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3 Financial Statement Analysis
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2024cpa会计科目第17章，本章属于非常重要的章节，其内容知识点多、综合性强，可以各种题型进行考核。既可以单独进行考核客观题和主观题，也可以与前期差错更正、资产负债表日后事项等内容相结合在主观题中进行考核。2018年、2020年、2021年、2022年均在主观题中进行考核，近几年平均分值 11分左右。
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2024cpa会计科目第十二章，本章内容可以各种题型进行考核。客观题主要考核或有资产和或有负债的相关概念、亏损合同的处理原则、预计负债最佳估计数的确定、与产品质量保证相关的预计负债的确认、与重组有关的直接支出的判断等;同时，本章内容(如:未决诉讼)可与资产负债表日后事项、差错更正等内容相结合、产品质量保证与收入相结合在主观题中进行考核。近几年考试平均分值为2分左右。
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2024cpa会计科目第十一章，本章属于比较重要的章节，考试时多以单选题和多选题等客观题形式进行考核，也可以与应付债券(包括可转换公司债券)、外币业务等相关知识结合在主观题中进行考核。重点掌握借款费用的范围、资本化的条件及借款费用资本化金额的计量，近几年考试分值为3分左右。
3 Financial Statement Analysis
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- 2024cpa会计科目第17章收入、费用和利润
2024cpa会计科目第17章，本章属于非常重要的章节，其内容知识点多、综合性强，可以各种题型进行考核。既可以单独进行考核客观题和主观题，也可以与前期差错更正、资产负债表日后事项等内容相结合在主观题中进行考核。2018年、2020年、2021年、2022年均在主观题中进行考核，近几年平均分值 11分左右。
- 2024cpa会计科目第十二章或有事项
2024cpa会计科目第十二章，本章内容可以各种题型进行考核。客观题主要考核或有资产和或有负债的相关概念、亏损合同的处理原则、预计负债最佳估计数的确定、与产品质量保证相关的预计负债的确认、与重组有关的直接支出的判断等;同时，本章内容(如:未决诉讼)可与资产负债表日后事项、差错更正等内容相结合、产品质量保证与收入相结合在主观题中进行考核。近几年考试平均分值为2分左右。
- 2024cpa会计科目第十一章借款费用
2024cpa会计科目第十一章，本章属于比较重要的章节，考试时多以单选题和多选题等客观题形式进行考核，也可以与应付债券(包括可转换公司债券)、外币业务等相关知识结合在主观题中进行考核。重点掌握借款费用的范围、资本化的条件及借款费用资本化金额的计量，近几年考试分值为3分左右。
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Financial Statement Analysis
绪论
Introduction
Roles of Financial Reporting and Financial Statement Analysis
Role of financial reporting: provide information about a company's performance, financial position, and changes in financial position for users
Role of financial statement analysis: use financial reports and other information to evaluate the past, current, and potential performance and financial position of a company to make economic decisions
Primary Financial Statements and other framework
Complete set of financial statements
Statement of financial position (i.e., a balance sheet,B/S)
公式: Assets = Liabilities + Owners' equity
Statement of comprehensive income (i.e., a single statement of comprehensive income or an income statement and a statement of comprehensive income)
Revenue + Other income –Expenses = Income – Expenses = Net income
CI(comprehehsive income)=NI(Net income)+OCI(other comprehehsive income)
Statement of changes in equity
实收资本(Paid- in capital)
留存收益(Retained earnings)
Statement of cash flows
Operating: day- to- day operations of the company
Investing: long- term assets, such as property and equipment
Financing: obtaining or repaying capital to be used in the business
Accompanying notes or footnotes to the financial statements
The basis of preparation for the financial statements
Information about the accounting policies, methods, and estimates
资产负债表是存量，其他是流量
Additional information
Management discussion and analysis [MD&A]
External auditor's report
Introductory
Scope
Opinion
Unqualified audit opinion
Qualified audit opinion
Adverse audit opinion
Disclaimer of opinion
Governance report
Corporate responsibility report
Other sources of information
Proxy statements
Interim reports (semiannually or quarterly,unaudited)
Press releases
External sources (the economy, the industry, the company, and peer (comparable) companies
Financial Statement Analysis Framework
Articulate the Purpose and Context of Analysis（表达分析目的与背景）
Collect Data（搜集数据）
Process Data（加工数据）
Analyze/Interpret the Processed Data（分析/解释加工后的数据）
Develop and Communicate Conclusions/ Recommendations（沟通结论或推荐）
Follow- Up（跟进）
Finalcial reporting standards
Objective of Financial Reporting
Provide financial information about the reporting entity
Standard- Setting Bodies and Regulatory Authorities
Standard- setting bodies
International Accounting Standards Board(IASB)
IFRS
Financial Accounting Standards Board(FASB)
US GAAP(generally accepted accounting principles)
Regulatory authorities
International Organization of Securities Commissions (IOSCO)
US SEC (the Securities and Exchange Commission).
Objectives
Protecting investors
Ensuring that markets are fair, efficient, and transparent
Reducing systemic risk
International Financial Reporting Standards(IFRS) Framework
Qualitative characteristics of financial reports
Fundamental characteristics
Relevance
Materiality
Faithful representation
Complete
Neutral
Free form error
Enhancing characteristics
Comparability
Verifiability
Timeliness
Understandability
Constraints on financial reports
Tradeoffs are necessary
Benefits derived from information should exceed the costs of providing and using it
Balance between costs and benefits
Elements
Financial position
Assets
Liabilities
Equity
Performance
Income
Expenses
Underlying assumptions
Accrual accounting(与cash basis区分)
Going concern
Measurement of financial statement elements
Historial cost
Amortized cost
Current cost(同一资产当前价格)
Realizable(settlement) value: sell the asset in an orderly disposal
Present value
Fair value
General features and requirements
内容:四表+notes
Features
Fair presentation
Going concern
Accrual basis
Materiality and aggregation
No offsetting
Frequency: at least annunally
Comparative information
Structure and content requirements
Classified B/S: distinguish between current and non-current assets
Minimum information
On the face of financial statements
In the notes
Comparative information
Comparison of IFRS with Alternative Reporting Systems
Differences between IFRS and US GAAP
Monitoring Developments in Financial Reporting Standards
A company can reach about a new standard not yet implemented if the standard
Does not apply
Will have no material impact
Management is still evaluating the impact
The impact of adoption is discussed
总体财务分析
Understanding income statements(I/S)
Components and Format of the Income Statement
Revenue
Net revenue(adjusted for cash of volume discounts,etc.)
Net revenue=revenue-sales return&allowance
sales/turnover
Expense
group by nature: depreciation
group by function: cost of goods sold(COGS)
Net income(net earnings,profit or loss)
利润计算
毛利润（gross profit)=revenue - COGS
operating profit=gross profit - 销售、管理研发等费用(SG&A)
息税前利润(EBIT)= operating profit+ other income -other expense
税前利润(EBT)=EBIT-利息费用(interest expense
net income=EBT-所得税费用(income tax expense)
Format
Single-step
Multi-step
Revenue Recognition
Income increases in economic benefits in the form of
Inflows or enhancements of assets
Decreases of liabilities that result in increases in equity, other than those relating to contributions from equity participants
General principles
Can occur independently of cash movements
revenue is recognized when it is earned, meaning the risk and reward of ownership is transferred
Trade/accounts receivable
Unearned revenue
Accounting standards
Five steps
1.Identify the contract(s) with a customer
2.Identify the separate or distinct performance obligations in the contract
3.Determine the transaction price
4.Allocate the transaction price to the performance obligations in the contract
5.Recognize revenue when (or as) the entity satisfies a performance obligation
Factors to consider whether the customer has control of an asset
Entity has a present right to payment,
Customer has
Legal title
physical possession,
Significant risks and rewards of ownership
Accepted the asset.
