analyzing investing activities. the balance sheet copyright © 2010 pearson education, inc....

Analyzing Investing Activities

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall

The Balance Sheet

2-2

“Old accountants never die; they just lose their balance”

--Anonymous

Current (Short-term) Assets

Current (Short-term) Assets

Noncurrent (Long-term)

Assets

Noncurrent (Long-term)

Assets

Resources or claims to resources that are expected to be sold,

collected, or used within one year or

the operating cycle, whichever is longer.

Resources or claims to resources that are expected to be sold,

collected, or used within one year or

the operating cycle, whichever is longer.

Resources or claims to resources that are expected to

yield benefits that extend beyond one

year or the operating cycle,

whichever is longer.

Resources or claims to resources that are expected to

yield benefits that extend beyond one

year or the operating cycle,

whichever is longer.

ClassificationAssets

2-5

Common-Size Balance Sheet

• Expresses each item on the balance sheet as a percentage of total assets

• Reveals the composition of assets• Form of vertical ratio analysis that allows

comparison of firms• Useful for evaluating trends within a firm

and to make industry comparisons

TURKCELL $ 000 Common Size 2010 2009 2010 2009Property, plant and equipment 3,068,021 2,652,222 31.32% 28.45%Intangible assets 1,709,311 1,897,981 17.45% 20.36%GSM and other telecommunication operating licenses 955.703 1,058,098 0.01% 11.35%Computer software 547.607 595.218 0.01% 0.01%Other intangible assets 206.001 244.665 0.00% 0.00%Investments in equity accounted investees 399.622 383.49 0.00% 0.00%Other investments 33.849 34.755 0.00% 0.00%Due from Related parties 1.044 21.039 0.00% 0.00%Other non-current assets 107.277 75.12 0.00% 0.00%Trade receivables 35.024- 0.00% Deferred tax assets 2.876 2.058 0.00% 0.00%Total non-current assets 5,357,024 5,066,665 54.69% 54.36%Inventories 24.386 28.205 0.00% 0.00%Other investments 8.201 62.398 0.00% 0.00%Due from related parties 88.897 108.843 0.00% 0.00%Trade receivables And accrued income 816.151 783.752 0.01% 0.01%Other current assets 197.74 175.417 0.00% 0.00%Cash and cash equivalents 3,302,163 3,095,486 33.71% 33.21%Total current assets 4,437,538 4,254,101 45.31% 45.64%Total assets 9,794,562 9,320,766 100.00% 100.00%

ARCELIK $ 000 Common Size2010 2009 2010 2009

Donen varliklar:Nakit ve nakit benzerleri 1,317,166 904,734 17.99% 14.08%Türev finansal araçlar 1,185 4,444 0.02% 0.07%Ticari alacaklar 2,324,578 2,233,011 31.75% 34.75%Stoklar 987,526 906,786 13.49% 14.11%Diger dönen varliklar 117,984 108,980 1.61% 1.70%Toplam donen varliklar 4,748,439 4,157,955 64.85% 64.70%Duran varliklar: 0.00% 0.00%Ticari alacaklar 12,461 4,254 0.17% 0.07%Finansal yatirimlar 658,679 395,814 9.00% 6.16%Özkaynak yöntemiyle degerlenen yatirimlar 136,604 129,169 1.87% 2.01%Yatirim amaçli gayrimenkuller 5,480 6,344 0.07% 0.10%Maddi duran varliklar 1,252,245 1,244,109 17.10% 19.36%Maddi olmayan duran varliklar 461,417 439,993 6.30% 6.85%Serefiye 7,190 7,511 0.10% 0.12%Ertelenen vergi varliklar 39,244 41,509 0.54% 0.65%Toplam duran varliklar 2,573,320 2,268,703 35.15% 35.30%Toplam varliklar 7,321,759 6,426,658 100.00% 100.00%

Current Assets


2-8

Operating cycleTime required to purchase or manufacture

inventory, sell the product, and collect the cash

Working capitalAlso called net working capitalCurrent assets less current liabilities

Cash and Cash Equivalents Short-term, highly liquid investments that are:

