1.

Book Value VS Fair Value

Fair value is the current price for which an asset could be sold on the open market. Book value is the actual price paid for the same asset. These two prices do not usually match. Book Value The book value of an asset equals the price that you paid minus any depreciation in value of the asset. Book value either stays the same or falls. Fair Value The current price on the open market rises and falls depending on several factors that have nothing to do with the book value of your asset. It can increase or decrease after you buy the asset. The Difference The difference between the book value and fair value is a potential profit or loss. There is no way to know which you will have until you sell the asset. Function Fair value is used to figure replacement cost. Book value isn't used when replacing assets or figuring the amount of insurance needed on your current assets, as replacing an asset involves buying it at market price. Measurement The fair value indicates whether your asset is priced too high or too low. You should know the fair value or market value if you are trying to sell your asset. The difference between net income and comprehensive income is known as other comprehensive income. Other comprehensive income includes unrealized gains and losses on certain investments in securities, foreign currency items, and certain pension liability adjustments. Net income is reported on the income statement and is included in the retained earnings section of stockholders equity. Other comprehensive income items are not reported on the income statement, and are included in the accumulated other comprehensive income section of stockholders equity.

1. comprehensive income and other comprehensive income

A security, whose price is dependent upon or derived from one or more underlying assets. The derivative itself is merely a contract between two or more parties. Its value is determined by fluctuations in the underlying asset. The most common underlying assets include stocks, bonds, commodities, currencies, interest rates and market indexes. Most derivatives are characterized by high leverage.

2. Derivative

3. GAAP and IFRS

U.S. GAAP Treatment No required income statement captions, and either

IFRS Treatment Minimum captions in income statement are prescribed under IFRS

single-step or multiple-step format can be used Little specific guidance as to form, but ex-penses are to be classed by function (e.g., cost of sales, administrative, etc.) Extraordinary items classification permitted under limited circumstances, with net-of-tax presentation, and unusual items can also be segregated within operating income (but not tax effected); will be revised to mirror IFRS Estimated operating results of a discontinuing operation are included in the measurement for the expected gain or loss on disposal; timing of segregation of discontinuing operations from continuing operations may differ from that under IFRS; direct continuing cash flows or involvement in operations preclude discontinuing operations display Broader definition of discontinued operations than under IFRS, either a reportable business or geographical segment, or reporting unit, subsidy, or asset group Restructuring costs recognized when there is little discretion to avoid costs; most costs recognized when later incurred Other comprehensive income items can be presented in separate statement, combined with income statement, or in changes in stockholders equity statement CI below net income ( with a statement of comprehensive income, Or in a statement of changes in stockholders equity) Joint financial reporting project with IASB in progress, which may require inclusion of changes in other comprehensive income in income statements Cash Flow Statement. (Book 3, page 102) Expenses can be classed by function or nature (e.g., salaries, cost of goods sold, etc.)

Extraordinary classification is banned, but unusual items can be segregated

Actual operating results of a discontinuing operation are reported as incurred; timing of recognition of gain or loss in discontinuance and income or loss from activities of the dis-continuing operation may differ from US GAAP

Narrow definition of discontinued operations as being reportable business or geographical segment or major component

Restructuring costs recognized when an-nounced or commenced, which is earlier than under US GAAP

Other comprehensive income items are presented in a separate statement of comprehensive income, and can not be relegated to statement of changes in equity Include expense and revenue in comprehensive income statement Present separate IS and CIS Joint project with FASB; decision to require single statements of recognized income and expense, replacing two separate statements under current IFRS Interest and dividends received; Interest and dividends paid Under operating activities or financing activities.

Tax paid as the operating activities. Cash Flow presentation: Direct method needs the reconciliation of the adjustments of net income to the cash flow for operating activities; Interest and tax could be in the body of the statement or the footnote FIFO and LIFO

A tax paid is considered the function of the used cash. Net flow No need for this kind of reconciliation

Interest and tax must be in the body of the statement Allocate the inventory cost : Specific identification; (each unit sold is matched with the units actual cost, not interchangeable) FIFO; Weighted average cost. Write down and write up We need the NRV or cost, see which one is lower

At the lower of cost or market, And the replacement cost is between the NRV and NRV less the normal profit margin, no write-up is allowed only write-down Component depreciation used seldom.

