Financial Reporting and Analysis and Corporate Finance KAPLAN\ SCHOOL OF PROFESSIONAL Ta Sha ea okeonun telsonBook 2 — Financrat REPORTING AND ANALYSIS AND CoRPORATE FINANCE Readings and Learing Outcome Statement. a ‘Study Sesion 5 — Financial Reporting and Analysts. inventories and Long lived Asset si roach ‘Stanly Set 6 = Fiancial Reporting ae Anyi ntescnpontt Ista Pose Employmen and Shae-Based Compensation, and Multinational Opetiahs.68 xX 163 SaleTexe Financial Reporting and Analg aut Seady Sesion 8 ~ Corporte Finance 229 Seady Sexion 9 ~ Corporate Finance puacing and Controle onnnansB2L Selene ~ Corporate Finapc. 390 Formalin * nl Inder. 399AND ANALYSIS AND CORPORATE FINANCE (©2013 Kaplan nc Aly reserve Published in 2013 BBS ne. Prine in chesURRe Sites of Americ, x we ick dor ign on Kahn Siro bp ek os Sorged wiser rion a inn She Dn of aga nsdn di ition tal spi oe or jl atest cor ga pied ee cn TI BOOK 2: FINANCIAL REPORTING 116 Rid bis bine “GAS ed Gel Gen hn awe nda, promt rein rat es te pac orks edb Rap eiptcin of hn ne ranaton git copes nd he CTA tn Cae ot hi Sor aninasen parsing pone of ne at pps by CEA Iniciar 204 CEA Lee W Sud Guide Th ntowmation oman tee Noes ee oe rng et CH rd db ne sxc The mira the eferenae renig ent edd posed oe NatsREADINGS AND LEARNING OUTCOME STATEMENTS Reapines ‘he flowing material sa reve ofthe Financial Reporting and Anal and Corporate Finance prints died addres the aring oome tatment ie fthby CFA ‘tina oe Reading Assignments f al pid abs CA Pegi Cav, ane La (Ceninaiue, 2015) ~ 17 nv Iles i imc Se eto 18 Long-lived Ass: Implicatons Soc sabg sage S necro end Aah, CEA Prog Cares, Vue, Levelt (Cixiowe, 2019) nc see Rios poke 34 Cree aetsane i 21: Malinaonal Qoghises ae 124 F a — ws BEES nam 3 (02018 Kiln. Paeseck 2 nani Repti nd Arian Corpor ance Rendng nd owing Outree Smee Reading Asignment CConprae Finance CPA Program Crim, Volume 3, Level I (CEA Tosiace, 2013) 28. Corporate Goremance page 321 29, Meyers and Acquisitions page 340 Laaanane Oureous Starmamrs (LOS) (6 ‘The CPA Instat Learning Onto Steet ar lite re pati ac topic review even the over may base brn caged ra beri withthe fo of te rei eee © x % ox Tepe cee cept wt ining CP ated rang 17 Tmt Ipenns fx unel Semnad Retos Thread dle 1 oa dep niin ad dco fienty os ce Diets lena eordamyaiiendieertnay ‘ee 10 LIPO tudo and see cso aac ‘i ands 19 ta companys sported Brac satnet om LIFO to FIEO for fompree (2 sie plains ing inven ot eae ve aan steed a ge 2) a ‘vamendheakreny sale arin (apa pinto ha ma shud cna on xg company itemery dru and ter euro inert 2) ‘The pal casragecrrspods wit he flowing CEA hte asigned reading. 18, Longlivd Acts Implication for Finca Statements and Raton “The andiate should be alo 4 explain and cialuate how cpiaising versus expensing costs inthe period in Arch they are lneured aft acl eaent tnd extn, (age 34) 1b. pln and cvlte how she diferent deprecition methods for propery plant tne equipment ale nancial statement and rai (page 41 plain and craluate how inpsiement and reraluaon of propery plant and sppaenipa sglesestralicr omnrad sain Seve fog 4) Late and inept Banal seement dicosues earing longline 35 (page 9) explain and caluate how leasing ast intend of purchasing them fess Financial satement and vats. (page 51) explain and cialuate how fiance lene and oprating leases aes anc tetemenes and ato fom the perspective of boc the leo and the lene (page 5) (07015 Kaplan neBook 2 Func Repo sod Anis and Corpor Fsnce ‘Reaings ad Leaing Otc Sateen i pil ne coped ith he flog CEA It nine mating 19, Imogene ren Thecanddae sold beable: 1 Goer he cacao, meanest an doe we ltrs Franca Rpg Sade IF) fr 1 sven ancl se Bip neon hi jaw ined tai taro 3) pci prone ond ule lover nti gs 6) a 1 Glguul tomes IRS end US GAAP che Cheatoon mason {nd don of eins in ancl tavern ai wo. ies hen pes pets greece mts “The inpiel oocag tered wih the fllorig CEA Ip ped ig een Spier crac ot Saar OMe aetenar 7 Or 1b explain and calculate meaurs ofa df benefit pesion obligation ee ees gtace tenis Sida Sea teeth component of ean dened beac pension cot (age 106 4k erin and cel te fa deine Bnei plan amampcon onthe ind en 3 and pro penton com 103) oa