Danh sach bai tap + cau hoi ly thuyet

property at a bargain price; 3 the lease term is equal to 75 percent or more of the estimated economic life of the property; or 4 the present value of the rentals and other minimum lease

Questions 3.1 – 3.18 Exercise 3.1 + Problem 3.1, 3.2, 3.3

3–1 Identify and describe the two major sources (as linked with business activities) of current liabilities (Xác định và mô tả hai nguồn chính (liên kết với các hoạt động kinh doanh) của nợ ngắn hạn.)

1 The two major source of liabilities, for both current and noncurrent liabilities, are operating and financing activities Current liabilities of an operating nature—such as accounts payable and operating expense accruals—represent claims on resources from operating activities Current liabilities such as notes payable, bonds, and the current maturities of long-term debt reflect claims on resources from financing activities

3–2 Identify the major disclosure requirements for financing-related current liabilities (Xác định các yêu cầu công bố thông tin chính cho khoản nợ ngắn hạn liên quan tài chính.)

2 The major disclosure requirements (in SEC FRR, Section 203) for financing-related

current liabilities such as short-term debt are:

a Footnote disclosure of compensating balance arrangements including those not reduced to writing

b Balance sheet segregation of (1) legally restricted compensating balances and (2) unrestricted compensating balances relating to long-term borrowing arrangements if the compensating balance can be computed at a fixed amount at the balance sheet date

c Disclosure of short-term bank and commercial paper borrowings:

i Commercial paper borrowings separately stated in the balance sheet

ii Average interest rate and terms separately stated for short-term bank and

commercial paper borrowings at the balance sheet date

iii Average interest rate, average outstanding borrowings, and maximum month-end outstanding borrowings for short-term bank debt and commercial paper combined for the period

d Disclosure of amounts and terms of unused lines of credit for short-term

borrowing arrangements (with amounts supporting commercial paper separately stated) and of unused commitments for long-term financing arrangements

Note that the above disclosures are required for filings with the SEC but not necessarily

for disclosures in published annual reports It should also be noted that SFAS 6 states

that certain short-term obligations should not necessarily be classified as current

liabilities if the company intends to refinance them on a long-term basis and can

demonstrate its ability to do so.

3–3 Describe the conditions necessary to demonstrate the ability of a company to refinance its short-term debt on a long-term basis (Mô tả các điều kiện cần thiết để chứng minh khả năng của một công ty để tái tài trợ nợ ngắn hạn của nó trên cơ sở lâu dài.)

3 The conditions required by SFAS 6 that demonstrate the ability of the company to

refinance it short-term debt on a long-term basis are:

a The company has actually issued a long-term obligation or equity securities to replace the short-term obligation after the date of the company's balance sheet but before its release

b The company has entered into an agreement with a bank or other source of capital that permits the company to refinance the short-term obligation when it becomes due Note that financing agreements that are cancelable for violation of a provision that can

be evaluated differently by the parties to the agreement (such as ―a material adverse change‖ or ―failure to maintain satisfactory operations‖) do not meet the second

condition Also, an operative violation of the agreement should not have occurred.

3–4 Explain how bond discounts and premiums usually arise Describe how they are accounted for (Giải thích cách mà phần bù và chiết khấu trái phiếu thường phát sinh Mô tả cách thức mà chúng được hạch toán.)

4 Since the interest rate that will prevail in the bond market at the time of issuance of bonds can never be predetermined, bonds usually are sold in excess of par (premium) or below par (discount) This premium or discount represents, in effect, an adjustment of the coupon rate to the effective interest rate The premium received is amortized over the life of the issue, thus reducing the coupon rate of interest to the effective interest rate incurred Conversely, the discount also is amortized, thus increasing the effective

interest rate paid by the borrower

3–5 Both convertibility and warrants attached to debt aim at increasing the attractiveness of debt securities and lowering their interest cost Describe how the costs of these two features affect income and equity (Cả hai khả năng chuyển đổi và bảo đảm gắn liền với nợ mục tiêu để tăng tính hấp dẫn của chứng khoán nợ và giảm chi phí lãi vay của chúng Mô tả cách thức chi phí của hai tính năng này ảnh hưởng đến thu nhập và vốn chủ sở hữu.)

5 The accounting for convertibility and warrants impacts income and equity as follows:

a The convertible feature is attractive to investors As a result, the debt will be issued at a slightly lower interest rate and the resulting interest expense is less (and conversely, equity is increased) Also, diluted earnings per share is reduced by the assumed conversion At conversion, a gain or loss on conversion may result when equity instruments are issued

b Similarly, warrants attached to bonds allow the bonds to pay a lower interest rate

As a result, interest expense is reduced (and conversely, equity is increased) Also, diluted earnings per share is affected because the warrants are assumed converted

3–6 Explain how the issuance of convertible debt and warrants can affect the valuation analysis conducted by current and potential stockholders (Giải thích việc phát hành nợ chuyển đổi và bảo đảm có thể ảnh hưởng đến việc phân tích định giá được tiến hành bởi các cổ đông hiện tại và tiềm năng.)

6 It is important to the analysis of convertible debt and stock warrants to evaluate the potential dilution of current and potential shareholders if the holders of these options choose to convert them to stock This potential dilution would represent a real wealth transfer for existing shareholders Currently, this potential dilution is given little formal recognition in financial statements

3–7 Describe the major disclosure requirements for long-term liabilities (Mô tả các yêu cầu công bố chính đối với nợ dài hạn.)

