. attribution. . Champaign IL USA. . . . attribution. . Coffee from MAME Zurich Switzerland. . . . attribution. . Soufis Toronto CA closed Kamat Bugle Rock Bangalore IN and Tsukiji Market and Fuunji Tokyo JP. . . . attribution. . From markets in Helsinki Finland Lindau Germany Feldkirch Austria Vienna Austria. . . . attribution. . From scratch Putanesca sauce with semolina pasta various Xinjiang lamb dishes porcini risotto various Mexican dishes. . . . attribution. . John Sloan The Coffee Line 1905. . . . attribution. . Taken in Southern Tyrol Italy. . . . Accounting disclosure What companies say and why it matters. Focus on social media and regulatory filings. Approach this using AIML techniques. . . 1 Detecting financial misreporting using the topic modeling of annual report text. 2 Multiple projects on Twitter showcasing. 1 How companies strategically disseminate financial information on Twitter. 2 That executives disclosures are as important on Twitter as their firms disclosures. 3 How firms change disclosure strategies following passage of anti fake news laws. 3 Newer work on. Sentiment and understandability in accounting text. How open source software facilitates information democratization. The nature of discussions among analysts and managers. . calloutnote . All of the above use textbased data paired with AIML algorithms A secondary thread is the importance of content while some papers also push for better causality in research. . . . . . . . columns. . column width50. Course_DiagramsACCT_101_course_map_progressionpngwidth450px. . . column width50. 1 span stylecolor5555ddBasic elements of FAspan. 2 FA statements. span stylecolor5555ddIncome Balancesspan. span stylecolordd5555Cash flowsspan. 3 span stylecolor5555ddFinancial accounting rulesspan. 4 span stylecolorcc8855Complex transactionsspan. 5 span stylecolordd5555Financial statement analysisspan. . . . . . 1 Accounting is best learned in a seminar style. Less lecture more thinking. 2 Working with others greatly extends learning. If you are ahead. The best sign that youve mastered a topic is if you can explain it to others. If you are lost. Gives you a chance to get help and catch up. . Standard SMU grading policy. Participation 10. Homework 10 equally weighted. 2 quizzes 75 each. Group project 15. Final exam 50. . Come to class. If you have a conflict email me. Excused classes do not impact your particpation grade. Excused quizzes add to the finals weighting. Ask questions to extend or clarify. Answer questions and explain answers. Give it your best shot. Help those in your group to understand concepts. Present your work to the class. . Actively learn learn from others. . columns. . column width50. . Homeworks. . Only 10 because they are for learning. Submit on eLearn. Reinforce lesson. Apply to the real world. Useful after graduation. Answers are expected to be your own work. No sharing answers. Automatically checked by eLearn. . . . column width50. . Practices. . For you to practice material. Not required no direct impact on grades. Can do in study groups individually etc. All practices are on eLearn. Automatically graded for quick feedback. These questions are easier than exam questions. . . . . . . Why. Reinforce what you have learned. Early progress indicator. What to expect. 1 hour each. Hosted online. Calculationbased. Extracting information from a situation. Problem solving. . What to expect. 1 case per group covering a recent or ongoing accounting issue. Groups of 45 fairly assigned. Why. Brings course material to a real context. Helps develop soft skills. Learn about many real world situations. . Why. Ex post indicator of attainment. How. 3 hours. Long format like quizzes. Potentially some MCQ. Same exam across all sections. . columns. . column width50. . In class. . Participate. Ask questions. Clarify. Add to the discussion. Answer questions. Work with classmates. . . . column width50. . Out of class. . Check eLearn for course announcements. Read in advance of class. This will help a lot. Do homeworks on your own. Submit on eLearn. Do practices on your own or in groups. Office hours and TA hours are there to help. Short questions can be emailed instead. . . . . . . columns. . column width50. Spiceland Thomas and Herrmann. . Financial Accounting 6th edition McGraw Hill. . . . column width50. . FiguresBookjpgwidth400px figaligncenter. . . . . . A decent textbook but consider my slides to be more reliable. . . Laptops and other tech are OK. Use them for learning not messaging. Examples of good tech use. Taking notes. Viewing slides. Working out problems. Group work. Avoid. Watching livestreams. Messaging your friends on Telegram. Working on homework for the class in a few hours. . TA Office hours. Ryan By appointment on Telegram see syllabus for contact info. Timothy By appointment on Telegram see syllabus for contact info. Prof office hours. Bookable at a hrefhttpsrmclink101OHrmclink101OHa. Short questions can be messaged to TAs via Telegram or emailed to me. I try to respond within 24 hours. . Any office hours with me should be booked using the link above. . Official SMU Policy. . If you are in mandated self isolation do that. No live streams Zoom classes. . Relaxed policy for this course. . If you are symptomatic but not positive you can be excused from class. If you have completed a 7 day isolation but still feel unwell you can be excused from class. Live streams available for those with excused absences see details on eLearn. . To be excused for a COVIDrelated absence fill out this form httpsformsglegPpDZt6cp37sY6iD8. . All requests are automatically approved unless you hear back from me by email. . Due to room limitations no camera equipment the live stream will not capture all of the class. All of my audio should be captured though. Your classmates questions probably wont be captured. The whiteboard will probably be hard to see. A recording may or may not be released. . Live stream attendance is not required and does not count towards participation. . . Keep your mic muted when you are not speaking. 20 mics all on at once creates a lot of background noise. You are welcome to leave your video on seeing your reactions helps me to gauge your learning of the course content. If you are uncomfortable doing so please have a profile photo of yourself. To do this click yourself in the participants window click more or and then Edit Profile Picture. Feel free to use Zooms built in functionality for backgrounds. Just be mindful that this is considered a professional environment and that online class sessions are recorded. . Online sessions will be recorded to provide flexibility for anyone missing class It also allows you to easily review the class material. . If you have a question use the Raise Hand function. Where to find it. Desktop Click Reactions and then Raise hand. Mobile Under More in the toolbar. When called on. 1 Unmute yourself. 2 Turn on your video if you are comfortable with it. 3 Ask your question. 4 You are always welcome to ask follow up questions or clarifications in succession. 5 After your question is answered mute your mic. . I will make use of the Breakout room functionality on a weekly basis. Your group can use the Share screen function to emulate crowding around one laptop. If your group is stuck or needs clarification you can use the Ask for help function to get my attention. I will drop by each group from time to time to check in and see how you are doing with the problem. I may also ask your group to present something to the class after a breakout session is finished. . Groups will be randomized each class session to encourage you to meet each other Once group project groups are set breakout sessions will be with your group project group. . I dont expect everything to run 100 smoothly on either side and there will be more leniency than a normal class session to account for this. If you miss a Zoom session please let me know the reason in advance and then work through the recording on your own. I always provide a survey at the end of each class session that allows you to anonymously voice anything you liked or didnt like about a session Do use this channel if you encounter any difficulties Common agreedupon problems will be addressed within 12 class sessions. The survey link is on eLearn under the sessions folder and will be on the last slide I present each week. . . Survey at a hrefhttpsdocsgooglecomformsde1FAIpQLSd_6y9qksqfePypgr5SeT97hRRCa5RnXRZHAN78EeepcjgqAviewformrmclink101surveya. Results are anonymous. . . columns. . column width50. Course_DiagramsACCT_101_course_map_1svgwidth480px figaligncenter. . . column width50. . 1 Develop a base understanding of accounting institutions. 2 Understand the building blocks of the accounting system. 3 Apply the accounting equation. . . . . . FiguresPerceptionjpegwidth420px figaligncenter fragment fadeup lightbox. . FiguresRealityjpegwidth500px figaligncenter lightbox. . The language of business. . 1 Measure business activities. Ex Sales wages inventory changes . 2 Process reports into data. For managers investors etc. 3 Communicate results to financial statement FS users. Ex Statements disclosures press releases . . 1 Financial. Provides information to external users. Needs to be decision relevant. Audit fits in here. 2 Managerial. Provides information to internal users. Used for budgeting forecasting strategy. 3 Tax. Technically a subset of financial accounting. Used for determining tax liability. . FiguresMegaphonepngwidth600px figaligncenter. . How companies communicate information publicly. . Looking for a needle it may or may not be there. . How companies generate and communicate information internally. . . Pay money to save even more money. . columns. . column width50. . p stylefontsize08emSmallbusiness owners tend to hate accounting because its boring The mistake they make is not thinking about how they can use certain numbers as tools to better manage where their business is headed tomorrowp. . a hrefhttpwwwnytimescom20110804businesssmallbusinessafewaccountingessentialsarecrucialforsurvivalhtmlBasics of Accounting Are Vital to Survival for Entrepreneurs NYTimesa. . . . column width50. . . . . . . . columns. . column width50. . 1 Sole proprietorship. 1 owner usually small service firms. Not a legal entity. Owner receives all profit and loss. 2 Partnership. Multiple owners at least one is a General Partner while others are Limited Partners. Not a legal entity. Owners receive all profit and loss. . . . column width50. . FiguresStartuppngwidth300px figaligncenter. . FiguresKPMGpngwidth300px figaligncenter. . . . . . columns. . column width50. . 3 Corporation. Has a board of directors CEO CFO COO etc. One or more stock classes. From Initial Public Offering IPO or SecondarySeasoned Equity Offering SEO. IPO When a company first offers stock to investors. Separate legal entity under corporate law. Profitloss goes to the company. . . . column width50. . FiguresStarbuckspngwidth300px figaligncenter. . FiguresMicrosoftpngwidth300px figaligncenter. . . . . . . Summary. . . . IASB created IFRS in 2001. An attempt to standardize accounting rules across countries. Over a hrefhttpswwwifrsorgusearoundtheworlduseofifrsstandardsbyjurisdiction100 countriesa and a hrefhttpswebarchiveorgweb20170511100347httpswwwifrsorgUsearoundtheworldPageslistedcompaniesusingifrsstandardsgloballyaspx27K companiesa use IFRS. . . . FiguresIFRS_Frameworkpngwidth950px figaligncenter. . Prescribes nature function and boundary of an accounting system. Purpose To provide financial information that is useful to existing and potential investors lenders and other creditors in making decisions about providing resources to the entity. . The conceptual framework lays a foundation for resolving big issues. . Focused on general purpose financial statements prepared at least annually. Usually quarterly. Semiannually in the UK. Economic resources what you own. Inventory buildings patents etc. Claims claims on the companys assets. Claims by lenders and creditors debt. Claims by owners shareholders. . . Fundamental characteristic. Is the information material. Material Important enough to warrant sharing. Would not disclosing or incorrectly disclosing affect users decisions. . The information is useful. . Fundamental characteristic. Complete Includes all necessary information to understand economic phenomenon. Neutral No bias. Free from error no errors or omissions. . Information is complete neutral and free from error. . Enhancing characterisic. Information by the firm can be compared across years. Not across firms. If you change the way something is calculated show the new and the old way. . Compare over time for the same firm. . Enhancing characterisic. All accounting figures can be verified from a paper trail. Receipts. Records of counts. Calculations. . Verifiability Paper trail. . Enhancing characterisic. Takes time to prepare and verify information. More timely is a tradeoff with other characteristics. . Is the information useful when released. . Enhancing characteristic. Regardless of how useful the content is it isnt useful unless users can understand it. Baseline is a reasonably educated user. You after you finish this class. . Can a reasonably educated user use it. . Assumption. The basis for our accounting system and many others. Alternative is cash basis. Record when cash changes hands. This will be the focus next week. . Record when something happens not when cash changes hands. . Assumption. Entity will last long enough to use all assets and pay all liabilities. . Assume the company isnt collapsing. . columns. . column width50. . . Companies paying money to employees and auditors. Theoretical societal loss from leaking of confidential informationspan. . . . column width50. . . Gain from distribution of information. Leads to more informed investments. Better contracts. Better economyspan. . . . . . Benefit of accounting to society outweighs its cost. . DiagramsActivity_11svgwidth1000px figaligncenter. . DiagramsActivity_11Anssvgwidth1000px figaligncenter. . . . columns. . column width50. . Well cover each of these at length later. Covered in Session 3. Income Statement. Changes in Equity. Balance Sheet. Covered near the end of the course. Statement of Cash Flows. . . . column width50. DiagramsAccounting_statementssvgwidth600px figaligncenter. . . . . . Part of the Statement of Comprehensive Income. Well get to this later. Shows net profit or loss for a period. Comprised of. Revenues and gains. Expenses and losses. . Shows transactions with owners. Net income flows from the Income Statement to this Statement. Includes outflows from dividends. . More formally known as the Statement of Financial Position. A snapshot at a point in time of a companys. 1 Assets. 2 Liabilities. 3 Equity. . Measures cash receipts and payments. Breaks cash activities into. 1 Operating activities. 2 Investing activities. 3 Financing activities. . a hrefhttpslinkssgxcomFileOpenBTG2020Annual20Report2020FY202018ashxAppAnnouncementFileID548170Breadtalk 2018 before their delisting in 2020a. a hrefhttpswwwsamsungsecuritiescomenginvestannual_reportdotabCode1Samsung 2023a. a hrefhttpswwwdbscomannualreports2023filesmediadbsannualreport2023pdfDBS 2023a. . . . Everything is classified as one of. 1 Assets. 2 Liabilities. 3 Shareholders Equity. . These cover all elements of a transaction . . Economic resources controlled by an entity which are expected to produce future economic benefits to the entity. . Cash accounts receivable AR. Inventory equipment. Factories machinery. Coffee shop. Cash. Inventory coffee beans food. Fixed assets building espresso machine. . Debit span stylecolor33bb33Increasespan qquad Credit span stylecolorbb3333Decreasespan. . Present obligations of the entity which are expected to result in an outflow of economic benefits from the entity. . Accounts payable. Bills outstanding Wages payable utilities payable. Debt. Coffee shop. Bank loan maybe used to buy the building. Outstanding utility bill. Bill from coffee supplier. . Debit span stylecolorbb3333Decreasespan qquad Credit span stylecolor33bb33Increasespan. . The residual interest in the entitys assets after deducting the entitys liabilities and represents shareholders residual claim to the entitys assets. . Share capital Amount paid in by owners. Retained earnings net profit not released as dividends. Revenue Sales income. Expenses costs of doing business. Coffee shop. The money put in by the founder. Revenue from selling coffee and expenses from paid wages. . Debit span stylecolorbb3333Decreasespan qquad Credit span stylecolor33bb33Increasespan. . columns. . column width50. . Instructions. . 1 Divide up into groups of 4. 2 Pick any company. 3 Determine 3 each of assets liabailities and equity. . Raise your hand to call me over if you would like something clarified. . If you would like to share your work with the class call me over to let me know 23 groups. . . . column width50. . Company. Assets. 1 . 2 . 3 . Liabilities. 1 . 2 . 3 . Shareholders Equity. 1 . 2 . 3 . . . . . . . . Assets Liabilites Equity. . Intuition. 1 All the assets must be owned by someone. 2 Liabilities and Equity represent all the claims on assets. 3 Assets must equal liabilities plus equity. . DiagramsAccounting_equation1svgwidth800px figaligncenter. . columns. . column width50. . Increase. . Receiving assets. Creating assets. . . . column width50. . Decrease. . Selling assets. Using assets. . . . . . columns. . column width50. . Increase. . Receiving a debt. Payables like bills. Loans. Recognizing something you owe. . . . column width50. . Decrease. . Paying off a debt. . . . . . . columns. . column width50. . Increase. . Income increases equity. Revenues Income from ordinary operations. Gains Income from other activities. . . . column width50. . Decrease. . Expenses decrease equity. Expenses Expenses from ordinary operations. Losses Expenses from other activities. . . . . . . . . columns. . column width50. . Increase. . Share capital. Money paid in by owners. For corporation money paid in at IPO or SEO. Retained earnings. Economic contribution of the firm lifetime. . . . column width50. . Decrease. . Dividends. Paid to shareholders. Not an expense. . . . . . Retained earnings sum_textall yearsRevenues Expenses Dividends. . beginalign. Assets Liabilities Equity . Equity Shares RetainedEarnings Dividends Revenues Expenses. endalign. . . DiagramsAccounting_equation2svgwidth800px figaligncenter. . Raising capital. Assets cash Equity share capital. Paying an expense early. Assets prepaid expense Assets cash no net effect. Paying prerecorded wages. Assets cash Liability salaries payable. Revenue. Asset cash Revenue . With inventory include Asset inventory Expense cost of goods sold. Paying debt. Assets cash Liabilities . No change in equity unless theres an interest payment. . . . Try to work these out with your group If you are stuckconfused call me over to help. . 1 Sell a latte to a customer. span classfragmentAssets cash Equity revenue quad Also Assets inventory Equity expensespan. 2 Pay the utility bill. span classfragmentAssets cash Liabilities unpaid utilities. Alternatively Assets cash Expenses Utilities expensespan. 3 Buy lunch for the suppliers representative. span classfragmentAssets cash Expenses misc expensespan. 