ew bj en opined be Fe enn tha rrp in the notes the anil tenn ei semen apg 11) {exer penson psn noe dscoares nln ash ow eed information ni Repl Leen wth etn fo shar ted compara, Greta) |. explain how accounting for rock grants and stock options affects financial Stements andthe importance of companie ssumpion i valuing thee france and opions (page 114) The tpl conerogecomepons with he fll CFA Jace ane reading 21, Mulational Opera “The candidate shoud be able to: 4. diaingush among preston currency, functional cutens and lost tateny (page 129) describe foreign currency canton exposure inluing accounting or and “lclsures about foreign currency anion gains and losses (page 125) analy bow champs in change ats flere mmdte ale of teeing and paren company (page 126) (02015 Klan. a Peseck 2 nani Reporting nd Aris Compre aance Readng md Lonng Outrne Smee Pe 4 cong the crt ite mathe and eh tenparl method, eat ow ec affects the parent company’s blance shee and income sateen, and determine Which method is appropriate in vasous scenarios. (page 126) alate he rari feces and evaluate the etalon of subsidise’ balance shee and income statement inte the patent companys presentation nmeney (page 132) Thow the curt se method and che repora meth afc Companys nancial atements and tos. (page 140) {ale how aerarverandation methods for eabaliare operating in hyper ily men fetal eer els a1 5 EEE etna terse co mis «Soi mgs become nt sg WO ant metas 5 i cans an oni fn Snyper Mo hed re pn filing Dic ig aig 22, The Lesions We Lenn The candidate should St: 1. dsinguih qo rine defiion of esings (eg EBITDA, operating ssi taenngs et come, ee) page 168) 1 pln tends in cas ow roms operation can be more liable sha end i (page 165) the accounting reaxment fr derivatives being wid o hedge expose Change inthe value of ses nd abit, expose vo variable xh ows, and foreign curtency epere of investent in Figs corporations, (page 165), The mpl covers crepes wi the folloving CEA hte exigued reading $vauatng Financial Reporting Quality Then shal babe cones ahbuss and acrul-bass ecouniag, and explain why accounting Slucrecion ex nam acoral accounting stem. (page 172) ‘describe the elation beoneen the level of acral nd the persistence of xings ted eeaive lil chat dhe eh ad acral components of earings should ‘aol recive valason gee 174) «explain apporanitier and mervarons fr management ro inerene in he tstenal nancial eprting process and mechanisms dat dsepine sk incererton. page 173) 4 describe earings qual and measures fcrmings quality and compare she ‘senings quit of pee compari. (pae 17) © explain ean reversion in earings and how the accrual component of caning fects he apeedof mean reversion. (page 181), dep porn pects Gar fir te ually oF Eran porting, inclaing revenue rengition, expense tetgition, balance sheer nes and {oh lr stent is and interes waraing igs of hee potential problems (gage 182), (02015 Kaplan neBook 2 Func Reponing sod Anis and Cron Fiance ‘ean and eaing Osc Sateen. Tepid ng conepnd ih the flowing CA nin eed mang 24. peo of Pal Sent asa Tei Theda sh eset er ee ean es pliner etoamt pape eee ory Sopa etipacer any Saanye pester foe et emt ae aes orton ge 30) Si ul tag cin ae ha flee uly nd earpbtny sap cal emcees woh a ‘tena Secon ges © crue the quality of «company’s financial data, and recommend app se Spee eet emer Dotigepecne i athaesomvolpeestah Sd e Sa fae ety ees agg Oosrcrtt a eee analy and inerpet how balance sec soit 1p normalization, and cash om statement rated modesto eee: financal rer ons etre eg oe o 20" epi eng comepds AX ering Co ent eed main 25, Capital Badgting Then a Be 2 i eau fcapnso nd cnn cit pj sachet ene eh ee Sus Soo + Sin aes beige presen dene the opi cpa fen ans li talebefencokS wept lec tie cane jon multi alvr prac rhe quer antl anny ppc, NSIT Cota ning gage 20) 2 apa ho seutvin naps seas as and Ment Cal sialon Se brulee siete owes Petia pro im gh vs Splat clara tac unabnd sta soe ala slacecarel poe e200 1 Getty eal epi and ata api prot igre pons (gee) Joie al bdgeog plc gage 251) Slee tol nya sti ee el omnes a in stay budgie 252) 1. lst tng ener ec til irae anon soe Grain balpsnyed onkaut aja pepraiogenl e565) (02015 