7 SFAS 47 requires note disclosure of commitments under unconditional purchase

obligations that provide financing to suppliers It also requires disclosure of future payments on long-term borrowings and redeemable stock Required disclosures include:

For purchase obligations not recognized on purchaser's balance sheet:

a Description and term of obligation

b Total fixed and determinable obligation If determinable, also show these amounts for each of the next five years

c Description of any variable obligation

d Amounts purchased under obligation for each period covered by an income statement

For purchase obligations recognized on purchaser's balance sheet, payments for each of the next five years

For long-term borrowings and redeemable stock:

a Maturities and sinking fund requirements for each of the next five years

b Redemption requirements for each of the next five years

3–8 Debt contracts usually place restrictions on the ability of a company to deploy resources and

to pursue business activities These are often referred to as debt covenants (Các hợp đồng nợ thường đặt các hạn chế về khả năng của một công ty để triển khai các nguồn lực và theo đuổi các hoạt động kinh doanh Chúng thường được gọi là giao ước nợ.)

a Identify where information about such restrictions is found (Xác định nơi thông tin về những

hạn chế như vậy được tìm thấy.)

b Define margin of safety as it applies to debt contracts and describe how the margin of safety

can impact assessment of the relative level of company risk (Xác định biên an toàn khi áp dụng cho các hợp đồng nợ và mô tả cách biên độ an toàn có thể ảnh hưởng đến đánh giá mức độ liên quan của rủi ro công ty.)

8 a Information about debt covenant restrictions are available in the details of the bond indentures of a company Moreover, key restrictions usually are identified and discussed in the financial statement notes

b The margin of safety as it applies to debt contracts refers to the slack that the company has before it would violate any of the debt covenant restrictions and be in technical default For example, if the debt covenant mandates a maximum debt to assets

ratio of 50% and the current debt to assets ratio is 40%, the company is said to have a margin of safety of 10% Technical default is costly to a company

Thus, as the margin of safety decreases, the relative level of company risk increases

3–9 Explain how analysis of financial statements is used to evaluate a company’s liabilities, both existing and contingent (Giải thích cách phân tích các báo cáo tài chính được sử dụng để đánh giá công nợ của một công ty, cả hiện có và tiềm ẩn.)

9 Analysis of the terms and conditions of recorded liabilities is an area deserving an analyst's careful attention Here, the analyst must examine critically the description of debt, its terms, conditions, and encumbrances with a desire to satisfy him/her as to the ability of the company to meet principal and interest payments Important analyses in the evaluation of liabilities are the examination of features such as:

 Contractual terms of the debt agreement, including payment schedule

 Restrictions on deployment of resources and freedom of action

 Ability to engage in further financing

 Requirements relating to maintenance of working capital, debt to equity ratio, etc  Dilutive conversion features to which the debt is subject

 Prohibitions on disbursements such as dividends

Moreover, we review the audit report since we expect auditors to require satisfactory recording and disclosure of all existing liabilities Auditor tests include the scrutiny of board of director meeting minutes, the reading of contracts and agreements, and inquiry

of those who may have knowledge of company obligations and liabilities

The analysis of contingencies (and commitments) also is aided by financial statement analysis However, the analysis of contingencies and commitments is more challenging because these liabilities typically do not involve the recording of assets and/or costs Here, the analyst must rely on information provided in notes to the financial statements and in management commentary found in the text of the annual report and elsewhere Due to the uncertainties involved, the descriptions of commitments, and especially contingent liabilities, in the notes are often vague and indeterminate This means that the burden of assessing the possible impact of contingencies and the probabilities of their occurrence is passed to the analyst Yet, the analyst assumes that if a contingency (and/

or commitment) is sufficiently serious, the auditor can qualify the audit report.

The analyst, while utilizing all information available, must nevertheless bring his/her own critical evaluation to bear on the assessment of all existing liabilities and contingencies

to which the company may be subject This process must draw not only on available disclosures and reports, but also on an understanding of industry conditions and

property at a bargain price; (3) the lease term is equal to 75 percent or more of the

estimated economic life of the property; or (4) the present value of the rentals and other minimum lease payments, at the beginning of the lease term, equals 90 percent of the fair value of the leased property less any related investment tax credit retained by the lessor

If the lease does not meet any of those criteria, it is to be classified and accounted for as

an operating lease

With regard to the last two of the above four criteria, if the beginning of the lease term falls within the last 25 percent of the total estimated economic life of the leased property, neither the 75 percent of economic life criterion nor the 90 percent recovery criterion is

to be applied for purposes of classifying the lease and as a consequence, such leases will be classified as operating leases.

b Summary of accounting for leases by lessees:

1 The lessee records a capital lease as an asset and an obligation at an amount equal to the present value of minimum lease payments during the lease term, excluding executory costs (if determinable) such as insurance, maintenance, and taxes to be paid

by the lessor together with any profit thereon However, the amount so determined should not exceed the fair value of the leased property at the inception of the lease If executory costs are not determinable from provisions of the lease, an estimate of the amount shall be made

2 Amortization, in a manner consistent with the lessee's normal depreciation policy,

is called for over the term of the lease except where the lease transfers title or contains a bargain purchase option; in the latter cases amortization should follow the estimated economic life

3 In accounting for an operating lease the lessee will charge rentals to expenses as they become payable, except when rentals do not become payable on a straight-line basis In the latter case they should be expensed on such a basis or on any other

systematic or rational basis that reflects the time pattern of benefits serviced from the leased property.

