Professional Documents
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Table of Contents
1. Lecture 1....................................................................................................................................3
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1. Lecture 1
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Financial Accounting Aiyesha Dey Class 1 o Three homework assignments Accounting o language of business o Collection, processing and reporting of info about activities and events that affect the organization Three types of accounting users o Financial Accounting and Reporting: recording financial transactions, position and results and communicating it to outside stakeholders o Managerial Accounting and Reporting: communicating the position and results of firm internally. o Tax Accounting and Reporting: recording and reporting financial position to IRS. Accounting Principles o Generally Accepted Accounting Principles (GAAP) SEC has authority to set GAAP SEC delegates this authority to the Financial Accounting Standards Board (FASB) FASB rules are called Statements of Financial Accounting Standards (SFAS) currently over 150 rules Attributes of ideal accounting system Reliability verifiable by an independent party Relevance it has to be timely, and have feedback value and predictive ability to a certain extent (you may want to use the info to make future decisions) Other important accounting concepts Conservatism report bad news but not good news if there is uncertainty Materiality if tracking an account is costly and reporting it doesnt change decisions, it is not worth it. Accounting Qualities o Decision Usefulness Relevance Timely Feedback value tells you about the past (evaluate the managers of the firm); feedback on past performance and management performance Predictive value Reliability Verifiability Representational faithfulness Neutral (compare firm across years and compare across firms) Comparability Materiality o Understandability Assumptions Underlying Financial Accounting o Three Assumptions Entity Concept parent company and any subsidiaries controlled by the parent; independent subsidiaries are not part of the firm Arms length transaction
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Class 2 10/6/2008 - Balance Sheet Definitions o Assets: economic resourcecs with the ability to provide future benefits to a firm o Liabilities: creditors claims on the assets of a firm and show some of the sources of the funds the firm uses to acquire the assets. o Shareholders Equity: amount of funds owners have provided and, in parallel, their claims on the assets of a firm. o Retained Earnings: source of funds a firm derives from its earnings that exceed the dividends it has distributed to S/Hs since its formation o Current Liabilities: obligations a firm expects to pay in one year o Current Assets: generally convert into cash within one year. o Historical valuation: reflects the acquisition cost of assets or the amounts of funds originally obtained from creditors or owners o Current Valuation: reflects the current cost of acquiring assets or the current market value of creditors and shareholders claims on a firm. - Income Statement Definitions o Income Statement: attempts to answer question How profitable is the firm? by showing net income or earnings for a period o Net Income: revenues expenses (aka earnings) o Revenues: measure of the inflows of assets (or reductions in liabilities) from selling goods and providing services to customers. o Expenses: measure of outflows of assets (or increases of liabilities) used in generating revenues.
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o A) o Cash: Dr 343000 o Inventory: Dr 275000 o Prepaid Insurance: Dr. 12000 o Land 50000 o Buildings 400000 o Equipment 80000 o Accounts Payable: Cr 30000 o Notes Payable: Cr. 80000 o Loan payable: Cr. 300000 o Common stock: Cr. 800000 Assets o Cash: 343000 Total Current Assets: 630,000 o Land 50000 o Building 450000 o Equipment 80000 Total Assets: 1210000 Liabilities
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THE INCOME STATEMENT - Presents a moving picture of the operating results of a firm for a given period of time (e.g. quarter, fiscal year) o Also known as Statement of Operations, Statement of Earnings - Cash accounting o Cash Accounting method of accounting where revenues are recorded when cash is received and expenses are recorded when cash is expended. o Advantages Provides reliable information about cash flows Intuitive and easy to understand Objective timing of transactions is clear o Disadvantages Delay in recording revenues/expenses until cash changes hands Poor matching of resources expended to benefits received Subject to manipulation for example, firm can delay recording an expense by postponing cash payment o Accrual Accounting Accrual Accounting: method of accounting where revenues and expenses are recorded on an economic basis regardless of the actual flow of cash Revenues recorded when benefits are earned o When is revenue earned? Expenses recorded when resources are expended to produce benefits. Advantages Better measurement of performance and matching of benefits and costs of transactions Curtails manipulation of cash transactions Disadvantages More difficult conceptually (at what point is revenue earned?) Cash is still king Non-cash financial manipulation through discretion and choice in accounting rules o Earnings management: use of accounting discretion to distort reported earnings o Methods of Managing Earnings 1) Cookie Jar Reserves take hits during good periods (restructuring costs) to smooth out earnings numbers.