Klan. a Peereck 2 nani Reporting nd Aris Compre aance Readng md Lonng Outrne Smee Ppt 27, Dividends and Share Repurchases: Ar ‘The mp coveie crepes wt the following CEA hata exiued reading 26, Capel Stactre “The candidate shoud be able: 2 explain dhe Modigliani Miler propositions rgurdingcpitl srucrre,incding the eles of leverage, ees financial dss agency costs and symmetcc information on a company’ cot of equity cox a etal and optinal capil secre (page 27) 1b. decribe the arge apt racer and explain why a compay’ ssl capil ‘erate may Herat around is age (page 284) decibel of debt ratings incepta reap: (page 284) ‘explain fctor an analyst should conser in evaluating tee of epi ‘erature pliy on valuation. (page 285), «dosibe iteration differences in thea of Gan Factor hat ‘plain chev dilrence, and implicaons ua rence for iver nls (page 286) paerarstornsas fo Tien hea tie 1. compre theres of dividend QS SS, explain implications of ech for share value given description gbeoparat dividend scion. (page 295) 1 ascribe peso infra gal) dha dividend inistions, increases, Azcreses, nd omar may convey (page 299) explain how cepa ffcts and agency Ses may fea company’ payout AL Epln lO te fe vided pic. (page 298) {© caeulite and inrerpe the effective ox rae om given carency ania ‘ening under double aston, dividend imputation, and spite (page 300) ompare able Grider constant dividend payor rato and reid dividend payout polices and calculus the dividend wader cach pli. (age 302) 1 Sxplin the choice heeween paying cash dividends and reparchasing shares (page 303) 1. describe bond tends incorporate dividend polices. (page 308) 1 calealt and interpre dividend coverage tor Base on I) ne income and 2) free eh ow. (pge 309) js en characteris of companies ha may ot be ale wo sustain chee Aividend, (page 309) Ss wT “The mpal coves crepes wi he folloving CEA bate exigned readings 28, Corporate Governance “The candidate should be abet: 1 describe objectives and core stibutes ofan fective compote governance system, an eva wheter «company's coporate govern av those ecbute. (page 321) 1. Compare major business forms, and decide the conics of ines associated svc each (page 322), (02015 Kaplan neack 2 racial Reponing ond Ansys and Corpor Face ening nd Lexing Outcome Saeets phn cat shai ney mop Iaeogmangtne isle conte and decor: of op 30) 4. Scene rons ic af ie pn qo cose hat nee rca be of Secor e323) pleco nae eo be ‘crs end onlane reap nd weknonr of company corpo ferme ace e309) ome era rman of corp grein pal ac srcmnen onion henge SoReal plemme ikopre ra) explain the valuation Implications of eorporute governance. (page 330) of “he pia come carpal ith te illewing CFA Iiteasignal 29, Mergers and Acquisitions ns “hand si bse © 2 certipeenpr und eyiden (MA) wii bed gf gts ising and relcdncs of busness cvs, (guge 340) Sn otnen oan bid Mie 4) © Gin teoumopsg tengo oe OA che ccmpnyt poner EF gs) < Sin Sony ce, tgs arene econ Speer trsi0 ot Stim nan care by fom of scion, mead of faye sl sade of op htb Regen pgs 5 Reigpticaeng regi ptt nats te ia ieue330 x g calculate and. fenketi ‘Herfindah!-Hirschman Index, and evaluate the Talihood of ar ghana challenge fora given barnes combination (page 353) 1h. compare the discounted cash flow, comparable companys and comparable oe ya for valiogctnget company, icing Eh adantge and Snes oh ge 309 1 ele i flo i compa, and eine comps sc value based on discounted cash ove analyse (ge 358) KO) timate the value ofa targer company using comparable company and cennparble rantcton ana, (page 360] 1 Gale lee bids od clare heeled posr-soptfon vale of {macquirer andthe gains ceued to she target shareholders Vers the aque Stareoldes (page 368) 1k ‘pln bow price and payweie mcd tec the dition OF nd benefit in MAA eranescone (page 372) sm, drscibe carscterac of MEA tansactions that create vl. (page 373) dling among equity carve-out spin-off spol, and bguason (page 373) (0 expan common sons for retracting. (page 374) (©2013 Kaplan Pac‘Fieiosaye say ds Rania peg alas papa ped cline erg come oxenene ne ry CE tae Thi opera cove INVENTORIES: IMPLICATIONS FOR FINANCIAL STATEMENTS AND Ratios Study Sion 5 Exam Focus “This topi eview