Financial Accounting (Fach) / AppliedQ (Lektion)

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• Provide two specific potential adjustments necessary to CFO in order to ensure comparability with US firms. We neet to check whether  (1) interst and dividends received is classifies as investing activities, because IFRS offers flexibility as to report those either as investing OR operating activities. (2)  interst and dividends paid is classified as financing activities, because IFRS offers flexibility to report those either as investing OR operating activities. Under US GAAP, interest and dividends received and paid MUST be operating activities. 
• Why does XY subtract 200m EUR for "gains/losses" from disposal of noncurrent assets and securities? Because "gains/losses" is a non-cash item
• What was the overall change in cash and cash equivalents? From an investors point of view, are the cash flows favourable or unfavourable? From an investors point of view, they are generating enough Cash Flow to cover their operations and fund new investments.  Moreover, they continue to pay cash dividens to investors. Overall, we can argue that X is a mature company with fairly favourable CF movements. a) in the operating activities: Does negative CFO correspond with level of operating profit? Is the change in receivables justified by change in the sales level, or – perhaps it results from changes in the company’s situation leading to lengthen (there are difficulties in collecting accounts receivable) or shorten the credit period for customers? Is the change in inventories justified by the scale of business, or maybe there are – changes in inventory management policies, problems with selling the goods? Is the change in non-interest-bearing current liabilities justified by the scale of – business, or perhaps a company has problems with paying debts to suppliers?  b) in the investing activities: Are changes CFI received from the sale of assets used – in ongoing operations or from the sale of investment assets, and perhaps these are the returns from earlier investments (dividends, interest, repayment of loans, etc.)? How much cash does the company spend to develop business operations and – how much to buy investment assets? What are the sources of financing these activities? c) in the financing activities: What is the scale of debt financing? – Does the company use such sources of debt that are similar in nature to the – equity? For example, loans from owners (especially subordinated debt) are shown as debt but they are similar to the equity – they accept higher risk and are used to help in crisis situations. Are the debt repayments reconcilable with debt repayment schedule? – Does the company pay dividends regularly or is there only a one-time payment? – Does the company fund dividends from internal or external sources? Will the company be able to maintain paying dividends in the future?Nauki o Finansach 1(10_2012_Bogacka-Kisiel.indb 134 2012-04-02 12:10:30Analysis of cash flow statement 135From the answers to those questions, analysts can obtain information [Palepu, Bernard, Healy 2000, p. 340]: How strong is the firm’s internal cash flow generation? If the cash flow from – operation is negative, is it because the company is growing or unprofitable or is having problems with working capital management? Does the company have the ability to meet its short-term financial obligations – from its operating cash flow or should it reduce its operating potential
• Assuming all sales were on credit and receivables all relate to customers sales, how much did they collect from customers during 2014? Cash Collections = Sales + Increase in A/R 
• What are the two conditions they must satisfy in order to capitalize their development costs under IFRS? Under IFRS, X will be able to capitalize development statge RD cost if they  (1) prove commercial feability and  (2) prove technical feasibility
• Some have claimed that many of the intangible assets that drive the corporate values are not even to be found on the Balance Sheet. Why are these intangible assets not recognized in X financial statements? The majority of intangible assets are not recognized, because (1) it is too difficult to reliabily measure the asset value (seperable) (2) there is considerable doubt over the nature (and eventuality) of the future economic benefit For intangible assets that are acquired to be recognized, they must be Under the firm's control Identifiable  Provide future economic benefits
• What is the net effect of X non-operating transactions on inventories reported at year-end? from Balance Sheet (InventoryBB. - InventoryEB) - ΔInventory (from CFO) = Net effect of non-operating transactions
• X would like to know which leasing alternative will give the highest operating income in the short-term and which will result in the highest cumulative NI over the entire life of the lease - Operating lease will likely give the higher short-term NI, because capital lease includes depreciation and interest charges, which reduce over the life of the lease - Either option has the same cumulative impact on RE at the end of the lease term. 
• Provide 2 specific differences between the current lease classification criteria used under IFRS vs US GAAP IFRS does not have a defined threshold as part of their classification tests, i.e. 75% of useful like or 90% of Fair Value of asset as in Gaap vs. .... in iFRS IFRS has an additional classification rule: The leased assets are of such a specialised nature that only the lessee can use them without major modifications.
