Discussion Questions & Answers

Week 1
1: Cash is the most important of the three assets. While accounts receivable and
inventory are also important everything boils down to liquidity; the organizations
ability to quickly access cash resources or turn assets into cash in order to support
such functions as purchasing inventory and maintaining operations.
I would think that each is susceptible to error; a simply put explanation: human
error, people make mistakes, overlook things, etc. In terms of fraud, I think that
receivables would be the most susceptible to fraudulent activity. Consumers
nowadays tend to try to get something for nothing and in such a process they
attempt to rip off businesses through counterfeit cash, stolen credit cards, fake
checks, etc.
A misstatement could adversely affect each asset, whether it be to overstate or
understate. To overstate cash funds could cause paychecks to bounce, just to name
one affect it would have. To understate cash funds could mean a decision to pass up
an opportunity because it is believed that you do not have the funds (when in fact
you do). To overstate receivables would be to overstate cash, make checks bounce,
and Im sure many other things happen. To overstate inventory, you may not be
able to fulfill all of your orders and that in itself could cause a lot of issues and extra
work to correct.
Liquidity can be measured through a metric of an organizations working capital.
Working capital is defined as current assets minus current liabilities. A positive
position means that a company is able to support its operations (including
purchasing inventory).
One of the metrics shortcomings, however, is that current assets often cannot be
liquidated in the short term. High working capital positions often indicate that there
is too much money tied up in accounts receivable and inventory, rather than shortterm liquidity.
All organizations should focus on their level of working capital. Organizations that
improve their management of working capital are able to free up cash and thus, for
example, can reduce their dependence on outside funding or finance additional
growth projects.
2: What are the different ways to estimate bad debt? How does this affect net
income? What does generally accepted accounting principles require? Why?
Should all companies have bad debt? Explain your answer.
I actually found this bit of information to be interesting. Through the allowance
method I found two ways to estimate bad debt were either the income statement
approach or the balance sheet approach. With the examples that I reviewed it
illustrated how the balance sheet approach will base the allowance for doubtful
accounts on a percentage, that percentage is applied to the accounts receivable
balance at the end of the year. The allowance method estimates bad debt as a
percentage of sales for the period, this percentage is based on the companys past

experience, that percentage is applied to the total sales (or the total of accounts
receivable for the year).
The GAAP requires companies to use the allowance method, organizations that are
not in compliance with the GAAP may use the direct write-off method.
I dont know if all companies should have bad debt but it seems they all do
eventually because consumers just are not as honest and forthright as they should
or used to be.

Discussion Questions & Answers

Week 2
1: What are the criteria for capitalization of fixed assets? What items are included
in the cost of fixed assets? Should interest be included in the cost of a fixed asset?
Explain why or why not.
Fixed assets are also known as capital assets and they can make up a large part of a
company's balance sheet; especially for manufacturers and other like businesses.
Because the life of a fixed assets can be many years, accounting for them correctly
requires that they are capitalized and depreciated over time. Because it has a long
life, GAAP requires that it is capitalized as an asset on the balance sheet and the
total cost brought into expenses over time. Another important criterion is that a
fixed asset is tangible. The total cost of a fixed asset to be capitalized is more than
just the purchase cost. Include any non-recoverable sales taxes or fees paid related
to the purchase. Also include any costs to install the asset or make it ready for use. I
think that interest should be included in the capitalization of a fixed asset, as it is
part of the total cost of the asset.
(1) Acquisition of Equipment. To be considered for capitalization, and thus subject
to depreciation, an asset must fulfill three characteristics: 1) the asset must
be acquired (i.e., purchased, gift-in-kind) for use in operations, and not for
investment or sale; 2) the asset (per individual unit) must have a useful life of
at least three years (two years for laptops) ; and 3) the asset must have a
cost value exceeding, at a minimum, $5,000.
(2) Acquisition or Construction of Buildings. These expenditures include the cost
for renovations, betterments, or improvements that add to the permanent
value of the asset, make the asset better than it was when purchased, or
extend its life beyond the original useful life. To capitalize these costs, the
improvements must fulfill at least one of the following three criteria: (1) the
useful life of the asset is increased; (2) the productive capacity of the asset is
improved; (3) the quality of units/services produced from the asset is
enhanced. The total project cost must also exceed $5,000.
2:

Discussion Questions & Answers

Week 3
1: Why are research and development costs expensed? Is this consistent with how
other similar costs are handled? Explain why or why not. Should research and
development costs be expensed? Explain why or why not.
R&D expenses are a form of operating expense and are deducted as such on the
business tax return and are consistent with how other similar costs are handled.
Because R&D costs and activities usually result in new products, patents, formulas,
etc. one could almost consider R&D to be an asset but because it is so difficult to
determine the degree of the future benefits, the length of time said benefits would
be realized, as well as identifying and linking specific costs to specific
achievements, projects, or activities R&D must, for now, remain an expense.