dicuses she analy of inventory given the di ‘methods: FIFO, LIFO, and weighed wveage cose. You must air ca eth else sigan prota ein end yy A be ‘Bitten he apron stones atte WLIO fms LO iin letra aS aN Ibevmeronr Accouerma NX “The ces oFinreitory ct low U.S. GAAP and om form cr he Bis icome statement, balance sheet, and many financial rigs Avon the cast fw method ca affect the es Income acer ad, ths, he Be eth How eal om Lvl a fons (COGS ad he bing bance ofinventary, puis, and the ending blanc oF avert: Coge Deinning nema» puch ending imenory xe sen be cwien ena vena» began lavestory» puchuses— COGS & ARP set he 0G a eng ey wld nae ei = ‘particular valuation method increases che value of ending inventory, che COGS would (loeteateates CCPAS Program Carica, Vlume 2 page 8 IF he cose of inventory remains constant overtime, determing the Bris COGS and ‘ding inventory simple. To compute COGS, simply maltiply the number oF unite Selby the cos per unit, Silay, compute ending inventory, mliply che number oP aab cantly Caterer Pag 10 (02015 Kaplan neSeay Sian 5 Cos Refewnce to CFA Ist Angel Reg #17 lve: plo fr Financ Setement nd Rais “lever ii ily tha, ve ime the con of purchasing oe prdcng ventory will change A res rms must selec a ost How method allocate he inventory cost. the income statement (COGS) and the balance sheet endiag iaveneon) ‘Under 1PRS, he permissible methods are 4+ Speci idenicaton + Finein, roar (FIO). + Weighed average cos “The tame cont ow methods are lo allowed under U.S. GAAP However, US. GAAP. lho permits he ure oF thease, Srat-o (LIFO) method, LIFO i nor lowed unde irae of Profixor’s Note: With the eset conergnce of US. GAAP gid ERS later ‘his decade, IFO would longer be permitted in he Unis Ne Specific Meatfeation Method eo Une he spi denitein mad ach nig aed wie nits sete coe Spe Months ep Srreney een ie Feccsepatn on icone sol gat scal rose shen ead dining hens, sch a ewer andl Specie encaon rao ‘Spot for pei ondes oe pojgyitide a Bes ral nn of bse FIFO Method KO Under he FIFO ti ate purchased thei item sold The avancage oF FIEO i chat Srvettocy it valued bated onthe mort scene purchae, xgebly the bs ppratimsion ef eusent eo. Convery, FIFO COGS is based onthe est purchae coef aninfaonary envionment, COGS willbe underrated compared 0 sre and tae wil be oes mS LIPO Method Under the LIFO method, the item purchased mon recently i sumed ro be he Be ican sold nan inflaonary environment, IFO COGS wil be higher han FIFO (COGS, snd earings wl be lover, Liner earnings asa ino lower Income tes, ‘wlich beens th perce Bosker LIEO, ending ineseny the bale Sheets ale using the eas ox, Therefore, in an inlaionary environment LEO ding inventory lee han exe co, As discus previously LIFO i permite under US. GAAP buts nor allowed under TERS. The IFO conformity ul of the US. ax cde eure Brn tha ate LIFO for ‘ax purposes tao use LIEO for financial reporting purposes This izaneaea where cooley between Srancl reporting and tax reporting standards i reuied. (02015 Klan. a PagetSil Sion 3 Croce to CFA Inne Aged Reding 017 venti: ncn for nan Satenes and Ros, \\ ar" es Pap 12 “The income tex wboege fly IFO expat is pop eran US. frm ‘Beene of infacon, using LEO forex reporting generates tx savings since LIFO caning at gene lower than FIPO earnings Thierens n the pela station where wer pred craig ar acid with igh tho Fm operon ‘Weighted Average Cost Method average costs. simple and objective method. The average cost per unc of Inventory i eorpure by dividing che teat of goods salable faye (oeieig, inventory + purchatey) bythe oral quay avaiable For ale To comfate COGS, te aserage eos por units multiplied by the number of units so o compute ‘ding inventory, he average cont per aie malic by yo amber anit that, remain. S ‘Duving infationry of dfaonsr pcods, the weld verge cose mathod ill rodacean inventory valu betwee hse rade by FIFO and IFO. Fig: near Con Hy Compan” age ae aT ea See Wogeal — items tepid — oe iia hentia narrpetvey. tn otberwopidhal ve been using FIFO all long. ern ta idm ro ee es FERRERS Scone ee ee ee ee ere ee ee adie uo mene hrm torr nt Srotimrasaecicen atom a IX reserve, neta x » $1,940 20X5 sets + $72 20XS