CMA 2015 Changes

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Part 1: Section A: External Financial Reporting Decisions

Financial Statements (Public limited companies-must) Historical

Users-Decisions-Communicate-Results

Users: External/Internal

Shareholders

Tax Authorities

Regulatory Agencies

Banks

Creditors

Management

Employees

Board of Directors

Balance sheet=Picture of OWES (Liab&Equity) & OWNS (Assets)

Income statement-Movie

Assts-Liab=Equity (Proprietary Theory)

Balance sheet=Permanent Accounts (Liquidity,Solvency,Flexibility)

Income statement=Temporary Accounts

Elements of Balance sheet

Assets

Liabilities

Equity

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Asset = Unexpired Cost.

1. You Own

2. Provide Future Benefit

3. Arouse from a past transaction

When we talk about intangible assets we come back to this.

Liability =

1. You Owe

2. Cause Future Cash Outflow

3. Arouse from a past transaction

Current vs. Non-Current (Fixed)

Current Asset is converted to Cash within 12 months or 1 operating

cycle whichever is longer.

For most businesses the Operating cycle is generally less than 12

months but there are some exceptions like construction companies

etc...

Limitations of Balance sheet:

Historical Cost,Judgments and Estimates, e.g.: % of Bad debt, Useful life, Warranty

Internally generated assets are NOT recorded e.g. Goodwill, Brand.

Income Statement – MOVIE (starting point and ending period)

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Single step and Multi step income statements.

Single step:

Revenues

-All Expenses

---------------------------

Net Income

Multi step:

Sales Revenue

-COGS

----------------------

Gross Profit

-Selling, general and admin expenses

----------------------

Operating Income

+ Interest and dividend income-Interest expense

+/- Non operating gains/Losses

----------------------

Income from continuing operationsbefore Income Tax

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-Provision for Income Taxes on above Income

----------------------

Income from continuing operations

+/- Gains/losses on operations of discontinued operation (Net of Tax)

+/- Gains/losses on Disposal of discontinued operation (Net of Tax)

----------------------

Income before Extraordinary item

+/- Extraordinary Gains/losses (unusual and infrequent)

-Applicable Tax

----------------------

Net Income

----------------------

Elements of Income Statement

Revenues Primary Business Operations

Expenses

Gains Non Primary Operations

Losses

Unusual or infrequent is a separate item in Continued operations

Uses:

Asses Risk

Past PerformanceBasis for predicting future performance

Limitations:

Net income Full of assumptions

Eg: accounting method, depreciation method, FIFO or LIFO,

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Items not able to be measured like Brand

Cash Flow

Operating,

Investing,

Financing

Uses:

Liquidity and Cash Analysis

Limitations:Indirect method has limitations

Comprehensive Income: All transactionsexcept transactions with

Owners.

Net income

+/- Gains/losses foreign currency

Translation

+/- Gains/losses prior service costs/

Credits related to pension plan Other Comprehensive Income

+/- Gains/losses Unrealized

Held for sale securities

+/- Gains/losses effective portion

Cash flow hedge-----------------------------

Comprehensive income

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Limitations of financial statements

Only Monetary (Quantitative), No quality items

Lot of Estimation/Judgment/Choices

Past transactions and Historical Cost

Assume Going Concern

Statement of Cash flow (Connected to Income statement)

Income statement is the starting point for Cash Flow Statement.

Income statement and adjustments. i.e. non-cash transactions.Eg: Credit transactions, Depreciation

Also some cash transactions not in income statement.(unearned

revenue)

Cashflow is connected to Income statement.

No. of CashFlowStatement = No. of Income Statements

Three Categories of Activities

Operating Activities:(which are NOT Financing or Investment

Activities i.e Revenues and expences eg.Interest paid and rec’d,

Trading securities, Taxes, DividendsRECEIVED)

Investment Activities: Invest for future benefits eg.Purchase or sale

of PPE, Make(give) and collect back loan, Buying and selling shares

of other companies, Aquiring and disposing debt in other companies

Buying and selling available for sale/held for maturity investments.Financing Activities: to raise capital

Eg.issuing stock,treasury stock transactions,DividendPAID,issue

debt and repay debt(lease, mortgage etc..),obtain and repay loan,

some taxes issues related to share based compensation .

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Notes:

Present each side of transaction and do not net off

Non cash investment and financing transactions present separately at

the bottom of cashflow statement.

e.g. issue of stock to purchase PPE

Cash equivalents(3 months or less) NOT shown

Foreign currency Cash Flows :Use rate in effect or Avg.rate.