特殊情况
Barter transaction
IFRS: Revenue must be based on fair value from similir non-barter transactions with unrelated parties
US GAAP: Revenue can be recoginzed at fair value only if the firm has historially transactions
Goss/net reporting
Expense Recognition
Matching principle
Period costs
计算方法
Specific identification method
FIFO
Weighted average
LIFO(只能在US GAAP下使用)
特殊情况
Doubtful accounts:
Companies make estimates based on previous experience of how much of the revenue will ultimately be uncollectible
Company records its estimate of uncollectible amounts as an expense (bad debt expense) on the income statement, not as a direct reduction of revenues
Warranties: Recognize an estimated warranty expense in the period of the sale, and to update the expense as indicated by experience over the life of the warranty
Depreciation and amortisation(long-lived assets)
Depreciation: tangible
Amortisation: intangible
Non- Recurring Items and Non- Operating Items
Discontinued operations: 利润表中以终止经营业务单独列出
Extraordinary items
IFRS prohibit classification of any income or expense items as"extraordinary"
US GAAP will no longer include the concept of extraordinary items after December 15, 2015
Unusual or infrequent items
IFRS: items of income or expense that are material and/or relevant to the understanding of the entity's financial performance
US GAAP: material items that are unusual or infrequent are shown as part of a company's continuing operations
disclosed separately
会计变更
Changes in ccounting policies
Retrospective application: the financial statements for all fiscal years shown in a company's financial report are presented as if the newly adopted accounting principle
Changes in accounting estimates
Prospectively; no adjustments are made to prior statements, and the adjustment is not shown on the face of the income statement but in the notes
A correction of an error for a prior period
Restating the financial statements for the prior periods presented in the current financial statements
Note disclosures are required regarding the error
Non-operating items
Reported separately from operating income
Under IFRS, there is no definition of operating activities
US GAAP: operating activities generally involve producing and delivering goods and providing services
Earnings Per Share(EPS)
Capital structure
Complex: a company has issued any financial instruments that are potentially convertible into common stock,for example,
Convertible bonds
Convertible preferred stock
Employee stock options
Warrants
Simple: a company’s capital structure does not include such potentially convertible financial instruments
basicEPS=diluted EPS
Basic EPS
公式
说明
Weighted average number of shares outstanding is a time weighting
Stock dividend/split
Stock split: a-for-b split表示有N股的人在分割后有N*a/b股
Diluted EPS
公式
时间加权
计算方法
可转换: If-converted
Effects
Convertible preferred securities would no longer be outstanding; instead, additional common stock would be outstanding. Thus, the weighted average number of shares outstanding would be higher
If such a conversion had taken place, the company would not have paid preferred dividends. Thus, the net income available to common shareholders would be higher
分子、分母同时增加，对diluted EPS影响不确定
假设所有优先股都转换
stock option/warrants: treasury stock method
if diluted EPS>basic EPS,use basic EPS
Analysis of the Income Statement
Common-size analysis
Financial ratios
Comprehensive Income
定义
IFRS: the change in equity during a period resulting from transaction and other events
US GAAP: the change in equity [net assets] of a business enterprise during a period from transactions and other events and circumstances from non- owner sources
除了向所有者出资或向其分配利润之外所有权益的所有变化
组成
Net income
Other comprehensive income(both IFRS and US GAAP)
Foreign currency translation adjustments.
Unrealized gains or losses on derivatives contracts accounted for as hedges
Unrealized holding gains and losses on available- for- sale securities
Certain costs of a company’s defined benefit post- retirement plans
Understanding balance sheets(B/S)
Components and Format of the Balance Sheet
Components
Assets(A)
Liabilities(L)
Equity(E)(net assets)
说明
The balance sheet under current accounting standards is a mixed model with respect to measurement
Even the items measured at current value reflect the value that was current at the end of the reporting period, the values of those items obviously can change after the balance sheet is prepared
The value of a company is a function of many factors. Important aspects of a company's ability to generate future cash flows are not included in its balance sheet
Current and non-current classification
Assets
Current: Within one year or one operating cycle
Non-current: greater than one
Liabilities
Currernt
Expected to be settled in the entity's normal operating cycle
Held primarily for the purpose of being traded
It is due to be settled within one year after the balance sheet date
The entity does not have an unconditional right to defer settlement of the liability for at least one year after the balance sheet date
Working capital: The excess of current assets over current liabilities
Non-current
Format
IFRS/US GAAP: Classified balance sheet--separately classified current and non- current assets and liabilities
IFRS: Liquidity-based presentation; all assets and liabilities are presented broadly in order of liquidity
Current
Current Assets
Cash and cash equivalents
特点: highly liquid, short-term,value changes significantly with interest rates
Financial assets, measured and reported at either amortized cost or fair value
Marketable securities
treasury bills, notes, bonds, and equity securities, such as common stocks and mutual fund shares
Trade receivables(accounts receivable)
Reported at net realizable value(NRV)
Bad debt expense
Allowance for doubtful accounts(contra account)
accounts receivable - allowance for doubtful accounts=NRV
Inventories
Cost of inventories
Purchase
Conversion
Other costs incurred in bringing the inventories to their present location and condition
Measure of cost
Standard cost
Retail method
IFRS: NRV
US GAAP: The lower of cost or market value
Other current assets
Prepaid expense: Paid in advance and will be recognized as an expense in future periods
Deferred tax liabilities
Current Liabilities
Trade payables(accounts payable) and notes payable
Any notes payable, loans payable, or other financial liabilities that are due within one year (or the operating cycle, whichever is longer) appear in the current liability section of the balance sheet
Any portions of long- term liabilities that are due within one year (i.e., the current portion of long- term liabilities) are also shown in the current liability section of the balance sheet
Accured expenses
Income taxes payable
Accrued interest payable
Accrued warranty costs
Accrued employee compensation(wages payable)
Deferred income(deferred revenue, unearned revenue): A company receives payment in advance of delivery of the goods and services associated with the payment
Non-current
Non-Current Assets
Property, plant and equipment(PPE)
IFRS:Cost or revaluation model
US GAAP: Only cost model
Investment property
定义
IFRS: property not used in the production of goods or services or for administrative purposes but to earn rental income or capital appreciation (or both)
US GAAP: no specific definition
计算(IFRS)
Cost model
Fair value model
A company must apply its chosen model to all of its investment property
Intangible assets
Example: patents, licenses, and trademarks.
计算
IFRS
Cost model
Revaluation model
US GAAP: only cost model
Goodwill
Financial assets
Held- to- maturity: measured at amortised cost if the asset's cash flows occur on specified dates and consist solely of principal and interest, and if the business model is to hold the asset to maturity
Unrealized gains or losses: not recoginsed
Available- for- sale
Measured at fair value
Any unrealized holding gains or losses recognized in other comprehensive income.
Held for trading (trading securities)
定义：financial assets that is acquired primarily for the purpose of selling in the near term
Measured at fair value, and any unrealized holding gains or losses are recognized as profit or loss on the income statement
Non-Current Liabilities
Long-term financial liabilities
Example: loans and notes or bonds payable
Reported at amortised cost on the balance sheet.
Deferred tax liabilities
Equity
Components
“三股”
Common stock
数量关系
The number of authorized shares
The number of issued shares
The number of outstanding shares: issued shares - treasury shares
Preferred shares
Treasury shares
A purchase of treasury shares reduces shareholders' equity by the amount of the acquisition cost and reduces the number of total shares outstanding
Non- voting and do not receive any dividends
“三益”
Retained earnings: cumulative amount of earnings recognized in the income statements which have not been paid to the owners of the company as dividends
Accumulated other comprehehsive income
Non-controlling(minority) interest: the equity interests of minority shareholders in the subsidiary companies that have been consolidated by the parent (controlling) company but that are not wholly owned by the parent company.
Statement of changes in equity
Total comprehensive income for the period;
The effects of any accounting changes that have been retrospectively applied to previous periods
Capital transactions with owners and distributions to owners
Reconciliation of the carrying amounts of each component of equity at the beginning and end of the year
Analysis of the Balance Sheet
Vertical common-size analysis
方法: stating each balance sheet item as a percentage of total assets
分类
Time-series analysis
Cross-sectional analysis
Balance sheet ratios
Liqudity ratios
Solvency ratios
Understanding cash flow statements(CF/S)
Components and Format of the Cash Flow Statement
Classification of cash flow and non-cash activities
Operating activities(CFO)
概念: The company’s day- to- day activities that create revenues, such as selling inventory and providing services, and other activities not classified as investing or financing
分类
Cash inflows
Cash sales
Collection of accounts receivable
Cash outflows
Cash payments for inventory, salaries, taxes, and other operating-related expenses
Paying accounts payable
Operating activities include cash receipts and payments related to trading securities (cash equivalents)
Investing activities(CFI)
定义: purchasing and selling long- term assets and other investments
分类
Cash inflows: cash receipts from the sale of non-trading securities; property, plant, and equipment; intangibles; and other long- term assets
Cash outflows: cash payments for the purchase of these assets.