3–11.A a Identify the different classifications of leases by a lessor Describe the criteria for

classifying each lease type (Xác định các phân loại khác nhau của hợp đồng thuê của bên cho thuê Mô tả các tiêu chí để phân loại từng loại thuê.)

b Explain the accounting procedures for leases by a lessor (Giải thích các quy trình kế toán cho hợp đồng thuê của bên cho thuê.)

11 a The major classifications of leases by lessors are:

below), it is to be classified and accounted for as either a sales-type lease (if

manufacturer or dealer profit is involved) or a direct financing lease The additional criteria are (1) collectibility of the minimum lease payments is reasonable predictable, and (2) no important uncertainties surround the amount of unreimbursable costs yet to

be incurred by the lessor under the lease A lease not meeting these criteria is to be classified and accounted for as an operating lease.

b The accounting procedures for leases by lessors are:

Sales-type leases

1 The minimum lease payments plus the unguaranteed residual value accruing to the benefit of the lessor are recorded as the gross investment in the lease

2 The difference between gross investment and the sum of the present value of its two components is recorded as unearned income The net investment equals gross investment less unearned income Unearned income is amortized to income over the lease term so as to produce a constant periodic rate of return on the net investment in the lease Contingent rentals are credited to income when they become receivable

3 At the termination of the existing lease term of a lease being renewed, the net investment in the lease is adjusted to the fair value of the leased property to the lessor at that date, and the difference, if any, recognized as gain or loss The same procedure applies to direct financing leases (see below.)

4 The present value of the minimum lease payments discounted at the interest rate implicit in the lease is recorded as the sales price The cost, or carrying amount, if

different, of the leased property, and any initial direct costs (of negotiating and

consummating the lease), less the present value of the unguaranteed residual value is charged against income in the same period.

5 The estimated residual value is periodically reviewed If it is determined to be excessive, the accounting for the transaction is revised using the changed estimate The resulting reduction in net investment is recognized as a loss in the period in which the estimate is changed No upward adjustment of the estimated residual value is made (A similar provision applies to direct financing leases.)

receivable

Operating leases

The lessor will include property accounted for as an operating lease in the balance sheet and will depreciate it in accordance with his normal depreciation policy Rent should be taken into income over the lease term as it becomes receivable except that if it departs from a straight-line basis income should be recognized on such basis or on some other systematic or rational basis Initial costs are deferred and allocated over the lease term.

3–12.A Describe the provisions concerning leases involving real estate (Mô tả các quy định về thuê liên quan đến bất động sản.)

12 Where land only is involved the lessee should account for it as a capital lease if either of the enumerated criteria (1) or (2) is met Land is not usually amortized

In a case involving both land and building(s), if the capitalization criteria applicable to land (see above) are met, the lease will retain the capital lease classification and the lessor will account for it as a single unit The lessee will have to capitalize the land and

buildings separately, the allocation between the two being in proportion to their

respective fair values at the inception of the lease

If the capitalization criteria applicable to land are not met, and at the inception of the lease the fair value of the land is less than 25 percent of total fair value of the leased property both lessor and lessee shall consider the property as a single unit The

estimated economic life of the building is to be attributed to the whole unit In this case if either of the enumerated criteria (3) or (4) is met the lessee should capitalize the land and building as a single unit and amortize it

If the conditions above prevail but the fair value of land is 25 percent or more of the total fair value of the leased property, both the lessee and the lessor should consider the land and the building separately for purposes of applying capitalization criteria (3) and (4) If either of the criteria is met by the building element of the lease it should be accounted for

as a capital lease by the lessee and amortized The land element of the lease is to be accounted for as an operating lease If the building element meets neither capitalization criteria, both land and buildings should be accounted for as a single operating lease Equipment which is part of a real estate lease should be considered separately and the minimum lease payments applicable to it should be estimated by whatever means are appropriate in the circumstances Leases of certain facilities such as airport, bus

terminal, or port facilities from governmental units or authorities are to be classified as operating leases.

3–13 Discuss the implications of lease accounting for the analysis of financial statements (Thảo luận về những tác động của kế toán hợp đồng thuê để phân tích các báo cáo tài chính.)

13 In the books of the lessee, the primary consideration regarding leases is the appropriate classification of operating leases When leases are classified as operating leases, the lease payment is recorded as rent expense However, lease assets and

liabilities are kept off the balance sheet Because of this, many companies avail

themselves of operating lease treatment even when the underlying economics justify capitalizing the leases If this is done, the asset and liabilities of a company are

underreported and its debt-to-equity ratios are biased downward Often such leases are a form of ―off balance sheet‖ financing Therefore, an analyst must carefully examine the classification of operating leases and capitalize the leases when the underlying

economic justify.

3–14.A When a lease is considered an operating lease for both the lessor and the lessee, describe what amounts will be found on the balance sheets of both the lessor and the lessee related to the lease obligation and the leased asset (Khi một hợp đồng thuê được xem là thuê hoạt động cho cả hai bên cho thuê và bên thuê, mô tả những gì số tiền đã được tìm thấy trên bảng cân đối của cả hai bên cho thuê và bên thuê liên quan đến nghĩa vụ thuê và tài sản cho thuê.)

