Receivables sold but… with recourse! Better add it back, increase CA and CL. This also toys with your cash flows, you should subtract from OCF and add to FCF (financing cf) as this is not an operating activity.
I’ll keep this going, today is my FSA day. Unconsolidated SPEs: Add the assets and liabilities (both long and current - term) of the SPE to the primary beneficiaries’ statements. Also a point to remember to save you some thought: When make an adjustment that adds back assets and liabilities, it will always increase leverage as equity does not change while you’re liabilities increase.
I hate everything FSA, probably synthesis the most. Just looking at this makes me frustrated.
Deferred taxes make me furious. Someone else can tackle those.
Not an “up or down A &L” but something to remember (I lost 2 questions because of it): when calculating PV of lease, use LESSER of firms borrowing rate or implicit rate in lease.
mwvt9 Wrote: ------------------------------------------------------- > Good one. > > That would be CA and CL. > > They also have an impact on the IS, which I can’t > remember. mwvt9 - in reference to your comment above regarding operating leases, don’t think its CA and CL since a lease (if capitalized) could be treated as PP&E and hence would not be CA. I think it’ll be best to think of lease as impacting A & L. goes to eleven Wrote: --------------------------------------------------------- > Not an “up or down A &L” but something to remember (I lost 2 questions because of it): when calculating PV of lease, use LESSER of firms borrowing rate or implicit rate in lease. Goes to 11 - This is a VERY good point and something that could be easily overlooked. were the questions you missed on last year’s exam or practice Qs this time around.
^^^^ I missed them for sure on a practice question this morning, and possibly on last years test if it was there.
Investment in 20% - 50% sub, eliminate the equity one liner, and do a proportionate consolidation up A, up L, but E =
SYNOPSIS FSA ADJUSTMENTS: ASSET SIDE- Cash and cash equivalents: no adjustments AR: if you sold with recourse, add back receivables sold but not collected. CA up, CL up. treat as ST loan, imputed interest expense goes to I/S. restate proceeds from transaction from CFO to CFF INVENTORY: use FIFO calculations (LIFO ending inventory + LIFO reserve) so up A and up E by amount of LIFO reserve INVESTMENTS IN AFFILIATES: replace equity method investments with prop consolidation Investment in 20% - 50% sub, eliminate the equity one liner, and do a proportionate consolidation: up A, up L, but E = PENSIONS: on B/S, replace net pension asset with fair value plan assets - PBO. if it were a liability you’d replace the liability with PBO - fair value of plan assets. if liability: A same, you’d up L but then also down L a bit by the drop in deferred tax liability. so E down, but not by the full amt of the L you threw up on the B/S *we probably should find and do a problem with this to solidify it* GOODWILL: eliminate it unless the firm is earning excess returns from acquisitions So A down, E down. Per MWVT9- GW not removed in RI models if the results are from an acquisition DEPRECIATION: if you move from let’s say DDB to SL- you’d what, down A, down E? maile- you posted it- elaborate a bit if you can w/ an example? LIABILITY SIDE- DEFERRED TAXES: if no reversal, drop L and up E by full amount. if reversal, the difference b/t the reported value and the PV should be reclassified as equity (drop L, up E for that difference) LEASES: operating make capital- so A up, L up by the PV of the lease payments. remove rent expense from I/S and replace with depreciation and interest expense. COMMITMENTS AND CONTINGENCIES (I have not confirmed these in books- let’s chat them through)- ENVIRONMENTAL- someone said up L, up A. how come up A and not down E? LITIGATION- someone said up L, down E. you’d adjust the B/S by PV of this transaction. LTD: replace book value w/ mkt value. if it’s an increase, you’d up L and down E. CAPITALIZATION OF INTEREST: down A, down E, reduce NI by int expense (can someone confirm this one?) SPE: consolidate them. Up A, up L (both ST and LT assets and liabilities said someone here- pls confirm) STOCKHOLDER’S EQUITY SIDE: PREFERRED STOCK: restate to either mkt or liquidation value. can somone confirm if we’d up the value then, it’d be up equity, up assets? INCOME STATEMENT MOVES: DEPRECIATION- changing methods- change in depr x (1-t) added to NI says maile- this would be let’s say if you went DDB to SL so you’d up your NI since you’re taking less depr out early? ADJUST FIFO COGS TO LIFO LIFO COGS = FIFO COGS + (beginning FIFO inventory x firm/industry approx. inflation rate) if anyone wants to elaborate on this stuff, LIFO liquidations, etc… that’d be super. Please adjust or add to this list- this is a nice list so far- a few of them like the contingencies, anyone pls just confirm/deny some of the stuff there- thx!