关于long-term assets
范围
Property, plant, and equipment(PPE)
Other long- term assets
Both long- term and short- term investments in the equity and debt issued by other companies
Exclude
Any securities considered cash equivalents
Securities held for dealing or trading purposes
Financing activities(CFF)
定义: Obtaining or repaying capital, such as equity(shareholders) and long-term debt(creditors)
分类
Cash inflows
Cash receipts from issuing stock (common or preferred) or bonds
Cash receipts from borrowing
Cash outflows
Cash payments to repurchase stock (e.g., treasury stock)
Repay bonds and other borrowings
Indirect borrowing using accounts payable is not considered a financing activity—such borrowing is classified as an operating activity
Non-cash transaction: Not involve an inflow or outflow of cash,but is required to be disclosed, either in a separate note or a supplementary schedule to the cash flow statement
Differences between IFRS and US GAAP
比较
IFRS allow more flexibility
Interest and dividends received as either CFO or CFI
Interest and dividends paid as either CFO or CFF
US GAAP: 除了支付股息为CFF，其他均为CFO
Summary
Income tax expenses
Separately disclosed under IFRS and US GAAP.
US GAAP: CFO
IFRS: also CFO, unless the tax expense can be specifically identified with an investing or financing activity
Methods for reporting cash flow from operating activities(针对CFO,其他两个都是直接法)
Direct
It shows each cash inflow and outflow related to a company's cash receipts and disbursements.
Primary argument: provides information on the specific sources of operating cash receipts and payments
The additional information is useful in understanding historical performance and in predicting future operating cash flows
Indirect
特点
Shows how cash flow from operations can be obtained from reported net income as the result of a series of adjustments and begins with net income
Adjustments are made for non-cash items, for non-operating items, and for the net changes in operating accruals
Arguments
The main argument is that it shows the reasons for differences between net income and operating cash flows
Another argument is that it mirrors a forecasting approach that begins by forecasting future income and then derives cash flows by adjusting for changes in balance sheet accounts
The Cash Flow Statement: Linkages and Preparation
Linkages of the CF/S with the I/S and B/S
The beginning and ending balances are shown on the company's balance sheets and the bottom of the cash flow statement reconciles beginning cash with ending cash
Any differences between the accrual basis and the cash basis of accounting for an operating transaction result in an increase or decrease in some (usually) short-term asset or liability on the balance sheet
图解
Steps in preparing the cash flow statement
CFO
Direct method
Cash received from customers(cash collection)
ΔAccounts receivable = Ending accounts receivable -Beginning accounts receivable = revenue- cash collected from customers
Cash received from customers= Revenue – ΔAccounts receivable
Cash paid to suppliers
Δ Inventory = Ending inventory-Beginning inventory = purchases- cost of goods sold
ΔAccounts payable = Ending accounts payable -Beginning accounts payable = purchases- cash paid to suppliers
Cash paid to suppliers = Cost of goods sold + Δ Inventory – ΔAccounts payable
Cash paid to employees = Salary and wages expense - Δ Salary and wages payable
Cash paid for other operating expenses = Other operating expenses + Δ Prepaid expenses – Δ Other accrued liabilities
Cash paid for interest = Interest expense – Δ Interest payable
Cash paid for income taxes = Income tax expense – Δ Income tax payable
Indirect method
CFI
Historical cost of PPE sold =Beginning balance PPE (from balance sheet)+ PPE purchased (from informational note)- ending balance PPE (from balance sheet)
Accumulated depreciation on PPE sold =Beginning balance accumulated depreciation (from balance sheet)+ depreciation expense (from income statement)- ending balance accumulated depreciation (from balance sheet)
Cash received from sale of PPE =Historical cost of PPE sold- accumulated depreciation on PPE sold = book value of PPE sold+ gain on sale of equipment (from the income statement)
CFF
Change in long- term debt = net issuance or retirement
Change in common stock = net issuance or repurchase
Cash dividends paid =Beginning balance of retained earnings (from the balance sheet)+ net income (from the income statement)- ending balance of retained earnings (from the balance sheet)
Overall statement of cash flows
Direct
CFO: Cash received from customers
- Cash paid to
Suppliers
Employees
- Cash paid for
Other operating expenses
Interest
Income tax
= Net cash provided by operating activities
CFI: Net cash used for investing activities =Cash received from sale of equipment-Cash paid for purchase of equipment
CFF
Cash paid to retire long-term debt
Cash paid to retire common stock
Cash paid for dividends
Net cash used for financing activities
Indirect(CFO): Adjustments to net income(反向)
Additions
Non-cash items
• depreciation expense of tangible assets
• amortization expense of intangible assets
• depletion expense of natural resources
• amortization of bond discount
Non-operating items
• loss on sale or write-down of assets
• loss on retirement of debt
• loss on investments accounted for under the equity method
Increase in deferred income tax liability
Changes in working capital
Decrease in current operating assets (e.g., accounts receivable,inventory, and prepaid expenses)
Increase in current operating liabilities (e.g., accounts payable and accrued expense liabilities)
Subtractions
Non-cash items (e.g., amortisation of bond premium)
Non-operating items
• Gain on sale of assets
• Gain on retirement of debt
• Income on investments accounted for under the equity method
Decrease in deferred income tax liability
Changes in working capital
Increase in current operating assets (e.g., accounts receivable, inventory, and prepaid expenses)
Decrease in current operating liabilities (e.g., accounts payable and accrued expense liabilities)
Conversion of cash flows from the indirect to the direct method（CFO)
Disaggregating net income into total revenues and total expenses
Remove any non-operating and non-cash items
Convert accrual amounts of revenues and expenses to cash flow amounts of receipts and payments by adjusting for changes in working capital accounts
Cash Flow Statement Analysis
Evaluation of the sources and uses of cash
Where the major sources and uses of cash flow are between operating, investing, and financing activities
The primary determinants of operating cash flow,investing cash flow, and financing cash flow
Common-size analysis
To express each line item of cash inflow (outflow) as a percentage of total inflows (outflows) of cash
To express each line item as a percentage of net revenue
Free cash flow to the firm and to equity
FCFF
定义: the cash flow available to the company's suppliers of debt and equity capital after all operating expenses (including income taxes) have been paid and necessary investments in working capital and fixed capital have been made
计算
FCFF = NI(Net income)+ NCC(Non-cash charges) + Int(Interest expense)*(1 – Tax rate) – FCInv(Capital expenditures) – WCInv(Working capital expenditures)
FCFF = CFO(cash flow from operating activities) + Int(1 – Tax rate) – FCInv
FCFE
定义: the cash flow available to the company's common stockholders after all operating expenses and borrowing costs (principal and interest) have been paid and necessary investments in working capital and fixed capital have been made
计算
FCFE = CFO – FCInv + Net borrowing
FCFE = CFO – FCInv – Net debt repayment
Cash flow ratios
Cash flow performance (profitability) ratios
Cash flow coverage (solvency) ratios
Financial analysis techniques
Analytical Tools and Techniques
Common- Size Analysis
Cross-sectional analysis: compares a specific metric for one company with the same metric for another company or group of companies
Trend analysis
Ratios
概念: one quantity in relation to another (usually as a quotient)
注意
The ratio is an indicator of some aspect of a company's performance, telling what happened but not why it happened
Differences in accounting policies can distort ratios, and a meaningful comparison should involve adjustments to the financial data
Not all ratios are necessarily relevant to a particular analysis
The ratio analysis does not stop with computation; interpretation of the result is essential
Common Ratios Used in Financial Analysis
Activity ratios
Description: measure how efficiently a company performs day-to-day tasks, and is also called asset utilization ratios or operating efficiency ratios
计算
对主要指标评价
Inventory turnover and DOH
A high inventory turnover ratio (low DOH)
Might indicate highly effective inventory management
Possibly indicate the company does not carry adequate inventory, so shortages could potentially hurt revenue
A low inventory turnover ratio (high DOH)
An indicator of slow-moving inventory, perhaps due to technological obsolescence or a change in fashion
Comparing the company's sales growth with the industry can offer insight
Receivables turnover and DSO
A relatively high receivables turnover ratio (low DSO)
Highly efficient credit and collection
The company's credit or collection policies are too stringent, suggesting the possibility of sales being lost to competitors offering more lenient terms
A relatively low receivables turnover ratio (high DSO)
Raise questions about the efficiency of the company's credit and collections procedures
Comparison of the company’s sales growth relative to the industry can help the analyst assess whether sales are being lost due to stringent credit policies
Payables turnover and the number of days of payables
A relatively high payables turnover ratio (low days payable)
The company is not making full use of available credit facilities
A company taking advantage of early payment discounts
An excessively low turnover ratio (high days payable)
A company hastrouble making payments on time
exploitation of lenient supplier terms
If liquidity ratios indicate that the company has sufficient cash and other short-termassets to pay obligations and yet the days payable ratio is relatively high, theanalyst would favor the lenient supplier credit and collection policies as an explanation
Working capital turnover: This ratio indicates how efficiently the company generates revenue with its working capital. A higher ratio indicates greater efficiency
Fixed asset turnover: This ratio measures how efficiently the company generates revenues from its investments in fixed assets. A higher ratio indicates more efficient use
Total asset turnover: This ratio measures the company’s overall ability to generate revenues with a given level of assets. A higher ratio indicates greater efficiency
Liquidity ratios
Description
Liquidity measures how quickly assets are converted into cash
Liquidity ratios measure the ability to pay off short-term obligations.