2: We discussed the impact on inventory valuation under iGAAP last week. How
may iGAAP impact R&D costs? Which industry may be impacted the most?
IFRS gives management more flexibility in the area of asset valuation as a
whole, discretion that is also likely to increase company income. In the area of R&D
costs and the related area of homegrown intangible assets valuation, IFRS allows
development costs, but not basic research costs, to be included in the companys
assets and, therefore, not expensed against income. U.S. GAAP insists that all
research and development costs are expensed, except in extremely limited
industry-specific circumstances. I was not able to find any other facets affected by
the convergence, nor was I able to find which industry would be most greatly
impacted by converging. Would you be able to provide that information or advise
where it is located? Thank you!
3: What is the purpose of depreciation? Does the book value of a fixed asset (cost
minus accumulated depreciation) communicate to a user what the asset is worth?
Explain why or why not. Should the financial statements reflect the market value of
fixed assets? Explain why or why not?
The purpose of depreciation is to match the cost of a productive asset (that has a
useful life of more than a year) to the revenues earned from using the asset. Since it
is hard to see a direct link to revenues, the asset's cost is usually allocated to the
years in which the asset is used. No, the book value is simply the purchase price of
the asset minus the accumulated depreciation of the asset. Book value does not
measure the "utility" value of the asset. Book value does not accurately reflect the
market value of an asset is because the depreciation expense of an asset is merely
an estimate. Once an asset has been fully depreciated the book value is zero unless
a salvage value was initially calculated.
4: Kevin, you bring up an important point. What should the company do in year
three and they decide the asset has only a 7 year life?
5: I don't remember is someone has mentioned this already of not, but does iGAAP
allow a business to reflect the market value of an asset on their balance sheet?

6: Thao and class, do you think that adjusting the fixed asset value each may lead
to income statement manipulation?
7: Juan, I could envision a third party valuation system to make the valuation more
objective, but even then I could see some valuation companies being more
conservative than others and once that is identified, a company could use that
knowledge to select a certain tendency depending on how they wanted the
valuation to lean in a particular year
8: Michelle, do you think the added expense of estimating the market value of each
asset would be of that much value for the stakeholders? If so, would you suggest
that the company perform this annually or quarterly, or only on specific fixed
assets?

Discussion Questions & Answers

Week 4
1: If you were going to purchase a bond and hold it full term, would you prefer to
purchase one at a discount or a premium? Why?
2: What is a bond? What are some features of a bond? How do you value bonds?
What factors can affect that value?
When companies need to raise money to finance new projects, maintain
ongoing operations, etc. they may issue bonds directly to investors instead of
obtaining loans from a bank. A bond is a debt investment in which an investor loans
money to a corporation (or governmental) entity, which borrows the funds for a
defined period of time at a variable or fixed interest rate. Bonds are used by
companies, municipalities, states and sovereign governments to raise money and
finance a variety of projects and activities. Owners of bonds are debt holders, or
creditors, of the issuer. Many corporate and government bonds are publicly traded
on exchanges, while others are traded only over-the-counter (OTC).
Features of a bond include:
Face value is the money amount the bond will be worth at its maturity, and
is also the reference amount the bond issuer uses when calculating interest
payments.
Coupon rate is the rate of interest the bond issuer will pay on the face value
of the bond, expressed as a percentage.
Coupon dates are the dates on which the bond issuer will make interest
payments, with most having annual or semi-annual coupon payment
intervals.
Maturity date is the date on which the bond will mature and the bond issuer
will pay the bond holder the face value of the bond.
Issue price is the price at which the bond issuer originally sells the bonds.
In order to value a bond we would first need to find the present value (PV) of
the bond's future cash flows. The present value is the amount that would have to be
invested today to generate that future cash flow. PV is dependent on the timing of
the cash flow and the interest rate used to calculate the present value.
Factors affecting the value of a bond include:
Face/Par Value
o The amount of money a holder will get back once a bond
matures.
Coupon/Interest Rate
o The amount the bondholder will receive as interest payments.
Maturity
o The maturity date is the date in the future on which the
investor's principal will be repaid.
o Maturities can range from as little as one day to as long as 30
years, but longer terms have been issued.
3: What are the criteria for classifying an item as a current liability? What are some
examples of current liabilities? Why is it important to classify a portion of long-term