14 For the lessor, when a lease is considered an operating lease, the leased asset remains on its books For the lessee, it will not report an asset or an obligation on its balance sheet

3–15.A When a lease is considered a capital lease for both the lessor and the lessee, describe what amounts will be found on the balance sheets of both the lessor and the lessee related to the lease obligation and the leased asset (Khi một hợp đồng thuê được coi là một hợp đồng thuê vốn

cho cả hai bên cho thuê và bên thuê, mô tả những gì số tiền đã được tìm thấy trên bảng cân đối của cả hai bên cho thuê và bên thuê liên quan đến nghĩa vụ thuê và tài sản cho thuê.)

15 When a lease is considered a capital lease for both the lessor and the lessee, the lessor will report lease payments receivable on its balance sheet The lessee will report the leased asset and a lease obligation totaling the present value of future lease

payments

3–16 Discuss how the lessee reflects the cost of leased equipment in the income statement for

(a) assets leased under operating leases and (b) assets leased under capital leases (Thảo luận về

cách bên thuê phản ánh chi phí của thiết bị được cho thuê trong báo cáo thu nhập cho (a) Tài sản cho thuê theo hợp đồng thuê hoạt động và (b) các tài sản cho thuê theo hợp đồng thuê vốn.)

16 a Rent expense

b Interest expense and depreciation expense

3–17.A Discuss how the lessor reflects the benefits of leasing in the income statement under (a)

an operating lease and (b) a capital lease (Thảo luận về cách bên cho thuê phản ánh lợi ích của

việc cho thuê trong báo cáo thu nhập theo (a) là thuê hoạt động và (b) một hợp đồng thuê vốn.)

17 a Leasing revenue

b Interest revenue (and possibly gain on sale in the initial year of the lease)

3–18 Companies use various financing methods to avoid reporting debt on the balance sheet Identify and describe some of these off-balance-sheet financing methods (Các công ty sử dụng phương pháp tài chính khác nhau để tránh báo cáo nợ trên bảng cân đối Xác định và mô tả một

số trong những phương pháp tài chính ngoại bảng.)

18 Property, plant, and equipment can be financed by having an outside party

acquire the facilities while the company agrees to do enough business with the facility to provide funds sufficient to service the debt Examples of these kinds of arrangements are through-put agreements, in which the company agrees to run a specified amount of goods through a processing facility or "take or pay" arrangements in which the company guarantees to pay for a specified quantity of goods whether needed or not

A variation of the above arrangements involves the creation of separate entities for ownership and the financing of the facilities (such as joint ventures or limited

partnerships) which are not consolidated with the company's financial statements and are, thus, excluded from its liabilities

Companies have attempted to finance inventory without reporting on their balance sheets the inventory or the related liability These are generally product financing

arrangements in which an enterprise sells and agrees to repurchase inventory with the repurchase price equal to the original sales price plus carrying and financing costs or other similar transactions such as a guarantee of resale prices to third parties.

4–1 Companies typically report compensating balances that are required under a loan agreement

as unrestricted cash classified within current assets.

a For purposes of financial statement analysis, is this a useful classification? Explain.

b Describe how you would evaluate compensating balances.

1 a No When analyzing cash, the most liquid of current assets, the analyst is

interested in the availability of cash in meeting the company's obligations A restriction under compensating balance arrangements does, at worst, remove these cash balances from immediate availability as means of payment Indeed, use of such balances can have repercussions for the company that can affect its future access to bank credit.

b The analyst should exclude cash restricted under compensating balance agreements from current assets SEC Accounting Series Release 148 requires that

a company that has borrowed money from a bank segregate on its balance sheet any cash subject to withdrawal or usage restrictions under compensating balance agreements with the lending bank These requirements may, as is often the case

in such situations, move companies and their banker to alter the form of their contractual agreements while retaining their substance The analyst must be ever alert to such attempts to distort analysis measurements by presentations whose form is not a true reflection of their substance One measure of a company’s vulnerability in this area is the ratio of restricted cash to total cash.

4–2 a Explain the concept of a company’s operating cycle and its meaning (Giải thích các khái

niệm về chu kỳ kinh doanh của công ty và ý nghĩa của nó.)

b Discuss the significance of the operating cycle to classification of current versus noncurrent

items in a balance sheet Cite examples (Thảo luận về ý nghĩa của các chu kỳ kinh doanh để phân loại các khoản mục current với noncurrent trong một bảng cân đối Cho ví dụ.)

c Is the operating cycle concept useful in measuring the current debt-paying ability of a

company and the liquidity of its working capital components? ( khái niệm chu kỳ kinh doanh có hữu ích trong việc đo lường khả năng chi trả trong ngắn hạn của một công ty và tính thanh khoản của các thành phần vốn lưu động của nó hay không?)

d Describe the impact of the operating cycle concept for classification of current assets in the

following industries: (1) tobacco, (2) liquor, and (3) retailing (Mô tả các tác động của các khái niệm chu kỳ kinh doanh để phân loại tài sản ngắn hạn trong ngành công nghiệp sau: (1) thuốc lá, (2) rượu, và (3) bán lẻ.)

2 a The operating cycle concept is important in the classification of assets and

liabilities as either current or noncurrent The operating cycle encompasses the period of time from the commitment of cash for purchases until the collection of receivables resulting from the sale of goods or services The diagram near the beginning of Chapter 4 illustrates this concept.

b If the normal collection interval of a receivables is longer than a year (such as with longer term installment receivables), then their inclusion as current assets is proper provided the operating cycle is equal to or greater than the obligation due date for the receivables Similarly, if inventories, by business need or custom, have to be kept on average for more than 12 months, then this normal inventory holding period becomes part of the operating cycle and such inventories are included among current assets.

c The limitations of the current ratio (which is computed from items defined as working capital) as a measure of short-term liquidity are discussed in Chapter 11.