Readily convertible to a known cash amount. Close to maturity date and not sensitive to interest rate

changes Companies risk a reduction in liquidity should the market

value of short-term investments decline Cash and cash equivalents are sometimes required to be

maintained as compensating balances to support existing borrowing arrangements or as collateral for indebtedness.

arcelik vestel turkcell aksa enerji logo yazilim

000%005%010%015%020%025%030%035%040%045%

Receivables Receivables are amounts due from others

that arise from the sale of goods or services, or the loaning of money

Accounts receivable refer to oral promises of indebtedness due from customers

Notes receivable refer to formal written promises of indebtedness due from others


000%

005%

010%

015%

020%

025%

030%

035%

Receivables are reported at their net realizable value — total amount of receivables less an allowance for uncollectible accounts

Management estimates the allowance for uncollectibles based on experience, customer fortunes, economy and industry expectations, and collection policies

Receivables are reported at their net realizable value — total amount of receivables less an allowance for uncollectible accounts

Management estimates the allowance for uncollectibles based on experience, customer fortunes, economy and industry expectations, and collection policies

Valuation of Receivables

TURKCELLAllowance for doubtful receivablesDuring the current year, the Group has changed its accounting estimates regarding the

determination of allowance for doubtful receivables.Formerly, the allowance for doubtful receivables was based on management’s evaluation of the

volume of the receivables outstanding, historical collection trends and general economic conditions. With the new accounting estimate, the Group maintains an allowance for doubtful receivables for estimated losses resulting from the inability of the Group’s subscribers and customers to make required payments.

The Group bases the allowance on the likelihood of recoverability of trade and other receivables based on the aging of the balances, historical collection trends and general economic conditions. The allowance is periodically reviewed.

The allowance charged to expenses is determined in respect of receivable balances, calculated as a specified percentage of the outstanding balance in each aging group, with the percentage of the allowance increasing as the aging of the receivable becomes longer.

This change is accounted as a change in accounting estimates in accordance with IAS 8 “Accounting Policies, Changes in Accounting Estimates and Errors”. Based on the evaluation performed, the change in the estimates regarding the determination of allowance for doubtful receivables caused the following impact on bad debt provision expense:

Bad debt expense for the year ended 31 December 2010 Previous accounting estimate127,921Current accounting estimate 126,257Impact 1,664Due to the impracticability, the Group has not disclosed the effect of the change for the future

periods.

Arcelik

Assessment of earnings quality is often affected by an analysis of receivables and their collectibilityAnalysis must be alert to changes in the allowance—computed relative to sales, receivables, or industry and market conditions.Two special analysis questions: (1) Collection Risk

Review allowance for uncollectibles in light of industry conditionsApply special tools for analyzing collectibility:

• Determining competitors’ receivables as a percent of sales—vis-à-vis the company under analysis

• Examining customer concentration—risk increases when receivables are concentrated in one or a few customers

• Investigating the age pattern of receivables—overdue and for how long

• Determining portion of receivables that is a renewal of prior receivables

• Analyzing adequacy of allowances for discounts, returns, and other credits (2) Authenticity of Receivables Review credit policy for changes Review return policies for changes Review any contingencies on receivables

Assessment of earnings quality is often affected by an analysis of receivables and their collectibilityAnalysis must be alert to changes in the allowance—computed relative to sales, receivables, or industry and market conditions.Two special analysis questions: (1) Collection Risk

Review allowance for uncollectibles in light of industry conditionsApply special tools for analyzing collectibility:

• Determining competitors’ receivables as a percent of sales—vis-à-vis the company under analysis

• Examining customer concentration—risk increases when receivables are concentrated in one or a few customers

• Investigating the age pattern of receivables—overdue and for how long

• Determining portion of receivables that is a renewal of prior receivables

• Analyzing adequacy of allowances for discounts, returns, and other credits (2) Authenticity of Receivables Review credit policy for changes Review return policies for changes Review any contingencies on receivables

Analyzing Receivables

(C) 2007 Prentice Hall, Inc.