4 Take a business trip to Guatemala to visit coffee farms Paid by cash. span classfragmentAssets cash Expenses misc expensespan. 5 Take a vacation to Guatemala not for business. span classfragmentNonespan. 6 Bought a new coffee maker on credit. span classfragmentAssets equipment Liabilities APspan. . . . columns. . column width50. . 1 Pick a company. 2 Come up with 3 transactions the company might have. 3 How would each transaction affect the companys accounting equation and why. . . . column width50. . Company. Transactions. 1 A L E . Explanation. 2 A L E . Explanation. 3 A L E . Explanation. . . . . . . . . . . . . For next week . 1 Recap the reading for this week. 2 Read the pages for next week. Bookkeeping Chapter 2. Accrual accounting and adjusting entries Chapter 3. 3 Practice on eLearn. Automatic feedback provided. Make sure you have the accounts and accounting equation down. Youll need to know these next week. Survey on the class session at rmclink101survey1httpsdocsgooglecomformsde1FAIpQLSdzyohx5MTN40nrDxCWRfuyapH7b1N6NG6MQqV6lMMNT9z2Qviewformuspsf_link. . kableExtra. knitr. revealjs. . . . . . . Homework 1 due next week. Available on eLearn. Submit on eLearn. Covers topics from todays session. . columns. . column width50. Course_DiagramsACCT_101_course_map_2pngwidth450px figaligncenter. . . column width50. . Bookkeeping Chapter 2. 1 Understand how accounting works. 2 Record transactions in the journal. 3 Construct a trial balance. Accruals and Adjustments Chapter 3. 1 Relate accrual accounting and cash flows. 2 Apply the revenue and matching principals. 3 Adjust accounts. . . . . . . . . . . columns. . column width50. . 8500 BCE Shaped clay tokens represent commodities. 200 BCE Arabic numerals except 0. 600 CE 0 developed. 800 CE 10digit numerals spread throughout Europe. . Figuresbulla1pngwidth200px figaligncenter. . . . column width50. . Figuresbulla2pngwidth340px figaligncenter. . httpwwwschoyencollectioncomhttpwwwschoyencollectioncommathematicscollectionpreliteratecountingbullaenvelopems4631. . . . . . . attribution. . This slide is based on a history lecture by Dr Pierre Liang at Carnegie Mellon from October 2017. . . . columns. . column width50. . 1400s CE First evidence of double entry accounting in Italy. 1494 CE Italian monk and scholar Luca Pacioli publishes first text on double entry bookkeeping. Summa de Arithmetica Geometria Proportioni et PropotionalitahttpsbooksgooglecomsgbooksaboutSumma_de_Arithmetica_geometria_proportiohtmlidiqgPe49fhrsCredir_escy. . Figurespaciolijpgwidth280px figaligncenter. . . . . . column width50. . Figuressummajpgwidth280px figaligncenter. . . . . . . attribution. . This slide is based on a history lecture by Dr Pierre Liang at Carnegie Mellon from October 2017. . . . columns. . column width50. . . . column width50. . . . . . . Images from Littleton 1928 TAR. . FiguresLittleton_1928English_JE_Evolutionpngwidth450px figaligncenter. . Shakespeare likely did this sort of work for the British Navy Source a hrefhttpsjstororgstable2490385Reynolds 1974 JARa. . . . . . columns. . column width50 stylefontsize2em. Debits . on . the . left. . . column width50 stylefontsize2em. Credits . on . the . right. . . . . Memorize this. . This is double entry accounting. . columns. . column width50. . Debits DR. . Increase assets. Decrease liabilities. Decrease equity. Decrease revenue. Increase expenses. . . . column width50. . Credits CR. . Decrease assets. Increase liabilities. Increase equity. Increase revenue. Decrease expenses. . . . . . . The side of an account that increases its balance is called the accounts normal balance. . Debits always equal credits for a transaction. . DiagramsTaccountpngwidth1200px figaligncenter. . . DiagramsDRCRpngwidth550px figaligncenter. . . 1 Where do debits go. 2 Where do credits go. 3 What do debits equal. 4 What do credits equal. . 1 Where do debits go. span classfragmentLeftspan. 2 Where do credits go. span classfragmentRightspan. 3 What do debits equal. span classfragmentCreditsspan. 4 What do credits equal. span classfragmentDebitsspan. . . beginalign. A L Eqquad ALE in inftyinfty. DR CRqquad DRCR 0. endalign. . . Both of these equations inherently require that at least two changes per transaction. For the top equation the changes must either. Affect both sides in the same direction or. Cancel out within one side. For the bottom equation the change must have a debit and a credit. As these hold at the smallest element of the system they aggregate up to hold for any amount of transactions. Ie for a whole company or any subset thereof. . Now we have a robust way to check for mistakes anywhere in our accounting system just check each equation. . . columns. . column width50. . Assets Cash AR inventory equipment . Liabilities AP debt expenses payable . Equities Expenses revenue capital ret earnings . Chart of Accounts. Granularly documents all accounts the firm has. . . . column width50. . FiguresSAP_Accountspngwidth450px figaligncenter. . . . . . . columns. . column width50. The paper trail. Establishes amounts. Confirms a traction occurred or was contracted. Allows for analyzing and verifying at the transaction level. Needed for auditing. . . . column width50. . Figuresbill_of_laidingjpgwidth380px figaligncenter. . Bill of laiding 1852. . Heinz Museum. . . . . . columns. . column width50. . Where everything is recorded first. Everything. Every little transaction. Specifies the accounts values and document for each transaction. We will skip references. We will be doing journal entries through session 9. Always list debits first. . . . column width50. . FiguresJournaljpgwidth500px figaligncenter. . . . . . DR CR for each entry. . DiagramsJournal_entrypngwidth900px figaligncenter. . . 1 Get the in class activity spreadsheet. Session_2_Activityxlsx. 2 Well go through the first three transactions together. Journal entries. 3 Journal ie right out journal entries for the next 11 transactions with your group in the span stylecolorblueblue tabspan of the spreadsheet. Well do the rest of the activity throughout the class today. . An aggregation of all the accounts. Shows all account balances. Includes details of each account. Taccounts sufficient for this course. . DiagramsGeneral_ledgerpngwidth800px stylemargin0px figaligncenter. . columns. . column width50. . Shows all account balances just like the general ledger. Make sure they add up. Use it to verify DR CR. Use it to verify the accounting equation. Usually prepared at the end of a period. Can prepare income statement and balance sheet from it. . . . column width50. . Figurestrialpngwidth400px figaligncenter. . . . . . DR CR for totals. . DiagramsLedger_postpngwidth900px figaligncenter. . Cant catch. Unrecorded transactions. Because theres no trace of them. Wrong amounts in transactions that balance in the journal. Everything still balances. Wrong accounts of the same type used in the journal. Everything still balances. A L E holds. Let the Out of balance OOB amount be . OOB Assets Liabilities Equity. If OOB 2 is an integer. DR and CR in a transaction may be flipped. Ex Recorded a cash sale as a CR to cash and a CR to revenue. Should be a DR to cash and a CR to revenue. If OOB 9 is an integer there may be a. Slide error multiplied by 10 or divided by 10. Ex Recorded 5400 instead of 54000. Transposition error flipped the first 2 digits. Ex Recorded 45000 instead of 54000. . 1 Return to the in class activity. 2 Well do the first one as a class. 3 Finish the rest of the activity with your group. Do the two span stylecolorgreengreen tabsspan. . . Records cash only transactions. Used by small companies. Profit Cashin Cashout. . PROBLEM. . This ignores underlying economic activity. If we make a sale on credit that doesnt add to profit. If we put an expense on credit it doesnt lower profit. . Records impact of transactions as they occur. Required per IAS1 Presentation of Financial Statements. Revenue recorded when it is more likely than not. Expenses recorded as incurred. Profit Revenue Expenses. . PROBLEM. . Profit may not be indicative of cashflows. This is a concern for lenders. If theres no cash profit doesnt matter as the company will go bankrupt. . . columns. . column width50. . Divides time into artificial segments to understand a firms changes over time. Fiscal year fiscal quarter. Citigroup Jan 1 Dec 31. Microsoft Jul 1 Jun 30. Walt Disney . 2023 Oct 2 Sept 30. 2022 Oct 3 Oct 1. 2021 Oct 3 Oct 2. 2020 Sept 29 Oct 2. . . . column width50. . FiguresCitipngheight80px figaligncenter. . FiguresMicrosoftpngheight80px figaligncenter. . FiguresWalt_Disneypngheight80px figaligncenter. . . . . . . Dont focus on this too much for this class. . Recognize revenue in the period it was earned. This may not be when cash is received. Goods revenue recorded when it is more likely than not. Service revenue recorded at the percentage complete. If 50 of the work is finished record 50 of the revenue. If 20 of the work is finished record 20 of the revenue. . This will lead to a lot of tricky accounting but mostly around period ends. . Record revenue when. Revenue can be measured reliably. Economic benefits are more likely than not. For goods you also need to. Transfer any significant risks to buyer. If we are shipping FOB destination wait until received. If they handle shipping FOB shipping point wait until picked up for delivery. Have no continuing managerial involvement to an extent. Be able to reliably measure all costs incurred from the transaction. For services you also need to be able to reliably measure. The stage of completion. The costs incurred to date and costs to finish. . Recognize expenses only when an asset is used up. Asset purchase ne expense. Can record partial usage. Formally expenses are recognized when. 1 Obligations are incurred such as when services have been received. 2 Obligations are offset against recognized revenues matching principle. . Matching principal Expenses are recorded in the same period as the related revenue. . Eg even if we arent given an electricity bill that neatly aligns with our fiscal year end we need to record the portion of the next one associated with the ending fiscal year. . columns. . column width50. . 3 ways to match. Directly. The expense is easy to track. Ex Inventory. Indirectly over a period. The asset has a long life or is difficult to track. Ex Buildings. With acquisition. Simultaneous usage and acquisition. Ex Utilities rent labor. Often prepaid expenses. . . . column width50. . Figuresboxpngheight200px figaligncenter. . Figuresfactorypngheight200px figaligncenter. . Figureslamppngheight200px figaligncenter. . . . . . . . 1 A sale we are shipping at our expense. span classfragmentOnce the product reaches the buyerspan. 2 A sale we are shipping at the buyers expense. span classfragmentOnce we ship the productspan. 3 Revenue for a week long consulting project paid for up front. span classfragmentOnce the project is finishedspan. 4 Electricity usage. span classfragmentWhen billed or at period end matching principlespan. 5 Building usage our building. span classfragmentAt period end matching principlespan. 6 Sale of inventory for revenue. span classfragmentAt the time the revenue is recognizedspan. . . The matching principle. Everything needs to be matched at period end. Do before balance sheet and income statement. Adjustments will go to the trial balance once we record them. We call this an Adjusted trial balance. Why not do this continuously. Too costly some accounts continuously change. Investors only see periodend statements anyway. . Well only do this at period end. . columns. . column width50. . Adjustments needed to. Asset values. Prepaid expenses. Inventory supplies etc. Noncurrent assets. Liabilities. Payables we have yet to recognize. Unearned revenues. Balanced by. Revenues. Expenses. . . . column width50. . All adjustments affect. 1 BS account. Assets. Liabilities. Equity excluding revenuesexpenses. 1 IS account. Revenue or expense. NEVER affects cash. . . . . . Deferral. Adjust for prepaid expense some used. Adjust for unearned revenue some may be earned. Depreciation. Some long term assets have been used up. Accrual. Record an expense in advance. . Adjustment for cash paid or received in advance. Expense or revenue has yet to occur. We defer some of it to the next period. . DiagramsJE_21pngwidth800px figaligncenter lightbox. . DiagramsJE_22pngwidth800px figaligncenter lightbox. . . . Adjustment for allocating the cost of Property Plant and Equipment PPE over its useful life. Record to accumulated depreciation. Assets book value is asset account minus accumulated depreciation. Depreciate to salvage value. What you expect to get when it is used up. . DiagramsJE_23pngwidth800px figaligncenter lightbox. . columns. . column width50. . Straight line. Same amount each period. If N periods S salvage value H historical cost. HSN per period. Units of activity. Expense based on units produced. Good if capacity is known and tracked. Declining balance. More depreciation early on less later. . . . column width50. . Figuresdesktoppngwidth180px figaligncenter. . Figuresmachinepngwidth180px figaligncenter. . Figuresrolls_roycepngwidth180px figaligncenter. . . . . . . Accrued expense debit expense credit liability. . DiagramsJE_24pngwidth800px figaligncenter lightbox. . Accrued revenue debit asset credit revenue. . DiagramsJE_25pngwidth800px figaligncenter lightbox. . . . . nbsp Asset Dr Liability Cr Expense Dr Revenue Cr . Homework 1 should be submitted soon. Submit on eLearn if you havent. Homework 2 due next week. Looking through real annual reports. Largely open ended and will be graded for completion. Some questions ask for your own opinion there is no explicitly correct answer to these since everyone has their own preferences. Look for it on eLearn. . . columns. . column width50. Course_DiagramsACCT_101_course_map_3pngwidth450px figaligncenter. . . column width50. . Financial Statements Ch 3. . 1 Appreciate annual reports as a communication tool. 2 Understand the presentation of the Statements of. Financial Position. Comprehensive Income. Changes in Equity. . Equity Chapter 10. . 1 Learn about the share structure of a corporation. 2 Account for changing capital structure and dividends. . . . . . . . . . Corporate information. Names history key managementdirectors structure. Awards company description operating statistics. Letter to shareholders. Written by CEO. Management Discussion and Analysis MDA. Management writes this section. Often discuss. The years performance. Possible future risks. . Explicit and unreserved statement of compliance to financial reporting standards. Accounting statements. Statement of financial position. Statement of comprehensive income. Statement of changes in equity. Statement of cash flows. Statement notes. Often quite long substance focused. Discusses important but difficult matters. Cannot rectify inappropriate accounting treatments. Acknowledgement of responsibility by management. . If you ever need information about a companys financial standing the annual and quarterly reports are your primary source. If you get information elsewhere Bloomberg Morningstar etc. They got it from there. Or from someone else who got it from there. Contains a lot of other useful information about the companies. . Financials. Risks to the company going forward. Legal issues. Corporate strategy. The companys major customers. Very helpful for checking out competitors. Plenty more. . a hrefhttpswwwdbscomannualreports2016pdfdbs_annual_report_2016pdfFull 2016 report herea. a hrefhttpswwwdbscomannualreports2016indexhtmlWeb version herea. . . We use adjusted consolidated segment operating income or Adjusted CSOI and free cash flow as key nonGAAP financial measures Adjusted CSOI and free cash flow are used in addition to and in conjunction with results presented in accordance with GAAP and should not be relied upon to the exclusion of GAAP financial measures. . a hrefhttpswwwwsjcomarticlesSB10001424053111904006104576499962706947324End resulta. a hrefhttpblogauditanalyticscomnongaapmeasuresusefultoolorredflagFollow up analysisa. . . Name of reporting entity date ended currency used level of rounding. Or individual entity Consolidated report for. Can group similar accounts together if immaterial. Not disclosing separately has no impact on FS users. Cannot offset liabilities with assets unless allowed. IAS 16 IAS 18. Foreign exchange gains and losses. Must be done at least yearly fiscal year. Usually provide comparative information for the past two periods. . Also known as a Balance Sheet BS. Presents. Noncurrent assets 1 year in life. PPE intangible assets. Current assets. Cash and equiv trade other financial assets biological assets typical inventory items eg tshirts receivables. Long term 1 year until paid off then current liabilities. Provisions other financial liabilities. Equity. Noncontrolling equity interests issued capital reserves. Retained earnings. . Presents companies stock of assets liabilities and equity. . p stylemargin0pxfontsize06emTechnically inventory that usually takes more than 1 year to sell eg a nuclear submarine can be considered as a noncurrent assetp. . columns. . column width50. . 1 Start with an adjusted trial balance. 2 List all long term assets and sum. 3 List all short term assets and sum. 4 Total all assets. 5 List all long term liabilities and sum. 6 List all short term liabilities and sum. 7 Total all liabilities. 8 List retained earnings. 9 List capital accounts. 10 Total all equity accounts. 11 Sum Total liabilities and equities. 12 Verify A L E. . . . column width50. . DiagramsBalance_sheetpngwidth370px figaligncenter. . . . . . . Also known as an Income Statement IS. Presents. Revenue. Expenses categorized by nature or function. Operating expenses. Non operating expenses. Net income. Below or separately it presents. Gains and Losses. Called other comprehensive income OCI. . While taxes are always included you will not be asked to calculate taxes for this course If no taxes are mentioned assume they are 0. . columns. . column width50. . 1 Start with an adjusted trial balance. 2 List revenue. 3 List cost of goods sold COGS. 4 Calculate gross profit revenue COGS. 5 List other expenses exc interest taxes. 6 List other revenues exc interest other holdings. 7 Calculate operating profit. 8 List other nontax expenses and incomes. Those that arent included above. 9 Calculate income before taxes. 10 List taxes. 11 Calculate net income loss. 12 Optional start a new page. 13 List OCI items gains and losses. 14 List tax on OCI. 15 Calculate OCI net of tax. 16 Calculate total comprehensive income. OCI net of tax net income loss. . . . column width50. . DiagramsIncome_statementpngwidth370px figaligncenter. . . . . . . Reconciles from period start to end. Per IAS 1must reconcile each equity item separately as well as the total. Shows all transactions with owners. Shows all dividends paid can be as a note to the statement. This statement often relies on information that is contained outside the adjusted trial balance. . You wont be required to construct this statement for exams. . columns. . column width50. . 1 List all equity items across the top as columns. Generally includes share capital APIC retained earnings treasury stock total equity. 