These liquidity ratios reflect a company's position at a point in time, and use data from the ending balance sheet rather than averages
计算
对指标评价
主要指标
Current ratio: expresses current assets in relation to current liabilities.
Quick ratio: includes only the more liquid current assets ( "quick assets") in relation to current liabilities
Cash ratio(最严格): normally represents a reliable measure of an entity’s liquidity in a crisis situation. Only highly marketable short-term investments and cash are included
其他
Defensive interval ratio
This ratio measures how long the company can continue to pay its expenses from its existing liquid assets without receiving any additional cash inflow
A higher defensive interval ratio indicates greater liquidity
Cash conversion cycle (net operating cycle): A shorter cash conversion cycle indicates greater liquidity, and a longer cash conversion cycle indicates lower liquidity
A higher ratio indicates a higher level of liquidity
Solvency ratios
Description
Solvency refers to a company's ability to fulfill its long-term debt obligations
Solvency ratios provide information regarding the relative amount of debt in the company's capital structure and the adequacy of earnings and cash flow to cover interest expenses and other fixed charges as they come due
计算
对主要指标评价
Debt or leverage ratios
Debt- to- assets ratio: measures the percentage of total assets financed with debt
Debt- to- capital ratio: measures the percentage of a company's capital represented by debt
Debt- to- equity ratio: measures the amount of debt capital relative to equity capital.
Financial leverage ratio: measures the amount of total assets supported for each one money unit of equity. A higher ratio means the company is more leveraged
A higher ratio indicates weaker solvency
Coverage ratios
Interest coverage: measures the number of times a company's EBIT could cover its interest payments
Fixed charge coverage: measures the number of times a company's earnings can cover the company's interest and lease payments
A higher ratio implies stronger solvency
Profitability ratios
Description
Profitability ratios measure the return earned by the company during a period
Return-on-sales profitability ratios express various subtotals on the income statement (e.g., gross profit, operating profit, net profit) as a percentage of revenue. Essentially, these ratios constitute part of a common-size income statement discussed earlier
Return on investment profitability ratios measure income relative to assets, equity or total capital employed by the company
计算
对主要指标评价
Gross profit margin: Higher gross profit margin indicates some combination of higher product pricing and lower product costs
Operating profit margin: An operating profit margin increasing faster than the gross profit margin can indicate improvements in controlling operating costs
Pretax margin: If pretax margin is increasing primarily as a result of increasing amount of nonoperating income, the analyst should evaluate whether the increase will continue
Net profit margin: The net income used in calculating net profit margin is adjusted for nonrecurring items to offer a better view of a company's potential future profitability.
ROA(return on assets): measures the return earned by a company on its assets. The higher the ratio, the more income is generated by a given level of assets
ROE(return on equity) measures the return earned by a company on its equity capital, including minority equity, preferred equity, and common equity
Integrated financial ratio analysis
概念: DuPont analysis, by the decomposition of ROE
方法
Two components
Three components
Five components
前三项乘积为销售净利率
Equity Analysis
Valuation ratios
计算
对主要指标评价
Price to earnings ratio (P/E ratio) is probably the most widely cited indicator in discussing the value of equity securities, which relates share price to the earnings per share (EPS)
Some analysts use other market multiples, such as price to book value (P/B) and price to cash flow (P/CF)
Dividends
可持续增长率
RR(retention rate)
Credit Analysis
Z-score
计算: Z = 1.2 × (Current assets – Current liabilities)/Total assets + 1.4 × (Retained earnings/Total assets) + 3.3 × (EBIT/Total assets) + 0.6 × (Market value of stock/Book value of liabilities) + 1.0 × (Sales/Total assets)
说明：In Altman's initial study, a Z-score of lower than 1.81 predicted failure
其他
Model Building and Forecasting
意义: The results of an analyst’s financial analysis, including commonsize and ratio analyses, are integral to this process, along with the judgment of the analysts
方法
Sensitivity analysis
Scenario analysis
Simulation
资产与负债分析
Inventories
Cost of Inventories
Capitalized Items
Costs of purchase
Purchase price
Import and tax-related duties
Transport, insurance during transport, handling
Other costs directly attributable to the acquisition of finished goods, materials, and services
Costs of conversion: costs directly related to the units produced, such as direct labor, and fixed and variable overhead costs
Other costs incurred in bringing the inventories to their present location and condition
Expensed Items
Abnormal costs incurred as a result of waste of materials, labor or other production conversion inputs
Storage costs (unless required as part of the production process)
All administrative overhead and selling costs.
Treated as expenses and recognised on the income statement
Inventory Valuation Methods
IFRS and US GAAP
Specific identification
The cost of sales and ending inventory reflect the actual costs incurred to purchase (or manufacture) the items specifically identified as sold and the items specifically identified as remaining in inventory
This method matches the physical flow of the specific items sold and remaining in inventory to their actual cost
First in, first out(FIFO)
假设: the oldest goods purchased (or manufactured) are sold first and the newest goods purchased (or manufactured) remain in ending inventory
Cost of sales reflects the cost of goods in beginning inventory plus the cost of items purchased (or manufactured) earliest in the accounting period
The value of ending inventory reflects the costs of goods purchased (or manufactured) more recently
Weighted average cost
The average cost of the goods available for sale (beginning inventory plus purchase, conversion, and other costs) during the accounting period to the units that are sold and to the units in ending inventory
The weighted average cost per unit is calculated as the total cost of the units available for sale divided by the total number of units available for sale in the period
Only US GAAP: Last in, first out(LIFO)
假设: the newest goods purchased (or manufactured) are sold first and the oldest goods purchased remain in ending inventory
Cost of sales reflects the cost of goods purchased (or manufactured) more recently, and the value of ending inventory reflects the cost of older goods
Inventory systems
Periodic Inventory Systems
Inventory values and costs of sales are determined at the end of an accounting period
The ending inventory amount is subtracted from the goods available for sale to arrive at the cost of sales
Perpetual Inventory Systems
Inventory values and cost of sales are continuously updated to reflect purchases and sales
The allocation of goods available for sale to cost of sales and ending inventory is the same if the inventory valuation method used is either specific identification or FIFO., but not true for the weighted average cost method or LIFO.
Comparison of different methods
In an environment of declining inventory unit costs and constant or increasing inventory quantities
FIFO (in comparison with weighted average cost or LIFO) will allocate a higher amount of the total cost of goods on the income statement and a lower amount to ending inventory on the balance sheet
A company's gross profit, operating profit, and income before taxes will be lower under FIFO
In an environment of rising inventory unit costs and constant or increasing inventory quantities
FIFO (in comparison with weighted average cost or LIFO) will allocate a lower amount of the total cost of goods on the income statement and a higher amount to ending inventory on the balance sheet
A company's gross profit, operating profit, and income before taxes will be higher under FIFO
The carrying amount of inventories under FIFO will more closely reflect current replacement values
The cost of sales under LIFO will more closely reflect current replacement value
The LIFO Method
Effects of LIFO Methods
The potential income tax savings are a benefit of using the LIFO method when inventory costs are increasing
Effect for financial statements
Income statement consequences of using the LIFO method include higher cost of sales, and lower gross profit, operating profit, income tax expense, and net income. The lower income tax paid will result in higher net cash flow from operating activities
The balance sheet consequences include lower ending inventory, working capital, total assets, retained earnings, and shareholders'equity
The lower income tax paid will result in higher net cash flow from operating activities
Some of the financial ratio effects are a lower current ratio, higher debt-to-equity ratios, and lower profitability ratios
LIFO reserve
LIFO reserve = FIFO inventory value - LIFO inventory value
COGS(FIFO) = COGS(LIFO) - ΔLIFO reserve
LIFO liquidations
定义: the number of units sold exceeds the number of units purchased or manufactured, the number of units in ending inventory is lower than the number of units in beginning inventory
产生原因
Rising inventory unit costs
The carrying amount of inventory: FIFO>LIFO
LIFO reserve may increase over time
The number of inventory units manufactured or purchased exceeds the number of units sold
LIFO reserve may increase as the result of the addition of new LIFO layers (the quantity of inventory units is increasing and each increase in quantity creates a new LIFO layer)
结果
Produce an inventory-related increase in gross profits
A decline in the LIFO reserve from the prior period may be indicative of LIFO liquidation
Inventory Adjustments (IFRS and US GAAP Requirements)
IFRS
Inventories shall be measured and carried on the balance sheet at the lower of cost and net realisable value(NRV)
NRV=selling price in the ordinary course of business - estimated costs necessary to make the sale - estimated costs to get the inventory in condition for sale
会计处理
Impairment
The inventory carrying amount must be written down to its NRV
The loss is recognised as an expense on the income statement, and the expense may be included as part of cost of sales or reported separately
Reversal
Reversal is not more than the amount of the original write-down
The reversal of any write-down of inventories is recognised as a reduction in cost of sales
US GAAP
Inventories shall be measured at the lower of cost or market to value inventories
Prohibit the reversal of write-downs. Any write-down reduces the value of the inventory, and the loss in value (expense) is generally reflected in the income statement in cost of goods sold
影响
Reduces both profit and the carrying amount of inventory on the balance sheet
Negative effect on profitability, liquidity, and solvency ratios
Activity ratios will be positively affected.
