FA note to self

Fundamnetal qualities

- Relevance  Predictive or confirmatory value / Materiality

- Faithful representation  Complete/Neutral/ Free from error

Enhancing qualities  Comparability/Verifiability/ Timeliness/Understandability

Year end adjusting entries include Accruals, Deferrals, Depreciation

Accruals  is unbilled whereas billed ones will be receivable

REVENUE-recognition  5 conditions

1. Transfer of risk
2. No managerial control
3. Can be reliably measured
4. Probable economic inflow
5. Cost can be reliably measured
6. Stage performed (services)

Accounting treatment for bad debts: (Allowance method)

- When increasing allowance: Dr Bad debt expense Cr AR allowance

- When Confirming/ recognising bad debt: Dr AR allowance Cr AR
- When reversing the bad debt: Dr AR Cr AR allowance
o Dr Cash Cr AR
o Dr AR allowance Cr Bad debt expense

Direct write off method

FX  Changes in the value of asset in functional currency should be recognised in the PL during year end
(AR,FVTPL, AFS)

Inventory valuation (FIFO, LIFO, WA, Specific identification)

- FOB Shipping point/Destination (transfer of risk is at shipping point/destination  normally the one
paying for the shipment will bear the risk)
- Consignor owns the property, so its consign the item to consignee
Perpetual Periodic
- Purchases add to inventory - Purchases go to purchase account
- Record COGS immediately at the point of sales - COGS will be adjusted at year end as the
- WA  calculated at the point of sales balancing figure for: Beginning inventory
+ Purchases – Ending inventory = COGS
- WA weighted average is calculated at
the end of the perod (so 1 fix COGS rate)

PPE

Depreciation  Straight-line, Double declining (if straight line is 10%, then decline at 20%, rmb need to
remove scrap when calculating the declining), units of production.
Cost model vs Revaluation model  When reverting to revaluation model, entire asset class, accumulated
depreciation still remains (so revaluation amount is calculated by comparing the CV with FV then exercise
Dr/Cr on the Cost of the Asset) goes to RR and OCI

Impairment  when CV higher than recoverable amount (higher of FV less cost of disposal & Value-in-use
(NPV))  after impairment need to account under accumulated impairment loss

Intangible assetidentifiable non-monetary asset without physical substance  Identifiable (separate from
entity i.e. can be sold), control, existence of future economic benefit)

6 criteria technical feasible, intention to complete and ability to use or sell, cost can be measured reliably

Investments:

- Associate  take in only Net Income, not responsible for sales or revenue (significant control or 20%)
dividend reduce asset value
- Subsidiaries  take in every thing account for NCI (must be 50% above voting rights)
- Investment and financial assets
-
FVTPL (sell in one year) AFS (not associate, not FVTPL) - Fina
ncia
- Transaction cost hit P/L - Transaction cost capitalise
l
- Changes in value hit P/L under unrealised - Changes in value hit OCI under AFS
gain/loss reserve
- Mark to Market (without disposal cost) - Mark to market (without disposal cost)
- Realise P/L on sale - Recycle AFS Reserve to P/L
assets are non-physical assets whose value is derived from a claim  can be cash, receivables, loans, equity
instruments
- Investment’s FX gain/loss is accounted in OCI
- Dividend FVTPL and AFS hit income statement

Bond issue:

If Effective rate is not the same as coupon, must report ER as the interest expense. The balance of ER and coupon
will be used to grow/amortise the bond itself

Coupon: 5% ER: 10% Face value: 100,000 Issue price: 87,566

Temporary vs Permeant tax difference  one is cause timing difference

Leases (if not its service)

- Condition A: Identifiable asset esits: Supplier must have no right to the asset & no benefit to supplier
- Condition B: Right to control exists: Customer has right to all economic benefits from asset and direct
use of it
Share Authorizedtotal legal amount of shares

Share issued  Outstanding + Treasury

Share buy-back can be immediately cancelled to reduce outstanding and issued shares

Cash flow: indirect and direct only difference is in operating

Quality of income: CFO/NI

Fraud and internal control:

- Pressure
- Rationalization
- Opportunity

Need to:

- Safeguard assets
- Encourage emplyees to follow company’s policies
- Promote operational efficiency
- Ensure accurate, reliable accounting records
- Comply with legal requirements

Internal controls:

- Seperation of duties
- Comparison and Compliance Monitoring
- Adequate Records
- Limited Access
- Proper Approvals
- IT

Bank Reconciliation

Change the BOOKS cause bank statement is the correct cash amount

DUPONT ratio

ROE=Profit margin x Asset turnover x Financial Leverage(Asset/equity)

Unbilled(accrued) revenue=/= accounts receivable  accounts receivable is billed i.e. invoiced  sometimes unbilled
revenue  is when you performed the service contract but not billed(think phone)

Bad debt realization  Dr accounts receivable Cr Bad debt realization

Financing cost to purchase asset is cannot be capitalized

Cost asset is at cost value with 2 contra  acc dep and acc gain/loss in FV  must revalue when below NPV

FV basis  cannot return back to cost, will have acc dep account if change from cost model (ASK HOW IS IT
SHOWN IN FS)

Bucket purchase  when we buy a asset bundle  cost is allocated to the proportion of FV (land and building combo
is the most typical)
Accounting on financial structures

Relevance  FV valuation is more relevant than historical and it is more useful

Faithful representation  FV might not be objective enough

Cash flow

Look into big ticket items. (depreciation, stock base compensation, share buyback, dividend payout, share issuance)

IT they like to pay share base compensation (because the most valuable is intangible asset, growth focus and
cause they lack cash)

Direct and indirect method only affects the operating cash flow. No difference in investing and financing

(Total asset/ equity) Financial Leverage  For every dollar in asset, company use % in equity and % in debt to finance

Net profit margin measures how effective management is at generating profit on every dollar of sales.

Gross Margin  After subtracting the cost of producing or purchasing goods, Company was able to generate % on
every dollar of sales.