Receivables are Carried at Amortized Cost

2-15

When sales are made on credit, the interest imputed in the transaction is not recognized as sales revenue but as INTEREST INCOME

By using the Effective Interest Method


Illustration

2-16

%171000,50

52,000 i

)360/90/(1

The sales price of TL 52.000 was charged to customer for a sales on credit (n/90) on 1 November. If the same goods were sold at cash, the price would have been TL 50.000

The effective interest rate for the transaction is: 1/

FVi = 1

PV

Future value

PV = Present Value

n = days to maturity

i = effective interest rate

n

FV

(C) 2007 Prentice Hall, Inc. 2-17

Debit Credit

Accounts Receivable

52.000

Unearned financial income

2.000

Sales Revenue

50.000

Adjusting Entry: 31.Dec.xx (end of accounting period)

Unearned Financial Income 1.325

Interest Income 1.325

325.51)17,0(1

52.000 PV

360/30

Present Value of 52,000 at the end of the year – 30 days remain to payment day

Securitization (or factoring) is when a company sells all or a portion of its receivables to a third party

Receivables can be sold with or without recourse to a buyer (recourse refers to guarantee of collectibility)

Sale of receivables with recourse does not effectively transfer risk of ownership

Securitization (or factoring) is when a company sells all or a portion of its receivables to a third party

Receivables can be sold with or without recourse to a buyer (recourse refers to guarantee of collectibility)

Sale of receivables with recourse does not effectively transfer risk of ownership

Securitization of Receivables

•For securitizations with any type of recourse, the seller must record both an asset and a compensating liability for the amount factored•For securitizations without any recourse, the seller removes the receivables from the balance sheet

Inventories-Definitions Inventories are goods held for sale, or goods acquired

(or in process of being readied) for sale, as part of a company’s normal operations

Expensing treats inventory costs like period costs—costs are reported in the period when incurred

Capitalizing treats inventory costs like product costs—costs are capitalized as an asset and subsequently charged against future period(s) revenues benefiting

from their sale


000%

005%

010%

015%

020%

025%

030%

FIFO46%

Other4%Weighted

Average20%

LIFO30%

Use of Inventory Methods in Practice

Inventory Costing Method

Costs of Goods SoldCosts of

Goods Sold

Ending InventoryEnding

Inventory

Oldest Costs

Oldest Costs

Recent Costs

Recent Costs

First-In, First-Out (FIFO)

Cost Flow of Inventories

Costs of Goods SoldCosts of

Goods Sold

Ending InventoryEnding

Inventory

Recent Costs

Recent Costs

Oldest Costs

Oldest Costs

Last-In, First-Out (LIFO)

Cost Flow of Inventories

Average Cost

When a unit is sold, the average cost of each unit in inventory is assigned to

cost of goods sold.

When a unit is sold, the average cost of each unit in inventory is assigned to

cost of goods sold.

Cost of Goods

Available for Sale

Units available

on the date of

sale

÷


Inventory Accounting Methods

2-24

Inventory valuation may significantly affect BOTH the balance sheet and the income statement and thus the financial ratios based on these statements

Disclosure of inventory cost flow assumption found in notes

Inventory reported on balance sheet at LOWER OF COST OR MARKET (net realizable value)

Checked for impairment annually Companies may use more than one method

for inventories

Inventory on January 1, Year 2 40 @ $500$ 20,000

Inventories purchased during the year 60 @ $600

36,000Cost of Goods available for sale 100 units $

56,000

Note: 30 units are sold in Year 2 for $800 each for total Revenue of $24,000

Inventory on January 1, Year 2 40 @ $500$ 20,000

Inventories purchased during the year 60 @ $600

36,000Cost of Goods available for sale 100 units $

56,000

Note: 30 units are sold in Year 2 for $800 each for total Revenue of $24,000

Illustration of Costing Methods

Beginning Net Cost of EndingInventory + Purchases = Goods Sold +

InventoryFIFO $20,000 + $36,000 = $15,000 + $41,000LIFO $20,000 + $36,000 = $18,000 + $38,000Average $20,000 + $36,000 = $16,800 + $39,200 Assume sales of $35,000 for the period—then gross profit under each method is:

Sales – Cost of Goods Sold = Gross ProfitFIFO $24,000 -- 15,000 = $9,000 LIFO $24,000 -- 18,000 = $6,000Average $24,000 -- 16,800 = $7,200