Still, if we accept the proposition that it is useful to measure the current resources available to pay current obligations, then it is difficult to see how extension of

"current" from the customary 12 months to periods of 36 months or longer can serve a useful purpose The operating cycle concept may help companies show the kind of positive current position that they otherwise might not be able to show, but this concept is of doubtful value or validity from the point of view of a financial analyst that must assess a company’s short-term liquidity.

d (1) Tobacco Industry The tobacco leaf must go through an aging, curing, and drying process extending over several years This tobacco inventory (green leaves), that may not be used in the production of a salable product for many years, is classified as current under the operating cycle concept This would occur even if long-term loans (classified among noncurrent liabilities) were taken out to finance the carrying of this inventory.

(2) Liquor Industry The liquor industry has an operating cycle extending beyond the customary 12 months In this case, the holding of liquor inventory for aging purposes over many years provides sufficient justification for inclusion of such inventories among current assets.

(3) Retailing Industry In retailing, the sale of "large ticket" items on the installment plan can extend the operating cycle to, for example, 36 months or longer As such, these installment receivables are reported among current assets.

4–3 a Identify the main concerns in analysis of accounts receivable (Xác định các mối quan

tâm chính trong phân tích các khoản phải thu.)

b Describe information, other than that usually available in financial statements, that we should

collect to assess the risk of noncollectibility of receivables.

3 a The two most important questions facing the financial analyst with respect to

receivables are: (1) Is the receivable genuine, due, and enforceable? and (2) Has the probability of collection been properly assessed? While the unqualified opinion of an independent auditor lends some assurance with regard to these questions, the financial analyst must recognize the possibility of an error of judgment as well as the lack of complete independence.

b Description of the receivables in the notes to financial statements usually do not contain sufficient clues to allow a reliable judgment as to whether a receivable is genuine, due, and enforceable Consequently, knowledge of industry practices and supplementary sources of information must be used for additional assurance, e.g.:

 In some industries, such as compact discs, toys, or books, a substantial right

of merchandise return exists and allowance must be made for this.

 Most provisions for uncollectible accounts are based on past experience although they should also make allowances for current and emerging industry conditions In practice, the accountant is likely to attach more importance to the former than to the latter The analyst must, in such cases, use one’s own judgment and knowledge of industry conditions to assess the adequacy of the provision for uncollectible accounts.

 Information that would be helpful in assessing the general level of collection risks with receivables is not usually found in published financial statements Such information can, of course, be sought from the company directly Examples of such information are: (1) What is customer concentration? What percent of total receivables is due from one or a few major customers? Would failure of any one customer have a material impact on the company's financial condition? (2) What is the age pattern of the receivables? (3) What proportion

of notes receivable represent renewals of old notes? (4) Have allowances been made for trade discounts, returns, or other credits to which customers are entitled?

 The analyst, in assessing current financial position and a company's ability to meet its obligations currently—as expressed by such measures as the current ratio—must recognize the full impact of accounting conventions that relate to classification of receivables as "current." For example, the operating cycle concept allows the inclusion of installment receivables, which may not be fully collectible for years In balancing these against current obligations, allowance for such differences in timing of cash flows should be made.

4–4 a What is meant by the factoring or securitization of receivables? (ý nghĩa của việc phân

tích hoặc chứng khoán hóa các khoản phải thu là gì?)

b What does selling receivables with recourse mean? What does it mean to sell them without

recourse?

c How does selling receivables (particularly with recourse) potentially distort the balance sheet?

4 a Factoring or securitization of receivables refers to the practice of selling all or

a portion of a company’s receivables to a third party.

b When receivables are sold with recourse, the third party purchaser of the receivables retains the right to collect from the company that sold the receivable if the receivable proves uncollectible When receivables are sold without recourse, the purchaser of the receivables assumes the collection risk.

c When receivables are sold with recourse, the balance sheet reports the cash received from the sale of the receivable However, the balance sheet may or may not report the contingent liability to the receivables purchaser for uncollectible receivables purchased with recourse—this depends on who assumes the risk of ownership.

4–5 a Discuss the consequences for each of the acceptable inventory methods in recording costs

of inventories and in determination of income (Thảo luận về hậu quả đối với mỗi phương pháp hàng tồn kho chấp nhận được trong việc ghi lại chi phí hàng tồn kho và xác định thu nhập.)

b Comment on the variation in practice regarding the inclusion of costs in inventories Give

examples of at least two sources of such cost variations (Nhận xét về sự thay đổi trong thực tế liên quan đến sự bao gồm các chi phí hàng tồn kho Cho ví dụ về ít nhất hai nguồn của các biến thể chi phí như vậy.)

5 a Few useful generalizations about the effect of differing methods of inventory

valuation on financial analysis can be made Yet, we provide some guidance.

 In the case of LIFO, we know that under conditions of fluctuating price levels,

it will have a smoothing effect on income Moreover, the LIFO method yields, in times of price inflation, an unrealistically low inventory amount This, in turn,

lowers the current ratio and tends to increase the inventory turnover ratio We also know that the LIFO method affords management an opportunity to manipulate profits by allowing inventory to be depleted in poor years, thus drawing on the low cost pool to inflate income A judgment on all of these consequences can only be made on the basis of an assessment of all surrounding circumstances For example, a slight change in a current ratio of 4:1 may be of no significance, whereas the same change in a ratio of 1.5:1 may

be of far greater importance.