reserve, net oF a) /2= $2081, “Thus, the IRO rear om anti $217 / $2081 = 10.4%. I hit example, the Bem is igh ess profitable under FIFO because the increase in FIFO net income i more ‘haw oer by the increas in FIFO average assets Tiss not always the ese, LLIFO Liquidation Rec that the LIFO reserve sequal rth ference berween LO invencory and FIFO inventory. The LIEO retervewilinceate when plo ate eng and inventory squamiies re table or increasing, IF che Bm i guidating ies inventory of prices ae [alia dhe LIFO reserve wil deine. [ALIFO liguidatin occurs when LIPO Sr nveneory quantities are declining In ‘his station the olde lower ents are av included ia COGS. The ol is higher [roc ae ihr incor eves. Noss ewcreg ies Lager poke ‘cl (phantom) because ei ot ssexnable. The fem cannot guia it inventory (02015 Kaplan ne‘Cos Refewnce to CFA Inte Angel Readg #17 leo: ImplconsFr Finan Seemed indliialy becuse i il evenly rn ut of gods tel You can shisk ofa LIPO. liquidation as finaly ecogniing previously unceognied inventory guns in the income Obvious ems can dliberaely increase earnings by simply guiatng she older lower ast invenony and no replacing the onentory. However, LIFO igidaions ean ao soul fom sees, eter ot desing domed oat extoe. “The analy should adjust COGS for the decline in the LIF reserve cae bya decline in yee Fes mene dato = IFO leuiaton fn the Snncl sraerent ove to falar the adjasment. ample LIFO Higuidaton sw’ Aegan mga vey a eo Peed Ren ain — Gare Tr ato eter axe rr aie a8 sexs ‘a ty 130 aoe ta a to aor ta aie 5 0" $6,500. moe Dating 208 ig od 40 Ree deieetet ek Oiedeetliew tule 1 een peal ete eT ee alee eer when coca ss ps YBirimnoy See san peal re Ceara a ewe) Teocldea” eae Had i plac 40 nll, COGS woud ve en 16 filo ace Ajnnglonny 60 shan0 na fe ‘Se auxuomey Eraser tia = COGS UFreples) 4056160 Duet the LIFOliguidation, COGS was lower by $860 (86,160 ~ $5.30} thas pretax profi was higher by S860. The higher profi unsusimable Because Big 4 wll ‘renal un out of inventor. (02015 Klan. a agaiSay Soon 3 (et clene to CFA Inte Asie Reding #17 oven pion fr Financ! Semen nd Rae LOS 17.c: Convert a companys reported Financial statements from LIFO to FIFO for purpores of compation, (CPA Pregram Cariculum, Volume 2 page 12 ccase af the diferent inventory cox fw choices, analysts may ned 0 make adjustments or ompartve purpose le adion, nals may need 0 make fdjsrmente in advance ofa aicpared change in inventory method, For example, US. firns dope LFRS as expected, LIFO inveeory accountng wll diappe “The adjastment For comparative purposes ar generally made esos. This means the prior year Boal statements are ear based one cost Rom method, ‘The cumulative eet ofthe change i reported a 0, “ fo the belaning etined earnings of the als yen rset For example, turing to ou ear LEO a ae xample che ans woud east, leh er meg FO Pie pre Fie Viper Bete <”" Gdjused om UFO w FIFO) Gy \ 20K6 —20x5 ioe oo cant om ome me Inver? ye 410340 Tale is st endcipoen SIA 81700 oxaane 360340 o Tela sa 02 » adhiewtncie am suo 0 nt 1s Conn vais as tone ee 7 7 Commons io 30 ‘ed picid o © Seder? io 32 Toc abies nd iy "Saba emer op IFO rere of 821 and $18 or 20K apd 20K, expec 2 AUALIFO wre of $100 $90 for 2086 an 2085, spt 5 Add LIPO tere (et ae) oF 579 an $72 for 20K and 2083, respecte. Page 22 (07015 Kaplan neSeay Sian 5 Cos Refewnce to CFA Ist Angel Reg #17 lve: plo fr Financ Setement nd Rais ‘Viper tacome Statement Use en FO eG) — ett Cora poet 2 Coupee wat ae 0 oreing po se ete 2 Cp 310 20 ta A 6 ne a sf Centon ns so & 1 Sober $10 change a cre For RE oN furs cg se e088 x The efca ofthe sje con a undead SOK orcs FO i ite teers tides pe reer cee ‘ron hr vm a gee ef hens dpe da, Tecan stead waco eine Th anes COGS cnn dean EO COUS lw compared ro LO (atuming nfl Wcoute under FIFO the lower cot unts ate ‘old Bese Lower COGS ress ilhr ne income. {LOS 17.d: Deserbg ff itplication of valuing iavencory at net realisable value knees J CEA Peg Gail, Vle 2 pag 23 say SS ti ed sl sc be ntl ei lt Pg eeprom teeter beer eee eC ee realizable value. Net ealzable value sequal othe esimated sles price les the ‘Stimaed sling cous and completion cons. Went realizable alee es