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Actual Entry Dr. Cost of Goods Sold 5000 Cr. Cash 5000 Correct Entry Dr. Equipment 5,000 Cr. Cash 5000 Dr. Depreciation 500 (5000*1/5 * ) Cr. Accumulated Depreciation (contra account) Correcting Entry Cr. Cost of Goods Sold 5000 Dr. Equipment 5,000 Dr. Depreciation 500 (5000*1/5 * ) Cr. Accumulated Depreciation 500 (contra account) Effect on balance sheet Assets understated by 4500 (5000-500) Liabilities no effect Shareholders Equity understated by 4500 Retained earnings understated by 4500 Expenses overstated by 4500 Income Statement Classification o Operating (related to core operations of firm) Recurring (persist in future) Product sales SGA COGS Non-recurring (temporary charge) Discontinued operations (closed unit) o Peripheral (not related to core activity) Recurring Depreciation Interest Expense/Revenue Income Tax Gains & Losses on Asset Sales Non-recurring Patent litigation Natural disasters o You want to look at these different categories so you can invest properly. Look at what is likely to persist in the future. EPS = (net income dividends)/avg common shares outstanding If effect of dilution on EPS > 3% you must report both basic and diluted EPS.
CLASS 3 - Revenue Recognition Principles o Reasonably Certain that you will collect it from customers o Delivered goods or provided the service at least most of the service or most of the goods
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1) Review the revenue recognition policies of Staples discussed in Note A (Summary of Significant Accounting Policies). What are the types of revenue recorded by Staples? Discuss why the recognition policies for these revenue types are consistent with the revenue recognition criteria discussed in class.
Revenue is recognized at the point of sale for the Companys retail operations and at the time of shipment for its delivery sales. This is consistent with the Revenue Recognition principles of GAAP Sales of extended service plans are either administered by an unrelated third party or by the Company. The unrelated third party is the legal obligor in most of the areas they administer and accordingly bears all performance obligations and risk of loss related to the service plans sold in such areas. In these areas, Staples recognizes a net commission revenue at the time of sale for the service plans. In certain areas where Staples is the legal obligor, the revenues associated with the sale are deferred and recognized over the life of the service contract , which is typically one to five years. This is consistent with GAAP. 2) What is Staples accounting policy for advertising expenditures? What percent of Staples Sales are advertising and marketing expenses in fiscal 2005, 2004 and 2003? What percent of Operating and Selling expenses are advertising and marketing expenses in fiscal 2005, 2004 and 2003? Staples expenses the production costs of advertising the first time the advertising takes place, except for the cost of direct-response advertising, primarily catalog production costs, which are capitalized and amortized over their expected period of future benefits (i.e., the life of the catalog). Direct catalog production costs included in prepaid and other assets totaled $28.4 million at January 28, 2006 and $30.8 million at January 29, 2005. Total advertising and marketing expense was $588.2 million, $526.0 million and $492.7 million for fiscal years 2005, 2004 and 2003, respectively. This is consistent with GAAP. They spend about 4% of sales on advertising in 2003, 2004 & 2005 Advertising over Operating and Selling costs is about 22% across the years. If you are looking for a particular expense, sometimes you need to look at the footnotes. 3. Show the journal entry made by Staples to reflect the amount of dividends declared during fiscal 2005. You may assume that there are no prior period adjustments that affect Retained Earnings. Retained Earnings Credit Debit 2818163 Net Income 834409 Dividends ?? (123402) Ending Balance 3529170 (this increases because of net income) Retained Earnings End Balance = RE Beginning Balance + Net Income Dividends How write as a journal entry? Dr. Retained Earnings 123402 Cr. Dividends Payable (or Cash) 123402 4. What is the number of shares of common stock that have been issued as of January 28, 2006? Show how the accounting value for the Common Stock account in the Balance Sheet on this date was determined. Issued vs. Authorized vs. Outstanding Authorized # shares total number of shares a firm can issue over its life
o o
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o o o
o o o o
CLASS 3 - Review of Accrual Accounting o Assets = Liabilities + Owners Equity (this is always balanced) - Assets Increase by: o Borrowing (Liabilities increase) o Owner investments (contributed capital increases) o Earnings Income (Retained Earnings increases) - Net Income = Revenues Expenses o Revenues are inflows of assets o Expenses are outflows of assets o Revenues and expenses can be recognized even when cash does not chance hands. Revenue recognition criteria and expense recognition - The Statement of Cash Flows
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o o
(30) 10 (20)
(30) 12 (18)
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Proceeds from Disposition of Property $53 They got Cash of $53 Accumulated Depreciation What was the depreciation of the sold PP&E? How do we figure it out? We know the gain was $3 (subtracted from operations) We know that it cost $53, so we know accumulated depreciation was $50. Dr. Cash 53 Dr. Acc Depre 50 Cr. Gain 3 Cr. PPE 100 (given)
6) As a result of the September 11 attacks, Congress passed legislation authorizing payments to airlines to compensate them for 9/11 losses. How much did U.S. Airways receive in 2001 from these grants and how much of this amount was in cash? Dr. Cash 264 Dr Acc Rec 56 Cr Airline Grant 320 Cr. 7) Why is the amount for Non-cash Charges an addition to net income in determining cash flow from operations? Because it is non-cash 8) Why are increases in Accounts Payable and Accrued expenses an addition to Net income in determining cash flow from operations?