2 Put balance as of beginning date as the first row. 3 List all items that effected 1 of the columns values for the year as the rows. Generally includes share issuance treasury share sales dividends paid net income. 4 Put balance as of ending date as the last row. 5 Fill out all changes. 6 Often includes the prior year as well. . . . column width50. . DiagramsSCEpngwidth600px figaligncenter. . . . . . . . Well get back to this. Sessions 10 and 11. Chapter 11. . Practice problem on eLearn for Coffee Corp last weeks company. . 1 Construct a Statement of Financial Position. Use the adjusted trial balance. Do for 2018. 2 Construct a Statement of Comprehensive income. Use the adjusted trial balance. Do for 2018. Ignore taxes. 3 If you have time go back and do for 2019 too. . There is an Excel file on eLearn with the adjusted trial balances for 20X8 and 20X9. . . DiagramsFinancingpngwidth800px figaligncenter. . . Companies can issue shares from treasury or unissued shares. Factors in issuing shares. 1 Companys current health. 2 Companys outlook. 3 Expected dividends. 4 Economy health. 5 Market factors liquidity. . columns. . column width50. . Equity. . Advantages. No legal obligation to distribute profits. Great for growth. All profit can be reinvested. Disadvantages. Dilutes existing shareholders ownership. Decreases the of the company they own. More expensive. Can only be issued by a corporation. . . . column width50. . Debt. . Advantages. Shareholders maintain ownership. Can be quicker to receive financing. Disadvantages. Often need to pay periodic interest. Requires cash on hand to pay. Solvency risk Rightarrow bankruptcy. . . . . . . . columns. . column width50. . Equity is governed by a corporations articles of incorporation. Also known as a corporate charter. Written at the time of incorporation. When the company is created. Governs. Nature of business activities. Number of shares of stock. Initial board of directors. . . . column width50. . a hrefhttpswwwstarbuckscomaboutuscompanyinformationcorporategovernanceimg srcDocumentsStarbucks_Incorporationpng width100 height800pximga. . . . . . . . . columns. . column width50. . Advantages. . Can raise both equity and debt. Continuous life. Ownership is liquid. Limited liability for owners. . . . column width50. . Disadvantages. . Separation of ownership and management. Leads to conflicts of interest. Other tax policies apply. Double taxation A corporations income is taxed and dividends to investors are taxed. Generally not an issue in Singapore. More government regulation. . . . . . . . columns. . column width50. . Public. . Public investment. No cap on of shareholders. Increased regulation. . FiguresMicrosoftpngheight80px figaligncenter stylemargin0px. . FiguresWalt_Disneypngheight80px figaligncenter stylemargin0px. . FiguresStarbuckspngheight100px figaligncenter stylemargin0px. . . . column width50. . Private. . No public investment. Some exceptions to this. Fewer shareholders. Less regulated. . FiguresCargillpngheight80px figaligncenter stylemargin0px. . FiguresKochpngheight80px figaligncenter stylemargin0px. . FiguresValvepngheight80px figaligncenter stylemargin0px. . . . . . . columns. . column width50. Voting. . For board of directors. For important events. . . . column width50. . Dividends. . Right to share in profits when dividends are declared. . . . . . columns. . column width50. Liquidation. . Right to share in asset value if company liquidates. After lenders get their share of value. . . . column width50. . Limited liability. . Can only lose what was originally invested. . . . . . How shareholders protect themselves. . . columns. . column width50. . Ordinary shares. . Standard share type most common. Has the four basic shareholder rights. Benefits the most if the company succeeds. Takes on the most risk. . . . column width50. . Preferred shares. . Limitedno voting rights. Earns a fixed dividend. Receives dividends before common shares. Receives assets before common shares in liquidation. May have other rights convertible redeemable cumulative. Varies from company to company. . . . . . . . Corporate charter stipulates the number of shares. Rare that a company has all such shares issued. Investors hold shares. The company holds treasury shares. Shares the company has bought back. Unissued shares have never been issued. Can issue in an Initial Public Offering IPO or SecondarySeasoned Equity Offering SEO. Requires government and exchange approval. . Figuresfacebook_valuationjpgwidth800px figaligncenterhttpsbetatechcrunchcomwpcontentuploads201101facebookgraphr7bigjpg. . Source httpstechcrunchcom20110110facebook5. . . DiagramsShare_numberpngwidth800px figaligncenter. . Singapore does not allow the par value method. Still allowed in many countries. The book uses this mostly so ignore the book on this topic. Simpler treatment in Singapore. Note The book uses the account name Common stock which is commonly used in the US. . p stylemargin0pxfontsize06emSituation The company issued 1 million ordinary shares at 15 eachp. . DiagramsJE_31pngwidth800px figaligncenter fragment lightbox. . . Separate accounts for par capital and abovepar capital. Note The book uses the account name Additional Paidin Capital which is common in the US. . p stylemargin0pxfontsize06emSituation 1 The company issued 1 million ordinary shares at 15 each with par value of 15br2 The company issued 1 million ordinary shares at 15 each with par value of 1p. . DiagramsJE_32pngwidth800px figaligncenter fragment lightbox. . Par value is a value of a share of stock stipulated in the corporations articles of incorporation. It has no relationship with the market value of the stock stock price. Ex Facebook has a par value of USD 0000006share. Not used in Singapore since 2005. . . . . . Using the same numbers as the common stock example. Note The book uses the US account name Preferred stock. . p stylemargin0pxfontsize06emSituation The company issued 1 million preferred shares at 15 eachp. . DiagramsJE_33pngwidth800px figaligncenter fragment lightbox. . We almost always treat preferred shares as equity. . p stylemargin0pxfontsize06emThe exception IAS 32 is for redeemable shares with fixed redemption date and fixed dividend paymentsp. . Common stock that has been repurchased. Reasons for repurchasing. 1 Issue incentive compensation. 2 Increase stock price. By distributing cash to shareholders. 3 Use in trading. 4 Increase EPS. 5 Remove a shareholder defensive. . Retirement removes the shares from share capital entirely. . p stylemargin0pxfontsize06emSituation The company purchased 20000 shares at 20 each and then retired themp. . DiagramsJE_34pngwidth800px figaligncenter fragment lightbox. . Treasury shares contra equity account decreasing equity. . p stylemargin0pxfontsize06emSituation The company purchased 20000 shares at 20 each and then sold them in 2 transactions 10000 for 25 each and 10000 for 15 eachp. . DiagramsJE_35pngwidth690px figaligncenter lightbox. . DiagramsJE_36pngwidth690px figaligncenter fragment lightbox. . . . p stylemargin0pxfontsize06emSituation The company purchased 20000 shares at 20 each and then sold them in 2 transactions 10000 for 15 each and 10000 for 25 eachp. . DiagramsJE_37pngwidth690px figaligncenter lightbox. . DiagramsJE_38pngwidth690px figaligncenter fragment lightbox. . . Treasury shares represents the issued shares held by the firm itself. It is a contra equity because it takes away from owners ownership. . columns. . column width50. . Profit from treasury shares. . Not considered actual profit wont hit the IS. Can fill in prior losses in retained earnings. Can add to Additional Paidin Capital APIC. . . . column width50. . Losses from treasury shares. . Not considered an actual loss wont hit the IS. Subtracts from APIC. If APIC hits 0 subtract from Retained earnings. . . . . . All treasury shares transactions are based on actual amounts paid market value. . p stylemargin0pxfontsize06emSituation The company purchased 20000 shares at 20 each and then sold them in 3 transactions 5000 for 15 each 5000 for 26 each and 10000 for 18 eachp. . DiagramsJE_39pngwidth750px figaligncenter fragment lightbox. . Cash dividends. Final dividend year end policy voted on by shareholders. Interim dividends declared by board of directors. Need to have enough retained earnings on hand to declare the dividend. Need to have enough cash on hand to pay the dividend. Share dividends. Proportional distribution of shares to shareholders. Shifts retained earnings to share capital. Increases number of outstanding shares. . DiagramsDividends_timelinepngwidth1000px figaligncenter. . Situation declared 010 per share of dividends on Jan 1 with record date of Jan 15 and payment date of Jan 30 100000 shares are outstanding. . DiagramsJE_310pngwidth800px figaligncenter fragment lightbox. . Shifting of values within equity accounts only. Record at market value. . Situation declared 005 shares per share as a share dividend on Jan 1 100000 shares are outstanding with a market value of 10 each. . DiagramsJE_311pngwidth800px figaligncenter fragment lightbox. . Exchange all common shares at a certain ratio. Such as a 2 for 1 stock split receive an additional 1 share for every share owned. Not substantively different from a stock dividend. Just a larger change in the number of shares outstanding. No accounting effects. No journal entry. . . Take 510 minutes to work on this in groups. . p stylemargin0pxfontsize1emCaffeine Co had 50000 shares outstanding as of Jan 1 20X8 The following transactions occurred throughout the year Prepare the journal entries for each transactionp. . 1 On January 30 Caffeine Co purchased 10000 shares for 10 per share. 2 On March 30 Caffeine Co sold 2000 treasury shares at 8 per share. 3 On April 1 Caffeine Co declared a dividend of 005 per share The date of record was April 15th with payment on May 30th. 4 On May 1 Caffeine Co sold 6000 treasury shares at 15 per share. 5 On May 30 Caffeine Co paid the previously declared dividend. 6 On October 31 Caffeine Co sold its remaining 2000 treasury shares at 8 per share. . DiagramsEquity_exercise_answerpngwidth900px figaligncenter lightbox. . . . . . . For next week. 1 Recap the reading for this week. 2 Read the pages for next week. Control Systems Chapter 4. 3 Homework to turn in next week. Available on eLearn. Submit on eLearn. 4 Practice on eLearn. Extra Excel practice on BS and IS. Practice on both FS and equity. Automatic feedback provided. Survey on the class session at rmclink101survey3httpsdocsgooglecomformsde1FAIpQLSdzyohx5MTN40nrDxCWRfuyapH7b1N6NG6MQqV6lMMNT9z2Qviewformuspsf_link. . curl. kableExtra. knitr. quantmod. revealjs. . . . . . . Delete the slide Equity details. Make a graph continuum of TS effects showing negative side is retained earnings positive side is APIC Starting point it 0. . Debit Credit song httpswwwyoutubecomwatchvj71Kmxv7smk. . . Closing entries Revenues Expenses Gains Losses Dividends. Depreciation. Price paid salvage value life length from purchase. In homework 200000 40000 5 32000. Accrual entries. 1 Bring an expense or revenue forward. 2 Create a payable or receivable as well. 3 Payable or receivable reversed upon payment. . DiagramsJE_40pngwidth800px figaligncenter. . . 60 minutes long mostly calculation based. What can be covered. Everything in the Session 1 to 4 slides. . columns. . column width50. . Not on the quiz. . Par value accounting. Concept names and definitions. Matching principle periodicity etc. . . . column width50. . Potentially on the final. . Par value accounting for equity. . . . . . The quiz is to makes sure you have the fundamentals down. . Practices provided on eLearn. A full practice Quiz 1 paper version. A set of extra Quiz 1 practice questions. Select textbook problems with answers. There is an account glossary on eLearn. It lists and defines every account weve seen so far. . . columns. . column width50. Course_DiagramsACCT_101_course_map_4pngwidth450px figaligncenter. . . column width50. . Control Systems Chapter 4. . 1 Understand the drivers of fraud. 2 Be able to identify weaknesses in firms systems and suggest improvements. 3 Be able to reconcile book and bank cash. . AR Chapter 5. . 1 Understand how to write off uncollectible AR. . . . . . . . . Errors that affect firms accounting statements or disclosures which were done seemingly intentionally by management or other employees at the firm. . Figuresjohnnyautomaticbagofmoneypngwidth200px figaligncenter. . 1 A company is underperforming. 2 Management cooks up some scheme to increase earnings. Wells Fargo 20112018. Fakeduplicate customers and transactions. 3 Create accounting statements using the fake information. . a hrefhttpswwweconomistcomnewsbook20100723takingawaydellscookiejarDell 20022007a. Cookie jar reserve secret payments by Intel of up to 76 of quarterly income. 1 The company is overperforming. 2 Save up excess performance for a rainy day. 3 Recognize revenueearnings when needed to hit future targets. a hrefhttpswwwsecgovnewspress2007200770htm Apple 2001a. Options backdating. a hrefhttpswwwsecgovlitigationlitreleases2012lr22552htmChina North East Petroleum Holdings Limiteda. Related party transactions transferring 59M USD from the firm to family members over 176 transactions. . . a hrefhttpswwwsecgovlitigationadmin2007338815pdfCVS 2000a. Improper accounting treatments Not using marktomarket accounting to fair value stuffed animal inventories. a hrefhttpswwwsecgovlitigationlitreleaseslr16732htmCountryland Wellness Resorts Inc 19972000a. Gold reserves were actually span classfragment excludedirtspan. . . a hrefhttpwwwstraitstimescombusinesscompaniesmarketskeppelactsagainststaffinbriberyscandalKeppel OMa. 55M USD bribery in Brazil for contracts. Highly profitable until fines rolled in. Profit of 3518M USD. Fines of 422M USD to US Brazil Singapore so far. 6 employees implicated. 1 Keppel lawyer pleaded guilty in USA for drafting bribery contracts. a hrefhttpwwwstraitstimescomsingaporecourtscrimekeppelclubduoconvictedfor37mmembershipscamKeppel Cluba. Employees created 1280 fake memberships sold them and retained all profits. 375M from June 1 to August 1 2014. a hrefhttperesourcesnlbgovsginfopediaarticlesSIP_422_20050125htmlAsia Pacific Breweries Chia Teck Lenga. Forged documents from 1999 to 2003 to obtain 117M from 4 banks. To fund gambling addiction. 42 year jail sentence. . columns. . column width50. . Opportunity. Hole in the control system. Profitably exploitable. Rationalization. Resentment of corporation. Poor culture. Borrowing. Motivation. Family needs. Maintaining lifestyle. Maintaining performance. . . . column width50. . Figures3legs_fraudpngwidth400px figaligncenter. . . . . . Need all 3 for fraud to happen. . . Each part of the company is dependent on other parts. Consider how all parts work together. . . Simplest case is a linear assembly line. . Pass the product from one stop to the next until its done. Except for. Maintenance. Input selection. Product mix. Quality control. . Where does information flow. . Prevention. Make sure something doesnt go wrong. Ex Inspect raw materials before assembly. Detection. Check if something went wrong. Ex Check products randomly after assembly. Correction. Something went wrong so we need to fix it. Ex Determine cause of defects learn from problems. . Separation of duties. Different parts of a system are handled by different employees. Ex Inspection not done by assembly line worker. Monitoring. Check if things are normal. Ex Boss stops by every now and then. Limited access. Employees only have access to what they need. Ex Line workers cant access inventory records. Ex Raw material purchasers cant access salary records. Approvals. Require oversight for some actions. Ex Buying from a new vendor may require bosss signature. . Collusion. Multiple people can jointly subvert systems. Fatigue. People are not perfect. Negligence. Not every employee does what they are supposed to. . callouttip . How would we control car quality Prevention Detection Correction. . . . How would we control car quality. Prevention. span classexcludePurchase materials from trustworthy suppliersspan. Detection. span classexcludePoint inspections on finished carsspan. Correction. span classexcludeRecallsspan. . . . columns. . column width50. . Their Objectives. . 1 Validity All recorded transactions ocurred. 2 Completeness All valid transactions have been recorded . 3 Valuation Amounts measured properly. 4 Security Information system protected from unauthorized access or destruction. . . . column width50. . Discussion questions. . What are some risks that threaten these objectives. How frequent is the risk. How serious is the risk. How could they be addressed. . FiguresParking_Meterjpgwidth200px figaligncenter. . . . . . . columns. . column width50. . Documents. . Purchase orders. Invoices for purchasessales. Checks. Payment records. Petty cash. Small amount set aside for small purchases. . . . column width50. . DiagramsCash_postpngwidth420px figaligncenter. . . . . . . columns. . column width50. . Documents. . Cash deposits withdrawals. Checks. Electronic checks. EFT ACH GIRO etc. Bank interest and fees. Nonsufficient funds. Customers check is rejected. Check writer didnt have enough cash in the bank. . . . column width50. . DiagramsCash_bankpngwidth420px figaligncenter. . . . . . . The two records come from different sources. We can use this to verify the records. But they likely wont be exactly the same. Why are the records different. Time lags. We receive cash and checks first. These may still be in transit to the bank. Banks receive electronic checks first. Banks know about fees and interest first. Time lags are shorter these days with internet banking. . DiagramsBank_recpngwidth800px figaligncenter lightbox. . columns. . column width50. . Cash up DR cash CR. . Dividends received. Dividend revenue. EFT from customer. AR. Interest from bank. Interest revenue. Prepayment. Unearned revenue. . . . column width50. . Cash down CR cash DR. . Charges from the bank. Bank service charges. This is an expense account. Check failed NSF. Receivable the check was for AR. Charged expenses. The expense. . . . . . DiagramsBank_rec_expngwidth800px figaligncenter lightbox. . 1 Get the in class activity spreadsheet. Session_4_Activity_Cashxlsx. 2 Do the bank reconciliation. 