debt on a yearly basis as a current liability? What is the implication of misclassifying

a liability as current or long-term? How can misclassification of current liabilities be
used to cover fraud within an organization?
The main criteria for classifying an item as a current liability would be an
organizations debt or obligation that is due within a year. Some current liabilities
may include: Accounts payable - money owed to suppliers. Accrued expenses are
monies that are due to a third party but not yet payable; like wages payable.
Accrued Interest - Which includes all interest that has accrued since last paid. It is
important to classify a portion of long-term debt on a yearly basis as a current
liability because it represents the total amount of long-term debt that must be paid
within the next year. Misclassifying a liability as current or long-term would imply
the possibility of fraud if done purposely; it also has an adverse impact on debt
analysis, and can have a multitude of ramifications such as investors deciding to
sell their stock, or discovered misclassification can sink a company by causing
investors and the public to lose confidence in the companys financial health and
reputation.
4: Class question, what happens if the company does not pay the principle at the
end of the term, or periodic interest payments?
5: Bond Article:
Well, after reviewing the information in this article, I dont think I will ever purchase
a bond from either a corporation or government entity. It seems as though the
purpose of the bond is to aid struggling businesses and or governments. I
understand that some corporations truly do have a surefire concept or product that
is practically guaranteed and they just need a little assistance with the initial
funding of the project, in those situations bonds are great for both parties. I think
this was the original intended purpose of bonds and everyone else decided to
manipulate the system and the investors; but thats just my opinion.

Discussion Questions & Answers

Week 5
1: What are the differences between a direct-financing and a sales-type lease for a
lessor? Why would a lessor provide direct-financing to a lessee? What types of
organizations provide direct-financing leases?
In a direct-finance lease, the carrying amount of the lease equals the fair market
value of the leased asset. Therefore, the transaction does not result in a gain or
loss, only interest revenue for the lessor. The lessor records the entry as a sale,
removing the asset from its books and creating a receivable for the interest
payments. The lessor determines the interest rate by calculating the internal rate of
return for the asset.
A sales-type lease provides the dealer with a profit on the sale of the asset in
addition to interest revenue earned. The profit derives from the difference between
the fair value of the asset, or selling price, and the carrying value of the asset sold.
The lessor uses the same accounting treatment as a direct-finance lease; however,
profit is recognized at the inception of the lease.
The lessor in a direct financing lease is not the manufacturer or dealer. The lessor
purchases the item for the express purpose of leasing it out. So, if you are a leasing
equipment company, you will use a direct financing lease with your clients.
Manufacturers and dealers of a product offer sales-type leases. The item is assumed
to have been sold in the year the lease begins. Interest will accrue to the lessor
during the term of a sales-type lease.
2: We talked a few weeks back about recognizing and reporting liabilities. Suppose
you have a guaranteed lease, you are in year 2 of the 5 year term. The current day
market value is substantially lower than the guaranteed residual value.
Do you think you should recognize the loss, place in a footnote, or do nothing? Why?
You would have to recognize the loss eventually anyway but if youre only in
year two of a five year term then the best thing I would think to do is to make a
footnote, it may not help much but at least you would be able to track the value;
and in some cases, depending on the asset, there is a chance that the value may
increase again, though chances of such occurrences I believe are fairly slim.
3: What is residual value? What is the implication to the lessee if the residual value
is guaranteed or unguaranteed? What is the implication to the lessor?
In accounting, residual value is another name for salvage value, the remaining
value of an asset after it has been fully depreciated. Residual value is calculated by
using a base price, but is calculated after depreciation.
Guaranteed residual value is easily understood while reading it but, for me, difficult
to paraphrase in a way that would be easily understood. Basically guaranteed
residual value is where the lessee makes a guarantee that the asset leased will
retain a minimum value equal to that of the residual value, should the residual
value wind up being less than the guarantee then the lessee is required to pay the
difference to the lessor.
An unguaranteed residual value is the residual value of a leased asset that will
revert to the lessor at the end of the lease term, without a guarantee of the residual
value the value of the asset at the end of the lease is determined by the assets
condition as well as market factors.

For the lessor, a guaranteed residual value is part of the residual value guaranteed
by the lessee. The un-guaranteed residual value is the portion of the residual value
of the leased asset; where the realization of it is not assured by the lessor, nor
guaranteed to the lessor by any party.
In the lessees perspective, having a guaranteed residual value would affect the
calculations of the minimum lease payment, whereas and un-guaranteed residual
value would not.
In the lessors perspective it would make no difference if the residual value is
guarantee or un-guaranteed once the lease rate is determined.