They are not cash. It is an expense for the period but not a cash expense. Therefore, you add it back because you only want to find the cash part of the period. Add anything that was a non-cash item.
Class 4: Class Notes for Chapter 6 - Accounts Receivable and Revenue Recognition o Revenue is recognized when 1) firm has delivered the goods/services to the customer 2) Collection of cash is reasonably assured 3) Cash to be received is measurable o Accounting for bad debts from customers and other costs associated with accounts receivables focuses on the last two criteria o Objective when reporting Revenue and corresponding A/R:
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11/10/08 - GAP and AOL Case - Product Development Costs o 1) Capitalize Costs o 2) Amortize Costs o 3) Expense when Technological Feasibility is not reached - Journal Entreis o Capitalize Dr. Product Development Cost 51 Cr. Cash/Payable 51 o Amortize Dr. Amortization Expense 36 Cr. Product Development Cost (Net) Or Cr. Accumulated Amortization 36 o Expensing Dr. Product Development Expense 95 Cr. Cash/Payable 95 - Deferred Subscriber Acquisition Cost o Beginning Balance o Amount Capitalized o Sold Net o Amortization Expense o Write-offs o End Balance - Fiscal Year 1996 - Deferred Subscriber Acquisition Cost o Beginning Balance: 6/30/95 77 o Costs Capitalized (cash flow) 363 o Amortization Expense (SCF) o Writeoffs (SCF) o o End Balance: 6/30/96 314 - Journal Entries o Capitalize Dr. Deferred Subscriber Acquisition Cost 363 Cr. Cash/Payable 363 o Amortization Dr. Amortization Expense 126 Cr. Accumulated Amortization 126 Or Cr. Deferred Subscriber Acquisition, Net 126 o Writeoffs Dr. Writeoff (Inc. Stmt) 0 Cr. Deferred Subscriber Acquisition, Net 0 - Fiscal Year 1997
126 0
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o Bonds o o
Bonds o o o o
Dr. Interest Expense Dr. Bond Premium Cr. Cash Ending Balance of Bond Premium eventually becomes zero and Bond value goes down to par value. o Balance Sheet At Issue Date Bonds Payable: 8000000 Bond Premium: 1849208 Net Book Value of Bonds: 9849206 6 months later Bonds Payable: 8000000 Bond Premium 1824682 Net Book Value of Bonds 9824682 1 yr after issue Bonds Payable: 8000000 Bond Premium 1799422 Net Book Value of Bonds 9799422 I NEED TO GET A PHOTOCOPY OF THE BONDS STUFF Bonds o More on Bonds Example Dr. Cash 6627309 Dr. Bond Discount 1372691 (plug) Cr. Bonds Payable 8000000 Market Rate: 10%, period rate 5% USE TABLE 2 and TABLE 4
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o o o
o o o
TRIBUNE CASE o 7. What is the amount of long-term debt that is scheduled to be paid by the Tribune Company during fiscal 2002? Note 10: 410,890 o 8. What was the adjusting entry recorded by The Tribune Co. on December 31, 2001 to recognize fiscal 2001interest expense on the LYONs (Liquid Yield Options Notes)? Look at Note 10 The percentage before the amount is a coupon rte. LYONs is a zero coupon bond. YTM was 3.57% but the coupon rate was zero. What is the interest expense every period? It is due in 15 years. Typical journal entry Dr. Interest Expense Cr. Bond Discount Cr. Cash Find out the amount the bond is amortized and that is the same as the interest expense because Cash is zero with a zero coupon bond. Bond Discount Account (Unamortized bond discount) o LYONs are zero coupon bonds interest expense = amount of amortization of discount o Alternative: Change in net book value (NBV) of bond = 291,644 281,602 = 10,042. o Change in Bond Discount Account = Change in Net Book Value (NBV) of bond. this is true even if it is not a zero coupon bond. o 217,498 o 207,456