US GAAP is similar to IFRS in its treatment of inventories of agricultural and forest products and mineral ores. These inventories may be measured at net realisable value according to well-established industry practices
Evaluation of Inventory Management
Presentation and Disclosure
IFRS
a. the accounting policies adopted in measuring inventories, including the cost formula (inventory valuation method) used
b. the total carrying amount of inventories and the carrying amount in classifications appropriate to the entity
c. the carrying amount of inventories carried at fair value less costs to sell
d. the amount of inventories recognised as an expense during the period (cost of sales)
e. the amount of any write-down of inventories recognised as an expense in the period
f. the amount of any reversal of any write-down that is recognised as a reduction in cost of sales in the period
g. the circumstances or events that led to the reversal of a write-down of inventories
h.the carrying amount of inventories pledged as security for liabilities
US GAAP
除了f和g, 其他和IFRS相同
US GAAP also require disclosure of significant estimates applicable to inventories and of any material amount of income resulting from the liquidation of LIFO inventory
Inventory Ratios
Inventory turnover ratio
Days of inventory on hand(DOH)
Financial Analysis Illustrations
A significant increase (attributable to increases in unit volume rather than increases in unit cost) in raw materials and/or work- in- progress inventories
The company expects an increase in demand for its products
An anticipated increase in sales and profit
A substantial increase in finished goods inventories while raw materials and work- in- progress inventories are declining
A decrease in demand for the company's products and hence lower future sales and profit.
A potential future write down of finished goods inventory
Long-lived assets
Acquisition of Long- Lived Assets
Property, Plant, and Equipment
成本计算
Capitalised
定义: All the expenditures necessary to get the asset ready for its intended use
特点: on the balance sheet; provide benefits beyond one year in the future
实例
Expenditures that extend the original life of the asset
Purchase cost
Feight costs, insurance and installation
Testing costs
The borrowing(interest) costs incurred directly related to the construction of an asset (or acquires an asset that requires a long period of time to get ready for its intended use)
Interest expenditure
For the company's own use: on the balance sheet as a part of the relevant long-lived asset (i.e., property, plant, and equipment)
Sell: on the company's balance sheet as part of inventory
Expensed
特点: not expected to provide benefits in future periods
实例
Depreciation expense
Training required to use the property and equipment
IFRS或US GAAP对投资收益的记录
IFRS, but not under US GAAP: income earned on temporarily investing the borrowed monies decreases the amount of borrowing costs eligible for capitalisation
Interest payments made prior to completion of construction that are capitalised are classified as an investing cash outflow(CFI)
Expensed interest may be classified as an operating or financing cash outflow under IFRS and is classified as an operating cash outflow under US GAAP
Intangible assets
Internally develop
Expensed
Purchased in situations other than business combinations, such as buying a patent
Capitalised
Goodwill: capitalised, no depreciation
IFRS和US GAAP要求
IFRS
The expenditures on research (or during the research phase of an internal project) should be expensed
Companies can recognise an intangible asset arising from development (or the development phase of an internal project) if certain criteria are met
US GAAP: both research and development costs should be expensed as incurred except capitalisation of certain costs related to software development
Impact on financial statements and ratios
Capitalised
In the period of the expenditure
Increases the amount of assets on the balance sheet
Investing cash outflow on the statement of cash flows
In subsequent periods: depreciation or amortisation expense
Reduces net income on the income statement
Reduces the value of the asset on the balance sheet
No impact on the cash flow statement.
Expensed
Reduces net income by the after-tax amount of the expenditure in the period it is made
On the balance sheet
No asset is recorded
No depreciation or amortisation occurs in subsequent periods
The lower amount of net income is reflected in lower retained earnings on the balance sheet
On the CF/S: operating cash outflow in the period
No effect on the financial statements of subsequent periods
Depreciation and Amortisation
Definitions
Cost model: at any point in time, the carrying amount= historical cost - the amount of accumulated depreciation or amortization
Revaluation model: a company reports the long-lived asset at fair value, permitted under IFRS but not under US GAAP
Calculation
Depreciation
Straight-line
Accelerated method(double decling method)（开始折旧费用较多）
最后一年：折旧费用=期初账面价值-残值
Units-of-production method
Amortisation
Only those intangible assets assumed to have finite useful lives are amortised over their useful lives, following the pattern in which the benefits are used up, and assets assumed to have an indefinite useful life (i.e. without a finite useful life) are not amortised
Acceptable amortisation methods are the same as the methods acceptable for depreciation
The Revaluation Model
Uses of Revaluation Model(IFRS)
A key difference between the two models is that the cost model allows only decreases in the values of long-lived assets compared with historical costs but the revaluation model may result in increases in the values of long-lived assets to amounts greater than historical costs
IFRS allow a company to use the cost model for some classes of assets and the revaluation model for others, but the company must apply the same model to all assets within a particular class of assets and must revalue all items within a class to avoid selective revaluation
记录
If a revaluation initially decreases the carrying amount of the asset class, the decrease is recognised in profit or loss
Later, if the carrying amount of the asset class increases
The increase is recognised in profit or loss to the extent that it reverses a revaluation decrease of the same asset class previously recognised in profit or loss
Any increase in excess of the reversal amount will not be recognised in the income statement but will be recorded directly to equity in a revaluation surplus account
If a revaluation initially increases the carrying amount of the asset class, the increase goes directly to equity under the heading of revaluation surplus
Any subsequent decrease in the asset's value: (1)first decreases the revaluation surplus; (2)goes to income
Impacts on Financial Statements and Ratios
An increase in the carrying amount of depreciable long-lived assets increases
Total assets
Shareholders' equity
reduce reported leverage
Assets revaluations
Decrease the carrying amount of the assets reduce
Net income
In the year of the revaluation, Profitability measures such as ROA, ROE
However, the company may appear more profitable in future years
Asset revaluations that increase the carrying amount of an asset
Initially increase depreciation expense, total assets, and shareholders' equity.
Profitability measures, such as ROA and ROE would decline
Impairment of Assets
Impairment of Property, Plant, and Equipment(PPE)
Test for impairment
Accounting standards do not require to be tested annually for impairment
If there is no indication of impairment, the asset is not tested for impairment, or the recoverable amount of the asset should be measured in order to test for impairment
Impairment losses
when should be recognised
The asset's carrying amount is not recoverable
The carrying amount is more than the recoverable amount
Impacts on financial statements
Reduce the carrying amount of the asset on the balance sheet
Reduce net income on the income statement
Non-cash item and will not affect cash from operations
在IFRS和US GAAP下的记录方式
IFRS: measured as the excess of carrying amount over the recoverable amount of the asset
Recoverable amount of an asset is defined as "the higher of its fair value less costs to sell and its value in use”
Value in use is a discounted measure of expected future cash flows
US GAAP: An asset's carrying amount is considered not recoverable when it exceeds the undiscounted expected future cash flows.
