Different types of assets and liability and measurement base

BS 0

Different types of assets and liability and measurement base

  • Current asset (11)
    • Cash and cash equivalents (12)
      • Highly liquid investment, ready to convert to cash 
      • Near enough to maturity that interest rate risk is insignificant
      • Example
        • Treasury bills (12-1)
        • Commercial paper (12-2): unsecured, short-term debt instrument issued by a corporation
        • Money market funds (12-3): open-ended mutual fund that invests in short-term debt securities such as US Treasury bills and commercial paper.
      • Is considered as financial asset
        • Reported on the balance sheet at amortized cost or fair value
    • Marketable securities (13)
      • Financial assets that are traded in a public market
      • Value is readily determined
      • Example
        • Treasury bills
        • Notes: The same debt and bonds but is not considered being security under the law as bond is. 
        • Bonds
        • Equity securities
      • Details are disclosed in financial notes
    • Account receivables (14)
      • Financial assets represent amounts that customers owed to the firm for goods and services sold on credit
      • Are reported at net realizable value (NRV)
        • Based on bad debt expense (14-1) which increase allowance for doubtful accounts
        • Account receivables at net realizable value = gross receivables – allowance for doubtful accounts
      • Firms need to disclose significant concentration of credit risk 
      • Analyzing receivables relative to sales can reveal collection problems
    • Inventories (15)
      • Goods held for sale to customers or used in manufacture of goods to be sold
      • Manufacturing firms separately reported inventories of 
        • raw materials
        • work in process 
        • finished goods
      • Inventory cost:
        • Cost associated to inventories
          • Purchase cost
          • Conversion costs
          • Other costs to bring it to present conditions
        • Cost excluded from inventories
          • Abnormal waste: material, labor, manufacturing overhead
          • Storage costs, administrative overhead, selling cost…
        • Standard costing (15-1): 
          • Often used by manufacturing firms
          • Assigning amounts of 
            • Materials
            • Labor
            • overhead 