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DEFERRED TAXES - Introduction o If you use LIFO for accounting, you must use it for taxes. o You can get two separate forms of income depending on the rules. This difference, and how it is reconciled, gives rise to deferred taxes. - Terminology o Book Income Income before income taxes (i.e. pre-tax income) for financial reporting purposes o Taxable Income The amount of income on which taxes currently due is figured for tax reporting purposes o Differences between book and taxable income are of two types Permanent differences: differences between book income and taxable income that arise from the inclusion of revenues and expenses for financial reporting but not for tax reporting some revenues and expenses have special tax treatment E.g. government bonds - interest revenue cannot include in tax statements Fines due to violation of laws cannot include in tax
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Kodak Case - 1. According to its tax returns, what was Eastman Kodaks total income tax obligation to all governmental entities in the year 2000? o Tax obligation Tax Payable = 145 + 268 + 35 = 448 - 2. What entry was recorded by Eastman Kodak to record its income tax provision in the year 2000? o Deferred Provision = Income Tax Provision - Income Tax Expense = o Deferred Provision = 225+37+15 = 277 o Income Tax Expense Journal Entry Dr. Income Tax Expense (Provision) 725 Cr. Income Tax Payable 448 Cr. Deferred Taxes (NET) 277 - 3. Assume that the U.S. statutory tax rate of 35% was used to calculate deferred tax liabilities related to depreciation. During the year ended December 31, 2000, which report included a greater amount of depreciation expense: the tax return or the financial accounting income statement? What was the magnitude of the difference? o During the year not cumulative looking for the current period difference in timing due to depreciation o Note 10 DTL regarding depreciation Change in DTL = Current Period Timing Difference * Tax Rate Change in DTL = 555 527 = 28 Current Period Timing Difference = 28/.35 = 80 How do you know if it is higher in tax or book? Depreciation expense is higher in the tax books DTL increased from 527 to 555. Therefore, liability is increasing making the expense higher in the tax books because income is lower in tax books so you paid less taxes and the liability therefore increases. - 4. Assume that the U.S. statutory tax rate of 35% was used to calculate deferred tax liabilities related to depreciation. As of December 31, 2000, which system has recognized more depreciation expense: tax or financial accounting? What is the magnitude of the difference? What would be the percentage change in Net properties on the balance sheet if tax depreciation had been used throughout the assets lives? o Balance in DTL = Cumulative Timing Difference * Tax Rate 555 = Cumulative Timing Difference * .35 Cumulative Timing Difference = 555/.35 = 1586M As of Dec 31, 2000, cumulatively, tax statement has recorded 1586 more of depreciation. Over the life of the total assets, they have recognized more depreciation on the tax statement. o Percentage Change in Net Properties if Tax Depreciation had been used throughout the assets lives?