Beginning Net Cost of EndingInventory + Purchases = Goods Sold +

InventoryFIFO $20,000 + $36,000 = $15,000 + $41,000LIFO $20,000 + $36,000 = $18,000 + $38,000Average $20,000 + $36,000 = $16,800 + $39,200 Assume sales of $35,000 for the period—then gross profit under each method is:

Sales – Cost of Goods Sold = Gross ProfitFIFO $24,000 -- 15,000 = $9,000 LIFO $24,000 -- 18,000 = $6,000Average $24,000 -- 16,800 = $7,200

Illustration of Costing Methods

Economic Profit vs. Holding Gain

In periods of rising prices, FIFO produces higher gross profits than LIFO because lower cost inventories are matched against sales revenues at current market prices. This is sometimes referred to as FIFO’s phantom profits.

The FIFO gross profit is actually a sum of two components: an economic profit and a holding gain: Economic profit = 30 units x ($800 - $600) =

$6,000 Holding gain = 30 units x ($600 - $500) =

$3,000

Prepaid expenses are advance payments for services or goods not yet received that extend beyond the current accounting period—examples are advance payments for rent, insurance, utilities, and property taxes

Prepaid expenses are advance payments for services or goods not yet received that extend beyond the current accounting period—examples are advance payments for rent, insurance, utilities, and property taxes

Prepaid Expenses

Two analysis issues:

(1) For reasons of expediency, noncurrent prepaids sometimes are included among prepaid expenses classified as current--when their magnitude is large, they warrant scrutiny

(2) Any substantial changes in prepaid expenses warrant scrutiny

Two analysis issues:

(1) For reasons of expediency, noncurrent prepaids sometimes are included among prepaid expenses classified as current--when their magnitude is large, they warrant scrutiny

(2) Any substantial changes in prepaid expenses warrant scrutiny

Analysis of Prepaids

Other current assets

Mugan-Akman 201029 Chapter 9

Accounting for Debt and Equity Investments Debt

Valuation Method

Short term

Long term(trading

securities)

Fair Value (Market Value)

Held for resale* Held to maturity

Fair market value Amortized Cost

Stocks

Valuation Method

Short term (trading

securities)

Long term

Ownership percentage

0 –20% of the investee shares*

20-50% of the

investee shares

Greater than

50% of the investee shares



Equity Method Consolidation

* usually classified as available for sale investments


Investor CorporationInvestor Corporation

Minority, ActiveInvestments (typically

between 20% and50% ownership)

Minority, ActiveInvestments (typically

between 20% and50% ownership)

Majority, ActiveInvestments(greater than

50% ownership)

Majority, ActiveInvestments(greater than

50% ownership)

Minority, PassiveInvestments (less than

20% ownership)

Minority, PassiveInvestments (less than

20% ownership)

held ascurrent assets,

marketableSecurities

Trading sec

held ascurrent assets,

marketableSecurities

Trading sec

held aslong-term

Investments- Available for sale

held aslong-term

Investments- Available for sale

acquired inPurchase-

consolidation

acquired inPurchase-

consolidation

The accounting for investments depends on the purpose of the investment and the percentage of voting stock held.

Types of Investments-Stocks

Equity method of accounting

Equity method of accounting


Classification of Financial Instruments

Financial assets at fair value through profit or loss: has two subcategories: Trading securities: Marketable securities – both equity and

debt securities – that are held for short-term profit purposes; and

Derivatives: financial instruments that do not have a value by themselves but derive their value from the underlying security or asset such as shares, foreign exchange, commodities etc.- except for cash flow hedges that are accounted for similar to trading securities;

Held to Maturity: Debt securities for which a firm has both the positive intent and ability to hold to maturity

Available for Sale Securities: Neither trading securities nor securities held to maturity- usually classified as long term investments.


Short-Term Investments-Trading Securities

usually consist of : marketable equity securities (stocks of other companies) savings accounts (time deposits) investment funds precious metals like gold government bonds treasury bills asset securitized bonds private bonds

Characterized by frequent and active buying and selling with the object of generating profit

Typically only financial institutions hold trading securities

Since trading securities are acquired for short-term profit, unrealized gains or losses that result from adjustments to market value pass through the income statement and increase or reduce net income before there is a sale of the securities.