1 Figure out what needs to be reconciled from bank and book. 2 Record these in the reconciliation tab. 3 Make sure cash reconciles it will in this case. 4 Record the needed journal entries 3. . . Case Hanjin shipping. Read rmclink101class4httpswwwtheguardiancombusiness2016sep02hanjinshippingbankruptcycausesturmoilinglobalseafreight. . FiguresHanjinpngwidth600px figaligncenter. . callouttip . From a business perspective what does the Hanjin case tell us about the world. . . . Low on cash. Ports didnt think they would get paid back by Hanjin. Tons of products stuck in ports. Such as the School of Laws writing boards for class rooms when it opened. a hrefhttparstechnicacomgadgets201609hanjinbankruptcycouldmeanpricespikesfortvscarsotherlargeproducts datapreviewlinkShipping rates went up 55a. . In other words unexpected events happen. Companies can go bankrupt forget to pay or breach contracts. Two approaches. . columns. . column width50. . Allowance method. . Estimate decrease in asset values beforehand. Allowance for uncollectible accounts. Contra asset. Bad debt expense. . . . column width50. . Direct writeoff method. . Writeoff when the loss is guaranteed. Violates the matching principal. . . . . . We will use the allowance method as does IFRS. . DiagramsAR_Allowpngwidth900px figaligncenter lightbox. . Suppose we have the following allowance schedule and accounts receivables outstanding at year end. . DiagramsAR_Example_1pngwidth800px figaligncenter lightbox. . What should our allowance be. . DiagramsAR_Example_1Solpngwidth650px figaligncenter lightbox. . What about GC Corp. The auditor issued a going concern opinion. High chance of bankruptcy. Lets update the allowance schedule for that. . DiagramsAR_Example_2pngwidth600px figaligncenter. . DiagramsAR_Example_2Solpngwidth600px figaligncenter. . DiagramsJE_41pngwidth800px figaligncenter lightbox. . DiagramsJE_42pngwidth800px figaligncenter lightbox. . DiagramsJE_43pngwidth800px figaligncenter lightbox. . . Bankruptcy follows the direct writeoff method. We record it when it happens. Use up some of the allowance DR decrease our AR CR. If the firm recovers we reverse this transaction. Example PGUS goes bankrupt During bankruptcy they pay us 300 and we expect no further payments from them. . DiagramsJE_44pngwidth750px figaligncenter lightbox. . 1 Get the in class activity spreadsheet. Session_4_Activity_ARxlsx. 2 Complete the activity in groups. 1 Use the allowance schedule to determine the amount of uncollectible AR needed. 2 Use the Taccount to determine the adjustment needed. 3 Record the adjustment in the journal. . . . . . . . For next week. 1 Recap the reading for this week. 2 Read the pages for next week. Chapter 5 Part A. Chapter 6 Inventory. 3 No homework. 4 Practice on eLearn. Practice on bank reconciliation and AR. Automatic feedback provided. Survey on the class session at rmclink101survey4httpsdocsgooglecomformsde1FAIpQLSdzyohx5MTN40nrDxCWRfuyapH7b1N6NG6MQqV6lMMNT9z2Qviewformuspsf_link. . kableExtra. knitr. revealjs. . . . . . Wooclap enabled lesson wwwwooclapcom101W4. Might need to modernize the Champaign case. Need to modernize the Hanjin case. Add a graph list for risks to slides magnitude vs frequency of risks for case drawio . columns. . column width50. Course_DiagramsACCT_101_course_map_5pngwidth450px figaligncenter. . . column width50. . Starting part 2 of the course. . Deep dive into transactions. . Inventory Chapter 6. . 1 Understand the nature of inventory operations. 2 Record inventory transactions. 3 Determine inventory and COGS value. . . . . . . . . . calloutnote . Inventories are assets held for sale in the ordinary course of business or in the process of production for such sale or in the form of materials or supplies to be consumed in the production process or in the rendering of services. . . . . Unsold inventory is an asset. . Sold inventory is converted to COGS expense. . Why hold inventory. Supply can be erratic. No inventory could mean missed sales. Can buy more in low cost periods. Low costs from shipping production purchasing etc. Drawbacks of inventory. Cost of holding. Warehousing electricity . Liquidity Cash tied up as inventory. Inventory obsolescence. Adverse price changes. Buy low sell lower. . columns. . column width50. . Service firms. 1 Have little to no inventory. Merchandisers. 1 Get inventory items. 2 Sell them at a higher price. Than inventory cost overhead. Manufacturers. 1 Get raw materials. 2 Transform raw materials into finished goods. 3 Sell them at a higher price. Than raw materials transformation overhead. . . . column width50. . FiguresKPMGpngwidth300px figaligncenter. . FiguresTangspngwidth300px figaligncenter. . FiguresCreativepngwidth300px figaligncenter. . . . . . . 1 Inventories recorded at cost of purchase. Will need a price and quantity. 2 Add any conversion costs manufacturing. 3 Add delivery fees to get the item. 4 Subtract any discounts received. 5 Make sure the above is lower than the intended selling price. If its not decrease the value to selling price. Like with treasury stock and retained earnings the decrease in value can be reversed later. . The above works for individual items but well need a way to track items purchased and used. . . . Perpetual is better but periodic is easier. . columns. . column width50. . Usually barcode based. Allows efficient tracking. . . . . column width50. . Record two entries per transaction. DR Cash or AR CR Revenue . DR COGS CR Inventory . . . . . . DiagramsJE_51pngwidth800px figaligncenter lightbox. . . . . Relies on counts for data. Simpler but less efficient. One entry to record revenue. DR Cash or AR CR Revenue . Adjusting entry at end of each period. DR COGS CR Inventory . . Not practical for businesses that need close tracking of inventory. . . . Buying on cash or AP. Paying full amount. . DiagramsJE_52pngwidth800px figaligncenter lightbox. . If there are shipping costs to receive the inventory we add those to the inventory value itself. Debit inventory. Credit cash. . columns. . column width50. . DiagramsJE_56pngwidth600px figaligncenter lightbox. . . . column width50. . DiagramsJE_57pngwidth600px figaligncenter lightbox. . . . . . . Sometimes inventory needs to be returned. Wrong or faultybroken items. To record. Directly credit the inventory account for the amount returned. OR Credit Purchase returns a contraasset to inventory. Debit. AP if not yet paid. Cash if paid and receiving cash now. AR if paid and receiving credit now or cash later. . DiagramsJE_53pngwidth800px figaligncenter lightbox. . . Sometimes companies offer discounts for paying early. There is a standard format for B2B discounts. . DiagramsPurchase_discountpngwidth500px figaligncenter. . Ex 210 n30 . Get a 2 discount if paid in 10 days. Pay the full amount by 30 days. . Record discount as a decrease in inventory. Remember we record assets at cost paid for them. Can also record to a purchase discounts contraasset . . span stylefontsize08emSituation Purchase inventory on account for 100 with 210 n30 termsspan. . columns. . column width50. . DiagramsJE_54pngwidth600px figaligncenter lightbox. . . . column width50. . DiagramsJE_55pngwidth600px figaligncenter lightbox. . . . . . columns. . column width50. . Practice question 3 entries. . 1 Purchased 200 of inventory on account with 105 n45 terms. Also paid 20 in shipping to DHL on delivery. 2 50 of inventory was damaged which we returned. 3 Paid payable 3 days after receiving inventory. . . . column width50. . DiagramsInventory_inpngwidth500px figaligncenter. . . . . . . DiagramsJE_5P1pngwidth700px figaligncenter lightbox. . . . . Selling for cash or AR. Receiving full amount. . DiagramsJE_58pngwidth800px figaligncenter lightbox. . Recognize revenue when earned. Recall from lesson 2 Revenue recognition principle. FOB shipping point Record when given to shipping company. FOB destination Record when customer receives goods. Since we will need to pay shipping we will have a Delivery expense account an operating expense. . DiagramsJE_59pngwidth800px figaligncenter lightbox. . Sometimes our sales are returned Wrong or faultybroken items. To record debit. If faulty sales returns and allowances. Contraequity to revenue. And credit. AR if not yet paid. Cash if paid and returning cash now. AP if paid and giving credit now or returning cash later. If reusable also DR inventory and CR COGS. . DiagramsJE_510pngwidth700px figaligncenter lightbox. . We use the same discount terminology here. Record any discount as a debit to Sales discount. Another contraequity to revenue. . span stylefontsize08emSituation Sold inventory of 50 for 100 on account with 210 n30 termsspan. . . columns. . column width50. . DiagramsJE_511pngwidth600px figaligncenter lightbox. . . . column width50. . DiagramsJE_512pngwidth600px figaligncenter lightbox. . . . . . . columns. . column width50. . Practice question. . Determine the journal entries and then calculate Net sales Gross profit and operating profit. . 1 Sold 155 of inventory for 300 on account with 105 n45 terms. Also paid 20 in shipping to DHL for delivery. 2 50 of goods were damaged which were returned to us. 3 Customer Paid receivable 3 days after receiving goods. . . . column width50. . DiagramsSales_inpngwidth500px figaligncenter. . . . . . . DiagramsJE_5P2pngwidth1200px figaligncenter lightbox. . . . . At the end of the day we need inventory to be priced below what we can earn from it. We call this what we can make from it net realizable value NRV. . NRV is the estimated selling price in the ordinary course of business less the estimated cost of completion and the estimated costs necessary to make the sale IAS 26. . If Inventory NRV. Do nothing unless we previously wrote it down. If Inventory NRV. Need to write down to NRV. . Need to write down your inventory value. If book value of inventory lower of cost or NRV. . Situation Inventory is valued at 1500 but NRV is 1000. . DiagramsJE_513pngwidth800px figaligncenter lightbox. . Can be reversed if the value goes back up. Only up to the amount originally written down. Credit gain when reversing. . Using Inventory writedown is always correct. Using COGS for inventory writedowns is fine for small adjustments. Usually when writing down by 5 of inventory. Can use COGS for small theft. Do not use COGS for major price drops. . Wrong in some parts of the book Use the slides here. . When in doubt use Inventory writedown This is always a correct answer. . . An error in 1 year leads to an error in the following year in the opposite direction. . When you have a fixed margin you can use this to determine COGS. Fixed margin means that COGS constant of sales. Allows you to avoid counting inventory. . Example. Coffee corp always sells bags of beans at a 25 markup Revenue from selling bags of beans for the year was 10000 What was the COGS for selling bags of beans. Gross Margin 1 frac11Markup 1 frac1125 20. COGS Sales times 1 GrossMarin 10000 times 1 20 8000. . Situation Coffee Corp sells all of their products using fixed margins Determine the COGS for each product below using the given revenues. . 1 50000 worth of lattes were sold with a fixed gross margin of 70. 2 9000 worth of travel mugs were sold at a 50 markup. 3 1000 worth of espresso cups were sold comprising 50 cups each sold with 8 profit all cups cost the same. . . . . Situation Coffee Corp sells all of their products using fixed margins Determine the COGS for each product below using the given revenues. . 1 50000 worth of lattes were sold with a fixed gross margin of 70. 2 9000 worth of travel mugs were sold at a 50 markup. 3 1000 worth of espresso cups were sold comprising 50 cups each sold with 8 profit all cups cost the same. . Solution. . 1 COGS 50000 times 170 15000. 2 COGS 9000 times frac11 50 6000. 3 COGS 1000 50times 8 600. . . columns. . column width50. 1 FIFO . First In First Out. . . column width50. 2 LIFO . Last In First Out. . . . . columns. . column width50. . 3 Average cost. Value number of items. . . . column width50. . 4 Specific identification. Onetoone tracking. . . . . . . LIFO is not allowed under IFRS but you need to know it. . First three only require minimal tracking and are used when you have multiple orders of the same thing at different prices. . columns. . column width50. Only used with expensive items. Too costly to track individual items otherwise. Examples. Cars. Luxury goods. Real estate. . . column width50. . Figuresrolls_roycepngheight150px figaligncenter. . FiguresLeaseholdjpgheight200px figaligncenter. . . . . . Record COGS with revenue. . columns. . column width50. . First In First Out. Assumes you sell items in the order you received them. Ex You buy 5 bags of coffee beans for 10 each and then another 5 at 12 each You sell 3 bags and then 4 bags. The first 3. 3 times 10 30. The next 4. 2 times 10 2times 12 44. COGS 74 for 7 bags. . . . column width50. . DiagramsFIFOpngwidth400px figaligncenter. . . . . . . columns. . column width50. . Last In First Out. Assumes you sell the most recent items first. Ex You buy 5 bags of coffee beans for 10 each and then another 5 at 12 each You sell 3 bags and then 4 bags. The first 3. 3 times 12 36. The next 4. 2 times 12 2 times 10 44. COGS 80 for 7 bags. . . . column width50. . DiagramsLIFOpngwidth400px figaligncenter. . . . . . . beginequation. Price fracP_1 times N_1 P_2times N_2 cdotsN_1 N_2 cdots. endequation. . . columns. . column width50. . Assumes you sell a mix. Weighted average. P_i price per item for order i. N_i number of items in order i. Ex You buy 5 bags of coffee beans for 10 each and then another 5 at 12 each You sell 3 bags and then 4 bags. Avg cost frac5times 105times 125511. COGS 7times 11 77. . . . column width50. . DiagramsAC_Invpngwidth400px figaligncenter. . . . . . . columns. . column width50. . Perpetual. . 1 Calculate COGS for sales up to first purchase. 2 Add in first purchase. 3 Calculate COGS for sales up to next purchase. 4 Add in next purchase. 5 Repeat 3 and 4 until done. . . . column width50. . Periodic. . 1 Write out all your inventory for the period. 2 Determine what was sold. . Equivalent to assuming we bought all inventory before making any sales. . . . . . Note Perpetual and Periodic give the same answer under FIFO. . . Profit depends on method choice. FIFO typically leads to higher net income. Real effect taxes depend on net income. Use LIFO to minimize taxes. Choice can affect important ratios used in debt contracting. Changing methods is allowed but you need to report using both then. From our enhancing characteristic of comparability. Reliability. FIFO leaves the most recent purchases in inventory so the balance sheet numbers are more reliable. LIFO puts the most recent purchases in COGS so the income statement numbers are more reliable. Average cost is between the two. . span stylefontsize08emStarted with 10 bags of coffee beans at 10 each Then 1 purchased 5 bags at 12 each 2 Sold 7 bags 3 Bought 10 bags at 8 each 4 Sold 4 bags 5 Sold 4 bags Determine COGSspan. . DiagramsInv_FIFOpngwidth800px figaligncenter. . . . span stylefontsize08emStarted with 10 bags of coffee beans at 10 each Then 1 purchased 5 bags at 12 each 2 Sold 7 bags 3 Bought 10 bags at 8 each 4 Sold 4 bags 5 Sold 4 bags Determine COGSspan. . DiagramsInv_LIFOpngwidth800px figaligncenter. . span stylefontsize08emStarted with 10 bags of coffee beans at 10 each Then 1 purchased 5 bags at 12 each 2 Sold 7 bags 3 Bought 10 bags at 8 each 4 Sold 4 bags 5 Sold 4 bags Determine COGSspan. . DiagramsInv_Avgpngwidth800px figaligncenter. . span stylefontsize08emStarted with 10 bags of coffee beans at 10 each Then 1 purchased 5 bags at 12 each 2 Sold 7 bags 3 Bought 10 bags at 8 each 4 Sold 4 bags 5 Sold 4 bags Determine COGSspan. . DiagramsInv_FIFO_Periodicpngwidth800px figaligncenter. . span stylefontsize08emStarted with 10 bags of coffee beans at 10 each Then 1 purchased 5 bags at 12 each 2 Sold 7 bags 3 Bought 10 bags at 8 each 4 Sold 4 bags 5 Sold 4 bags Determine COGSspan. . DiagramsInv_LIFO_Periodicpngwidth800px figaligncenter. . span stylefontsize08emStarted with 10 bags of coffee beans at 10 each Then 1 purchased 5 bags at 12 each 2 Sold 7 bags 3 Bought 10 bags at 8 each 4 Sold 4 bags 5 Sold 4 bags Determine COGSspan. . DiagramsInv_Avg_Periodicpngwidth800px figaligncenter. . Inventory goes to the balance sheet. Almost always a current asset. Slow moving inventories can be noncurrent assets. Purchase discounts decrease inventory. COGS is an expense Rightarrow goes to income statement. Sales returns and allowance sales discount affect income statement. Decrease net revenue. Inventory writedowns decrease net income. Reversals are gains Rightarrow increase OCI. . Situation Coffee Corp started the year with 100 coffee cups for sale each originally purchased at 8 Determine the cost of goods sold under each inventory system given the transactions on the right. . columns. . column width50. . FIFO Perpetual. LIFO Perpetual. Average cost Perpetual. FIFO Periodic. LIFO Periodic. Average cost Periodic. . . . column width50. . 1 Sold 40 cups. 2 Purchased 60 cups 10 each. 3 Sold 90 cups. 4 Purchased 90 cups 12 each. 5 Sold 80 cups. . . . . . An Excel template for this is on eLearn. . 1 FIFO Perpetual 2000. Remaining 40 12. 2 LIFO Perpetual 2120. Remaining 10 12 30 8. 3 Average cost Perpetual 2030. Remaining 40 1125. 4 FIFO Periodic 2000. Remaining 40 12. 5 LIFO Periodic 2160. Remaining 40 8. 6 Average cost Periodic 208320 . Remaining 40 992. . DiagramsInv_FIFO2pngwidth1000px figaligncenter. . DiagramsInv_LIFO2pngwidth1000px figaligncenter. . DiagramsInv_Avg2pngwidth1000px figaligncenter. . DiagramsInv_FIFO_Periodic2pngwidth1000px figaligncenter. . DiagramsInv_LIFO_Periodic2pngwidth1000px figaligncenter. . DiagramsInv_Avg_Periodic2pngwidth1000px figaligncenter. . . . For next week. 1 Recap the reading for this week. 2 Read the pages for next week. PPE Intangibles Chapter 7. 3 No homework. 4 Practice on eLearn. Practice on Inventory. Automatic feedback provided. Survey on the class session at rmclink101survey5httpsdocsgooglecomformsde1FAIpQLSdzyohx5MTN40nrDxCWRfuyapH7b1N6NG6MQqV6lMMNT9z2Qviewformuspsf_link. . kableExtra. knitr. revealjs. . . . . . Add eq for markup and margin to gross profit method. . 75 of overall grade. 1 hour to complete. When finished revise or turn in at the front. 15 minute break after. Class will resume after the break. . Grades are on eLearn. Well have more practice with annual reports later in the course. Week 12 Using these reports to understand companies activities . All graded. We will go over the questions in class today. . . . columns. . column width50. Course_DiagramsACCT_101_course_map_6pngwidth450px figaligncenter. . . column width50. . PPE Intangibles Chapter 7. . 1 Understand which assets qualify as PPE and Intangibles. 2 Account for acquisition and depreciation of PPE. 3 Understand additional issues related to PPE. 4 Account for intangibles. . . . . . . . . . . columns. . column width50. . Long term investments. Construction in Progress. Incomplete skyscrapers. Incomplete manufacturing plants. Incomplete complicated machinery. Tungsten cathode LPP Fusion 125 years. . . . column width50. . FiguresWIP2pngwidth200px figaligncenter. . Figureslpp_tungstenjpgwidth200px figaligncenter. . . . . . . columns. . column width50. . Property Plant and Equipment PPE. Leasehold Land. 99 year ownership. Central Boulevard white sitehttpwwwbusinesstimescomsgrealestateioiplacestopbidofs257billionors1689psfpprforcentralboulevardwhitesite. S257B. Freehold land. Permanent ownership. The Peak Cairnhill II. Natural Resources. San Ardo Oil Fieldhttpswwwflickrcomphotoslocosteve6132400059. . . . column width50. . FiguresLeaseholdjpgwidth200px figaligncenter stylemargin0px lightbox. . FiguresFreeholdpngwidth200px figaligncenter stylemargin0px lightbox. . FiguresOil_Fieldjpgwidth200px figaligncenter stylemargin0px lightbox. . . . . . . columns. . column width50. . Property Plant and Equipment PPE. Buildings. Land improvements. Furniture and Fixtures. Equipment. Machinery. Vehicles. . . . column width50. . Figuresfactorypngwidth150px figaligncenter stylemargin0px. . Figurespcpngwidth150px figaligncenter stylemargin0px. . Figuresmachinepngwidth150px figaligncenter stylemargin0px. . . . . . columns. . column width50. . Intangibles. Patents. Internally developed software. Trademarks and names. MA value goodwill. Not accounted for intangibles. Reputation. Own brand name. Management quality. . . . column width50. . FiguresIPOSpngwidth400px figaligncenter. . . . . . . . . PPE has useful life or extends useful life whereas expenses do not extend useful life but merely maintain or restore working order IAS 16. . Include as an asset. Anything with useful life. Anything extending useful life. Expense. Maintenance. Maintenance doesnt extend useful life it just keeps useful life where it should be. . Include. Purchase price at historical cost. Net of discounts. Duties and nonrefundable taxes. Employee benefits. For setting up the PPE such as insurance. Purchase commissions. Site preparation. Delivery and handling. Installation andor assembly. Testing expenses. Net of test good proceeds. Fees incurred. . What dont we include. Opening ceremonies. No useful life after. Advertising a new product. A direct expense for operations not the PPE. Business costs due to dealing with customers. Operating costs. Adminoverhead costs. Operating costs. . . What is the asset value of the following. . . 