F2: M6-M8 Far CPA

Fair Value

The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the principle/ most advantageous market at measurement date under current market conditions

• “Exit Price”

• May include transportation costs, but does NOT include transaction costs

Exit Price

Price to sell an asset or transfer a liability

• Fair Value

Principal Market

Market with the greatest volume or level of activity for the asset or liability

• Price in market will be the Fair Value Measurement

• Company must have access to market

Most Advantageous Market

The market with the best price for the asset (Maximizes selling price of the asset) or liability (Minimizes payment to transfer liability), after considering transaction costs

• Used if there’s no Principal Market

• Maximizes NRV: SP - Transaction Cost

  • Only use Transaction Costs to determine market

Market Approach

Uses prices and other relevant information from the market transactions involving identical or comparable assets or liabilities to measure fair value

Income Approach

Converts future amounts, including cash flows or earnings, to a single discounted amount to measure fair value

• Asset must produce income

Cost Approach

Uses current replacement cost to measure the fair value of assets

Fair Value Hierarchy

Prioritizes the inputs that can be used in the valuation techniques

• Level 1 inputs have the highest priority, and Level 3 inputs have the lowest priority

Level 1 Inputs

Quoted prices in active markets for identical assets and liabilities that the reporting entity has access to on the measurement date

• Observable, active, and identical

• Most reliable

Level 2 Inputs

Inputs other than quoted market prices (Level 1) that are directly or indirectly observable for the asset or liability

• Observable, quoted

• Includes:

  1. Quoted prices for similar assets/ liabilities in active markets

  2. Quoted prices for identical or similar assets in markets that are not active

Level 3 Inputs

Unobservable inputs for the asset or liability; reflects the reporting entity’s assumptions and should be based on the best available information

• Must minimize use because’ it’s biased and least reliable

Special Purpose Frameworks (OCBOA)

Non-GAAP presentations that have widespread understanding and include:

1. Cash basis and modified basis of accounting

2. Tax basis of accounting

3. Regulatory basis of accouting

Cash Basis

Special purpose framework where revenues are recognized when cash is received and expenses are recognized when cash is paid

• Includes:

1. Statement of Cash and Equity

2. Statement of Cash Receipts and Disbursements (Similar to Accrual Based Income Statement)

NO Liabilities!

Modified Cash Basis

A hybrid method that includes elements of both cash basis and accrual basis accounting

• Used by most for-profit and non-profit companies that produce cash basis financial statements

• Include:

  1. Statement of Cash and Equity

  2. Statement of Assets and Liabilities

  3. Statement of Revenues and Expenses and RE

Income Tax Basis

Special purpose framework that is prepared based on the methods and principles used to prepare an entity’s tax return

• Include:

• Statements of Assets and Liabilities and Equity

• Statement of Revenues and Expenses and RE

Ratio

Financial indicators that distill relevant information from the financial statements

• Allow comparison with prior periods or with competitors/ industry

• Limitation:

  • Heavily depend on the reliability of the data

Horizontal Analysis

Measures the dollar and percentage change over a period of time, which helps to evaluate trends and material changes

• Look at target company relative to a base year

Vertical Analysis

Reduces statement items to a common size, as all elements are expressed as a percentage of common number

• Helps with period-to-period comparison, and allows for comparability among. other entities as the statement is in a common size format

• More meaningful comparisons of different size companies

Profitability Ratio

Measures of success or failure of an enterprise for a given time period

Liquidity Ratio

Measures of a firm’s short-term ability to pay maturing obligations

• Short-term risk

• Coverage Ratio

Solvency Ratios

Measures of security or protection for long-term creditors/ investors

• Long term risk that looks at your capital structure

Performance Metrics

Measures used to evaluate operating performance and elements of a company’s stock performance from the perspective of current and potential investors

Looks at core business performance

Variance Analysis

Too for comparing some measure of performance to a plan, budget, or standard for that measure

Contribution Margin

Money you have available to cover fixed costs; helps determine breakeven point

• CM = Sales - Variable Costs

Budget Variance Analysis

Reviews of flexible budget comparisons which allows manager sot identify how an individual change in a cost/ revenue driver affects the overall cost of a process