % owned) - Acq cost + (Net income x % not owned)- (Dividends x % not owned)

Allocate revenue from bundled product

- find total stand alone a + b = c

- price (a) / c x bundle price

Expected value contract or variable consideration

(Starting value x % within time) + (value - late fee x % for that)....

Characteristics of FIFO

Lowest cogs, highest ending inventory, highest income, highest income taxes

Characteristics of LIFO

COGS are higher; Gross Profit lower; Lower taxes/higher cash flow; lower ending inventory; lower working capital; There is income manipulation (buying/selling) inventory on last day); Better matching of current selling prices with current costs

Minority passive income

equal to any interest earned from an investment plus any dividends received from the investment

Minority passive investment

valued at fair value at time of acquisition

Minority active income

(Net income x % owned) - (Depreciation/life x % owned)

Minority active investment

(Initial investment + Minority active income) - (Dividends x % owned)

When do we use shortcuts to forecast financial statements?

When there is stability in the firm, industry, and economy

ex. common size shortcut

What does the introductory phase use to balance their balance sheet?

Issuance of equity

What does the growth phase use to balance their balance sheet?

Issuance of debt

What does the maturity phase use to balance their balance sheet?

Generating excess cash through operation

What does the decline phase use to balance their balance sheet?

Generating excess cash through selling off assets

Variable costs

cost goes up or down proportionally to activity

Fixed costs

costs do not change with activity

ex. accounts receivable is significantly lower than a massive jump in sales

Mixed costs

Costs changes with activity but not proportionally

A firm with excess capacity..

Will not changes prices in the near future

Asset growth ___ future sales growth for PPE

leads

Asset growth ____ future sales growth for accounts receivable

lags

Days A/R outstanding → A/R Turnover

low→high

Days inventory held→ inventory turnover

low→high

Days A/P outstanding→ A/P turnover

high→low