han the Salance sheer ore inventory is "writen down” tat rable ale and a lst is ecognined inthe income starement. If there fa subsequent every in val, the inventory canbe "writen up and a gain ie ecoguied inthe income tatement However the amount af ay ach gun is imited to he amoune previous recagnined a ‘es Inter wonds inventory cannot be reported a the bane shee 22m mount (hae exon rig ot Under U.S. GAAR inventory i eeported dhe balance shee a the lower af es oF rake, Maske i uray eqal replacement cost however, maker cannot be greter than ne aia value (NR) or estan NRV mins normal pot magi. tt (02015 Klan. a geCroce to CFA Inne Aged Reding 017 venti: ncn for nan Satenes and Ros, oes Papo seplacement cont xceds NRV, chen mae is NRV. I eplacement ots est han [NV mina normal pro margin, chen marke NRV minus + normal prof mari Profesor’ Now Thnk of lover fc o markt, where marker cennet se ontde a nang of ra The rene fit at elie seat sural prof margin te net realizable value So thee of the rage she arma pref margin. "Ne means sas pricels sling and completion cs Ir cont excols marke, he invenrry “wien dowa co market onthe balance sect and fui tongnned i the income statement, I thee a ubtequgcconry in ‘aluc “writeup ib allowed under U.S. GAAP In this case thy righ value becomes enewntlete Example: Laventory writedowns, & Ea eee eee eeeetecee eect ren seers ceed ores cs Sena ese eae ae Siete” 60) Nal pal mania Oe Deets pg err enero enema Usd te rein eee dice ie, Ses gic 21D acetals re G22) Sao ee eee ee rien h ie Guta ae abe ree $210wigad cn) Lepore nthe nce evens Under US. GAAR invenor is epore tthe lower of cost or mart In shies mae is equal to eplacemene cot of $197, since net reazbl ae of $203 i pester dha eplacrent cov, and net eae vale minus 3 normal pre margin ($203 $12 ~ 3191) isles than replacement cos Since orginal os eksedsmather (element cost) the inentery i writen dove S197 and $13 lo (S197 repicemen oat 8210 original cot) ie reported in he income sateen. Tee ‘Assume hatin the yar afc the weritedowa inthe previous example, pt reizable ‘ale and replacement cost both inate by $10. What the impact ofthe reser Under IFRS nd under U.S. GAAP? (02015 Kaplan neSeay Sian 5 Cos Refewnce to CFA Ist Angel Reg #17 lve: plo fr Financ Setement nd Rais Rl in LIFO cing ino id on le wero (sing intsap/2K Spurl a FPG Sts i raf mag chon npn ti beeline ceded peels Sg FPO or wl co pn a nin ae fing ere er ern ig Sil apie Reporting inencory above iso costs peieduder IFRS and U.S. GAAP in certain ndusticn.Thisecepion aplics ail aed delet of commit produce, such a arcaltrl and foes peda, ner ore and precious met jue and che unrated the income atrent If ‘Tanglin LIPO and FIFO ca bens niga 5 Figure 5: LIFO and FIFO Comparion—Assuming lafaton and Stable cresing HO eal Tower COGS Higher aes lower ee come (EBT nd EAT) highrise (BT acl EAT) awe ivemory bance ight invencry bases lower working cpa (CAC) higher working capita (CA ~ CL) phere onset nes pai out) awe ho (ae ae pid x) lower et and rose mans igh sex and gros mati lower cuen o Iipher careers Iipher inventory rnover ewe itor trove 1 desgy lame debsossiy (02015 Klan ne ge 25Say Soon 3 (et cene to CFA Inte Asie Reding #17 oven pion fr Financ! Semen nd Rae Aira chee Fenty cot stad ean hiv saint ee on rofl, iui, atv, and solvency. Prfewor’ Nowe: The presumption in hs section is that price arin and inetory quanti ae aul tcecting Profiailiy ‘As compated ro FIFO, LIFO products higher COGS in the income teria lower earnings. Any pecs sessre that ndude ‘der LIFO. For expe, higher COGS wil rel is ower ‘roi margins a compared to FIFO, py on ‘Ascomnpate to FIEO, LIFO retinas ventory value onthe lace shee. Sine inventory (a cuentas) IFO, ce eaten rato, a popular measure of liquidity, also nae [FO than under FIFO. Wesking cpt s Tower ander LIFO aswel becaystcutee set ae lowe. ¢ 2" a0" mum 6 COGS! rg inet high or rms ha we IFO at we PFO. Under LI, COGS ued tm meen numer einem aed he lowes cas ower 2) ihr uove ander IFO we newer dp of anny on Pus koeeaey cre {IFO resus in lower total asset compated 10 FIFO, since LIFO inventor's over Loe etal ances under LIFO rl i lower socolder equity (sets ibe). Sine