environmental liability -> same assets -> liabilities up, equity down
I have not categorized the items(like bannisja did), just posted some of adjustments that I have found useful. COMMITMENTS AND CONTINGENCIES increase Liabilities by the amount and decrease equity. PENSIONS: If we have a pension asset on the balance sheet but there is actually a pension liability, remove pension asset completely ( Asset dec, Equity Dec) and increase liability (inc Liability, dec Equity) If there is an increase in pension cost, increase liability, decrease equity CAPITALIZED INTEREST: remove capitalized interest from assets and equity add it to interest cost for calculating EBIT/int cost EBITDA should be reduced by amount of A/R not collected LIFO AND FIFO: FIFO Inv = LIFO Inv + LIFO Reserve FIFO COGS = LIFO COGS - (change in LIFO Reserve) If LIFO liquidation has occured, it means that cheaper, earlier inventory is reflected on COGS, so lower COGS and higher NI. We need to adjust for this by reducing NI new NI = old NI - (change in LIFO Reserve) (1-t) If LIFO reserve has increased, use reverse logic => higher inventory has been passed to COGS, which implies lower NI. We need to adjust for this by increasing NI new NI = old NI + (change in LIFO Reserve) (1-t) If share price of preferred stock is mentioned, we need to treat preferred stock like Debt so remove Preferred stock from Equity, add it to Debt.
can anyone sum a bit regarding adjustments of deferred tax liability on cash flow statements? I encountered such qs in practice exam
mvt9 the GW exception for RI u mentioned, what kind of significance does it have for the RI models or calculations
Convertible Debt (if conversion likely) A = L + E (L. dwn) ( E. up) Redeemable Pref. Stock (reclassify as debt) A = L + E (L. up) ( E. down) Deferred Tax Asset (Reversal Probable) A = L + E (L. dwn) (E. up)
A million pounds in intangible assets is hereby offered to the person who can explain in English why the answer to the following question is 86.2% over and above: 5 increase in assets + 3 increase in NI (5*1-.4) which will be added to equity and RE. 50/(50+5+3) = 86.2% Net income $23 million Total liabilities $50 million Total shareholder’s equity $50 million Effective tax rate 40 percent New increased return on plan assets of $5 million. This change resulted in an increase in the market-related value of plan assets with no long-term effect on the income statement. What is the impact on the debt/equity ratio?
CAPITALIZED INTEREST: remove capitalized interest from assets and equity add it to interest cost for calculating EBIT/int cost EBITDA should be reduced by amount of A/R not collected Man I don’t get this. Can someone explain this? Millions of THANKS
Anybody got an answer for achogogo on this? I’m wondering the same thing. Why do you have to reduce EBITDA after selling receivables. Once an item is sold it shouldn’t matter whether it hits cash or A/R. And when you sell the A/R, its not like you’re booking that as a sale - its just a method to speed up cash inflow, right? So why would we then reverse this? The only reason I could possibly see is if its deemed uncollectible. Ideas anyone? ---------------- EBITDA should be reduced by amount of A/R not collected Man I don’t get this. Can someone explain this? Millions of THANKS ------------------
ok I posted this adjustment… just gimme a while… I will need to look up the exact question…
Assume EBITDA is 4,800,000. Also consider that the company recently sold $400,000 worth of accounts receivable with recourse. To date only $100,000 has been collected. thus the 400,000 - 100,000 is uncollected yet it is reflected in sales of A/R. Thus reduce EBITDA by 300,000.
Thanks ruckmani. Is this from Schweser Q bank 28814? This is the only place I’ve seen it explained like that. If you’ve seen this elsewhere in study materials, can you direct me to it? My understanding was if you sell receivables, that decreases A/R and increases your Cash. Total assets are unchanged. I still don’t see how this hits the income statement. This is why I’m still confused on how it would effect EBITDA in this question.