CFA L2 学习笔记2-financial reporting and analysis.doc

Financial Reporting and Analysis1. defensive interval ratio=(cash + short-term marketable investments + receivables) / daily cash expenditures2. financial leverage ratio ( equity multiplier )= average total assets / average shareholders equity3. interest coverage ratio = EBIT / interest payments4. fixed charge coverage ratio= (earnings before interest and taxes +lease payments)/ (interest payments +lease payments)5. dividend payout ratio = common share dividends / net income attributable to common shares6. sustainable growth rate = retention rate * return on equity7. earnings per share = ( net income preferred dividends) /weighted average number of ordinary shares outstanding8. Free cash flow to equity (FCFE) = cash flow from operating activities investment in fixed capital + net borrowing9. Free cash flow to the firm (FCFF) = cash flow from operating activities + interest expense *(1- tax rate) investment in fixed capital10. Inventory turnover ratio = COGS / Average inventory11. Return on assets = NI / Average assets12. accounts receivable turnover = sales / accounts receivableReading21 Inventories: Implications for Financial Statements and Rations1. COGS= beginning inventory +purchases ending inventory. The COGS and ending inventory are inversely related. 2. LIFO reserve= inventory under FIFO - inventory under LIFO；inventory under FIFO = inventory under LIFO + LIFO reserveCOGS under FIFO = COGS under LIFO change in LIFO reserveNI under FIFO=NI under LIFO + change in LIFO reserve*(1-tax rate)Retained Earnings under FIFO=RE under LIFO + LIFO reserve*(1-rt)3. Under FIFO, income before taxes is higher, taxes paid is higher, cash is lower, inventory increases by a larger amount than cash decreases, and shareholders equity is higher because of higher retained earnings.4. LIFO better reflects replacement cost, so its gross profit margin would best reflect current costs of the industry. As LIFO reserve is decreasing, it may reflect a LIFO liquidation(后进先出法清算，一般发生在期末存货少于期初存货的情况下) which may distort gross profit margin.5. LIFO and FIFO Comparison6. inventory valuation methodReading22 Long-lived Assets: Implications for Financial Statements & Ratios1. Research and development costs: IFRS-research costs are expensed; development costs are capitalized. GAAP-both are expensed.2. Software development costs: costs to develop software for sale are expensed until the products technological feasibility has been established, then GAAP requires subsequent costs to be capitalized. Costs to develop software for own internal use are capitalized.3. Financial effects of capitalizing vs. expensing:4. Depreciation methods:Straight-line depreciation expense = ( original cost - salvage value ) / depreciable lifeDouble-declining balance (DDB) depreciation in year x = 2 / asset life in years* book value at beginning of year x5. MACRS: modified accelerated cost recovery system加速成本回收法修正系统6. Impairments for long-lived assets: under IFRSwhen carrying value (original cost less accumulated depreciation) exceeds recoverable amount( greater of “fair value less selling costs” and “value in use or present value of future cash flow stream”), the loss can be reversed in the future; under GAAP, when carrying value exceeds the fair value or the future cash flow stream(测试时用undiscounted现金流，减值计算时用discounted现金流), loss recoveries are prohibited except to long-lived assets held for sale. Impairment will result in lower assets and lower equity (retained earnings).7. Average age=accumulated depreciation / annual depreciation expenseAverage depreciable life = ending gross investment / annual depreciation expenseRemaining useful life = ending net investment / annual depreciation expense = average age - average depreciable lifeAverage total useful life = average age + remaining useful life8. A lease must be treated as a finance(capital) lease if any one of the criteria is met: title is transferred to the lessee at the end of lease period; a bargain purchase option exists; lease period is 75% or more of the assets economic life; present value of lease payments is 90% or more of the fair value.9. Under GAAP, interest expense of finance lease is reported as outflow from operating activities, and the principal payment is outflow from financing activities. Under IFRS, interest expense can be reported as outflow from operating activity or financing activity.10. Financial statement impact of lease accounting:Ratio impact of lease accounting: 总的来说，finance lease的指标比operating lease都要差。11. Adjusted operating lease to capital lease: adjusted EBIT = EBIT + lease expense - adjustment to depreciation; adjusted interest expense = interest expense + assumed interest expense on leases. Reading23 Intercorporate Investments1. accounting for investments:2. summary of classifications of financial assets: 3. Under IFRS, business combinations are not differentiated. Under GAAP, business combinations are categorized as: merger - the acquiring firm survives; acquisition both survives in a parent-subsidiary relationship; consolidation a new entity is formed; special purpose entities a special purpose entity is typically created for a single purpose by a sponsoring company.4. acquisition method vs. equity method: Acquisition method results in higher revenues and expenses, but net income is the same.5. Acquisition goodwill = purchase price fair value of net assets ( current assets + plant and equipment liabilities)Under partial purchase: Full goodwill method=purchase price/购买比例 fair value of net assets Partial goodwill method=purchase pricefair value of net assets*购比The two methods will have the same amount of debt; shareholders equity will be higher under full goodwill.6. Reported financial results from different accounting methods: 7. Under the pooling of interest method, all assets and liabilities are reported at historical book value. The equity is generally lower using the historical book value method than fair value method.Reading 24 Employee Compensation: Post-Employment and Share-Based1. Defined-contribution plan: employee assumes all of the investment risk.