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Study Session 9: Financial Reporting and Analysis: Financial Reporting Quality and Financial Statement Analysis

FRA

can someone tell the logic behind the conversion of LIFO inventory to FIFO inventory by using those formulae in the notes? Like we add the closing LIFO reserve to the ending LIFO inventory to get the FIFO inventory and for getting the COGS  we subtract the LIFO reserve from the COGS. Also the formula where After tax profit is calculated by adding the change in LIFO reserve(1-Tax rate) to LIFO after tax profit.

Distortion in Cash Flow from Financing?

When firms sell their accounts receivables, it distorts their CFO but what i was wondering is the impact on CFF and total cash flow if the firm is using the proceeds to reduce their debt?

Wont this deflate CFF by an equal amount while total cash flow remains same?

E.g. Firm sells $10 mn of A/R to reduce debt by $10 mn. Now CFO shows an extra +$10mn but CFF shows a negative 10mn outflow to settle debt while Total cash flow is unaffected.

Please tell me if I am thinking about this the wrong way


Solving for Avg A/R Balance

Business has avg receivables colleciton period of 19 days in 2003.  They want to decrease it 15 days in 2004.  Credit sales in 2003 are $300m and estimated to be $400m in 2004.  What will be the change in the avg receivable balance from 2003 to 2004?

Bit confused:

Been studying two formulas:

1) Receivables Turnover: Annual Sales/Avg Receivables

2) Days Sales Outstanding: 1/Receivables Turnover

The answer just states A/R Turnover to be 365/collection period.  Is this another formula to memorize?

Days sales payable

Dont really get this!!!!!

Brown corporation had average days of sales outstanding of 19 days in the most recent fiscal year.Brown wants to improve it’s  credit policies and collection practices and decrease its collection period in the next fiscal yr to match the industry average of 15 days.Credit sales in the most recent fiscal yr were $300m,and brown expects credit sales to increase to $390 m in the next fiscal yr.To achieve brown’s goal of decreasing the collection period,the change in the average accounts receivable balance that must occur is

A +0.41 m

Sinking fund provision

Debt covenants t o protect bondholders are leas t likely to :
A . restrict the payment of dividends .
B . require sinking fund redemptions.
C . prohibit bond repurchases at a premium to par.
 
I thought sinking funds are bad for bondholders because they give your money early using lottery….
The answer is C
 
Would someone please explain ??

Interest rate in the.finance lease

Hi all,
Have a question: for the finance lease, the annual lease payment is 10,000 for 4 years. The appropriate interest rate is 6%. The fair value of leased asset is 30,000.

We can calculate the present value of the lease payment at 6% is 34,651. The asset and liability recognized on the leesee’s balance sheet is the lower of the present value of the lease payments or the fair value of the leased asset, therefore 30,000.

For the interest expense, what is the appropriate interest rate in this case? 6% or rate greater than 6%?

Accounting shenanigans

Hey,

It seems I don’t understand quite well the accounting shenanigans section. Do you know for Sale of a long-term receivable, Sale of held-for-trading securities, and Securitization of accounts receivable, which would most likely increase the cash flow from investing activities under the indirect method? The correct answer is A (sale of long term receivables) and it says the other 2 choices are operating activities.

I don’t understand. Could someone explain to me the answer, and possible each one of the 3 activities?

Ratios! Heads up!

This is something that has confused me for a while, so i thought i’d put up some heads up 

Ratios can be confusing when you have questions asking what happens when a component of numerator increases or denominator decreases or both increases by a certain amount.

Situation 1

Both Numerator and Denominator increases by the same amount

if the Numerator is bigger than Denominator, the overall ratio will decrease.

E.g) if Asset/Equity = 3/2   …..if both of Asset and Equity increase by 1, then you now have Asset/Equity = 4/3

IFRS AND GAAP

Are we really supposed to know the accounting treatment differnces between IFRS and GAAP.  It quite tough to remember them all.