ttl ase and stockholder equity are lower unde LIFO, the dbrrato and the debesoreqiyttioate higher under LIFO compared wo FIFO, Profesor? Nowe: Amore sy of inking aban he ipa of LIRO on stealer puis that because IFO COGS i higher nt income i ner Lower et income wil ras ower cbholde eget (retained earing) seompured ts LPO seckboldert equi. Le euen the eater LIFO adjustment example. For compatizon purpose he ‘lowing table summarizes our odings Note the rele of Vipes peer proup ave een iced for anal purposes, Pag 26 (07015 Kaplan neSeay Sian 5 Cos Refewnce to CFA Ist Angel Reg #17 lve: plo fr Financ Setement nd Rais igi Rata Amalia ew nel 206 Vine or Gp eR crn 19 2 1 Inver rower 100 78 os Langeare daevesgeiy 07 os a6 eos profe msn 250% 233% nis Necro main 53% 4% osu ear ona 1a sos has 20 ageing Taf RO itn sl afc Vip ne “The adjusted rato exceed the per group indeating geste liquid. Sing ator ie "he ge ompone of Vipers caren ae, ado ana Aatvigy Viner adj inventory turnover decline a expecid at tthe decrease in {COGS and he ine in regimen Ad igguprimore i ew han the per group, which dices ta eke Viper long fe good In eee of Inventory dye (365 inventory trove Viper ha 8,0 dae of inveory om hand sil the per group has 37.2 days on hand Too melt inventory ical and ea also Dem inicacion of obo lecense o Satay Vp ated ingen egy on ne wi she pe ‘group. ee erm crane ese ie crepe Cision eae rea LOS 17. Explain ies shat analysts should consider when examining a ‘company’s inventory disclosures and other sources of information. (CEA® Pregnn Carica, Volume 2, page 30 Merchanlsing Sms, such a wholenles and rile parce inventory tat is eady forsale In this ase inventory i reported in one acount on the balance shee. On the ech and, manafcaring rms onmaly report iavenory using the septate sccouns rw material, worein-proay and Enished good. Analyt an woe here Aiclosres, along wth other sources of informacion, such as Managements Discusion fd Anais at gpl of is ature evens and eas For example, an increse in aw materiale andor work-in-poces inventory may be an Indication ofan expected increta demand. Higher demnd should eum higher revenues and emings. Convers an increase in fnshed goods inventory. while (02015 Klan. a ageSil Sion 3 (hore to CFA nts Asie Reding Inversion for Fanci! Semen nd Rae vr nro sid worktops ate Aeon, ny bean indton of dersng demand Analyse shold aio examine the relationship horween ales nd ited yoods. Finished goods invencry tats growing fxr than sles may be an indication of declining ‘oo much inventory is costly asthe frm incurs storage costs nsrance and ‘asc Too much inventory owes cash chat might be mote efciently wid samenhere che Pa 28 (07015 Kaplan neSealy Sein 5 Cos Refewnce to CFA Ist Angel Reg #17 lve: plo fr Financ Setement nd Rais Eeokeenecan Se dei eee [eer ccs eee eas pene a a ee ee ee et Bpepne See nd a “§ ia, ee ag as 108 17. wv “The LEO reserve ithe ifference in LIFO ending inva and FIFO ending invetory eid toast the LO fs nding enor and COGS back to FIFO for comparison purpose. oO ALTO ita ssa enya a Te Su ec a eee sheet etn eee 2 Los 17 2. “To adjust a LIFO fj acl sarements to reflect the FIFO cos ow methods 1° Ad the LIFO re to cutentasts (ending inventory). Suberct, ctv on the LIFO reserve om caren ant (ch) [Add the {PO reserve, ne of, shareder equi Subyatyhe change inthe LIFO reserve fom COGS, come et en the chong in the LIFO rte to nce expense Los 174 "Under IFRS, nsemois are valued at che lower of cox one elable value, Invennory “erteaps ae allowed, but onl the exe ha a previous write-down 0 net sealnle yl wer eorded Under US. GAAR inrenorarae vlad dhe lowe of cot act Mash ‘sully equal to replacement coe bu cannot eee ne teaiable vale hele than ‘eticlable value minis normal profi margin. No subsequent “write-up” isalloved (02018 Kiln. ge 29Sil Sion 3 (Cetcene to CFA Inte Aged Reding #17 venti: icons for nani Semet an Ratios Pape 30 Los ize [Asuming nfision and eableo increasing inventory quae 0 lit HBO lui. Iigher COGS lower COGS dower ae Niger ses Tower setae Nar net income Jeet ioesay blancs Nigh nena blanco Jower woking capita ihe working ail ghee Bove ite) lower cth Hows mere xe detail petit