1 10000 of land with a 1000 stamp duty tax and a 300 opening party. Answer 11000. Purchase cost is included. Taxes are including unless refundable. Opening ceremonies are excluded. 2 A 5000 machine where testing cost 1000 but created 500 of useful inventory. 5500. Purchase cost is included. Testing costs are included. Inventory created during testing is subtracted. . columns. . column width30. . Often companies purchasing groups of assets. Firesales or deals with other companies. We call this basket purchasing. 1 Determine the market value of each asset. 2 Allocate a percent of market value to each asset. 3 Allocate basket price by percentages to assets. Record journal entries as usual. . . . column width70. . DiagramsBasket_purchasepngwidth800px figaligncenter lightbox. . . . . . . . . . Situation Bought Machinery MV 8000 Land MV 10000 and Equipment MV 2000 for 10000 in one cash purchase. . DiagramsBasket_examplepngwidth800px figaligncenter. . Determine the value of each item in the following basket purchase for 90000 cash. . 1 A service van worth 30000. 2 A small tract of land worth 50000. 3 A large amount of inventory worth 20000. . DiagramsBasket_example2pngwidth1000px figaligncenter. . . Standard repairs are an expense. They dont increase useful life. They maintain it. Repairs that increase useful life should be capitalized. Add the repair cost to asset value. . Capitalize repairs only when useful life changes . . columns. . column width50. . DiagramsJE_61pngwidth600px figaligncenter lightbox. . . column width50. . DiagramsJE_62pngwidth600px figaligncenter lightbox. . . . . . . . . Recognize usage of assets over time. Even though we still have the asset its lost value. Not as new. Charge to income statement as depreciation expense. Recognize on balance sheet as accumulated depreciation on a specific asset account. Contra asset. Matching principal. We used the asset to generate revenue so we need to match asset usage expense to this revenue. . DiagramsJE_63pngwidth800px figaligncenter lightbox. . How much does 1 year affect the value of the following. . 1 Smart phone. 2 Car. 3 Textbook. 4 Fiction book. . 1 Straight line. Weve seen this one already. Depr fracCostSalvagePeriods. 2 Units of production aka units of activity. Depr CostSalvage fracUnitsUsedTotalUnits. 3 Double declining balance. P 2Periods. Depr Cost AccumDepr cdot P. . calloutimportant . Never go below salvage value Stop depreciating when you hit salvage value. . . . . . The depreciation method used shall reflect the pattern in which the assets future economic benefits are expected to be consumed by an entity FRS 1660. . Expect variation in methods used as different firms may argue different usage patterns for the same assets. . The method must be used consistently from period to period FRS 1661 62. . You generally cant change methods during the life of an asset. . . Depr fracCostSalvagePeriods. . . Constant over time. Same amount per year. Partial years multiply by the Months used12. Will end up at salvage value after Periods periods. . . . suppressPackageStartupMessageslibraryplotly. . m list. l 60. r 50. b 60. t 40. pad 4. . . df dataframe. yearc12345. slc2000020000200002000020000. unitc1000030000400001000010000. ddbc400002400014400864012960. slsc1500015000150001500015000. unitsc7500225003000075007500. ddbsc40000240001100000. . . dfv dataframe. yearc012345. v_slc100000800006000040000200000. v_unitc100000900006000020000100000. v_ddbc100000600003600021600129600. v_slsc1000008500070000550004000025000. v_unitsc1000009250070000400003250025000. v_ddbsc1000006000036000250002500025000. . . span stylefontsize08emYou have a 100k asset which you will use for 5 years with 25000 salvage value What is straightline depreciation in years 1 and 2span. . . span stylefontsize08emYou have a 100k asset which you will use for 5 years with 25000 salvage value What is straightline depreciation in years 1 and 2span. . . . Depr CostSalvage times fracUnits UsedTotal Units. . . Constant per unit produced. Same amount per unit but units vary by year. Partial years no change. Will end up at salvage value after the total number of units are produced. . . span stylefontsize08emYou have a 100k asset which you will use for 5 years with 25000 salvage value What is units of production depreciation in years 1 and 2 Usage will be 10 30 40 10 and 10 for each yearspan. . . span stylefontsize08emYou have a 100k asset which you will use for 5 years with 25000 salvage value What is units of production depreciation in years 1 and 2 Usage will be 10 30 40 10 and 10 for each yearspan. . . . Depr Cost Acc Deprtimes Pquad Pfrac2Periods. . . More depreciation early less later. Partial years multiply by the Months used12. Can hit salvage value early stop depreciating at this point. . . . . Depr Cost Acc Deprtimes Pquad Pfrac2Periods. . . Steps for calculation. . 1 Determine the percentage to deduct each period Pfrac2Periods. 2 Determine net asset value NAV HistoricalCostAccumDepr. 3 Determine the maximum depreciation maxNAV cdot P. 4 If not the last period. Check if NAVmax ge salvage. If it is depreciation is max. If it is not depreciation is NAV salvage. 5 If the last period. Take NAV salvage as your depreciation. . span stylefontsize08emYou have a 100k asset which you will use for 5 years with 25000 salvage value What is double declining balance depreciation in years 1 and 2span. . . span stylefontsize08emYou have a 100k asset which you will use for 5 years with 25000 salvage value What is double declining balance depreciation in years 1 and 2span. . . span stylefontsize08emSituation You have a 100k asset which you will use for 5 years with 0 salvage value Determine depreciation using the 3 methods Usage will be 10 30 40 10 and 10 for each yearspan. . . span stylefontsize08emSituation You have a 100k asset which you will use for 5 years with 25000 salvage value Determine depreciation using the 3 methods Usage will be 10 30 40 10 and 10 for each yearspan. . . Depletion. Just like units of production depreciation. Different name as resources are depleted when mined. Meaning the amount of resources left has decreased. . DiagramsJE_64pngwidth800px figaligncenter lightbox. . Useful life is an estimate. Salvage value is an estimate. Depreciation method is a choice. 0 net asset value NAV ne unusable. NAV asset value minus its accumulated depreciation. You wont record any more depreciation after hitting 0. . . Depreciation method affects your taxes. This makes doubledeclining balance look more enticing. . DiagramsPPE_Cyclepngwidth800px figaligncenter. . Partial years. Straightline and DDB Multiply yearly depreciation by Months used12. Units of production No change needed as fewer units produced controls for this. Many things change over time. This includes the accuracy of your depreciation assumptions. Length of time salvage value. Increased life from maintenance is an example. Use new assumptions going forward. Essentially treat as a new asset with a historical cost equal to the current NAV for the purpose of depreciation calculations. . span stylefontsize08emSituation Bought an asset on September 30th for 10000 with useful life of 7 years and 3000 of salvage value What is depreciation under straight line and DDB for the asset as of December 31st of the same yearspan. . Months passed 3 months. Oct Nov Dec. Straightline. Full year is frac10000300071000. Partial year is 1000 times frac312 250. DDB. Full year is 10000 0times frac27 285714. Partial year is 285714times frac312 71429. . span stylefontsize08emSituation Bought an asset on January 1st 20X0 for 10000 with useful life of 7 years and 3000 of salvage value to be accounted for using straight line depreciation In year 20X2 it was determined that the asset would only last 6 years in total with 0 salvage value and should be accounted for using DDB What is the depreciation expense in years 20X0 through and 20X2span. . Years 20X0 and 20X1. Normal straight line problem. Expense 10000 3000 7 1000. Year 20X2. Determine NAV new cost 10000 1000 1000 8000. Years left 6 2 4. New Acc Depr 0. DDB 8000 0 times frac24 4000. . Retirement throwing the asset out. Adjust the PPE value to include partial depreciation if any. Same as usual depreciation methods. Record retirement. . columns. . column width50. . Asset at 0 net asset value NAV. . No gain or loss here. . DiagramsJE_65pngwidth600px figaligncenter lightbox. . . column width50. . Asset at 0 net asset value. . Debit loss on asset retirement. . DiagramsJE_66pngwidth600px figaligncenter lightbox. . . . . . . Sale is like retirement but you are receiving some cash instead of nothing. Adjust the PPE value to include partial depreciation if any. Same as usual depreciation methods. Record a sale. . columns. . column width50. . Loss NAV Cash. . Debit loss on asset sale. . DiagramsJE_67pngwidth600px figaligncenter lightbox. . . . column width50. . Gain NAV Cash. . Credit gain on asset sale. . DiagramsJE_68pngwidth600px figaligncenter lightbox. . . . . . Exchange is the same as a sale but with noncash settlement. Ex Exchange machinery for a car. Adjust the PPE value to include partial depreciation if any. Same as usual depreciation methods. Record an exchange. . . columns. . column width50. . Loss NAV Asset received. . Debit loss on asset sale. . DiagramsJE_69pngwidth600px figaligncenter lightbox. . . . column width50. . Gain NAV Asset received. . Credit gain on asset sale. . DiagramsJE_610pngwidth600px figaligncenter lightbox. . . . . . . span stylefontsize08emSituation A machine bought for 10000 has 4000 of accumulated depreciation but the firm no longer needs the asset Record the following possible outcomes 1 Disposal of the machinery 2 Sale for 4000 cash 3 Exchange for an 8000 Warehousespan. . DiagramsJE_611pngwidth750px figaligncenter lightbox. . 1 Get the in class activity spreadsheet on eLearn. Session_6_Activity_Deprxlsx. 2 Calculate depreciation for the assets listed in the file using each method. . . Literally not perceptible by touch. Things you cant hold but still have value. Patents. Copyrights. Franchise rights. Licenses. Trademarks. Goodwill ie excess acquisition price. . Most cited US4683202AhttpspatentsgooglecompatentUS4683202Aen. Filed 25101985. 8000 citations. . The present invention is directed to a process for amplifying any desired specific nucleic acid sequence contained in a nucleic acid or mixture thereof The process comprises treating separate complementary strands of the nucleic acid with a molar excess of two oligonucleotide primers and extending the primers to form complementary primer extension products which act as templates for synthesizing the desired nucleic acid sequence The steps of the reaction may be carried out stepwise or simultaneously and can be repeated as often as desired. . Nortel patent salehttpswwwtheguardiancomtechnology2011jul01nortelpatentssoldapplesonymicrosoft. Over 6000 patents. Consortium of Microsoft Apple Sony RIM Blackberry EMC Ericsson. 45B. Merck Lawsuit against Gileadhttpswwwreuterscomarticleusgileadsciencesmerckcoverdictmerckwins254billioninhepatitiscdrugtrialagainstgileadidUSKBN1442U9. Over patent infringement. Hepatitis C drug. 254B jury verdict. 10 of all revenue. . or rights reserved. . . . texthttpwwwreuterscomarticlemcdonaldssingaporeidUSL4N1DX3RUa hrefMcDonalds franchise in Singapore is owned by Lionhorn Pte Ltda. Housed under Hanbaoabo Pte Ltd which is owned by Lion Arches which is owned by Lionhorn. . . Software licenses. Can be for a period or infinite. Periodic licenses treated as a prepaid expense. Infinite licenses treated as an asset. Unless the license usefulness is clearly limited. . . or . . . The amount paid for a company in an acquisition above its updated book value. If price updated book value negative goodwill. a hrefhttptimecom4376607microsoftlinkedingoodwillMicrosoft bought LinkedIna. 25B price. LinkedIn had about 4B book value. Note LinkedIns assets were worth more than their book value. As much as 17B was goodwill. . . If internally generated. Legal costs for titles can be capitalized registration costs. Added to asset account. Generation costs are expensed. Exception Development after Research can be capitalized under IFRS IAS 38. If purchased. Record at cost. . Why do we have this difference Its because purchases have more reliable values. . Intangibles are not physical items so they doesnt depreciate. They can lose value over time. . Solution for infinitely lived items. Revalue when doing financial statements. Involves decreasing book value to match the current lower value if lower by a process called impairment. We generally never increase book value. Solution for finitely lived items. Amortize their value. Works like straight line depreciation with 0 salvage value. Can also be impaired. . Impairment is not covered on the exam. . Amortization is like depreciation for intangibles. Debit Amortization expense. Credit accumulated amortization. Always use straightline with 0 salvage value. Example. . columns. . column width50. . 1 Bought a patent for 100 cash It has 5 years of life. 2 Recorded amortization after 1 year. 3 Recorded amortization after another year. . . . column width50. DiagramsJE_613pngwidth600px figaligncenter lightbox. . . . . . . Determining the life of intangibles. Often this is based on a countrys laws. Copyright duration is set by each country. Trademark law determines trademark life. Mergers will be infinitely lived but are often impaired. . . . . For next week. 1 Recap the reading for this week. 2 Read the pages for next week. Chapter 8 Liabilities. Tricky subject reading highly recommended. Well spend 2 weeks on liabilities. 3 Homework 3 to turn in next week. Available on eLearn. Submit on eLearn. 4 Practice on eLearn. Practice on Journal entries 2. Automatic feedback provided. Survey on the class session at rmclink101survey6httpsdocsgooglecomformsde1FAIpQLSdzyohx5MTN40nrDxCWRfuyapH7b1N6NG6MQqV6lMMNT9z2Qviewformuspsf_link. . kableExtra. knitr. plotly. revealjs. . . . . . . Debit Impairment expense. Directly record decrease to the asset Credit. We can impair PPE as well. . columns. . column width50. . 1 We bought a competitor for 800 400 of machinery and 400 of goodwill for their RD. 2 We realized that the RD we paid extra for had no value. 3 We realized we overpaid for the machinery by 200. . . . column width50. . DiagramsJE_612pngwidth600px figaligncenter. . . . . . . Goodwill comes from acquiring other firms. We record new book values for each asset acquired. We use the net asset value of each asset for this. To calculate goodwill. 1 Start with the purchase price of the firm. 2 Subtract the net asset values of all assets. 3 Add back all liabilities. 4 Whats left is goodwill. . span stylefontsize08emSituation Coffee Corp bought a rival coffeeshop for 100000 The coffee shop has book values of assets and liabilities of 80000 and 40000 respectively We estimate NAV to be 90000 What is goodwillspan. . Goodwill is 100000 90000 40000 50000. We ignore the old book value of assets. . Often we will collapse steps 2 and 3 together into a quantity called Net assets. Netassets Totalassets Totalliabilities. . Net assets and Net asset value are not the same. . Netassetvalue HistoricalCost AccumulatedDepreciation. . . Reworking the prior example Net assets is 90k 40k 50k. . To calculate goodwill. 1 Start with the purchase price of the firm. 2 Subtract net assets. 3 Whats left is goodwill. Goodwill is 100000 50000 50000. . . Record your group preferences at httpsrmclink101groupsG_. . The form asks for your preference of up to 2 classmates to work with. If you both choose each other you are highly likely to be allocated to the same group. Groups of 45 will be constructed based on your preferences. Based on a game theory algorithm for fair group allocation. . Timeline. . Project groups will be announced by tomorrow at 7 PM. At the same time I will release a form for selecting your project choices. Look for the announcement on eLearn. . . . columns. . column width50. Course_DiagramsACCT_101_course_map_7pngwidth450px figaligncenter. . . column width50. . Current liabilities Chapter 8. . 1 Account for current liabilities. 2 Become familiar with time value of money. Well need this for Bonds. . Sustainability reporting. . 1 Understand the components of a sustainability report. 2 Recognize challenges and benefits of sustainability reports. 