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MARKETABLE SECURITIES AND LONGTERM INVESTMENTS - Investments o Reasons to invest in other companies Improve competitive position To get a return in the form of dividends, interest or capital gains o Types of Investments Minority Passive (less than 20% ownership) firm has no influence Debt Securities hold until maturity o Amortized historical cost Trading Securities mark to market with unrealized gains/losses to income o Market Value Method of Accounting Available-for-sale Securities mark to market with unrealized gain/losses to shareholders equity o Market Value Method of Accounting o Not solely for purpose of speculation hold for longer term Minority Active (Between 20% and 50%) can influence management Equity Method of Accounting adjusted historical cost Majority (More than 50% ownership) effective control Full Consolidation purchase accounting o M&A Course 30117 Lots of Equity Method and Full Consolidation - Minority Passive Investments: Trading Securities o Securities held for short-term profit: intended to be actively or frequently traded for shortterm potential (primarily held by banks, insurance companies, and other financial institutions) o Accounting Treatment Balance Sheet Short-term: current asset called marketable securities Reflected at market value at the balance sheet date (marked to market) o Differences in book value and market value give rise to unrealized gains and losses. these go to the income statement even if you havent sold it. Income Statement Recognize dividend income as earned income All changes in value both unrealized and realized gains and losses are recognized each period in the income statement Statement of Cash flows o All activity is included in the operating section - Minority Passive Investments: Securities Available for Sale o Securities that are neither held to maturity nor trading securities Firms usually acquire these for their perceived longer-term investment potential rather than for short-term speculation purposes o Accounting Treatment Balance Sheet Asset is reflected at market value at balance sheet date (marked-tomarket)
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FINAL CLASS (SLIDE 6 MARKETABLE SECURITIES - 11.45 (modified) - Minority Passive Investment o Comprehensive income = net income + other changes in shareholders equity that are not related to owner transactions (e.g. unrealized gains and losses from marketable securities holdings) - Minority Active Investments o Ownership is between 20% and 50% of voting stock o Criterion: is there significant influence? o If there is control, it should be minority active. o Equity Method accounting method used by investing firm Initial purchase (including goodwill) is recorded as an asset at acquisition cost Goodwill excess of purchase price over market value of identifiable net assets Each period, the investing firm recognizes net income equal to its proportionate share of the net income of the investee firm. Dividends received from investee reduce the asset not recorded as revenue but rather a return of capital. Dr. Cash/Dividend Receivable Cr. Investment (why arent we crediting revenue like in minority passive?) Goodwill is tested each period for impairment - Minority Active Investments: Illustration o Suppose A invested in 30% of company B in Year 1. They paid $680k. o Details of B MV of total assets at time of purchase: $2M30% = 600k Net income for Yr 1: $500k 30% = 150k Dividends declared During Yr 1 = 180k 30% = 54000 Company B had an internally developed patent with book value = 0; 30% of the market value of the patent = $80k. The patent has a 10 yr life. o Amortization expense of patent = 80,000/10 - Minority Active Investment - Equity Method Illustration o Dr. Investment in B 680k o Cr Cash 680k o Dr. Investment in B 150k
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WELLS FARGO 8. What is the amount of net realized gains or losses relating to Securities available for sale sold during 2005? What is the effect of these transactions on net income before taxes for 2005? 40M in net realized gains (cash flow statement and somewhere else) 9. Prepare journal entries for the purchase and sale of Securities available for sale during 2005. You may ignore the impact of taxes. Assume that the carrying value of the securities at the time of sale was $19,029 million. Carrying value exising book value Purchases Dr. AFS Securities Cr. Cash Sales Dr. Cash Dr. Unrealized Gains Cr. Securities AFS Cr. Realized gains $28,634 $28,634 19,059 10 (PLUG) 19,029 40
Acquisition cost of goods sold securities book value unrealized gain Acquisition Cost = Book Value Unrealized Gain = 19029 10 = 19019 Acquisition Cost = Proceeds - Realized gains = 19059 40 = 1919 10. Determine the amount of net unrealized gains or losses for 2005 for securities available for sale securities on hand at December 31, 2005? [Hint: Use the information from question 10 and the information about net unrealized gains/losses in the securities footnote]. What is the effect of these transactions on net income before taxes for 2005?
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We need to go from 60 to 30. Subtract out the accumulated net unrealized gains/losses of sold securities from prior years. Take out any unrealized gains or losses from prior years. If it was trading, that would have already hit the income statement in prior years. Adjustments 1) Sold Securities - Eliminate net unrealized gains/losses 2) Securities on Hand Include unrealized gains/losses in income 2005 -10 -456
Net Income before taxes would have been lower by $466 if the securities were classified as trading rather than available for sale. What would be the effect on total Shareholders equity? There should not be any effect. It will be the same. Income statement will have a lower value but total shareholders equity will not be affected. Chapter 12: SHAREHOLDERs EQUITY - S/E is a residual interest, representing the SHs claims on the assets of a firm in excess of the claims of creditors o Authorize Shares total shares that can be issued at any time over the life of the company o Issued Shares # of shares issued at any point in time o Outstanding Shares Issued Shares Treasury Shares - Treasury Stock o Shares of the firms stock that have been repurchased by the firm o Why repurchase shares? To have on hand to give to employees exercising stock options May be the best use of excess cash As a takeover defense As a signal of undervaluation of shares Better way to repay S/Hs due to tax reasons (S/H can pay capital gains tax rate rather than dividend rate) Way to boost Earnings per Share o Accounting
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PACIFIC SUNWEAR CASE 1. What amount of cash did Pacific Sunwear use to repurchase shares of its common stock during the year ended February 3, 2007? What was the journal entry made by Pacific Sunwear to initially record the repurchase of these shares during fiscal 2006? What entry was made to reflect the subsequent retirement of the repurchased shares during fiscal 2006? Repurchase o Dr. Treasury Stock o Cr. Cash 99346 99346
Retirement o Dr. Common Stock 49 o Dr. Additional Paid in Capital 99297 o Cr. Treasury Stock Reclassified to Retained Earnings o Dr Retained Earnings 64934 o Cr. APIC
99346
64934
On average, what was the price for the shares repurchased? Average Price for Repurchase = 99346/4916 (in thousands) ~= $20 Average Par Value = 49000/4916000 = .01 2. Using the information in the Statements of Shareholders Equity, show the journal entries made by Pacific Sunwear during fiscal 2006 to reflect (1) stock option grants by Pacific Sunwear and (2) stock option exercises by employees.
