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Financial Statement Analysis

Financial Statement Analysis. Acct 592 July 17, 2003. Chapter Six Liabilities and Expenses. Three criteria for liability recognition: Obligation involves probable future sacrifice of resources The firm has little or no discretion to avoid payment

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Financial Statement Analysis

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  1. Financial Statement Analysis Acct 592 July 17, 2003

  2. Chapter SixLiabilities and Expenses Three criteria for liability recognition: • Obligation involves probable future sacrifice of resources • The firm has little or no discretion to avoid payment • The transaction or event giving rise to the obligation has already occurred

  3. Contingent Liabilities • Record an obligation if • Probable loss • Reasonably estimated • Otherwise? • Footnote disclosure • Effect on financials?

  4. Hybrid Securiites • Mandatory redeemable preferred stock • Convertible bonds

  5. Off-B/S Financing • Transactions not directly portrayed on B/S • Sale of Receivables with Recourse • Sale of Receivables without Recourse • R&D Financing through joint ventures or partnerships

  6. Derivatives: SFAS 133 • Derivative - define? • Assets or Liabilities? • Rights or Obligations settled with Cash?

  7. Leases • Benefits • Shift taxes • Flexibility • Reduce risk of tech. obsolescence • Ability to “acquire” when other sources of financing are unavailable • Operating vs. capital

  8. Capital Lease • If lease is at least 75% of asset’s life • OR, if it transfers ownership to the lessee at the end of the lease term • OR, if it seems likely that the lessor will transfer ownership to the lessee because of a “bargain purchase” option • OR, if the present value of contractual minimum lease payments are at least 90% of the fair market value of the assets at the time of signing

  9. Pensions • Defined Benefit Plan • Defined Contribution Plan • Which Plan is a Liability for the Firm? • Post Retirement Benefits

  10. Defined Benefit Terminology • Service Cost • Interest Cost • Actual Return on Plan Assets (ARPA) • Unexpected Gain / Loss on Plan Assets • Amortization of net pension asset • Amortization of PBO • Actuarial Gains / Losses

  11. Corporate Income Tax • Statutory tax rate • Effective tax rate • Deferred tax assets and deferred tax liabilities

  12. Permanent and TemporaryTax Differences • Permanent differences never effect tax rate • Temporary (timing) differences effect taxes • Pay too much today, less expense in future • Create an asset • Pay too little today, more expense in future • Create a liability

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