Accounting for Marketable Equity Securities record them at the acquisition cost that

includes the price of the security plus any brokerage commissions and applicable taxes, and other costs incurred

record dividend revenue when dividends declared and later when cash is received

adjust to fair market value at the end of the accounting period-adjusting entry

Mugan-Akman 201034

Adjusting Entries-Trading Securities

Chapter 9

at the end of an accounting period, cost/carrying value of the portfolio of marketable equity securities is compared with the fair value (market value)

carrying value = fair value at the latest reporting date if the fair value of the securities is greater than the

cost -unrealized holding gain if the fair value is less than the cost - unrealized

holding loss any unrealized gains or losses on trading securities are

charged to revenues securities are reported at the fair value in the

statement of financial position


Accounting for Marketable Debt Securities same as the accounting for marketable equity

securities –both are trading securities carrying value of these securities will be

compared to the market or fair value at the reporting dates

carrying value = the market value or fair value at the latest reporting date

unrealized holding gains or losses will be reflected in the income statement

Mugan-Akman 201036

Available for Sale Securities

Chapter 9

neither as trading securities or held to maturity securities held by non-financial companies usually both equity and debt securities non-derivative financial assets that are initially designated

by the management as available for sale (AFS) typically tied to a specific cash need usually classified as long-term assets measured at fair value in the statement of financial position unlike trading securities; any unrealized holding gains or

losses - shown under the owners’ equity section with the name “Unrealized Holding Gains or Losses”

realized gain or loss when these securities are sold interest or dividend revenues received from AFS securities

are reflected in the income statement

Mugan-Akman 201037

Comparison - trading and available for sale securities

Chapter 9

both are recorded at acquisition cost both are written up or down to market with adjusting entries at the

reporting date. both give rise to an unrealized holding gain or loss account upon

adjustment. unrealized holding gain or loss for trading securities is charged to revenues

–when sold, realized gain or loss is determined by taking the difference between the carrying value and proceeds from the sale

unrealized holding gain or loss for available for sale securities remains on the statement of financial position until such assets are sold-when sold, this account must then be closed and the realized gain or loss is computed by comparing the historical cost and proceeds from the sale


000%

001%

002%

003%

004%

005%

006%

007%

008%

009%

010%

Long term assets

Long-term assets—resources that are used to generate revenues (or reduce costs) in the long run

Long-term assets—resources that are used to generate revenues (or reduce costs) in the long run

Tangible fixed assets such as property, plant, and equipment

Deferred charges such as research and development (R&D) expenditures, and natural resources

Intangible assets such as patents, trademarks, copyrights, and goodwill

Financial assets such as available for sale; equity method investments

Allocation of initial costs to respective periods

Allocation—process of periodically expensing a deferred cost (asset) to one or more future expected benefit periods; determined by benefit period, salvage value, and allocation method

Terminology

• Depreciation for tangible fixed assets

• Amortization for intangible assets

• Depletion for natural resources

Allocation—process of periodically expensing a deferred cost (asset) to one or more future expected benefit periods; determined by benefit period, salvage value, and allocation method

Terminology

• Depreciation for tangible fixed assets

• Amortization for intangible assets

• Depletion for natural resources

Acquisitioncost

Acquisition cost excludes financing

charges (except in self constructed assets) and

cash discounts

All expenditures needed to prepare the asset

for its intended

use

Purchase

price

Acquisition cost of PPE


Property, Plant, and Equipment(PP&E)

2-41

Land refers to property used in business, not investment property.

Leasehold investments are additions or improvements made to leased structures.

Construction in progress are the costs of constructing new buildings that are not yet complete.

Equipment represents the original cost of the machinery and equipment used in business operations.


Property, Plant, and Equipment (PP&E)

2-42

Proportion of fixed assets in a company’s asset structure is determined by nature of the business.