tigi le Ieper eae te Higher ce a igherosentry mone lower i : igh debear say =a hy Los 176 ‘An incre in sw meri andor ri proces inventory maybe an indication of am expected increase in demand. Capel incese io fished goods inventory, ‘vile se asters and woe are cranny ben indation of Aecresing demand. Finished goods rowing fre than alos may be an indction of (07015 Kaplan neSealy Sein 5 te Aig Reig #17 ~ ler: plans fr ian Sesments nd Raion Chouno 1, Davin dhe month of Mayes lavencory account includ the flowing CR to CEA I May avery 25 unin @ $4.00 12 chad unin © $4.40 29 Parked so uniz @ $4.20 Sad aur es600 20 ee ce foes RS ae S aan Rs onary envionment 3 LIFO liquidation wil ap ily eae in an 2 Ina AF eee faa, oO t Case ¢ © scans pyle 3 5. ALO fin prs loving e potas > eerie : Botner Had ‘ sed FIFO wo acoune fries inventory sme income would have tee sits. 126,200. 8126.00, 4. Kamp, Inc els pein bicycle shes. At yearend, due ro sudden inereae in manufcraring corte the replacement on pee pi of shoo 5. ‘The orginal com it $43, and the current sling pice f $50. The normal pole marge 1086 of he selling peice, andthe selling costs ate 83 pr pi. ‘ezonding to US. GAAB, which othe illowing amos shold each pe of shoes be reported on Kamps yearend balance shee? Ase. Bsa © 807 (02015 Klan. a ageSaal Sion 5 (Cetcene to CFA Inte Aged Reding #17 venti: icons for nani Semet an Ratios 5. Allele equ in periods fing peices nl able iventry lvl, which ofthe folowing statements smo acme? ‘A. FIFO fms have higher cath flow fom operations than otherite entice IFO fre 3. IFO fms hae higher pot ma than eri enti FIFO CC FIFO fms have higher stockholder equity shan otherwise Hensal LIFO firms. the fica [Aka Bt st blaine ce peti, i epee gf tidaied Seema pal c ie ott xi po 6 Whi of loin wold marie stn nce her rai in Pap 32 (07015 Kaplan neSealy Sein 5 te Aig Reig #17 ~ ler: plans fr ian Sesments nd Raion CR to CEA I 1. Under LIF he ie wi pach ae hee ni Siren S480 (90 ane $6.00 ccocs 346 (30 uni $4.20) «(0 unt $440) GrmPmft SIM 2 Atos LO lidtin hold lowes oa penta persis COGS (oy pis 3. FIFO netincome = LIFO nt incme «lending mac — begining rere) ex fel} 125.000 + (15.00 12400)» a] 8126800. 4 ag hmm cong pan oi nape ‘ange. The pp bund er rable vale (NR), whch sheng price (550) lon selling eons (43) fora NAV of 7. Te let bud NR (847) Enema mn fang pce $9) eri $2 St iccaet eins eit eo mse ge Rr ny, SS one Pin che show shal be ‘ond con of 3. 1 Ade re ey cy seemed eed RE io ee 6A Amines in om mais my bea inden ofan expected nce a ‘dend Highs deand Be vet a ihe eee nd easing (02018 Kiln. gePape rr Bd ‘Fieiosaye say ds Rania peg alas papa ped cline erg come oxenene ne ry CE tae Thi opera cove Lone-Livep Assets: IMPLICATIONS FOR FINANCIAL STATEMENTS AND Ratios Study Sion 5 Exam Focus Fis ake many hice in canting fr ged nt hat che Bi? roti rds ees ca ow cuieaton You may daeand te effect fod ise tf capeig sees copending vrs epeackeecfDbg cons ime andrctchand developmen. For captained cosa bea with ‘he les ofthe diferent pesos cto sl bepAOSedeesne enact in th uci nen ironing aneeshatti exh fw scree of eh theless eng) 108 18a: Explain and erluagow capiaising versus expensing cons in the ree ehh hy ig ce Boll ser et ee rs CEA® Preguum Carica, Vane 2. page 52 ‘When rm male expendicr, it can ter capiaize the cove a 28 ar onthe ulance sg oespenae the cot in the income sateen nthe period incurred. Ara enc ugranexpenivare tha it expected to provide afte economie bene over ‘null stcounting poids is eapieaied but the future economic bene is lial erty wcerin sheep epened AVY pith ical ay snd ole hw ce fy co egg lane sey gape ert Ea ord aia dc (ac squston feet hs inten local nec amet nt ef a Geshe coer Ocal ed cannon cope ix gio amie Alernavly, fan expences eapenced, carne period net income i reuced by the Arersax amount ofthe expenditure ‘ig Term mee rpc cease bese gel ‘expensing wll ic ner ncome, shareholder equi, rotates, cash ow fom ‘operations, cashflow fom investing and numerous Branca rts [Net lacome Capaising a espera delays the recognition of expense inthe income statement “Thus, in the pesid that an expendiare capital, che or wl rept higher ner (02015 Kaplan ne