固定缴款计划Defined-benefit plan: employer assumes all of the investment risk.固定收益计划2. the funded status of the plan= plan assets-benefit obligation3. Projected benefit obligation (PBO): the actuarial present value at an assumed discount rate of all future pension benefits earned to date, based on expected future salary increases. It assuming going concern and employee will work for the firm until retire.Accumulated benefit obligation (ABO): actuarial present value of all future pension benefits earned to date based on current salary levels, ignoring future salary increases. If based on a non-pay related plan, the ABO and PBO are the same.Vested benefit obligation (VBO): amount of the ABO that is not contingent on future service.Influencing factors: current service cost, interest cost, past service cost, actuarial assumptions, benefits paid to employees.4. Calculate obligation at end of period:Current service cost=the present value of benefits earned by the employees during the current periodInterest cost=the PBO at the beginning of the period*discount rate5. Reported pension expense: 6. Firms can improve reported results by increasing the discount rate, decreasing the compensation growth rate, or increasing the expected return on plan assets.7. reconciliation of plan assets disclosed in the footnotes:8. pension accounting under IFRS: 9. Under IFRS, the net pension asset or liability reported on the balance sheet represents the funded status adjusted for unrecognized items. Under GAAP, the net pension asset or liability is equal to the funded status, without adjustment for unrecognized items.10. calculate economic pension expense:方法一summing all of the changes in PBO except for benefits paid and subtracting the actual return on assets方法二the change in the funded status excluding the firms contributions11. Stock appreciation rights: gives the employee the right to receive compensation (cash or equity) based on the increase in the price of the firms stock over a predetermined amount. Since no shares are actually issued, there is no dilution to the existing shareholders.Phantom stock: similar to stock appreciation rights except the payoff is based on the performance of hypothetical stock instead of actual shares. Usually be used in privately held firms or highly illiquid firms.12. Key inputs of option pricing models: exercise price, stock price volatility, estimated life of each award, estimated number of options that will be forfeited, and the risk-free rate of interest.13. Reclassifying pension expense for analytical purposes:Operating profit: add reported pension expense, subtract service costInterest expense: add interest costOther income: add the actual return on assets(=expected return on plan assets + actuarial gains)14. Health care costs, over time, will taper off to a lower, constant rate. This future inflation rate is defined as the ultimate health care trend rate.15. Under both GAAP and IFRS, the option expense for options that are fully vested on the grant date is equal to the value of the options using some option valuation model and is recorded on the grant date.Reading 25 Multinational Operations1. Local currency / functional currency / presentation currency2. Remeasurement: local currencyfunctional currency; temporal methodTranslation: functional currencypresentation currency; all-current method3. Under GAAP, if a subsidiary is operation in a hyperinflationary environment (cumulative inflation exceeds 100% over a 3-year period or more than 26% annual inflation), the functional currency is considered to be the parents presentation currency, and the temporal method is used. Under IFRS, the subsidiarys financial statements are restated for inflation and then translated using the all-current method.4. summary of temporal method and current rate method: 5. Monetary assets and liabilities: cash, receivables, payables, short-term and long-term debtNon-monetary assets and liabilities: inventory, fixed assets, intangible assets, unearned revenueNonmonetary items are not exposed to purchasing power gains or losses during inflation. Monetary assets will result in purchasing power losses, and monetary liabilities will result in purchasing power gains.6. impact of changing exchange rates on exposure: 7. under current rate method,用CTA调整差额；under temporary method,用retained earnings调整差额。8. Under the current rate method: Pure income statement and pure balance sheet ratios are unaffected. When the average rate is greater than the ending rate, the foreign currency is depreciating, and the mixed ratios (with an income statement item in the numerator and an end-of-period balance sheet item in the denominator) will be larger than the original ratio. When the foreign currency is appreciating, the mixed ratios will be smaller than the original ratio.9. Including the gains and losses (that are reported in shareholders equity) in net income is clean-surplus accounting. Dirty-surplus is gains and losses that are reported in shareholders equity.Reading 26 the Lessons We Learn1. Some common earnings measures:EBITDA: as a proxy for operating cash flowEBIT: as operating income or operating profitIncome from continuing operations: earnings exclude below the line Net income: includes all revenues, expenses, gains, losses, and below the line items2. Some common risks: interest rate risk, foreign exchange risk, accounts receivable risk, price risk of raw materials and other inputs.3. summary of hedge types: In all three hedge types, any portion of the hedge that is not effective is recognized in the income statement.4. The use of derivatives to hedge risks is often a prudent business strategy.Reading 27 Evaluating Financial Reporting Quality1. Deferred revenue: 已收未发生，负债，也叫unearned revenueAccrued revenue：未收已发生，资产Deferred expenses：已付未发生，资产Accrued expenses：未付已发生，负债2. Calculate aggregate accruals:Balance sheet approach: Operating assets = total assets - cash, equivalents to cash, and marketable securities. Operating liab