If the asset's carrying amount is not recoverable, the impairment loss is measured as the difference between the asset's fair value and carrying amount
Impairment of Intangible Assets
With a finite life
Amortised and may become impaired and are not tested annually for impairment
Tested only when significant events suggest the need to test
With indefinite lives
Not amortised
Carried on the balance sheet at historical cost but are tested at least annually for impairment
Impairment of Long-Lived Assets Held for Sale
A long-lived (non-current) asset is reclassified as held for sale rather than held for use when it ceases to be used and management's intent is to sell it
At the time of reclassification
Assets previously held for use are tested for impairment
Long-lived assets held for sale stop to be depreciated or amortised
Reversals
IFRS
Permit impairment losses to be reversed if the recoverable amount of an asset increases regardless of whether the asset is classified as held for use or held for sale
Do not permit the revaluation to the recoverable amount if the recoverable amount exceeds the previous carrying amount
US GAAP
Once an impairment loss has been recognised for assets held for use, it cannot be reversed
For assets held for sale, if the fair value increases after an impairment loss, the loss can be reversed
Derecognition
Sale of Long-Lived Assets
The gain or loss on the sale of long-lived assets = the sales proceeds - the carrying amount of the asset at the time of sale
Carrying amount is typically the net book value (i.e., the historical cost minus accumulated depreciation), unless the asset’s carrying amount has been changed to reflect impairment and/or revaluation
记录
I/S: A gain or loss on the sale of an asset
A component of other gains and losses
In a separate line item when the amount ismaterial
CF/S
CFO: using the indirect method adjusts net income to remove any gain or loss on the sale
CFI: include the amount of proceeds from the sale in cash from investing activities
Long-Lived Assets Disposed of Other Than by a Sale
Long-lived assets to be disposed of other than by a sale are classified as held for use until disposal. The long-lived assets continue to be depreciated and tested for impairment, unless their carrying amount is zero, as required for other long-lived assets owned by the company
When an asset is retired or abandoned, the accounting is similar to a sale, except that the company does not record cash proceeds. Assets are reduced by the carrying amount of the asset at the time of retirement or abandonment, and a loss equal to the asset's carrying amount is recorded
When an asset is exchanged, accounting for the exchange typically involves removing the carrying amount of the asset given up, adding a fair value for the asset acquired, and reporting any difference between the carrying amount and the fair value as a gain or loss
Presentation and Disclosures
Disclosures of Property, Plant, and Equipment
IFRS
The measurement bases
The depreciation method
The useful lives (or, equivalently, the depreciation rate) used
The gross carrying amount
The accumulated depreciation at the beginning and end of the period
A reconciliation of the carrying amount at the beginning and end of the period
US GAAP
The depreciation expense for the period
The balances of major classes of depreciable assets
Accumulated depreciation by major classes or in total
A general description of the depreciation method(s) used in computing depreciation expense with respect to the major classes of depreciableassets
Disclosures of Intangible Assets
IFRS: whether the useful lives are indefinite or finite
If finite, for each class of intangible asset
The useful lives(or, equivalently, the amortisation rate) used
The amortisation methods used and the gross carrying amount
The accumulated amortisation at the beginning and end of the period and where amortisation is included on the income statement
A reconciliation of the carrying amount at the beginning and end of the period
If infinite
The carrying amount of the asset
Why it is considered to have an indefinite life
US GAAP
The gross carrying amounts and accumulated amortisation in total
By major class of intangible assets, the aggregate amortisation expense for the period, and the estimated amortisation expense for the next five fiscal years
Disclosures Related to Impairment Losses
IFRS
Each class of assets the amounts of impairment losses and reversals
The main classes of assets affected by impairment losses and reversals of impairment losses
the main events and circumstances leading to recognition of these impairment losses and reversals of impairment losses
US GAAP
No reversal of impairment losses
description of the impaired asset, what led to the impairment, the method of determining fair value, the amount of the impairment loss, and where the loss is recognised on the financial statements
Under IFRS, for tangible and intangible assets, if the revaluation model is used, the date of revaluation, details of how the fair value was obtained, the carrying amount under the cost model, and the revaluation surplus must be disclosed
Investment Property
Definition
IFRS: as property that is owned for the purpose of earning rentals or capital appreciation or both (for example, earning rent)
US GAAP: no specific definition of investment property
Accounting for Investment Property(IFRS)
Cost model or a fair value model
The fair value model differs from the revaluation model used for property, plant, and equipment, so a company must be able to reliably determine the property's fair value on a continuing basis
Under the revaluation model, whether an asset revaluation affects net income depends on whether the revaluation initially increases or decreases the carrying amount of the asset. In contrast, under the fair value model, all changes in the fair value of the asset affect net income
In general
A company must apply its chosen model (cost or fair value) to all of its investment property until it disposes of the property or changes its use such that it is no longer considered investment property
The company must continue to use the fair value model for that property even if transactions on comparable properties, used to estimate fair value, become less frequent
Disclosures of Investment Property
Companies are required to disclose whether they use the fair value model or the cost model
If the company uses the fair value model
Additional disclosures about how it determines fair value
Reconciliation between the beginning and ending carrying amounts of investment property
If the company uses the cost model
Additional disclosures similar to those for property, plant, and equipment
The fair value of investment property.
Income taxes
Differences between Accounting Profit and Taxable Income
原因
Different guidelines for how income is reported on a company's financial statements
How income is measured for income tax purposes
一些名词
Taxable Income: the portion of its income that is subject to income taxes under the tax laws of its jurisdiction
Income Tax Payable: the basis for its income tax payable (a liability) or recoverable (an asset), which is calculated on the basis of the company's tax rate and appears on its balance sheet
Income Tax Paid: the actual amount paid for income taxes (not a provision, but the actual cash outflow)
Income Tax Expense: on its income statement and is an aggregate of its income tax payable (or recoverable in the case of a tax benefit) and any changes in deferred tax assets and liabilities
Changes in deferred tax assets and liabilities are added to income tax payable to determine the company's income tax expense (or credit) as it is reported on the income statement
Deferred tax
概念
Deferred Tax Assets(DTA): Actual income taxes payable > financial accounting income tax expense
Deferred Tax Liabilities(DTL): Financial accounting income tax expense>income taxes payable
Both appear on the balance sheet
影响
Any deferred tax asset or liability is based on temporary differences that result in an excess or a deficit amount paid for taxes
Only a temporary difference because taxes will be recoverable or payable at a future date
Accounting Profit(income before taxes; pretax income) :does not include a provision for income tax expense
Tax Base and Carrying Amount
Tax base: the amount at which the asset or liability is valued for tax purposes
Tax loss carry forward: a company experiences a loss in the current period that may be used to reduce future taxable income
Carrying amount: the amount at which the asset or liability is valued according to accounting principles
Changes in Income Tax Rates
Income tax rates increase
Deferred taxes(both DTA and DTL) increase
Income tax rates decrease
Deferred taxes(both DTA and DTL) decrease
Temporary and Permanent Differences
Permanent differences
概念: differences between tax and financial reporting of revenue (expenses) that will not be reversed at some future date and don't give rise to deferred tax
Items
Income or expense items not allowed by tax legislation
Tax credits for some expenditures that directly reduce taxes
影响: a difference between the company's effective and statutory tax rate
Effective tax rate = Income tax expense ÷ Pretax income (accounting profit)
Temporary differences
概念
Difference between the tax base and the carrying amount of assets and liabilities, which is only possible if the difference reverses itself at some future date
IFRS and US GAAP both prescribe the balance sheet liability method for recognition of deferred tax. This balance sheet method focuses on the recognition of a deferred tax asset or liability should there be a temporary difference between the carrying amount and tax base of balance sheet items
分类
Taxable Temporary Differences
Temporary differences that result in a taxable amount in a future period when determining the taxable profit as the balance sheet item is recovered or settled
Result in a deferred tax liability when
The carrying amount of an asset exceeds its tax base
The tax base of the liability exceeds its carrying amount
Deductible Temporary Differences
Temporary differences that result in a reduction or deduction of taxable income in a future period when the balance sheet item is recovered or settled
Result in a deferred tax asset when
The tax base of an asset exceeds its carrying amount
The carrying amount of the liability exceeds its tax base
Treatment
Recognition and Measurement of Deferred Tax
Measurement of Deferred Tax
计算
Income tax expense= tax payable+ ΔDTL- ΔDTA
At the end of each fiscal year, DTA and DTL are recalculated by comparing the tax bases and carrying amounts of the balance sheet items
DTA
ΔDTA= tax payable- income tax expense