 The use of FIFO for the valuation of inventories will generally result in a higher inventory on the balance sheet and a lower cost of goods sold (and higher income) in comparison to LIFO.

 The average cost method smoothes out cost fluctuations by using a weighted average cost in valuing inventories and in pricing cost of goods sold The resulting net income will be close to an average of the net income under LIFO and FIFO.

 The "lower-of-cost-or-market" principle of inventory accounting has additional implications for the analyst In times of rising prices it tends to undervalue inventories regardless of the cost method used This, in turn, will depress the current ratio below its true level since the other current assets (as well as current liabilities) are not valued on a consistent basis with the methods used

in valuing inventories.

b In practice we can find wide variations in the kinds of costs that are included in inventory Practice varies particularly with respect to the inclusion or exclusion of (1) various classes of overhead costs, (2) freight-in, and (3) general and administrative costs This variety in practices can have a significant effect on comparability across companies.

4–6 a Describe the importance of the level of activity on the unit cost of goods produced by a

manufacturer (Mô tả tầm quan trọng của mức độ hoạt động vào chi phí đơn vị hàng hoá được sản xuất bởi nhà sản xuất.)

b Allocation of overhead costs requires certain assumptions Explain and illustrate cost

allocations and their links to activity levels with an example (Phân bổ chi phí chung đòi hỏi một

số giả định Giải thích và minh họa cho việc phân bổ chi phí và liên kết của chúng với mức độ hoạt động với một ví dụ.)

6 a The allocation of overhead costs to all units of production must be done on a

rational basis designed to get the best approximation of actual cost However, this

is far from easy The greatest difficulty stems from the fact that a good part of overhead is fixed costs, i.e., costs that do not vary with production but vary mostly with the lapse of time Examples are rent payments and the factory manager's salary Thus, assuming only a single product is produced, fixed costs are $100,000, and 10,000 units are produced, then each unit will absorb $10 of fixed costs However, if 5,000 units are produced, each unit will absorb $20 of fixed costs This shows that level of activity is an important determinant of unit cost—wide fluctuations in output can yield wide fluctuations in unit cost.

b To allocate fixed costs to units, an assumption initially must be made as to how many units the company expects to produce This determines over how many units the overhead costs is allocated That calculation requires estimates of sales

and related production To the extent that actual production differs from estimated production, overhead costs will be either overapplied or underapplied That means that production and inventory are charged with more than total overhead costs or with an insufficient amount of overhead costs.

4–7 Explain the major objective(s) of LIFO inventory accounting Discuss the consequences of using LIFO in both measurement of income and the valuation of inventories for the analysis of financial statements (Giải thích các mục tiêu chính của kế toán hàng tồn kho LIFO Thảo luận

về hậu quả của việc sử dụng LIFO trong cả hai phép đo lường thu nhập và xác định giá trị hàng tồn kho để phân tích các báo cáo tài chính.)

7 The major objective of the LIFO method of inventory accounting is to charge cost of goods sold with the most recent costs incurred When the price level is stable, the results under either the FIFO or the LIFO method will be the same When price levels change, the use of these different methods can yield significantly different financial results One of the primary aims of LIFO is to obtain a better matching of costs and revenues in times of inflation Under the LIFO method, the income statement is given priority over the balance sheet This means that while a matching of more current costs with revenues occurs in times of price inflation (deflation), the inventory carrying amounts in the balance sheet will be unrealistically low (high) Note that use

of the LIFO method is encouraged by its acceptance for tax purposes The tax law stipulates that its use for tax purposes makes mandatory its adoption for financial reporting.

4–8 Discuss current disclosures for inventory valuation methods and describe how these

disclosures are useful in our analysis Identify additional types of inventory disclosures that would be useful for analysis purposes.

8 In most annual reports, insufficient information is given to allow the analyst to convert inventories accounted for under one method to a figure reflecting a different method of inventory accounting Most analysts want such information to better compare the financial statements of companies that use different inventory accounting methods Converting an inventory figure from one method to another is made even more difficult by the use of different methods for various components of inventory Still, analysts must, in most cases, make an overall assessment of the impact of different inventory methods on the comparability of inventory figures Such

an assessment should be based on a thorough understanding of the inventory methods in use and the effect they are likely to have on inventory values The differences that arise between informed approximations and exact figures using additional data generally are not materially different.

To be most useful, disclosures of inventory methods must give, in addition to methods used, an identification of the inventory components (in amounts) where such methods are used More important, disclosure of the dollar difference between the method in use and the method most prevalent in the industry would be very useful.

4–9 Companies typically apply the lower-of-cost-or-market (LCM) method for inventory

valuation (Các công ty thường áp dụng các phương pháp lower-of-cost-or-market (LCM) xác định giá trị hàng tồn kho.)

a Define cost as it applies to inventory valuation (Xác định chi phí khi áp dụng cho định giá

hàng tồn kho.)

b Define market as it applies to inventory valuation (Xác định thị trường khi áp dụng để định

giá hàng tồn kho.)

c Discuss the rationale behind the LCM rule (Thảo luận về lý do đằng sau nguyên tắc LCM.)

d Identify arguments against the use of LCM (Xác định các luận cứ chống lại việc sử dụng của

LCM.)