Cash Flow Statement –Methods

We know the answer before we begin; Answer to SCF is simple i.e

change in cash during period which comes from balance sheet.

For exam INDIRECT method is important.

The Difference between 2 valid methods under GAAP is in

presentation of operating activities section.

OP

INV

FIN

===

Change in cash

====

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INDIRECT METHOD

Steps forOPERATING Activities

1)Eliminate Non-Cash Items e.g. Depreciation

2)Eliminate Invest & Finance Activities e.g. Asset sale

3)Adjust for operating accounts(Cash items not there in IS)

4)Trading Securities

5)Disclosures

Change in the opening and closing balances need to be considered.

1. Add back depreciation, amortization expense etc..

2. Gain are subtracted and Losses added back from Net income

because these are not operating

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3. If AR or Inventory, increases subtract or vice-versa.

AP increases add back or vice versa.

Rule: Liabilities move same way

In the Exam, Trade securities are generally operating but companies

may choose to be as investing activities.

Under Indirect method:

Cash paid for interest as disclosure

Cash paid for taxes as disclosure

Investment and Finance Activities

How much cash rec’d and how much paid.

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Accounts receivable and Bad Debts

Two methods of Allowance

% of sales method (Income statement method)

% of A/R method (Balance sheet method)

The difference is in calculation, other than that the journal entries and

accounts are same.

Direct write off of Receivables is not allowed in US GAAP unless youhave very few.

Under % of sales method we calculate % of sales that will NOT be

collected.

Under % of A/R method we calculate % of ending AR that will NOT be

collected.

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Factoring

Interest calculation excludes reserve and fee.

Without recourse generally have higher interest rate

because of risk.

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Seller may get all or some of reserve back if customers

pay

.

With recourse is a liability (secondary).

Factor is a party which buys receivables at discount.

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Inventory

lassi!cation

Raw Material

Work in Process

Finished Goods

FOB shipping point Ownership of Goods in Transit.

FOB destination

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How often do we calculate average cost

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Till now we have seen periodic.

!g" Oldest person in the fa#il$ continues to %e oldest.

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&'FO is (ot accepta%le under 'FR).

F'FO*&'FO*W+M are all assu#ptions.

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Treat as one $ear and it will %e corrected, however one $ear isover stated and one $ear it is under stated.

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Totals are correct, %ut individual allocations are not correct.

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-!'&'(G (R/selling price0cost to co#plete or dispose

F&OOR(R/0(or#al Pro1t #argin

Want-urrent Market price

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We need to write down the inventor$ %$ 233.

Investments

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Bu$ing %onds of other co#panies.

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)#all e4uit$ invest#ents treat sa#e as de%t.

"ong term Investments.

5e%t will #ature %ut e4uit$ does not have #aturit$.

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!ven if there are less than 236 7 8 share, %ut there is a control

over the other co#pan$. -onsolidation #ethod is used.

+fter eli#inating 1nall$ we will have onl$ transactions with

outside parties.

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#roperty #lant $%uipment

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Which method is best&

The one which %est #atches revenues and e9penses.

!.g. +sset provide sa#e value of %ene1t ever$ $ear use )&M.

+sset provides #ore %ene1t in initial $ears use 55B.

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Salvage value is 'ot used in till the end.

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"I*"I+I$S

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$xpense warranty is at the time of sale by manufacturer

Sales warranty could be by anybody separately from

product.

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Income taxes

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#ermanent timing di,erences does not create deferred tax

items.

+hey are not same in all countries.

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eferred tax asset is nothing but prepaid tax is di,erence

between

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-ow much we want to pay ebit

-ow much we have to pay /redit

eferred tax asset is nothing but prepaid taxes

eferred tax liabilities is nothing but taxes payable.

It revolves around +emporary timing di,erences.

ommon Stock

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'o 0ournal entry is recorded.

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'ot a liability till it is declared. It has to be disclosed in

'otes.

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'eed more info.

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(o -ash received or paid.

1evenue 1ecognition

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"ong term ontract (more than one year)

When pro!t is recogni2ed&

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iscontinued 3perations and $xtraordinary items

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"eases

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IF1S same method for same inventory.

IF1S 4 *sset retirement obligation cost Inventory cost5S 6**#4 *sset retirement obligation cost *sset ost

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(P %efore Ta9 and e9traordinar$ is before dividend and after

interest.

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CMA 2015 Changes

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