DTA= (tax base- carrying value)*tax rate
DTL
ΔDTL= income tax expense - tax payable
DTL= (carrying value - tax base)*tax rate
Neither deferred tax assets nor liabilities are discounted to present value in determining the amounts to be booked. Both must be adjusted for changes in tax rates
Must be reassessed at the balance sheet date
Recognition of a Valuation Allowance
Under US GAAP, deferred tax assets are reduced by creating a valuation allowance, reducing the deferred tax asset and income in the period in which the allowance is established
The reversal will increase the deferred tax asset and operating income
Recognition of Deferred Tax Charged Directly to Equity
Regard whether the taxes should be included with deferred tax liabilities or whether it should be taken directly to equity
处理
Deferred tax liabilities should be treated as liability whenthey are expected to reverse
Deferred tax liabilities should be treated as equity whenthey are not expected to reverse
The deferred tax liability should be excluded from both debt and equity when both the amounts and timing of tax payments resulting from the reversals of temporary differences are uncertain
Non current(long term) liabilities
Bonds Payable
Accounting for Bond Issuance
Bonds contain two types of future cash payments
Face value
Also referred to as the principal, par value, stated value, or maturity value
Periodic interest payments
Based on the interest rate promised in the bond contract ,which is referred to as the coupon rate, nominal rate, or stated rate
Discounted to the present to arrive at the market value of the bonds
Effective interest rate: The market rate at the time of issuance
On the issuing company's statement of cash flows, the cash received (sales proceeds) from issuing bonds is reported as a financing cash inflow(CFF)
Market rate VS coupon rate
Market rate = coupon rate: at par
Market rate < coupon rate: at premium
Market rate > coupon rate: at premium
Bonds issued with a coupon rate of zero (zero-coupon bonds) are always issued at a discount to face value with no periodic interest payments
Accounting standards
IFRS: all debt issuance costs are included in the measurement of the liability, bonds payable
US GAAP
Debt issuance costs as an asset (a deferred charge)
amortised on a straight-line basis to the relevant expense (e.g., legal fees) over the life of the bonds
IFRS and US GAAP: cash outflows related to bond issuance costs are included in the financing section of the statement of cash flows
Accounting for Bond Amortisation, Interest Expense, and Interest Payments
绪论
The amount reported on the balance sheet for bonds is the historical cost plus or minus the cumulative amortisation, which is referred to as amortised cost
Companies initially report bonds as a liability on their balance sheet
IFRS: at the amount of the sales proceeds net of issuance costs
US GAAP: at the amount of the sales proceeds, ignoring any bond issuance costs
分类
At par
Initially: carrying amount = face value
The carrying amount will not change over the life of the bonds
Periodic interest expense = Periodic interest payment to bondholder
At premium
Initially: carrying amount > face value
As the premium is amortised, the carrying amount (amortised cost) of the bonds will decrease to the face value
Reported interest expense < coupon payment
At discount
Initially: carrying amount < face value
As the discount is amortised, the carrying amount (amortised cost) of the bonds will increase to the face value
Reported interest expense > coupon payment
Amortising methods for the premium or discount of bonds
Effective interest rate method
Required under IFRS and preferred under US GAAP
Applies the market rate in effect when the bonds were issued to the current amortised cost of the bonds to obtain interest expense for the period
The difference between the interest expense and the interest payment is the amortisation of the discount or premium
Straight-line method: evenly amortises the premium or discount over the life of the bond, similar to straight-line depreciation on long-lived assets
Effects on the financial statements
IFRS: interest payments on bonds can be included as an outflow in either the operating section or the financing section of the statement of cash flows ( CFO, CFF )
US GAAP: CFO
Cash interest paid is not shown directly on the statement of cash flows, but companies are required to disclose interest paid separately
Amortisation of a discount (premium) is a non-cash item and thus, apart from its effect o n taxable income, has no effect on cash flow
In the section of the statement of cash flows that reconciles net income to operating cash flow, amortisation of a discount (premium) is added back to (subtracted from) net income
Current Market Rates and Fair Value Reporting
原因: As market interest rates change, the bonds'carrying amount diverges from the bonds' fair market value
A company selecting the fair value option for a liability with a fixed coupon rate will report gains (losses) when market interest rates increase (decrease)
市场利率变化对公司债务的影响
Market interest rates decline/ other factors cause the fair value of a company's bonds to increase
The fair value of a bond with a fixed coupon rate increases
Acompany's economic liabilities may be higher than its reported debt based on amortised historical cost
Company reports a decrease in the fair value of its liability and a corresponding gain
Market interest rates increase/ other factors cause the fair value of a company's bonds to decline
The fair value of a bond with a fixed coupon rate decreases
Acompany's economic liabilities may be lower than its reported debt based on amortised historical cost
Company reports a decrease in the fair value of its liability and a corresponding loss
Using financial statement amounts based on amortised cost may underestimate (or overestimate) a company's debt-to-total-capital ratio and similar leverage ratios
Derecognition of Debt
Once bonds are issued, a company may leave the bonds outstanding until maturity or redeem the bonds before maturity by
Calling the bonds (if the bond issue includes a call provision)
Purchasing the bonds in the open market
不同情况
Remain outstanding until maturity
The company pays bondholders the face value of the bonds at maturity
The discount or premium on the bonds would be fully amortised at maturity
The carrying amount would equal face value
在财务报表上的记录: Bonds payable is reduced by the carrying amount at maturity (face value) of the bonds and cash is reduced by an equal amount, which appears in the statement of cash flows as a financing cash outflow(CFF)
Redeem bonds before maturity and extinguish the liability early
Bonds payable is reduced by the carrying amount of the redeemed bonds
The difference between the cash required to redeem the bonds and the carrying amount of the bonds is a gain or loss on the extinguishment of debt on the income statement
A gain or loss on the extinguishment of debt is disclosed in a separate line item when the amount is material
A company typically discloses further detail about the extinguishment in the management discussion and analysis (MD&A) and/or notes
Debt Covenants
目标: benefit borrowers to the extent that they lower the risk to the creditors and reduce the cost of borrowing
分类
Affirmative covenants: restrict the borrower's activities by requiring certain actions
Negative covenants: require that the borrower not take certain actions
Presentation and Disclosure of Long-Term Debt
Balance sheet: The non-current (long-term) liabilities section of usually includes a single line item of the total amount of a company's long-term debt due after one year, with the portion of long-term debt due in the next twelve months shown as a current liability
Notes
More information on the types and nature of a company's debt
These note disclosures can be used to determine the amount and timing of future cash outflows
内容
Stated and effective interest rates, maturity dates
Restrictions imposed by creditors (covenants)
Collateral pledged (if any)
The amount of scheduled debt repayments for the next five years
Leases
Advantages of leasing
Less costly financing and less restrictive provisions
The lessor may be in better position to take advantage of tax benefits(tax shield) of ownership, such as depreciation and interest
The lessor may be better able to value and bear risks associated with ownership,such as obsolescence, residual value, and disposion of asset
The lessor may enjoy economies of scale
Classification
For lessee
IFRS: Finance lease
GAAP
Operating lease
Finance lease
For lessor
IFRS
GAAP
Operating lease
Finance lease
Sales-type lease
Direct finance lease
Accounting and reporting
Lessee
Classification criteria
Finance lease(meet at least one)
Ownership have been substantially transferred to the lessee at the end of the lease
Lessee would cheaply purchase the asset at the end of the lease
The lease term is 75 percent or more of the useful life of the leased asset
Present value of lease payments is more than 90 percent fair value of the leased asset
Specialized nature of the leased asset that is not valuable for others
Operating lease: The lease cannot meet any of the five criteria
On the financial statements
Balance sheet
Finance lease (IFRS and GAAP)
Right-of-use asset (leased asset)
Lease liability(fair value和lease payment现值中的较小值)
Operating lease (only US GAAP)
Right-of-use asset (leased asset)
Lease liability
Income statement
Finance lease
Report depreciation expense on ROU asset
Report interest expense on lease liability
Operating lease: report single lease expense
Cash flow statement
Finance lease
Reduction of lease liability - CFF
Interest payment - CFO; CFO or CFF
Operating lease: cash payment - CFO
Lessor
A lessor will classify a lease as a direct financing lease if it meets all of the following conditions
The transfer of ownership criteria are not met
A third party guarantees the residual value of the asset at the end of the lease.
The sum of the promised lease payments and the asset's residual value is greater than or equal to the fair value of the asset
Lessor Reporting of Leases
Pensions and Other Postemployment Benefits
Defined contribution plan(DC)
定义
A retirement plan in which the firm contributes a sum each period to the employee's retirement account.
The firm's contribution can be based on any number of factors, including years of service, the employee's age, compensation, profitability, or even a percentage of the employee's contribution
The investment decisions are left to the employee, who assumes all of the investment risk
Defined benefit plan(DB)
定义
The firm promises to make periodic payments to employees after retirement.