Requires firms to depreciate the components of an asset separately, thereby requiring useful life estimates for each component. Expect to the depreciated cost, it has another way to have the fair value for the long-lived asset, which is revaluation model, but it is used less times.

Most long-lived assets are recorded at the depreciated cost Impairment

Both tangible and intangible long-lived assets with finite lives that are held for use.
It is tested for impairment for the condition of may not be reaching the carrying value for the future use. 1, recoverability test 2,measure the loss Loss recovery is not allowed. Annually assess whether events or circumstances indicate an impairment of an assets value has occurred. If impaired, Asset value = recoverable value in the balance sheet Impairment= BV- recoverable value= income statement Loss could be reversed But the loss reversal is limited by the original impairment loss. Impairment for the asset held to sale Both could be reversed. Recognition Assets are sold, exchanged, or abandoned. Disclosures P211

4. Minimum pension liability

The liability that represents the amount by which an organization's accumulated pension benefits exceeds the fair market value of its pension plan assets. The calculation is considered the minimum liability because it calculates benefits using current rather than projected future salaries that are likely to be higher.

5.
Footnote Noncash transaction Inventory disclosures, to evaluate the firms inventory management Supplemental schedule Noncash transaction

6.

Cash flow ratio for the performance ratio and coverage ratio. Sometimes we use it to detect the business strategies applied by the firm. Cf to revenue = cfo/net revenue Measures the amount of operating cash flow generated from each dollar of revenue. Cash return on assets =CFO/ average total assets Attributed to all providers of capital Cash return on equity =CFO/ average total equity Attributed to shareholders Cash to income =CFO/operating income

7.

The ability to generate cash from firm operations CF per share =(CFO-preferred dividends)/weighted A variation of basic earnings per share average number of common shares measured by using CFO instead of net income CF to earning index =CFO/net income 6 Debt coverage =CFO/total debt Financial risk and leverage Interest coverage =(CFO+interest paid +taxes paid)/interest Ability to meet its interest obligations paid Reinvestment =CFO/cash paid for long-term assets Acquire long-term assets with operating cash flow Debt payment =CFO/cash long-term debt payment Satisfy long-term debt with operating cash flow Dividend payment =CFO/dividend paid Make dividend payments Investing and financing =CFO/ cash outflows from investing and Purchases assets, satisfy debts, and pay financing activities dividends 7 Financial Ratio Gross profit margin, Operating profit margin, And net profit margin is all in the common-size income statement which is useful in studying the trends in costs and profit margins. Financial leverage we also use the long-term debt to total assets Liquidity and solvency ratios are the pure Liquidity is for the short term obligation; balance sheet ratio, because the numerator and Solvency is for the long term obligation. denominator are from the balance sheet. Liquidity If less than 1, means the negative working Current ratio = CA/CL capital, may be facing a liquidity crisis. Quick ratio = (cash + marketable securities +receivables)/CL Cash ratio = (cash+MS)/CL Solvency Long-term debt to equity = total LT D/TE D to E=td/te Total debt ratio=td/ta Financial leverage=ta/te Profitability The extent to which assets are financed by creditors. Used as a component of the DuPont model. How good management is at turning their efforts It excludes the inventory and less liquid CA.

Higher value higher leverage higher risk

Gross profit margin, Pre-tax margin Financial ratio into find different classifications 1, activity 2, liquidity 3, solvency 4, profitability 5, valuation

into profits. Increased by raising sales prices or lowering perunit cost.

receivables turnover=annual sales/average receivables days of sales outstanding = 365/receivables turnover

high-much capital tied up to assets

low-rigorous credit policy, hampering sales

inventory turnover=cost of goods sold/average inventory

efficiency

high-much capital is tied up to inventory financial ratio activity ( asset utilization or turnover ratios) solvency (financial leverage and longterm obligations) profitability (operating profits and net income profits from sales) valuation (sales per share, earnings per share, price to cash flow per share) days of inventory on hand = 365/ inventory turnover low-inadequate stock, hurt sales payable turnover

liquidity (pay cash expense)

number of days of payables high-too few assets for potential sales, assets are outdated total assets turnover low-tied up in its asset base fixed asset turnover