3 Identify sustainability as a core business value. . . . . . . . . . . Obligation of the enterprise arising from past events the settlement of which is expected to result in an outflow from the enterprise of resources embodying economic benefits FRS 3710. . Current liability Something you owe within the span of one year the current accounting term. NonCurrent liability Something you owe after the current accounting term. . Example current liabilities Accounts payable Unearned revenue Salaries payable Taxes payable Notes payable Interest payable ________ payable. . . columns. . column width50. . Also known as GST. Generally paid quarterly. Can pay monthly as well. Retailers collect this from customers to pass to tax authorities IRAS. . . . column width50. . Figuresiraspngwidth150px figaligncenter. . . . . . DiagramsJE_73pngwidth800px figaligncenter lightbox. . . columns. . column width50. . Notes payable is a small shortterm loan. Similar to AP but. More formal. Has a stated interest rate. Can be provided by any party. Banks. Suppliers. . . . column width50. . FiguresNotejpgwidth600px figaligncenter. . . . . . This is included in Chapter 5 in the book. . Creditor the lender. Debtor the party that owes money. Term length of time of the note. Maturity date when the note is due. Principal amount of money borrowed. Well record this at the start. Interest additional payments for borrowing. Well record these as they occur. Or when doing adjusting entries. Maturity value amount owed at maturity. Interest is usually all paid at the end. The interest rate will be given as the annual rate. . Received a 2000 note payable with 9 interest due in 3 months payable to our supplier. . DiagramsJE_75pngwidth800px figaligncenter lightbox. . Gave 2000 with 9 interest due in 3 months payable to our customer as a note receivable. . DiagramsJE_76pngwidth800px figaligncenter lightbox. . We consider any payment owed in the coming fiscal year as a current liability. This includes payments on long term debt. We shift these payments to short term debt when we do our balance sheet. Call it current portion of long term debt. . DiagramsCurrent_portion_LTDpngwidth700px figaligncenter. . Coffee Co gives 1000 to Latte Inc on November 1st 20X8 as a note with 6 interest over 6 months Record the journal entries for both companies ie the note receivable and the note payable Assume December 31st is both companies fiscal year end. . Hints. Money changes hands on November 1. Interest accrues on December 31. The note is paid back on April 30th. . DiagramsJE_7P1pngwidth800px figaligncenter lightbox. . DiagramsJE_7P2pngwidth800px figaligncenter lightbox. . . Everyone should have 1 card write your name on it. If you give me the card during the next break Ill give you 1 chocolate. If you give me the card at the end of class Ill give you 2 chocolates. Which do you prefer. What if it was 2 now and 1 later. What if it was 1 now and 1 later. How many chocolates would you need later to not take one now Decimals are fine. span stylecolorblueWell do 1 now or 2 laterspan. . This section is based on. . Corporate Finance An Introduction. . by Ivo Welch. . Pearson Boston MA 2009. . Its a good finance textbook. . No taxes. No transaction costs. Can find buyerssellers costlessly. Can deliver costlessly. Everyone has identical beliefs. Many buyers and sellers liquid. . Well use these assumptions in this class. . 1 You can earn interest on 1 today so its worth more than 1 tomorrow. 2 Inflation means that 1 tomorrow can buy less than 1 today. 3 1 today gives me the option to spend today or tomorrow but 1 tomorrow can only be spent tomorrow If that option to use the 1 today is valuable to me 1 today is worth more than 1 tomorrow. . All three of these are equivalent a dollar today is worth more than a dollar tomorrow. . When we talk about returns well talk about compounded returns. If 1 today is 110 next year. then 100 in two years is 121 not 120. Return scales with capital. More explicitly if the interest rate r is 10 and the principal P_0 is 1 then. Tomorrow P_0 is worth P_1P_0cdot 1r 1cdot 110 110. Flipping the equation implies P_0 fracP_11r frac11011 1. . What is 1 worth in two years Three years . P_2 left1cdot 11rightcdot 11 121. P_3 leftleft1cdot 11rightcdot 11rightcdot 11 1331. ldots. P_50 leftldots left1cdot 11rightcdot 11ldotsrightcdot 11 approx 10672. ldots. P_n P_0cdot 1rn. . . What is the current value of 1 in two years Three years . P_0 left111right11 083. P_0 leftleft111right11right11 075. ldots. P_050 leftldotsleft1 11right 11ldotsright 11 approx 00085. ldots. P_0n fracP_n1rn. . . . . . Answers. . 1 10times 1005202653. 2 frac10100520376. . . What we just did. Determine the price today of some future expected cash flows. Numerator is the future cash flow CF. Denominator is the discount factor R. That is we discount cash flows by the return to get todays value. . . NPV_0 CF R. . . What if there are multiple cash flows. . NPV_0 sum_i0n fracCF_iR_i. . NPV at time 0 today is the sum of all discounted cash flows. . The discount factor is the amount of cumulated return or interest you would expect to receive between two period of time. We often assume a fixed discount rate for each year of 1r. Let R_i denote the discount factor from time 0 to time i. R_11r. R_21rcdot1r. R_31rcdot1rcdot1r. ldots. R_n1rn. . A project costs 500 today and is expected to pay out the following. 100 in one year. 600 in two years. If the interest rate is 10 what is the NPV of the projectbrbr. . NPV frac5001010 frac1001011 frac6001012. NPV 500 9091 49587. NPV 8678. What if the interest rate was 5. NPV frac50010050 frac10010051 frac60010052. NPV 500 9524 54422. NPV 13946. . . . Easy to do a few cash flows with a calculator. Easy to do any number of cash flows with spreadsheets. What is the NPV of a project that pays out 100 each year for 100 years assuming the interest rate is 1. Value is r v. . . . 10 years 100 years 1000 years 10000 years. Pretty hard by hand. Trivial to brute force on a computer. . . Formulas . . Perpetuity The same cash flow and discount rate forever. PerpetuityNPV fracCFr. Growing perpetuity perpetuity but with a growth in cash flows of g. GPNPV fracCFrg gr. Annuity same cash and discount rate for only T periods. AnnuityNPV fracCFrleft1frac11rTright. . Well need this annuity NPV formula next class. . beginalign. NPV frac100001 cdot left1frac1100110000right . approx 10000 cdot 1 . approx 10000 . endalign. . What about for 70 periods. NPV frac100001 cdot left1frac1100170right. NPV 501685. . A note to those in finance from the textbook I am not a fan of memorization but you must remember the growing perpetuity formula It would likely be useful if you could also remember the annuity formula These formulas are used in many different contexts There is also a fourth formula which nobody remembers but which you should know to look up if you need it p53. . Growing annuity. . PV fracCrg left1 frac1gT1rTright gr. . You can derive the other 3 formulas from the fourth. . Growing perpetuity. lim_Trightarrowinfty fracCFrg left1 frac1gT1rTright fracCFrg left1 0right fracCFrg. Annuity. leftfracCrg left1 frac1gT1rTrightright_g0 fracCr left1 frac11rTright. Perpetuity. leftlim_Trightarrowinfty fracCFrg left1 frac1gT1rTrightright_g0 fracCFr0 left1 0right fracCFr. . You dont need to know this for this class. . 1 An investment costs 100 today and pays out 10 per year for the next 10 years In the 10th year it also pays back the original 100 If the interest rate is 10 what is the NPV. 2 What if the interest rate was 8 instead of 10 in 1. . An investment costs 100 today and pays out 10 per year for the next 10 years In the 10th year it also pays back the original 100 If the interest rate is 10 what is the NPV. . An investment costs 100 today and pays out 10 per year for the next 10 years In the 10th year it also pays back the original 100 If the interest rate is 10 what is the NPV. . beginalign. NPV 100 sum_i110 frac10101i frac10010110 . 100 frac1001left1frac110110right frac10010110 . 100 6145 3855. 0. endalign. . Use NPV and the annuity formula. . An investment costs 100 today and pays out 10 per year for the next 10 years In the 10th year it also pays back the original 100 If the interest rate is 10 what is the NPV. The NPV would be 0. . What if the interest rate was 8. . What if the interest rate was 8. . beginalign. NPV 100 sum_i110 frac101008i frac100100810 . 100 frac10008left1frac1100810right frac100100810 . approx 100 6710 4632. approx 1342. endalign. . Use NPV and the annuity formula. . . Are stock prices NPVs. . span stylecolorredNo taxesspan. span stylecolorredNo transaction costsspan. span stylecolorgreenCan find buyerssellers costlesslyspan. span stylecolorredCan deliver costlesslyspan. span stylecolorredEveryone has identical beliefsspan. span stylecolorblueMany buyers and sellers liquidspan. . . . . columns. . column width50. CSR. . Corporate Social Responsibility. The precursor to ESG. . . ESG. . Environmental Social Governance. Blends governance CSR and a broader focus on climate and its risks. . ESD. . Education for Sustainable Development. UpSkilling future leaders. . . . column width50. . ESD UNESCO. . ESD is a lifelong learning process and an integral part of quality education It enhances the cognitive socioemotional and behavioural dimensions of learning and encompasses learning content and outcomes pedagogy and the learning environment itself . . . . . . Environmental. . Climate change effluents and waste clean energy energy consumption carbon emissions biodiversity degradation water . . Social. . Diversity human rights everyones health safety child enforced labour product responsibility anticorruption . . Governance. . Management structure employee relations executive compensation Board diversity ethical culture Board and management competence. . . callouttip . The above comes from the Task Force on Climaterelated Financial Disclosures TCFD. . . . . columns. . column width50. . FiguresVZ_youtubepngheight650px figaligncenter. . . . column width50. FiguresVerizon_VZ1pngheight650px figaligncenter. . . . . columns. . column width50. . Before the video. . FiguresVerizon_Ars_originalpngheight550px figaligncenter. . . . column width50. . After the video. . FiguresVerizon_Arspngheight550px figaligncenter. . . . . . . columns. . column width50. . 1 Guided by strong moral and ethical standards in daily interactions with all stakeholders. 2 Carefully balance shareholders needs with the needs of other stakeholders. 3 Constantly consider the environmental impact of its business operations. . . . . column width50. FiguresNexuspngwidth600px figaligncenter. . . . . . FiguresS7_SDGjpgwidth1200px figaligncenter. . . . calloutnote . What needs to be reported often varies by jurisdiction company size ownership structure and industry In Singapore rules are determined by SGXhttpswwwsgxcomsustainablefinancesustainabilityreporting. . . . In Singapore the following must be reported by public companies. Starting FY 2025 Greenhouse gas emissions from their own or controlled operations Scope 1. Starting FY 2026 Greenhouse gas emissions from purchasing electricity heat or steam Scope 2. Starting FY 2027 Greenhouse gas emissions from the rest of their supply chain Scope 3. Starting FY 2027 Scope 1 and 2 need an audit. For large private firms. Scope 1 and 2 disclosure by 2027 Scope 3 by 2029. Audit of scope 1 and 2 by 2029. . Material risks must be disclosed already. . Materiality goes two ways. . columns. . column width50. . Company Rightarrow World. . What is the impact of the firm on. The local environment. Climate. Nearby communities. What risks does the companys actions pose on the environment and local communities. . . . column width50. . World Rightarrow Company. . What environmental risks does the company face. Does climate change pose a risk for the companys operations. . . . . . FiguresESG_frameworkspngwidth1200px figaligncenter. . calloutimportant . SGX reporting choices are generally in line with TCFD. . . . FiguresTCFD_summarypngwidth1200px figaligncenter. . Consider the following companies. 1 A Norwegian lumber producer. 2 A Singaporean airline. 3 . . Consider the following companies. 1 A Norwegian lumber producer. 2 A Singaporean airline. 3 . . . We will divide into 9 groups. Each group needs to pick 1 of the 6 provided company cards. . The task. . 1 Determine the key risks this firm faces top 6. 2 Determine the best solution for each of the risks choose 6 of 16 actions. 3 I will pull 6 event cards and we will see how your company performs. . . . You can find more details on sustainability in Singapore at this links. NEA Climate Changehttpswwwneagovsgourservicesclimatechangeenergyefficiencyclimatechangeoverview. Green Plan 2030httpswwwgreenplangovsg. Reduce Reuse and Recyclehttpswwwgovsgarticlehowtopractisethe3rs. Ministry of Sustainability and the Environmenthttpswwwmsegovsg. . . . For next week. 1 Recap the reading for this week. 2 Read the pages for next week. Liabilities Chapter 9. 3 Submit last weeks homework. Available on eLearn. Submit on eLearn. 4 Practice on eLearn. Practice on Time value of money. Automatic feedback provided. Survey on the class session at rmclink101survey7httpsdocsgooglecomformsde1FAIpQLSdzyohx5MTN40nrDxCWRfuyapH7b1N6NG6MQqV6lMMNT9z2Qviewformuspsf_link. . kableExtra. knitr. revealjs. . . . . . . . . Manufacturers need to factor in liabilities from warranties. Estimate this provision for warranty repairs at year end. . DiagramsJE_77pngwidth800px figaligncenter lightbox. . . Contingent liabilities are not presently liabilities but could become liabilities in the future. Listed in the financial statement notes but not journalized. To note all 3 must be true. 1 Must depend on a future outcome of past events. 2 May but probably will not require an outflow of resources. 3 Must not have a sufficiently reliable estimate of the amount owed. . Contingent liabilities are obligations you might or might not have. . If chance of owing is very low. Ignore. If chance is reasonably possible. Contingent liability Rightarrow Make a note to your financial statements but dont include it in the statements themselves. If a sufficiently reliable estimation can be made. This is a real liability Rightarrow Include it in your adjusting entries. Not as a contingent liability. Ex. Provision for warranty repairs . Covers everything since Quiz 1. Inventory. PPE. Intangibles. Liabilities. Bonds. For calculations the level of rounding will be specified. Same format as Quiz 1. Practice quiz and additional practice are on eLearn. . . columns. . column width50. Course_DiagramsACCT_101_course_map_8pngwidth480px figaligncenter. . . column width50. . Liabilities Chapter 9. . 1 Account for bonds at par. 2 Account for bonds not at par. 3 Account for bond buybacks. . . . . . . . . . . . . . . . . columns. . column width50. . An interest bearing note payable. Issued by a company in a manner similar to stock. Often to investors like stock. Trades on an exchange daily like stock. Does not offer ownership. For the simpler bonds well cover in this course. Usually due in 5 or 10 years frequently longer. Interest is usually paid every 6 months. . . . column width50. . FiguresBondjpgwidth600px figaligncenter. . . . . . Backing. Secured bonds Backed by assets such as real estate mortgage bonds or other assets collateral trust bonds. Unsecured bonds No asset backing also called debentures. Principal Payments. Term Bonds Mature on a single date. Serial bonds Pay off principal in installments. Other features. Convertible bonds can be converted into common stock at the creditors request. Callable bonds can be paid early at a stated amount prior to maturity at the debtors request. . You only need to price unsecured term bonds in this course. From the bond holders perspective. Higher precedence than stock during bankruptcy. No voting rights. No ownership. From the bond issuers perspective. Interest payments are tax deductible. Guaranteed cash outflows. Raises funds without giving up ownership. . DiagramsBondpngwidth800px figaligncenter. . Term length of time of the bond. Maturity date when the bond is due. Par value The amount the bond will pay at maturity. Aka principal amount maturity value face value. Coupon rate Yearly of interest paid. Aka Stated interest rate nominal rate. Yield Yearly percent return if you purchase the bond today. This was our discount rate last week. Aka Market interest rate effective interest rate. Price of par value you need to pay to purchase. 100 Rightarrow Full price At par. 100 Rightarrow Discount. 100 Rightarrow Premium. . CUSIP Unique identifier given to the bond. Ex a hrefhttpswwwfinraorgfinradatafixedincomebondsymbolFGDbondTypeCORP345277AE7a a hrefhttpswwwfinraorgfinradatafixedincomebondcusip345370CA6bondTypeCA345370CA6a a hrefhttpswwwfinraorgfinradatafixedincomebondcusip345370BH2bondTypeCA345370BH2a. Name Name given to the bond. Usually the debtors ticker symbol followed by a bondspecific portion. a hrefhttpswwwfinraorgfinradatafixedincomebondsymbolFGDbondTypeCORPFGDa a hrefhttpswwwfinraorgfinradatafixedincomebondcusip345370CA6bondTypeCAFGYa a hrefhttpswwwfinraorgfinradatafixedincomebondcusip345370BH2bondTypeCAFGIa. Day count 30360 or actual. 30360 Assumes 30 days per month 360 days per year. Most common day count for bonds. Easier to calculate. Actual Count the number of days. . callouttip . Bond quotes available at Finraorghttpswwwfinraorgfinradatafixedincome but certain details require subscriptions the LKS Library has. . . . . ActualActual day count. Use the actual number of days divided by the number of days in the year 365 or 366. 30360 day count. Full months have 30 days each. Full years have 360 days. If the starting date is the last day of the month call it the 30th. If the adjusted starting date is the 30th then if the ending date is the last day of a month call it the 30th as well. If not the 31st becomes the 1st of the next month. If not the 28th or 29th February stays where it is. . . Example Between June 20th and August 25th there are actually 66 days Using 30360 we say there are 65 days. . Diagrams30_360pngwidth400px figaligncenter lightbox. . . DiagramsCalendars_30_360_solnpngwidth1200px figaligncenter lightbox. . . We had 2 formulas last week that will help us calculate bond values. Single cash flow in the future NPV fracCF1rT. Repeated cash flow annuity NPV fracCFr cdot left1frac11rTright. From an investors perspective a bond is. An initial payment outflow. An annuity received every 6 months inflow. Annuity Receiving the same cash flow every period for a set number of periods. A final cash flow inflow. Investors pay the NPV of a bond when discounting by the yield. . The bond a hrefhttpswwwfinraorgfinradatafixedincomebondcusip594918AH7bondTypeCAMSFTGGa. Microsoft issued on September 27 2010. 10 year bond. 310 yield when it was issued. 300 coupon rate. Semiannual coupon payments interest payments. 30360. 1B par value in total. . One trick needed. Since this and most other bonds pay their interest semiannually we need to calculate using halfyears. . How much would investors pay for the bond. . Principal P is 1B. Annuity cash flow 300 of principal per year paid in 2 payments. 3 times 1B 30M per year so CF15M semiannually. Discount rate yield 310 rfrac3102155 semiannually. Number of semiannual periods T20. . P1B CF15M r155 T20. . Annuity portion. . beginalign. Annuity NPVfracCFr cdot left1frac11rTright . frac15M00155 cdot left1frac110015520right . approx 256M. endalign. . P1B CF15M r155 T20. . Final cash flow principal. . beginalign. Principal NPVfracP1rT . frac1B10015520 . approx 735M. endalign. . P1B CF15M r155 T20. . Bond price ie bond NPV. . beginalign. NPV Annuity NPV Principal NPV . 256M 735M . 991M . endalign. . This means that investors paid 991M for the bond issue when it was issued. . callouttip . If you solve this more precisely you will get an answer 01M off from the original issue price as the bond was actually a 10 year and 3 day issue We will ignore those 3 days We wont deal with these fractional years for bond pricing. . . . We can bring everything together into 1 equation. . beginequation. Price fracCFr cdot left1frac11rTright fracP1rT. endequation. . Variables. P Principal amount aka the par value. i Coupon rate. y Yield. Y Length of bond in years. n Number of payments per year. Then. CFfracPtimes in Cash flow per coupon. TYtimes n Number of payments. ryn Discount rate. . beginequation. Price fracCFr cdot left1frac11rTright fracP1rT. endequation. . Given. P1Bquad i3quad y310quad Y10quad n2. Calculate. CFfracptimes in frac1B times 3215M. TYtimes n10times 2 20. ryn 3102 155. . beginalign. Price frac15M00155 cdot left1frac110015520right frac1B10015520 . approx 991M. endalign. . The table method is allowed on the final exam and annuity and NPV tables will be provided. Table equation PriceCF times Annuity_factor Ptimes NPV_factor. Annuity_factor comes from the cell in the annuity table corresponding to T periods and r discount rate. NPV_factor comes from the cell in the NPV table corresponding to T periods and r discount rate. . The equation method is more accurate works for any r and T and can also be used in your other classes. . Bond McDonalds a hrefhttpswwwfinraorgfinradatafixedincomebondcusip58013MEU4bondTypeCAMCD4248394a. Principal of 700M. Coupon rate of 3375. Yield of 339. 