Fixed assets are most prominent at the manufacturing level.

arcelik vestel turkcell aksa enerji

logo yazilim

000%

010%

020%

030%

040%

050%

060%

operating assets

arcelik vestel turkcell aksa enerji

logo yazilim

000%

005%

010%

015%

020%

025%

030%

intangibles

Depreciation is the process of allocating the cost of a plant asset to

expense in the accounting periods benefiting from its use.

Cost

Allocation

AcquisitionCost

(Unused)

Stat of Fin Position

(Used)

Income Statement

Expense

Depreciation

Book value = original cost/revalued amount - accumulated depreciation to date – impairment losses

Factors in Computing Depreciation

The calculation of depreciation requires three

amounts for each asset: Cost.

Salvage Value.

Useful Life.

Depreciation Method

Cost - Salvage Value

Useful life in periods

DepreciationExpense per Year =

Straight-Line Method

Depreciation Rate = 1/ useful life in periods

If useful life is 5 years, straight line rate is = 1/5 = 20%

Straight-Line Method gives the same amount of depreciation

expense every year

Step 1:

Step 2:

Double-declining-balance rate = 2 ×

Straight-linedepreciation rate

Step 3:

Depreciationexpense =

Double-declining-balance rate ×

Beginning periodbook value

Ignores salvage value

Straight-linedepreciation rate =

100 % Useful life

Double-Declining-Balance Method

DepreciationPer Unit

= Cost - Salvage Value Total Units of Production

Step 1:

Step 2:

Depreciation Expense =

DepreciationPer Unit ×

Units Producedin Period

Activity (Units-of-Production) Method


Depreciation Methods-comparison

2-48

Straight-line method allocates an equal amount of expense to each year of the depreciation period.

Accelerated method apportions larger amounts of expense to earlier years of the asset’s depreciable life – in Turkey most common one is double declining.

Units-of-production method bases depreciation expense on actual use.

Companies can use different methods for different asset classes.

number of companies

% SL % ACC

1998-2006 48591 79,53 20,47

Economic consequences of firms’ depreciation method choice: Evidence from capital investments ☆Scott B. Jacksona,

Xiaotao (Kelvin) Liub,

Mark Cecchinia

http://www.sciencedirect.com/science/article/pii/S0165410109000317



mailto:[email protected]

SIC code description % SL % ACC

SIC code description % SL % ACC

Metal mining 10.89 89.11 Transportation equipment 74.75 25.25

Oil and gas extraction 17.39 82.61 Measuring, analyzing, and controlling instruments

82.07 17.93

Building construction general contractors 79.37 20.63 Miscellaneous manufacturing industries 76.03 23.97

Food and kindred products 86.05 13.95 Wholesale trade durable goods 75.96 24.04

Textile mill products 84.75 15.25 Wholesale trade non-durable goods 78.47 21.53

Apparel and other finished products made from fabrics

77.88 22.12 General merchandise stores 95.08 4.92

Furniture and fixtures 80.60 19.40 Food stores 92.73 7.27

Paper and allied products 63.25 36.75 Apparel and accessory stores 93.33 6.67

Printing, publishing, and allied industries 81.75 18.25 Home furniture, furnishings, and equipment stores

93.22 6.78

Chemicals and allied products 84.78 15.22 Eating and drinking places 93.71 6.29

Petroleum refining and related industries 38.89 61.11 Miscellaneous retail 87.24 12.76

Rubber and miscellaneous plastics products 79.83 20.17 Business services 86.86 13.14

Stone, clay, glass, and concrete products 66.22 33.78 Motion pictures 51.55 48.45

Primary metal industries 76.19 23.81 Amusement and recreation services 83.93 16.07

Fabricated metal products 81.58 18.42 Health services 91.55 8.45

Industrial and commercial machinery and equipment81.75 18.25 Engineering, accounting, management, and related services

81.98 18.02

Electronic and other electrical equipment and components

83.67 16.33 Other SIC codes 73.91 26.09

Economic consequences of firms’ depreciation method choice: Evidence from capital investments ☆Scott B. Jacksona, Xiaotao (Kelvin) Liub, Mark Cecchinia


Capitalization

Capitalization—process of deferring a cost that is incurred in the current period and whose benefits are expected to extend to one or more future periods For a cost to be capitalized, it must meet each of the following criteria:

• It must arise from a past transaction or event

• It must yield identifiable and reasonably probable future benefits

• It must allow owner (restrictive) control over future benefits

Capitalization—process of deferring a cost that is incurred in the current period and whose benefits are expected to extend to one or more future periods For a cost to be capitalized, it must meet each of the following criteria:

• It must arise from a past transaction or event

• It must yield identifiable and reasonably probable future benefits

• It must allow owner (restrictive) control over future benefits


Valuation of PPE

2-51

1. Option: Property, plant & equipment are valued at cost less accumulated depreciation and allowance for impairment

2. Option: Property, plant & equipment are valued at revalued amount less accumulated depreciation and allowance for impairment

Impairment—process of writing down asset value when its expected (undiscounted) cash flows are less than its carrying (book) value

Two distortions arise from impairment: Conservative biases distort long-lived asset

valuation because assets are written down but not written up

Large transitory effects from recognizing asset impairments distort net income.

Valuation Analysis Valuation emphasizes objectivity of historical cost, the conservatism principle, and accounting for the money invested

Limitations of historical costs: Balance sheets may not reflect market values after

initial acquisition Not especially relevant in assessing replacement

values- either entry or exit values Not comparable across companies—even if two land

pieces side by side– may be purchased at different times

Not particularly useful in measuring opportunity costs Collection of expenditures reflecting different

purchasing power

Total cost,including

exploration anddevelopment,is charged to

depletion expenseover periodsbenefited.

Extracted fromthe natural

environmentand reportedat cost less

accumulateddepletion.

Examples: oil, coal, gold

Natural resources (wasting assets)—rights to extract or consume natural resources

Natural Resources

Depletion is calculated using theunits-of-production method.

Unit depletion rate is calculated as follows:

Total Units of Capacity

Cost – Salvage Value

Depletion of Natural Resources

Depletion of Natural Resources

Total depletion cost for a period is:

Unit Depletion

Rate

Number of Units

Extracted in Period×

Totaldepletion

costIf not

Inventory

If sold Cost of goods sold

• Assess reasonableness of depreciable base, useful life, and allocation method• Review any revisions of useful lives• Evaluate adequacy of depreciation—ratio of depreciation to total assets or to other size-related factors• Analyze plant asset age—measures include

Average total life span = Gross plant and equipment assets / Current year depreciation expense. Average age = Accumulated depreciation / Current year depreciation expense. Average remaining life = Net plant and equipment assets / Current year depreciation expense.

Average total life span = Average age + Average remaining life

(these measures also reflect on profit margins and financing requirements)

Analyzing Depreciation and Depletion

Noncurrent assetswithout physical

substance.

Noncurrent assetswithout physical

substance.

Useful life isoften difficultto determine.

Useful life isoften difficultto determine.

Usually acquired for operational

use.

Usually acquired for operational

use.

IntangibleAssets

Often provideexclusive rights

or privileges.

Often provideexclusive rights

or privileges.

Intangible Assets

Accounting for Intangible Assets

Patents Copyrights Leaseholds Leasehold

Improvements Goodwill- only

recognized in company acquisitions – not amortized

Trademarks and Trade Names

Record at cost, including

purchase price, legal

fees, and filing fees.

Analyzing Intangibles and Goodwill Search for unrecorded intangibles and

goodwill—often misvalued and most likely exist off-balance-sheet

Examine for unusually good earnings as evidence of goodwill Review amortization periods—any likely bias is in the direction of less amortization and can call for adjustments Recognize goodwill has a limited useful life--

whatever the advantages of location, market dominance, competitive stance, sales skill, or product acceptance, they are affected by changes in business


Other Assets

2-60

Can include many other noncurrent items:• Property held for sale• Start-up costs in connection with a new

business• Cash surrender value of life insurance

policies• Long-term advance payments• Long-term investments

analyzing investing activities. the balance sheet copyright © 2010 pearson education, inc....

Documents

toplam varliklar

current assets copyright

classification assets

toplam duran varliklar

maddi duran varliklar

anonymous slide

toplam donen varliklar

current liabilities