9 a Cost, defined generally as the price paid or consideration given to acquire an

asset, is the primary basis in accounting for inventories As applied to inventories, cost generally means the sum of the applicable expenditures and charges directly

or indirectly incurred in bringing an article to its existing condition and location These applicable expenditures and charges include all acquisition and production costs—but they exclude selling expenses and general and administrative expenses not clearly related to production.

b Market, as applied to the valuations of inventories, means the current bid price at the balance sheet date for the inventory in the volume for which it

is usually purchased in The term is applicable to inventories of purchased goods and to manufactured goods (involving materials, labor, and overhead) More generally, market means current replacement cost— although, it must not exceed the net realizable value (estimated selling price less predicted costs of completion and disposal) and must not be less than net realizable value reduced by an allowance for a normal profit margin.

c The usual basis for carrying forward inventory to the next period is cost Departure from cost is required, however, when the utility of the goods included in inventory is less than their cost This loss in utility should be recognized as a loss

of the current period, the period in which it occurred Furthermore, the subsequent period should be charged for goods at an amount that measures their expected contribution to that period In other words, the subsequent period should be charged for inventory at prices no higher than those that would have been paid if the inventory had been obtained at the beginning of that period (Historically, the lower-of-cost-or-market rule arose from the accounting convention of providing for all losses and anticipating no profits—conservatism.)

In accordance with the foregoing reasoning the rule of "cost or market, whichever

is lower" may be applied to each item in the inventory, to the total of the components of each major category, or to the total of the inventory, whichever most clearly reflects the economic reality The LCM rule is usually applied to each item, but if individual inventory items enter into the same category or categories

of finished product, alternative procedures are suitable.

d Arguments against use of the lower-of-cost-or-market method of valuing inventories include:

(1) The method requires the reporting of estimated losses (all or a portion of the excess of actual cost over replacement cost) as income charges even though the losses have not been sustained to date and may never be sustained Under a consistent criterion of realization, a drop in selling price below cost is no more a sustained loss than a rise above cost is a realized gain.

(2) A price shrinkage is brought into the income statement before the loss has been sustained through sale Furthermore, if the charge for the inventory write-down is not made to a special loss account, the cost figure for goods actually sold is inflated by the amount of the estimated shrinkage in price of the unsold goods The title "Cost of Goods Sold" therefore becomes a misnomer (3) The method is inconsistent in application in a given year because it recognizes the propriety of implied price reductions but gives no recognition in the accounts

or financial statements to the effect of price advances.

(4) The method is inconsistent in application in one year as opposed to another because the inventory of a company may be valued at cost at one year-end and at market at the next year-end.

(5) The lower-of-cost-or-market method values inventory in the balance sheet conservatively Its effect on the income statement, however, may be the opposite Although the income statement for the year in which the unsustained loss is taken

is reported conservatively, the net income for the subsequent period may be distorted if the expected reductions in sales prices do not materialize.

(6) In the application of the lower of cost or market rule, a prospective "normal profit" is used in determining inventory values in certain cases Since normal profit is an estimated figure based upon past experiences (and might not be attained in the future), it is not objective in nature and presents an opportunity for manipulation of the results of operations.

4–10 Compare and contrast the effects of LIFO and FIFO inventory costing methods on

earnings in an inflationary period (So sánh và đối chiếu tác động của phương pháp định giá hàng tồn kho LIFO và FIFO lên thu nhập trong một chu kỳ kinh doanh)

10 LIFO tends to yield lower reported earnings when prices rise as compared to FIFO The following illustration highlights these effects:

Period Units in Inventory Cost per Unit Total Cost

Under LIFO, if 10 units are sold, then cost of goods sold is $125, computed as (5 x

$15) + (5 x $10) Also, the LIFO inventory value is $25, computed as 5 x $5 If units are sold for $20, then gross profit is $75, computed as (10 x $20) - $125 Under FIFO, if 10 units are sold, then cost of goods sold is $75, computed as (5 x $5) + (5 x $10) Gross

profit would be $125, computed as $200 - $75 Inventory would be valued at $75, computed as 5 x $15—inflating the balance sheet This shows that FIFO tends to increase income and taxes in inflationary periods.

4–11 Manufacturers report inventory in the form of raw materials, work-in-process, and finished goods For each category, discuss how an increase might be viewed as a positive or a negative indicator of future performance depending on the circumstances that led to the inventory build

up (Các nhà sản xuất báo cáo hàng tồn kho trong các dạng nguyên liệu, đang trong quá trình sản suất, và thành phẩm Đối với mỗi loại, thảo luận làm cách nào mốt sự gia tăng có thể được xem như là một chỉ số tích cực hay tiêu cực của hiệu suất trong tương lai tùy thuộc vào hoàn cảnh dẫn đến việc xây dựng hàng tồn kho.)

11 Increases in raw materials can, in certain instances, be a positive sign that the company is building inventories to meet expected demand However, increases in both raw materials and work-in-process inventories, can reflect inefficient operations that have slowed production Increases in finished goods can reflect the building of warehoused inventory to meet large demand or it can represent the stock piling of finished goods that are not in great demand The crucial part of analysis is to interpret these changes in the context of current and projected industry conditions.

4–12 Comment on the following: Depreciation accounting is imperfect for analysis purposes (Bình luận câu phát biểu sau: kế toán khấu hao là không hoàn hảo cho mục đích phân tích.)