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Stock Option Exercises by Employees o Dr. Cash 8570 o Cr. Common Stock 8 o Cr. APIC 8562 3. Using information in the stock options activity chart in Note 10, compute the value of option grants made during the year ended February 3, 2007. Assuming that the options vest, on average, over a 3.5 year period, what proportion of the total stock-based compensation expense recognized in 2006 relates to options granted to employees in 2006? o o o o o # shares granted = 684,325 FV of options granted (weighted average) = 9.36 Total FV of Options Granted = 684,325 * 9.36 = 6,405,282 Compensation expense = Total FV of Options Granted / Vesting Period = 6,405,282/3.5 = 1,830,081 29% of total expense Rest of Expense relates to prior period grant that are not yet vested.
EXAM - Compensation Expense - Treasury Stock Stuff Covered Post Mid-term - Long-lived assets o Capitalize(create an asset) vs. Expense o Three significant choices that affect depreciation Depreciation method, useful life, depreciable basis o Reflecting new information Asset impairment If net book value > undiscounted sum of future cash flows, write down asset to current market value Changes in depreciation estimates Net book value at date of new information used to compute new expense going forward Expense repairs/maintenance; capitalize capital improvements (somewhat of judgment call) Capitalize purchased intangibles; expense self-generated intangibles - Long-term Liabilities o Present Value Concepts PV Lump Sum = Future Lump Sum Amount * Factor from Table 2 PV Annuity = Future Annuity Amount * Factor from Table 4 o Bonds Proceeds/Issue price = PV of future cash outflows @ histoirical market rate Interest expense = beginning liability * historical market rate
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Leases o Operating vs. Capital Four tests to determine if lease is a capital lease o Operating Lease Record rent expense every period o Capital lesae Record lease liability and asset on signing Record interest expense and amortization expense every period Dr. Interest Expense Dr. Lease Liability Cr. Cash Note: Total interest expense + total lease liability = total cash payments (this is true for EVERY period) o The total amount expensed over the life of the lease under operating and capital lease are identical Amounts expensed under capital lease are larger in the early years o Capitalizing operating leases Effect on balance sheet Deferred Taxes o Arise due to temporary differences between taxable income and book income o For better matching, report tax expense equal to tax impact of book income Income tax expense = (Income before income taxes +/- permanent differences) * statutory tax rate o Deferred tax liabilities (DTL) are created when Cumulative taxable income < cumulative book income, OR Cumulative taxes paid < cumulative income tax expense in I/S o Deferred tax assets (DTA are created when Opposite of above o When tax rates change, record this impact on previously recognized DTAs and DTLs o DTA/DTL on balance sheet = bal TWO EQUATIONS I NEED FROM THE CHALK Investments o Minority Passive: less than 20% ownership Trading and AFS securities are marked to market at the end of the year: Market Vlaue Method Trading: both unrealized gains and losses are recognized each period in the I/S o Realized gain/loss = proceeds from sale book value AFS: unrealized gains and losses stay on the balance sheet as a SE account and do not pass through the I/S o Realized gain/loss = proceeds from sale original acquisition cost o Minority Active: 20-50% Investor firm recognize net income equal to its proportionate share of the net income of the investee firm Dividends received from investee reduce the investment asset not recorded as revenue
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