5 year bond. Semiannual coupon payments. . What is the price. . . P 700M. CF 700M times 33752 per year118125M. T 5 years times 2 per year 10text halfyears. r 3392 per year 1695. . . beginalign. Price fracCFr cdot left1frac11rTright fracP1rT . frac118125M001695 cdot left1frac1100169510right frac700M100169510 . approx 69952M. endalign. . . . columns. . column width50. . What we need to know. . Principal. Price we can solve for this if not given. Yield. Coupon amount or rate. Coupon payments per year. Count basis 30360 usually. . . . column width50. . Steps to account for. . 1 Account for bond issuance. 2 Account for coupon payments. 3 Account for accrued interest expense at year end. 4 In the final period pay back the principal. . . . . . calloutnote . Bond at par Coupon rate yield Leftrightarrow price par value. Discount bond Coupon rate yield Leftrightarrow price par value. Premium bond Coupon rate yield Leftrightarrow price par value. . . . . . . Example bond for these slides. Principal 100M. Price 100M. Yield 5. Coupon rate 5. Semiannual coupon payments every 6 months. Count basis 30360. Assume its a 10 year bond issued on March 10th 2018. Assume the firm issuing the bond uses a Dec 31 year end. . We will treat this very similarly to a note payable except there are interim interest payments. . Step 1 Account for bond issuance. . DiagramsJE_91pngwidth800px figaligncenter lightbox. . Step 2 Account for coupon payments. Interest expense. Cash payment is the coupon. . DiagramsJE_92pngwidth800px figaligncenter lightbox. . Step 3 Account for accrued interest expense at year end. The accrued interest is based on the number of days. Well use 30360 day counts unless otherwise stated. Interest owed will be CF times fracdays180. . DiagramsJE_93pngwidth800px figaligncenter lightbox. . Step 2 revisited Account for coupon payments. . DiagramsJE_94pngwidth800px figaligncenter lightbox. . Step 4 In the final period pay back the principal and a coupon. Since interest expense is the same every period for bonds at par we can figure this out. . DiagramsJE_95pngwidth800px figaligncenter lightbox. . Bond Fords a hrefhttpswwwfinraorgfinradatafixedincomebondsymbolFGDbondTypeCORPFGDa. Principal 36653M. Yield 93. Coupon rate 93. Semiannual coupons. 30360. Issued on March 1 1998. 32 year bond. Note Fords fiscal year ends on December 31. . Determine Fords journal entries for the bond for issuance the first coupon the adjusting entry and the second coupon. . . . Trading at a price below par. Equivalent to having a coupon rate lower than yield. Example bond for these slides. Principal 100M. Price 9256M. Yield 6. Coupon rate 5. Semiannual coupon payments every 6 months. Count basis 30360. Assume its a 10 year bond issued on March 10th 2018. Assume the firm issuing the bond uses a Dec 31 year end. . Recall. Bond payable amount is the par value. Cash amount is the price. Since these arent equal our very first entry wont balance. . Well use the Effective Interest Method to fix this. . Record a contraliability to our bond payable to reflect the difference. Account name is Discount on bonds payable. Over time we remove the discount by recording extra interest expense each period. Define Carrying value to be PayableDiscount. . Interest expense will be Carrying valuetimes yieldn. . Interest and carrying values. . . Initial price. . columns. . column width50. . P 100M. CF 100M times 52 per year25M. T 10 years times 2 per year 20text halfyears. r 62 per year 3. . . . column width50. . . beginalign. Price fracCFr cdot left1frac11rTright fracP1rT . frac25M003 cdot left1frac1100320right frac100M100320 . approx 9256M. endalign. . . . . . . . . . Step 1 Account for bond issuance. . DiagramsJE_96pngwidth800px figaligncenter lightbox. . Step 2 Account for coupon payments. Need to use the effective interest method. . DiagramsJE_97pngwidth800px figaligncenter lightbox. . Step 3 Account for accrued interest expense at year end. Interest owed and interest expense will be multiplied by fracdays180. . . DiagramsJE_98pngwidth800px figaligncenter lightbox. . Step 2 revisited Account for coupon payments. . DiagramsJE_99pngwidth800px figaligncenter lightbox. . Step 4 In the final period pay back the principal and a coupon. You wont be asked to figure this out without extra information. . DiagramsJE_910pngwidth750px figaligncenter lightbox. . . Trading at a price above par. Equivalent to having a coupon rate higher than yield. Example bond for these slides. Principal 100M. Price 10818M. Yield 4. Coupon rate 5. Semiannual coupon payments every 6 months. Count basis 30360. Assume its a 10 year bond issued on March 10th 2018. Assume the firm issuing the bond uses a Dec 31 year end. . Recall. Bond payable amount is the par value. Cash amount is the price. Since these arent equal our very first entry wont balance. . Well use the Effective Interest Method to fix this. . Record a liability along with our bond payable to reflect the difference. Account name is Premium on bonds payable. Over time we remove the premium by recording lower interest expense each period. Define Carrying value to be PayablePremium. . Interest expense will be Carrying valuetimes yieldn. . Interest and carrying values. . . Initial price. . columns. . column width50. . P 100M. CF 100M times 52 per year25M. T 10 years times 2 per year 20text halfyears. r 42 per year 2. . . . column width50. . . beginalign. Price fracCFr cdot left1frac11rTright fracP1rT . frac25M002 cdot left1frac1100220right frac100M100220 . approx 10818M. endalign. . . . . . . Step 1 Account for bond issuance. . DiagramsJE_911pngwidth800px figaligncenter lightbox. . Step 2 Account for coupon payments. Need to use the effective interest method. . DiagramsJE_912pngwidth800px figaligncenter lightbox. . Step 3 Account for accrued interest expense at year end. Interest owed and interest expense will be multiplied by fracdays180. . DiagramsJE_913pngwidth800px figaligncenter lightbox. . Step 2 revisited Account for coupon payments. . DiagramsJE_914pngwidth800px figaligncenter lightbox. . Step 4 In the final period pay back the principal and a coupon. You wont be asked to figure this out without extra information. . DiagramsJE_915pngwidth750px figaligncenter lightbox. . . The effective interest method distributes the discount or premium over the life of the bond. The discount or premium hits 0 just as the last coupon is paid. Discounts lead to higher expenses each year. We treat the shortfall in cash for a discount bond as a large amount of interest expense and amortize it over the life of the bond. Premiums lead to lower expenses each year. We treat the excess cash for a premium bond as free money that will cancel out some of our interest payments and thus we amortize it over the life of the bond. . . . . For each of the following bonds calculate the price and determine Fords journal entries for the bond for issuance and the next 3 journal entries 1 adjusting and 2 coupon payments Fords fiscal year end is December 31st. . columns. . column width50. . Bond Fords a hrefhttpswwwfinraorgfinradatafixedincomebondcusip345370CA6bondTypeCAFGYa Discount. Principal 1800M. Yield 753. Coupon rate 745. Semiannual coupons. 30360. Issued on July 16 1999. 32 year bond. . . . column width50. . Bond Fords a hrefhttpswwwfinraorgfinradatafixedincomebondcusip345370BH2bondTypeCAFGIa Premium. Principal 300M. Yield 904. Coupon rate 9950. Semiannual coupons. 30360. Issued on February 15 1992. 40 year bond. . . . . . . . Firms can retire a bond in two ways. 1 Work with creditors to establish a price to pay to end the bond. 2 Buy back bonds on the market. To retire a bond. 1 Record any accrued interest expense. 2 Debit out the bond payable account and any interest payable. 3 Close out any premium or discount account. 4 Credit the amount of cash paid to retire the bond. 5 Record the difference to a gain on bond retirement if credit balance or to a loss on bond retirement if debit balance. . Suppose our example bond at par was retired after 125 years on 20190610 for par plus accrued interest. . Par 100M Coupon rate 5 Yield 5. Carrying value on 20190310 100M. Accrued interest to pay 100M times frac52 times frac90180125M. Accrued interest expense 100M times frac52 times frac90180 125M. . DiagramsJE_917pngwidth800px figaligncenter lightbox. . . Suppose our example discount bond was retired after 125 years on 20190610 for par plus accrued interest. . Par 100M Coupon rate 5 Yield 6. Carrying value on 20190310 9312M discount 688M. Accrued interest to pay 100M times frac52 times frac90180125M. Accrued interest expense 9312M times frac62 times frac90180 140M. . DiagramsJE_916pngwidth800px figaligncenter lightbox. . Suppose our example premium bond was retired after 125 years on 20190610 for par plus accrued interest. . Par 100M Coupon rate 5 Yield 4. Carrying value on 20190310 10750M premium 750M. Accrued interest to pay 100M times frac52 times frac90180125M. Accrued interest expense 10750M times frac42 times frac90180 107M. . DiagramsJE_918pngwidth800px figaligncenter lightbox. . . . . . . . . . For next week. 1 Quiz 2 many extra practices on eLearn. 2 Recap the reading for this week. 3 Read the pages for next week. Financial statement analysis Chapter 12. 4 Homework to turn in early next week. Available on eLearn. Submit on eLearn. Graded based on effort. 5 Practice on eLearn. Practice on Bonds. Automatic feedback provided. Survey on the class session at rmclink101survey2httpsdocsgooglecomformsde1FAIpQLSdzyohx5MTN40nrDxCWRfuyapH7b1N6NG6MQqV6lMMNT9z2Qviewformuspsf_link. . . kableExtra. knitr. revealjs. . . . . . . . . columns. . column width50. Course_DiagramsACCT_101_course_map_9pngwidth450px figaligncenter. . . column width50. . 1 Learn about financial statement analysis. 2 Calculate and interpret financial ratios. . . . . . . . 1 The business environment. Economy health. Other countries particularly for multinational firms. Industry demand. Resource scarcity or supplier concentration. Consumer concentration. . . 2 Historical financials. Financial statements and notes. Competitors statements. . . columns. . column width50. . 3 Historical nonfinancials. Governance Risk disclosures Audit report. Shareholders supplier relationships. . . . column width50. . FiguresTeslajpgwidth450px figaligncenterhttpsarstechnicacomcars201609mobileyeandteslaspatheatsupasbothcompaniestradejabs. . Figuresmobileyepngwidth450px figaligncenterhttpswwwitprocomstrategy27005teslaautopilotsuppliermobileyecutstieswithelectriccarmaker. . . . . . . 1 Trend analysis aka Horizontal analysis. Compare dollar and percent changes across years. 2 Common size financial statements aka Vertical analysis. Compare financials across years or firms. A subset of ratio analysis. 3 Ratio analysis. 4 Analytics. . Only ratio analysis is on the final well cover the others briefly. . . . Comparing different years or quarters of data to see the trend in measures. Examples. Revenue grew by 3 this year. Net income grew by 4 this quarter. Quarterly revenue decreased 2 year over year. . a hrefhttpswwwwsjcomarticlesnikeridesoutitsmetoomoment1521812723Nike Rides Out its MeToo Momenta WSJ. . That is a reflection of a strong quarter Nike reported earnings of 68 cents a share beating analysts estimates by 15 cents and grew revenue by 7. . a hrefhttpswwwwsjcomarticleschinastencentinvestsinvideoaiandmobilepaymentsasearningssoar1521645233Chinas Tencent Invests in Video AI and Mobile Payments as Earnings Soara WSJ. . The plans emerged as the Shenzhenbased company said its fourthquarter revenue grew 51 year over year to 664 billion yuan 102 billion boosted by strong growth in mobile payments digital content subscriptions and advertising on its flagship mobile social apps WeChat and QQ. . 1 Get 2 financial statements from the same company typically the income statement. 2 Find the percentage change from the old figures to the new figures. . . . Standardizing figures in a financial statement by dividing by another figure. Allows for comparing financial statements across companies. Ex. Divide an income statement by revenue. fracGross profitRevenueGross Margin. fracNet incomeRevenueProfit Margin. Divide financial statements by total assets. . a hrefhttpswwwwsjcomarticlesgeneralmillsrisingsupplychaincostsweighonprofit1521636567Cheerios Could Get Pricier as General Mills Faces Rising Costsa WSJ. . Fourteen of the last 15 packaged food makers to report earnings posted lowerthanexpected gross margins said JP Morgan analyst Ken Goldman. . a hrefhttpswwwwsjcomarticlesfordceosayscompanycouldexceed8margintarget1521136839Ford CEO Says Company Could Exceed 8 Margin Targeta WSJ. . The company is forecasting an 8 global profit margin by about 2022 a number that would put it closer to betterperforming peers including GM Fords 5 operating margin last year was disappointing. . 1 Get a financial statement. 2 Divide every number by the same amount sales total assets etc to get the percent of sales of assets etc. . . We can compare accross companies or years. . . Using various ratios of numbers from financial statements to better understand companies. . All examples use the following data. . . 1 There are a few differences between the ratios in these slides and in the book These differences are due to simplifications I have made you can use these ratios on the final instead of the books ratios without penalty. 2 Some ratios have many definitions If you look online you may find other definitions for some of these ratios Dont use those on the final. . . fracCOGSfrac12leftInventory_T Inventory_T1right. . . How many times per year a company sells its inventory on hand. A similar measure is Inventory resident period. Aka Number of days sales in inventory. Calculated as frac365Inventory turnover. The number of days it take to sell the companys inventory. . Microsofts 2017 inv turnover frac34261frac12left2181 2251right 1546. . Microsofts 2017 inv period frac3651546236 days. . . fracRevenuefrac12leftAR_T AR_T1right. . . How many times per year a company collects its AR on hand. A similar measure is Receivable collection period. Aka Number of days sales in receivables. Calculated as frac365Accounts receivable turnover. The number of days it take to collect the companys AR. . Microsofts 2017 AR turnover frac89950frac12left19792 18277right 473. . Microsofts 2017 AR period frac365473772 days. . . fracCOGSfrac12leftAP_T AP_T1right. . . How many times per year a company pays its AP it owes. A similar measure is Payable outstanding period. Calculated as frac365Payable turnover. The number of days it take to pay the companys AP. . Microsofts 2017 AP turnover frac34261frac12left7390 6898right 480. . Microsofts 2017 AP period frac365480761 days. . . beginequation. frac365Inventory turnover frac365AR turnover frac365AP turnover. Updownarrow. scriptstyle Receivable collection period Inventory resident period Payable outstanding period. endequation. . . Measures how long it takes from paying payables to receiving cash for a sale. Can calculate from turnover ratios or periods. . An image of DiagramsCCCpngwidth1000px. . Microsofts 2017 cash conversion cycle 236 772 761 247 days. . . textAsset turnover fracNetrevenuefrac12leftAssets_T Assets_T1right. . . Measures sales volume in relation to asset base. . Microsofts 2017 asset turnover frac89950frac12left241086193468right414. . . fracCurrent assetsCurrent liabilities. . . Measures a companys ability to pay current liabilities. This should usually be 2. . Microsofts 2017 current ratio frac15985164527248. . . . fracCash Short term investments ARCurrent liabilities. . . Aka acidtest ratio . Measures a companys ability to pay current liabilities. Only factors in liquid current assets. This should be 1. . Microsofts 2017 quick ratio frac7663 125318 1979264527237. . . fracTotal liabilitiesTotal assets. . . Aka Debt to assets ratio. Measures a companys leverage. Leverage how much the company is financed by debt. Higher more leverage more debt financing. . Microsofts 2017 debt ratio frac168692241086700. . . . fracIncome from operationsInterest expense. . . Measures a companys ability to cover interest payments. Higher is better 1 should cause some worry. . Microsofts 2017 timesinterestearned ratio frac2232622221005. . Calculate the following ratios for Microsoft in 2016. . Payable outstanding period. Quick ratio. Debt ratio. Timesinterestearned ratio. . Extra info Microsofts AP in 2015 was 6591M. . . Payable payment period 761 days in 2017. 365 frac32780frac12left6898 6591right751 days. Quick ratio 237 in 2017. frac6510 106730 1827759357222. Debt ratio 700 in 2017. frac121471193468628. Timesinterestearned ratio 105 in 2017. frac201821243162. . . . fracProfitRevenue. . . Gross profit margin tells you about the companys selling margins. Operating profit margin tells you about its operating efficiency. Net profit margin tells you about its overall profitability. . Microsofts 2017 gross profit margin frac5568989950619. . Microsofts 2017 operating profit margin frac2232689950248. . Microsofts 2017 net profit margin frac2120489950236. . . fracNet incomefrac12leftAssets_T Assets_T1right. . . Measures overall profitability based on the companys size. Very common measure in practice. Higher is better. . Microsofts 2017 ROA frac21204frac12left241086193468right976. . . fracNet incomefrac12leftEquity_T Equity_T1right. . . Measures overall profitability based on the companys size. Stockholder focussed. Very common measure in practice. Higher is better. . Microsofts 2017 ROE frac21204frac12left7239471997right294. . Calculate the following ratios for Microsoft in 2016. . Net profit margin. Return on assets ROA. Return on equity ROE. . Extra info Microsofts 2015 total assets was 176223M and Microsofts 2015 total equity was 80083M. . . Net profit margin 236 in 2017. frac1679885320197. ROA 976 in 2017. frac16798frac12left193468176223right909. ROE 294 in 2017. frac16798frac12left7199780083right221. . . . . fracNet income Dividends on pref sharesfrac12leftShares_TShares_T1right. . . Measures the amount of profit tied to each share of stock. Very common measure in practice. Assume shares in year T and T1 are the same if not stated. span stylecolorredVery easily manipulatedspan. . Microsofts 2017 EPS frac21204 0frac12left77087808right273share. . . fracStock priceEPS. . . A measure of if a stock is overpriced. 