12 The observation is correct in pointing out that an analyst must subject the data regarding an entity's depreciation policies to critical analysis and scrutiny The company can choose among several acceptable but vastly different depreciation methods The reasons a particular choice(s) is made by the company and the effect

on reported depreciation expense and accumulated depreciation should be assessed.

4–13 Analysts cannot unequivocally accept the depreciation amount One must try to estimate the age and efficiency of plant assets It is also useful to compare depreciation, current and accumulated, with gross plant assets, and to make comparisons with similar companies While an analyst cannot adjust earnings for depreciation with precision, an analyst doesn’t require

precision Comment on these statements.

13 In the absence of more precise data, an analyst is better off adjusting depreciation charges on the basis of his/her estimates and assumptions than not adjusting them at all Analyses such as those described in the chapter can help to create a more useful estimate of periodic depreciation expense and accumulated depreciation.

4–14 Identify analytical tools useful in evaluating deprecation expense Explain why they are useful.

14 There are a number of measures relating to plant assets that are useful in comparing depreciation policies over time as well as for intercompany comparisons.

The average total life span of plant and equipment can be approximated as:

Gross Plant and Equipment  Current Year Depreciation Expense.

The average age of plant and equipment can be computed as:

Accumulated Depreciation  Current Year Depreciation Expense.

The average remaining life of plant and equipment is computed as:

Net Depreciated Plant and Equipment  Current Year Depreciation

Expense.

Also, drawing on the above relations, we can compute:

Average Total Life Span = Average Age + Average Remaining Life.

The above ratios are helpful in assessing a company's depreciation policies and assumptions over time The ratios can be computed on a historical cost basis as well

as on a current cost basis.

4–15 Analysts must be alert to what aspects of goodwill in their analysis of financial statements?

15 One of the more common solutions applied by analysts to the analysis of goodwill

is to simply ignore it That is, they ignore the asset shown on the balance sheet As for the income statement, under current accounting standards, goodwill is no longer amortized, but is subjected to an impairment test annually and written down if required Often, however, the write-down expense is treated with skepticism and is frequently ignored By ignoring goodwill, analysts ignore investments of very substantial resources in what may often be a company's most important and valuable asset Ignoring the impact of goodwill on reported income is no solution to the analysis of this complex item Even considering the limited information available, an analyst is better off evaluating the accounting numbers for goodwill rather than dismissing them altogether.

Goodwill is measured by the excess of cost over the fair market value of tangible net assets acquired in a transaction accounted for as a purchase It is the excess of the purchase price over the fair value of all the tangible assets acquired, arrived at by carefully ascertaining the value of such assets—at least in theory The analyst must

be alert to the makeup and the method of valuation of Goodwill as well as to the method of its ultimate disposition One way of disposing of the Goodwill account, frequently preferred by management, is to write it off at a time when it would have the least impact on the market's assessment of the company's performance (for example, in a period of losses or reduced earnings).

6–1 Explain why an analyst attaches great importance to evaluation of the income statement (Giải thích lý do tại sao một nhà phân tích coi trọng đánh giá các báo cáo thu nhập.)

1 The income statement portrays the net results of operations of an enterprise Since results are what enterprises are established to achieve and since their value is,

in large measure, determined by the size and quality of these results, it follows that the analyst attaches great importance to the income statement.

6–2 Define income Distinguish income from cash flow (Định nghĩa thu nhập Phân biệt thu nhập với dòng tiền.)

2 Income summarizes in financial terms the operating activities of a company Income

is the amount of revenues and gains for the period in excess of expenses and losses, all computed under accrual accounting Income provides a measure of the change in shareholder wealth for a period and an indication of a company’s future earning power Accounting income differs from cash flows because certain revenues and gains are recognized in periods before or after cash is received and certain expenses and losses are recognized in periods before or after cash is paid.

6–3 What are the two basic economic concepts of income? What implications do they have for analysis? (Hai khái niệm kinh tế cơ bản của thu nhập là gì? Chúng có tác động gì đến việc phân tích?)

3 Economic income is net cash flows plus the change in the present value of future cash flows Another similar concept, the Hicksian concept of income, considers income for the period to be the amount that can be withdrawn from the company in a period without changing the net wealth of the company Hicksian income equals cash flow plus the change in the fair value of net assets.

6–4 Explain how accountants measure income (Giải thích cách kế toán đo lường thu nhập.)

4 Accounting income is the excess of revenues and gains over expenses and losses measured using accrual accounting As such, revenues (and gains) are recognized when earned and expenses (losses) are matched against the revenues (and gains)

6–5 Distinguish between net income, comprehensive income, and continuing income Cite examples of items that create differences between these three income measures.

5 Net income is the excess of the revenues and gains of the company over the expenses and losses of the company Net income often is called the “bottom line,” although that is a misnomer because certain unrealized holding gains and losses are charged directly to equity and bypass net income Comprehensive income includes all changes in equity that result from non-owner transactions (excluding items such

as dividends and stock issuances) Items creating differences between net income and comprehensive income include unrealized gains and losses on available for sale securities, foreign currency translation adjustments, minimum pension liability adjustments, and unrealized holding gains or losses on derivative instruments Comprehensive income is the ultimate “bottom line” income number Continuing income is a measure of net income earned by ongoing segments of the company Continuing income differs from net income because continuing income excludes the income or loss of segments of the company that are to be discontinued or sold (it also excludes extraordinary items and effects from changes in accounting principles).

6–6 Although comprehensive income is the bottom line income number, it is rarely reported in the income statement Where will you typically find details regarding comprehensive income?