• Goodwill is defined as The unrecorded assers of an acquired company that are obtained when one business is purchased by another The Difference between the FV of Net Assets and the PP Arises as a result of a business combination -> it can only be acquired
• Effect of R&D Directly reduces Net Income Reduces Bottom Line Earnings, potential Dividends Expenditure that may lead to productive Innovation, which will lead to growth and Payoff in the Future 
• Over how many year do they depreciate? (Estimate!) Additions on Accumulated Depreciation = Depreciation Additions from Period / Accum. Depreciation BB
• Provide the specific entry that X would have recorded for the additions to their machinery and technical equipment during 2014. Assuming that all additions were paid in Cash. Dr PPE Cr Cash
• Capital Lease of an 8% Lease with a down payment of 12m. At the end, the asset can be sold for 5mn at the end of the useful life. Straight-line depreciation and 9 year useful life can be assumed. Lease Liability = PV of lease payments = Payment * A  Asset Value = Lease Liability + Down Payment Dr PPE Cr Lease Liability Cr Cash
• What is the total amount received from Shareholders? Capital Surplus + Subscribed Capital
• Suppose that Firm X bougt back 5 mn shared and retired them immediately. They purchased these shares at 4.9¤, which is the same amount that the shared were originally issued for. Note that par value was 1¤. Record the transaction Dr Share Capital € 5 mn Dr Share Premium € 19.5 mn Cr Cash € 24.5 mn
• State 2 reasons why companies would buy back their own shared Return Cash to Shareholders without timpacting Dividend policy Buy-Back shared to re-issue as part of employee share-based compensation schemes Signal to market that the firm's shared are undervalued 
• Discuss the impacts of a debt issue on the net impact and statement of cash flows. They would recognize interest expense at the market rate while paying the coupon payment at the coupon rate. appearing as  interest paid in Operating Activities
• Some analysts have stated that a bulk of intangible assets that derive Corporate Value are not even to be found on the Balance Sheet. Provide a brief explanation why that may be possible. Most intangible assets are not revognized, because It is too difficult to relaibly measure the asset value. Considerable doubt over nature (eventuality) of future economic benefits
• Define Brands Brands are  intangible long-term assets that represent the future benefits from legally protected product or place names and the associated recognizable marks that represent the product Brand Value is estimated when they are acquired and is tested for impairment periodically Brands are reported as 2goodwill and intangible assets" report only when they arise from an acquisition
• Calculate the D/E Ration before and after you adjust the balance sheet as if their operating leases were brought on balance sheet. Assume a Present Value Factor to apply to the undiscounted future lease payments is 29.82% The PV of Operating Lease payments would be 29.92% * minimum required payments in future If they would be brought on balance sheet, there would be a lease libaility and a lease asset. 
• Assume that in the past, X had repurchased 16m of its own shares for £64m and held them as treasury stock. What would be the journal entry to record the subsequent sale of those shares for £50m Dr Cash (A) 50 Dr Share premium/APIC (SE) 14 Cr Treasury stock (XSE) 64  --> “loss” on sale is recorded as a reduction directly in equity, not through the income statement  if there is no balance in share premium, could debit retained earnings instead of share premium. 
• Calculation of Firms FCF Shortcut method: CFO - Capex gives 110m Long method: EBIT - Tax + Depreciation -  Capex - Inc in WC (CFO)
• Why does X adjust the cash from operations section by +111m for depreciation and amortization? The CFO section is prepared using the indirect method, where net income is reconciled to operating cash flows by adding back non- cash expenses, such as depreciation and amortization. 
• How much have they collected from customers? Cash Collected = Revenue + Deferred Revenue - Increase in Receivables (Non-Cash Revenue) 
• What is the largest deferred tax liability that X reports, how did it arise, when might it be realised as a cash outflow? The largest deferred tax liability is “Property, plant and equipment”  most likely due to X using accelerated depreciation for tax reporting compared to financial reporting,with a resulting reduction in taxes paid initially. In the future, tax depreciation on these assets will be lower, X will have higher taxable income, and the taxes will be paid in the future. 
• What are the main sources of funding ? Funding comes from either debt or equity.  1. Issued capital (which the changes in equity statement appears to be largely retained earnings) 2. Interest-bearing loans and borrowings 1,003m Long term + 4m short term. 
• X would like to build a new rollercoaster at their theme park, financing the construction with a loan. How will they record expenditures related to the development of this new ride, and what expenditures should be expensed or capitalised? This is a constructed long term asset. They may capitalize all the needed costs associated with construction: design, labour, materials, reasonable overhead, as well as the interest on the construction loan, while the ride is under development. 