6 to 8 is common 20 is common for tech firms. Higher overpriced. Lower underpriced. Very common measure in practice. span stylecolorredVery easily manipulatedspan since EPS is easily manipulated. . Microsofts 2017 PE ratio frac6893273252. . Calculate the following ratios for Microsoft in 2016. . EPS. PE Ratio. . Extra info Microsofts 2015 outstanding shares was 8027M. . . EPS 273share in 2017. frac16798 0frac12left78088027right 212share. PE Ratio 252 in 2017. frac5117212 241. . . . scriptsize. beginalign. textInventory turnover fracCOGSfrac12leftInventory_T Inventory_T1right . textAR turnover fracRevenuefrac12leftAR_T AR_T1right . textAP turnover fracCOGSfrac12leftAP_T AP_T1right. textCash conversion cyle frac365Inv turnover frac365AR turnover frac365AP turnover. textAsset turnover fracNetrevenuefrac12leftAssets_T Assets_T1right . textCurrent ratio fracCurrent assetsCurrent liabilities . textQuick ratio fracCash Short term investments ARCurrent liabilities . textDebt ratio fracTotal liabilitiesTotal assets . textTimesinterestearned fracIncome from operationsInterest expense. endalign. . . . scriptsize. beginalign. textGross profit margin fracGross profitRevenue . textOperating profit margin fracOperating profitRevenue . textNet profit margin fracNet incomeRevenue . textReturn on assets ROA fracNet incomefrac12leftAssets_T Assets_T1right . textReturn on equity ROE fracNet incomefrac12leftEquity_T Equity_T1right. endalign . . . . scriptsize. beginalign. textEarnings per share EPS fracNet income Dividends on pref sharesfrac12leftShares_TShares_T1right . textPriceearnings ratio PE fracStock priceEPS. endalign. . . . This is a quick preview of a module called Forecasting and Forensic Analytics part of the Analytics major in SOA. . You dont need to know this for this class but the techniques covered here are becoming more and more important. . Predicting ROA for tech companies using prior year data. . . . Predict out Microsofts 2018 ROA. . . . columns. . column width50. . Using 3 components. 1 Topic what companies say in annual reports. 2 Style writing style used in annual reports. 3 Financials financial ratios. . . Brown Crowley Elliott 2020 Journal of Accounting Research. . . . column width50. . FiguresDetection_by_yearpngwidth380px figaligncenter. . . . . . . . . . . . . For next week. 1 Do Quiz 2 on eLearn. 2 Recap the reading for this week. 3 Read the pages for next week. Cash flows Chapter 11. 4 Practice on eLearn. Practice on Financial ratios. Automatic feedback provided. Survey on the class session at rmclink101survey2httpsdocsgooglecomformsde1FAIpQLSdzyohx5MTN40nrDxCWRfuyapH7b1N6NG6MQqV6lMMNT9z2Qviewformuspsf_link. . kableExtra. knitr. revealjs. . . . . . Consider adding. Debt to equity ratio. Consider removing. Operating profit margin. Debt ratio. . . Print out the ratios in advance too difficult to wing . columns. . column width50. Course_DiagramsACCT_101_course_map_10pngwidth450px figaligncenter. . . column width50. . 1 Understand why we have a Statement of Cash Flows. 2 Identify cash flows from. Operations. Investing. Financing. 3 Identify significant noncash activities. 4 Apply the indirect method. . . . . . . . . . Categorizes and presents all cash receipts and cash payments. Cash inflows where cash came in from. Cash outflows where cash went out to. Describes cash changes over a period. . DiagramsStatement_timingpngwidth1000px figaligncenter. . Helpful in assessing companies. Ability to generate future cash flows. Ability to pay dividends. Difference between net income and change in cash. Investing and financing activities during the period. Value using DCF models finance. Provides information on three types of cash flows accounting for all cash flows of the company. Operating activities. Investing activities. Financing activities. . DiagramsSCF_BSpngwidth700px figaligncenter. . IFRS under IAS 731. Pick any categorization. Dividends paidreceived can be any cash flow type. Interest paidreceived can be any cash flow type. Keep it the same yearafteryear. US GAAP specifies where to put these follow this if you dont have a strong opinion on where to put interest and dividends. Inflows from dividends or interest operating activities. Interest payments operating activity. Dividend payments financing activity. . Cash from standard business transactions. Useful in. Identifying sustainable cash flows. Management of current assets and current liabilities. Ie working capital. Identifying liquidity issues. Important for loans. . columns. . column width50. . Inflows. . Sales. Short term investments selling. Other revenues. . . . column width50. . Outflows. . Short term investments buying. Business expenses. Paying suppliers and employees. Taxes. Maintenance expense. . . . . . Focus on changes in current assets changes in current liabilities and the income statement. . . Cash transactions that increase or decrease longterm assets. Useful in. Identifying onetime or nonrecurring cash inflows and outflows. . columns. . column width50. . Inflows. . PPE disposal. Selling investments in other firms. Collection of principal on loans made. . . . column width50. . Outflows. . Purchasing PPE. Purchasing investments in other firms. Making loans. . . . . . Focus on PPE. . Cashbased increases and decreases in longterm liabilities and shareholders equity. Useful in. Predicting future claims on cash. Identifying how a company is financed. Internally vs externally. . columns. . column width50. . Inflows. . Receiving loans. Issuing stock. Selling treasury shares. . . . column width50. . Outflows. . Paying back loans. Buying treasury shares. . . . . . Focus on long term liabilities and shareholders equity. . Includes. Issuing common stock in exchange for PPE. Bond conversion Bond rightarrow equity. Debt issuance for PPE. PPE exchange. Useful in. Determining other future claims on cash. Getting a more complete picture of financing and investments. Reported at the bottom of SCF or in supplementary schedule. . What type of cash flows are each of the followingbr Operating Investing Financing Noncash NonebrbrIf it is a cash flow is it an inflow or outflow. . columns. . column width50. . 1 Reissue treasury shares for a warehouse. 2 Pay off a note payable. 3 Pay interest on a bond. 4 Issue new shares for 10 each. 5 Pay accounts payable. 6 Record 10000 depreciation on PPE. . . . column width50. . 7 Sell machinery at a loss. 8 Sell land. 9 Pay a dividend. 10 Buy a warehouse. 11 Sell goods for cash. . . . . . . . . . Two equivalent methods. . columns. . column width50. . Indirect method. . Backs out operating cash flow by starting with net income and adjusting out accruals. Most commonly used. Easiest to do. . . . column width50. . Direct method. . Tracks and reports exactly where operating cash flows came from. Preferred by IFRS. Most useful for investors. . . . . . . Both methods will get you to the same operating cash flow amount. . We will cover the direct method next week when we construct an SCF. . 1 Start with net income. 2 Add back noncash expenses ie pure accruals. Depreciation depletion amortization. Bond discount amortization. Bad debt expense warranty expense. 3 Subtract out any gains from asset sales included in net income. 4 Add back any losses from asset sales included in net income. 5 Subtract changes in current assets except cash. 6 Add changes in current liabilities. . DiagramsOCFpngwidth700px figaligncenter. . Steps 1 through 4 are available in the income statement. Steps 5 and 6 can be calculated by comparing balance sheets. Current year versus prior year balance sheets. Compare change in accounts such as. AR. Inventory. Prepaid expenses. Accounts Payable. Unearned revenue. . DiagramsSCF_Indirect_Examplepngwidth750px figaligncenter lightbox. . You find the following information in Kopi Corps 20X9 and 20X8 financial statements Based on this information what is their operating cash flow for 20X9. . DiagramsSCF_Indirect_Practicepngwidth900px figaligncenter lightbox. . DiagramsSCF_Indirect_Practice_Answerpngwidth800px figaligncenter lightbox. . . . For next week. 1 Recap the reading for this week. 2 Read the pages for next week. Cash flows Chapter 11. 3 Practice on eLearn. Practice on Cash flows. Automatic feedback provided. Survey on the class session at rmclink101survey2httpsdocsgooglecomformsde1FAIpQLSdzyohx5MTN40nrDxCWRfuyapH7b1N6NG6MQqV6lMMNT9z2Qviewformuspsf_link. . kableExtra. knitr. revealjs. . . . . . . . The exam will be done electronically on eLearn in a specified classroom at SMU. 8 questions that consist of problem solving journal entries reasoning explanations preparation of partial or full statements and financial statement analysis including ratios PVPVA tables will be given for bonds. These are comprehensive questions that integrate several topics The following topics will be covered. Accounts receivable and bad debt. Bank reconciliation. Inventory and COGS. Long term assets. Accrual accounting processing information adjusting. Liabilities. Stockholders equity. Statement of cash flows. Financial ratios. Ratios you must use the formulas in these lecture slides Formulas will not be provided in the exam papers. Not covered Par value for common shares periodic inventory systems sustainability. Use sample past year exam papers with caution The content coverage and difficulty level may be different. . Practice final exams. These are old exams which I have made annotations to in order to keep them relevant. Additional practices. Additional selected book problems. Review session by TAs. November 21 100pm300pm SOA SR 32. Office hours Contact TAs by Telegram. Other questions Email or Telegram me Regular office hours Dec 2 and 3. eLearn practices 250 questions. These can be very helpful to identify what you need to study. All practices from Quiz 1 and Quiz 2. . Remember that everyone is taking the same exam if you find it difficult or long others likely think the same. If you are stuck on a question skip it and come back later Its better to solve everything that you know well and then work on those you are stuck on. If you are really stuck on a topic while studying for finals drop by my office hours and well get it worked out. Course grades will be curved. . . . . . . columns. . column width50. Course_DiagramsACCT_101_course_map_11pngwidth450px figaligncenter. . . column width50. . 1 Learn how to construct a statement of cash flows. 2 Apply the direct method. 3 Calculate net investing cash flow. 4 Calculate net financing cash flow. . . . . . . . . . columns. . column width50. . 1 Start with a comparative balance sheet and the years income statement. 2 List all operating cash flows and sum. Can use direct or indirect method. 3 List all investing cash flows and sum. 4 List all financing cash flows and sum. 5 Sum all cash flows. 6 Reconcile this change using balance sheet cash. . . . column width50. DiagramsSCFpngwidth500px figaligncenter. . . . . . . Two equivalent methods. . columns. . column width50. . Indirect method. . Backs out operating cash flow by starting with net income and adjusting out accruals. Most commonly used. Easiest to do. . . . column width50. . Direct method. . Tracks and reports exactly where operating cash flows came from. Preferred by IFRS. Most useful for investors. . . . . . Both methods will get you to the same operating cash flow amount. . We will cover the direct method today. . Use information from the income statement first. Adjust for changes in current assets and current liabilities. Transactions with working capital can affect cash while not affecting the income statement. . DiagramsOCFpngwidth700px figaligncenter. . . columns. . column width50. Indirect method. . DiagramsSCF_OCF_indirectpngwidth600px figaligncenter lightbox. . . . column width50. Direct method. . DiagramsSCF_OCFpngwidth600px figaligncenter lightbox. . . . . . . . Still based on. Income statement. Changes in current assets. Changes in current liabilities. Goal is to directly calculate. Cash collections. From customers. Optionally from interest and dividends. Cash payments. To suppliers. To employees. For operating expenses. Optionally for interest and dividends. For taxes. . 1 Start with the related current asset or liability account. Record all steps in a Taccount. 2 Consider changes in the accounts recorded on the income statement. 3 Are there any noncash changes to this account. 4 The cash collection will balance the Taccount. . columns. . column width50. . 1 Start with AR. 2 Income statement info. Revenue. 3 No noncash changes in simple cases. 4 The cash collection will balance the Taccount. . . . column width50. DiagramsOCF_direct_customers0pngwidth400px figaligncenter stylemargin 0px 0px. . . . . . This requires careful consideration of business activities. . columns. . column width50. . 1 Start with AR and Allowance for Uncollectible Accounts. 2 Income statement info. Revenue. Bad debt expense. Gain on reestimation. 3 Noncash changes. Writeoff of AR. 4 The cash collection will balance the Taccounts. . . . column width50. . DiagramsOCF_direct_customerspngwidth400px figaligncenter stylemargin 0px 0px. . . . . . We need to consider effects from other accounts. . columns. . column width50. . 1 Start with AR and Unearned Revenue. 2 Income statement info. Revenue. 3 No noncash changes. 4 The cash collection will balance the Taccounts. . . . column width50. . DiagramsOCF_direct_customers2pngwidth400px figaligncenter stylemargin 0px 0px. . . . . . There can be multiple sources for Revenue. . columns. . column width50. . 1 Start with AP and Inventory. 2 Income statement info. COGS. 3 Noncash changes. Purchases on account assume all purchases. 4 The cash collection will balance the Taccount. . . . column width50. . DiagramsOCF_direct_supplierspngwidth400px figaligncenter stylemargin 0px 0px. . . . . . Use AP and Inventory to find payments to suppliers. . columns. . column width50. . 1 Start with the payable associated with the expense. 2 Income statement info. The expense amount. 3 No noncash changes in simple cases. 4 The cash collection will balance the Taccount. . . . column width50. . DiagramsOCF_direct_expensepngwidth400px figaligncenter stylemargin 0px 0px. . . . . . Use payable and expense to find payments for prepaid expenses. . columns. . column width50. . 1 Start with the prepaid expense associated with the expense. 2 Income statement info. The expense amount. 3 No noncash changes. 4 The cash collection will balance the Taccount. . . . column width50. . DiagramsOCF_direct_prepaidpngwidth400px figaligncenter stylemargin 0px 0px. . . . . . Use prepaid expense and expense to find payments for expenses. . columns. . column width50. . 1 Start with tinterest payable. 2 Income statement info. The expense amount. 3 No noncash changes. Bond amortization. 4 The cash collection will balance the Taccount. . . . column width50. . DiagramsOCF_direct_interestpngwidth400px figaligncenter stylemargin 0px 0px. . . . . . Make sure to take bond amortization into account. . . Based on. Income statement. Balance sheet. Additional information. Goal is to directly calculate. Inflows . Sales of longterm assets. Collection of loan principle. Outflows. Purchases of longterm assets. Loans made to other. . columns. . column width50. . Only 1 method to use. Essentially the direct method. Investing cash flows can be a bit trickier. Need to consider cash from journal entries. . . . column width50. . Format. . DiagramsSCF_ICFpngwidth600px figaligncenter. . . . . . 1 Start with the asset account and any related accounts. Record all steps in a Taccount. 2 Consider changes in the accounts recorded on the income statement. 3 Are there any noncash changes to these accounts. 4 Cash collections are either in the Taccount OR. 5 Reconstruct the journal entry to determine them. . columns. . column width50. . 1 Start with the PPE account and accumulated depreciation. 2 Income statement info. Gainloss on asset sale. Depreciation expense. 3 Noncash changes. Disposal amount. Disposal depreciation amount. 4 Finish tallying TAccounts. 5 Cash will be in the journal entry. . . . column width50. . DiagramsICF_ppepngwidth400px figaligncenter stylemargin 0px 0px. . . . . . . Based on. Income statement. Balance sheet. Additional information. Goal is to directly calculate. Inflows . Issuance of shares. Sales of treasury shares. Receipt of bond or loan principle. Outflows. Purchases of treasury shares. Payment of principle. Optionally payment of dividends. . . columns. . column width50. . Only 1 method to use. Essentially the direct method. Financing cash flows can be a bit trickier. Need to consider cash from journal entries. . . . column width50. . Format. . DiagramsSCF_FCFpngwidth600px figaligncenter. . . . . . 1 Start with the liability or equity account and any related accounts. Record all steps in a Taccount. 2 Consider changes in the accounts recorded on the income statement. 3 Are there any noncash changes to these accounts. 4 Cash collections are either in the Taccount OR. 5 Reconstruct the journal entry to determine them. . columns. . column width50. . 1 Start with the bond payable account and its discount or premium account. 2 Income statement info. Interest expense can be relevant. 3 Noncash changes. Changes in discount after issuance. Bond retirement in part. 4 Finish tallying TAccounts. 5 Cash will be in the journal entry. . . . column width50. . DiagramsFCF_bondissuepngwidth400px figaligncenter stylemargin 0px 0px. . . . . . columns. . column width50. . 1 Start with the bond payable account and its discount or premium account. 2 Income statement info. Interest expense can be relevant. Gain or loss on retirement. 3 Noncash changes. Changes in discount from retirement. Issuance in part. 4 Finish tallying TAccounts. 5 Cash will be in the journal entry. . . . column width50. . DiagramsFCF_bondretirepngwidth400px figaligncenter stylemargin 0px 0px. . . . . . . columns. . column width50. . 1 Start with the dividends payable account and retained earnings. 2 Income statement info. Net income. 3 Noncash changes. Stock dividends. 4 The cash collection will balance the Taccount. . . . column width50. . DiagramsFCF_dividendspngwidth400px figaligncenter stylemargin 0px 0px. . . . . . . . . Construct an SCF using the following information Use the indirect method to determine OCF. . DiagramsSCF_practicepngwidth800px figaligncenter lightbox. . DiagramsSCF_practiceSolutionpngwidth750px figaligncenter lightbox. . . . . . . . . . . For next week. 1 Recap the reading for this week. 2 Next week Group project presentations. Email me slides by 10am of the class day. 3 Homework 5 to turn in after class next week. Available on eLearn. Submit on eLearn. 4 Practice on eLearn. Practice on Cash flow statements. Automatic feedback provided. Survey on the class session at rmclink101survey2httpsdocsgooglecomformsde1FAIpQLSdzyohx5MTN40nrDxCWRfuyapH7b1N6NG6MQqV6lMMNT9z2Qviewformuspsf_link. . kableExtra. knitr. revealjs. . . . . . . . . columns. . column width50. Course_DiagramsACCT_101_course_map_12pngwidth450px figaligncenter. . . column width50. . 1 Learn about realworld issues and the financial accounting aspects involved. 2 Share your expertise with the class. . . . . . . 1215 minutes per group. Youll get a 2 minute warning at 13 minutes. At most 1 question after each presentation. Ask if you are curious about something. When not presenting. Give your full attention. . . . . . . 1 Homework 5 feedback. 2 Many practices on eLearn. 3 Office hours. With the TAs Sign up via Telegram message directly. With Prof From Nov 17 to Dec 1. Limited availability if you can please send all questions by email or Telegram. With Prof On Dec 2 and 3. Usual booking site is in effect. 4 Review session. November 21 100pm300pm SOA SR 32. 5 Final exam. December 4 8301130am. . Figureswordcloud_endpngwidth900px figaligncenter. . kableExtra. knitr. revealjs. . . . .