The benefit is usually based on the employee’s years of service and the employee’s compensation at or near retirement
Because the employee's future benefit is defined, the employer assumes the investment risk
记录
Key element: The net pension asset or net pension liability
The fair value of the plan's assets > the estimated pension obligation(PV)
Overfunded; records a net pension asset on its balance sheet
The fair value of the plan's assets < the estimated pension obligation(PV)
Underfunded; records a net pension liabillity on its balance sheet
On the financial statements
IFRS
I/S
Current service cost
Past service cost
Interest expense
Interest income
B/S
Actuarial gains and losses are recognized in OCI
Differences between the actual return on plan assets and interest income
US GAAP
I/S
Current service cost
Expected return
Interest expense
Amortization of past service cost
Amortization of actuarial gains and losses
B/S
Unamortization of actuarial gains and losses are recognized in OCI.
Unamortization of past service cost.
Differences between the actual return on plan assets and expected return
Evaluating Solvency: Leverage and Coverage Ratios
Leverage ratio
Debt-to-assets ratio = total debt / total assets
Debt-to-capital ratio = total debt / (total debt + total equity)
Debt-to-equity ratio = total debt / total equity
Financial leverage ratio = average total assets / average total equity
Coverage ratio
Interest coverage = EBIT / interest payments
Fixed charge coverage = (EBIT + lease payments) / (interest payments + lease payments)
财务报告质量分析与应用
Financial reporting quality
Conceptual Overview
Relationships between Financial Reporting Quality and Earnings Quality
Financial reporting quality: High-quality reporting provides decision-useful information, as well as the company's financial condition at the end of the period
Quality of reported results (earnings quality)
内容
The quality of earnings, cash flow, and/or balance sheet items
High-quality earnings result from activities that a company will likely be able to sustain in the future and provide a sufficient return on the company's investment
关系图
Biased Accounting Choices
Aggressive
概念: increase a company's reported performance and financial position in the current period
方法
Increase the amount of revenues, earnings, and/or operating cash flow reported in the period
Decrease the amount of expenses reported in the period and/or the amount of debt reported on the balance sheet
结果: may decrease the company's reported performance and financial position in later periods
Conservative
概念: decrease a company's reported performance and financial position in the current period
方法
Decrease the amount of revenues, earnings, and/or operating cash flow reported in the period
Increase the amount of expenses reported in the period and/or the amount of debt reported on the balance sheet
结果: may increase the company's reported performance and financial position in later periods
Earnings "smoothing"
Conservative choices to understate earnings in periods when a company's operations are performing well
Aggressive choices in periods when its operations are struggling.
Earnings management: make intentional choices that create biased financial reports
Take real actions
Change accounting choices,
Differentiate between Conservative and Aggressive Accounting(four potential benefits of conservatism)
Given asymmetrical information, conservatism may protect the contracting parties with less information and greater risk
Reduces the possibility of litigation and litigation costs
Conservative rules may protect the interests of regulators and politicians.
Companies can reduce the present value of their tax payments by electing conservative accounting policies for certain types of events
Context for Assessing Financial Reporting Quality
Motivations
Managers may be motivated to issue financial reports that are not high quality to mask poor performance
Managers frequently have incentives to meet or beat market expectations in analysts' forecasts and/or management's own forecasts
Exceeding forecasts increases stock price
Increases management compensation that is linked to increases in stock price or to reported earnings.
Career concerns and incentive compensation may motivate accounting choices
Avoiding debt covenant violations can motivate managers to inflate earnings
Conditions Conducive to Issuing Low-Quality Financial Reports
Opportunity
Internal
External
Motivation
Rationalization
Mechanisms that Discipline Financial Reporting Quality
Market Regulatory Authorities
Auditors
Private Contracting
Detection of Financial Reporting Quality Issues
Accounting Choices to Affect Financial Results
Increase performance and financial position in the current period
Recognize revenue prematurely
Use nonrecurring transactions to increase profits
Defer expenses to later periods
Measure and report assets at higher values
Measure and report liabilities at lower values
Increase performance and financial position in a later period
Defer current income to a later period (save income for a “rainy day”);
Recognize future expenses in a current period, setting the table for improving future performance
Non-GAAP Financial Measure
If a company uses a non-GAAP financial measure in an SEC filing
It must display the most directly comparable GAAP measure with equal prominence
Provide a reconciliation of the non-GAAP measure and the equivalent GAAP measure
Management must
Explain why it believes that the non-GAAP financial measure provides useful information
Disclose additional purposes, if material, for which it uses the non-GAAP financial measures
How Choices Affect the Cash Flow Statement
Significant earnings that are attributable only to accrual accounting methods and unsupported by actual cash flows may indicate earnings manipulation
Simple choices exist for managers to improve the appearance of cash flow provided by operations without actually improving it
实例: If the company's managers had further delayed paying creditors until the day after the balance sheet date, they could have increased the cash provided by operating activities
Warning Signs
Pay attention to revenue
Accounting policies: Consider whether the policies make it easier to prematurely recognize revenue
Barter transactions may exist, which can be difficult to value properly
Rebate programs estimates can have significant effects on revenue recognition
Multiple-deliverable arrangements of goods and services are common, but clarity about the timing of revenue recognition for each item or service delivered is necessary
收入关系: If a company's revenue growth is out of line with its competitors, its industry, or the economy, the investor or analyst needs to understand the reasons for the outperformance
Compare accounts receivable with revenues over several years
Examine asset turnover
Compare growth in inventories with competitors and industry benchmarks.
Calculate the inventory turnover ratio
Pay attention to signals from inventories
Note whether old, low-cost inventory costs have been passed through current earnings and artificially improved gross, operating, and net profits
Examine the company's accounting policy note for its capitalization policy for long-term assets
Compare the company's policy with the industry practice
Pay attention to the relationship of cash flow and net income: Construct a time series of cash generated by operations divided by net income
Other potential warnings signs
Depreciation methods and useful lives.
Fourth-quarter surprises.
Presence of related-party transactions.
Non-operating income or one-time sales included in revenue.
Classification of expenses as “non-recurring.”
Gross/operating margins out of line with competitors or industry
Restructuring and/or impairment charges
The restructuring charge also indicates that the old path of reported earnings was not real
In particular, expenses reported in prior years were very likely understated— even assuming that no improper financial statement manipulation had occurred
To extrapolate historical earnings trends, an analyst should consider making pro forma analytical adjustments to prior years' earnings to reflect a reasonable division of the latest period's restructuring and impairment charges
Financial statement analysis: applications
Application
Evaluating Past Financial Performance
An evaluation of a company's past performance, the causes behind the performance and how the performance reflects the company's strategy
Evaluative judgments assess whether the performance is better or worse than a relevant benchmark
Projecting Future Financial Performance
Projections of a company's near-term performance
Develop a more detailed analysis of the components of performance for multiple periods
For a large, diversified company, margin changes in different business segments may offset each other. Furthermore, margins are most likely to be stable in mature industries
Assessing Credit Risk
Scale and diversification
Tolerance for leverage
Operational efficiency
Margin stability
Application: Screening for Potential Equity Investments
A security selection approach
A valuation ratio (P/E) less than a specified value
A solvency ratio measuring financial leverage (total debt/assets) not exceeding a specified value
Positive net income
Dividend yield (dividends per share divided by price per share) greater than a specified value
Back-testing limitations
Survivorship bias
Look-ahead bias
Analyst Adjustments to Reported Financials
A Framework for Analyst Adjustments
Importance (materiality): Is an adjustment to this item likely to affect the conclusions?
Body of standards. Is there a difference in the body of standards being used (US GAAP versus IFRS)? If so, in which areas is the difference likely to affect a comparison?
Methods: Is there a difference in accounting methods used by the companies being compared?
Estimates: Is there a difference in important estimates used by the companies being compared?
Analyst Adjustments Related to Investments
Securities classified as "financial assets measured at fair value through profit or loss" (similar to “trading” securities in US GAAP), unrealized gains and losses are reported in the income statement
Securities are classified as "financial assets measured at fair value through other comprehensive income" (similar to “available-for-sale” securities in US GAAP), unrealized gains and losses are recognized in equity
Analyst Adjustments Related to Inventory
Companies that use the LIFO method must also disclose the value of the inventory under the FIFO method
To recast inventory values for a company using LIFO reporting on a FIFO basis, the analyst adds the ending balance of the LIFO reserve to the ending value of inventory under LIFO accounting
Analyst Adjustments Related to Property, Plant, and Equipment
Accumulated depreciation/depreciation expense = the average age of the asset base
Net PPE (net of accumulated depreciation) /depreciation expense = how many years of useful life remain
Gross PPE/depreciation expense = the average life of the assets.
Analyst Adjustments Related to Goodwill: Book value reduced by all intangible assets (including goodwill) is known as "tangible book value"
Analyst Adjustments Related to Off-Balance-Sheet Financing(以operating lease为例): add the present value of the off-balance-sheet future operating lease payments to the company's total assets and total debt