• What are the amounts X records for both the gross and net balance of “Plant and equipment”? Gross = Cost Net = Carrying Amount (Cost-Accumulated Depreciation)
• What is your estimate of the average age of plant and equipment? Accumulated Depreciation / Gross PPE
• The following information is provided for Bold Company for the year 2017: • Preferred stock, 6%, ¤50 par value, 1,000 shares issued and outstanding • Common stock, ¤100 par value, 2,000 shares issued and outstanding • Dividends in arrears for three prior years (2014-2016) • Total dividends declared and paid in 2017 were ¤50,000. How much of the 2017 dividend payment was paid to the preferred stockholders assuming the preferred stock is cumulative? The preferred stock annual dividend = €3,000 = Preferred stock number of shares x par value per share × dividend rate of 6% of par value = 1,000 × €50 × 6%. The dividend payment to the preferred stockholders in 2017 includes 3 years in arrears (2014-2016) plus the current year dividend = 4 years × €3,000 per year = €12,000. 
• What happens if we fail to report a gain or loss on disposal of a long-lived asset? Failure to record a gain on the sale of an asset understates net income, which understates retained earnings. Understated retained earnings results in understated stockholders' equity. 
• Where are Bond transaction involving a CF reported? Bond transactions involving a cash flow are reported within the cash flow from financing activities section of a cash flow statement. 
• A company was holding 5,000 shares of its $5 par value common stock in the Treasury. The stock had been bought-back by the company three years ago for $22 per share. Yesterday, the company sold 2,500 shares of the Treasury stock for $16 per share. Noting that the balance in the Share Premium account was $10,000 before the re-sale of the Treasury shares, what resulted? Decrease in Retained Earningy by the Loss Sell for loss of 2,500*6 = 15,000. We reduce share premium by 10,000 therefore the remaining balance of 5,000 is recognized against retained earnings. 
• Calculation Goodwill Goodwill = Consideration - Fair Value  Fair Value of all assets - brands, assets, etc. 
• What is the depreciation expense related to a capital leased asset that the company will recognize in their Income Statement for the year ended December 31, 2015? Asset Value =   down-payment + PV of future lease payments: 100,000 + 120,000*3.605 = £532,600 Depreciation expense is therefore: (£532,600 – 20,000) / 6 = £85,433.33
• What is the net effect of Xs non-operating transactions on Inventories reported at the end of 2014? Change in Inventories from CFO - Change in Inventories as per Balance Sheet = Non-Operating Transactions
• Cash paid to suppliers: COGS + change in inventory – change in A/P 
• Provide 2 potential transactions that may give rise to a DTA, and justify your answer. Deferred tax assets arise from transactions that increase the taxable income relative to income tax expense for the year. (1) Deferred revenue (taxed but not including in accounting income) (2) Creation of provisions (3) Losses carried forward 
• GSK purchased property, plant and equipment in 2014. How much of the purchase of property and equipment in 2014 was non-cash? Additions to PPE (Footnote) – cash paid per SCF = non-cash additions 
• Compute the new annual depreciation amount on this machine after the improvement. Compute book value just before improvement: Then add cost of improvement to get new cost base New depreciation is then (BV + Improvement Cost - SV) / 10 (remaining) years
• What is the effective (“market”) interest rate in each of the two financing arrangements? Option 1 (manufacturer direct):Cash Price  = $down payment + [Instlment x (P/A, 8, ?%)]  ---> Look up Annuity Interest rate = 10% Option 2 (Bank financing):Cash Price = £Payments x (P/A, 7, ?%) --> Look up Annuity Interest rate = 11%  Option 1 – because 10% < 11%, this option has the lower implicit market rate (i.e. cheaper) 
• X comes to you for advice and ask which alternative: operating or financing will provide the highest net income in the short-run, and which alternative will provide the highest cash flow from operations in the short-run. Net income: Operating leases, because capital leases have greatest income statement impact initially – with high interest allocation and depreciation that is greater than the stable operating lease rental payments. CFO: Capital leases because the liability reduction doesn’t flow through CFO, but rather in CFF 
• Mention two reasons why companies may buy-back their own shares Return cash to shareholders without impacting dividend policy  Buy-back shares to re-issue as part of employee share-based compensation schemes  Signal to market that the firm’s shares are undervalued 
• Journal Entry for Retirement of Shares Dr Share Capital Dr Share Premium Cr Cash
• Journal Entry for Bond Payments First, we need to compute the amount of the bond payable at the time of issue, i.e. what is the issue price: Calculate Bond Price 1. Beginning Bond payable balance is   2. Interest Expense for the year ---> Create Table with Opening Bal * market rate as Interest Expense  Total = Sum Interest expense for the year = 25,141,500 + 25,048,575 = £50,190,075  ---> Interest Payments to Financing Section of CFO

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