to goods produced

  • Retail method (15-2) for estimating cost of ending inventory
    • Ratio: Cost/retail price 
    • Retail – sale = retail price of ending inventory 
    • Cost of inventory = Retail price/ratio
  • Assign inventory cost to income statement (cost of goods sold)
  • Are reported at net realizable value or lower of cost 
    • NRV = Equal to selling price – completion costs – selling cost
  • Other current assets
    • Prepaid expense (16)
      • Operating costs that have been paid in advance but is not recognized yet
      •  
        • Rent payment: asset decrease, prepaid rent increase
        • Using of prepaid rent: prepaid rent decrease
    • Deferred tax assets (17)
      • Temporary difference between financial reporting income and tax reporting income
      • Equal to taxes payable – income tax expense recognized in the income statement
      • Occur when expense/loss is recognized before they are tax deductible
  • Current liabilities (18)
    • Accounts payable (19)
      • Amount firms owes to suppliers for goods or service purchased on credit
      • Can signal credit problems with suppliers
    • Notes payable (19-1) and current portion of long-term debt (19-2)
      • Obligation in the form of promissory notes owed to creditors and lenders
      • Reported as non-current liability if their maturities are greater than 1 year
      • Current position of long-term debt
        • Principal portion of debt due within one year or operating cycle
    • Accrued liabilities (20)
      • Recognized in the income statement but are not yet contractually due
      • Result form accrual method of accounting, under which expenses are recognized as incurred
      • Income tax payable (20-1)
        • Being recognized in the income statement but not yet been paid
      • Other examples: 
        • Interest payable, wages payable, accrued warranty
    • Unearned revenue (21)
      • Cash collected in advance of providing goods and services
      • An account under liability, not a revenue
      • Analysis implication
        • Does not require a future outflow of cash
        • Indication of future growth 
  • Non-current assets (22)
    • Property, plan and equipment (PP&E) (23)
      • Tangible assets used in production of goods and service
      • Lands, buildings, machinery, equipment, furniture, natural resources
      • Can be reported under cost model or revaluation model
      • Cost model(23-1): reported at amortized cost 
        • Historical cost – accumulated depreciation, amortization, depletion, impairment losses
          • Historical cost (23-2): purchase price + cost to get asset ready to use (delivery cost + installation cost)
          • Depreciation: straight-line, declining balance
          • Impairment: If its carrying value exceeds the recoverable amount and asset is written down to its recoverable amount and loss is recognized
    • Investment property (24)
      • Assets that generate rental income or capital appreciation
      • Under fair value model, change is recognized in the income statement
    • Intangible assets (25)
      • Non-monetary assets that lack physical substance
      • Securities are not considered intangible assets
      • Identifiable intangible assets (25-1)
        • Can be acquired
        • Result of rights or privileges conveyed to owner
        • Patents, trademarks, copyrights
        • If it is purchased → reported on the balance sheet
        • If it is created internally (R&D cost) → are expensed as incurred
          • Need to clarify research and development stage
      • Unidentifiable intangible assets (25-2)
        • Have an unlimited life
          • Goodwill
      • Finite-lived intangible asset (25-3)
        • Amortized over their useful lives
        • Tested for impairment 
      • Infinite lives 
        • Not amortized but tested for impairment 
      • Expense should be recognized as incurred
        • Start-up and training costs
        • Administrative overhead
        • Advertising and promotion costs
        • Relocation and reorganization costs
        • Termination costs
    • Good will (26) 
      • Is only created in a purchase acquisition
      • Is not amortized but must be tested for impairment
      • If goodwill is not impaired, it can remain on the balance sheet
      • Used to manipulate net income
        • Allocate more price to goodwill
        • Less to identifiable assets → less depreciation expense → higher net income
      • Accounting goodwill results from past acquisition
      • Economic goodwill results from future acquisitions 
      • Excess of purchase price over fair value of identifiable net assets acquired in a business acquisition
      • The amount of goodwill is the cost to purchase the business minus the fair market value of the tangible assets, the intangible assets that can be identified
      • Acquirers pay more as the target may have assets that are not reported on its balance sheet
        • Customer reputation, customer loyalty
  • Financial assets (27)
    • Can be found on the asset side and the liability side of balance sheet
    • Investment securities (stocks and bonds), derivatives, loans, receivables
    • Are measured at 
      • Historical cost (27-1): 
        • equity investments, loans to and receivables from other entities
      • Amortized cost (27-2): Held-to-maturity securities,
        • Equal to original issue price – principal payment + any amortized discount – any amortized premium – impairment losses
      • Fair value (27-2): trading securities, available for sale securities, derivatives 
        • Mar-to-market accounting
        • Trading securities (27-3): Debt and equity acquired with intent to profit over near term
          • Reported on the balance sheet as fair value
          • Unrealized gains and losses are recognized in the income statement
        • Available-for-sale securities (27-4) 
          • Not expect to be held to maturity or traded in the near term
          • Reported on balance sheet as fair value
          • Unrealized gains and losses are NOT recognized in the income statement but in comprehensive income
    • For all securities, dividend and interest income, realized gains and losses (actual when sold) are recognized in the income statement
  • Non-Current Liabilities (28)
    • Long-term financial liabilities (29)
      • Bank loan, notes payable, bonds payable, derivatives
      • Usually reported on balance sheet at amortized cost 
        • Equal to issue price – principal payments + amortized discount – amortized premium 
      • Some cases, it is reported at fair value
        • Short position in stock
        • Held-for-trading liabilities 
        • Non-derivative liabilities 
        • Derivative liabilities 
    • Deferred tax liabilities (30) 
      • Amounts of income taxes payable in future periods as a result of taxable temporary differences
      • Created when income tax expense recognized is greater than taxes payable
        • When expenses or losses are tax deductible before they are recognized in the income statement (not pay tax for reported expense which is not so real)
          • Using accelerated depreciation method for tax purposes but use straight-line method for financial reporting.
        • When revenue or gains are recognized in the income statement before they are taxable.

Note: 

  • Amortized cost: 
  • Promissory notes
    • a signed document containing a written promise to pay a stated sum to a specified person or the bearer at a specified date or on demand.
  • Recoverable value
    • Value in use
    • Equal to Fair value – selling cost 
    • Is the present value of asset’s future cash flow stream
  • Bond’s value and interest rate
  • Amortized discount 
    • Debt is paid down regularly along with its interest expense over the life of the bond.
  • Amortize premium 
    • amount of premium received when the corporation issued the bonds. 
    • Premium because bonds’ stated interest rate was greater than the market interest rate.
  • Tax deductible
    • lowers a person’s tax liability by lowering his taxable income.