Asset & Liability Valuation and Income Measurement (Ch. 2) Income Flows vs. Cash Flows - Key Relationships in the Dynamics of a Business (Ch. 3) Profitability Analysis (Ch. 4) Professor Cooperberg May 29th Part 2, 2013 * NOTE: Audio is quite staticy throughout the duration of this video, unfortunately. Primary qualities of accounting information includes relevance and reliability. The valuation of assets and liabilities reflects historical costs, current information, and expectations of future outcomes. The primary valuation methods include the historical method, the current value method (combined method) and the current value method. Acquisition cost (under the historical method) is the amount that is initially paid to acquire the asset. It includes the costs required to prepare the asset for its intended use and excludes costs to operate the asset. Examples include land, intangibles with indefinite lives, goodwill, and prepayments. With the adjusted acquisition cost (essentially, depreciation) services are consumed gradually or immediately and the asset is reduced and an expense is increased. Buildings, equipment, and plant assets generally use this. The initial present value of cash flows is an asset or liability that is monetary in nature, such as bonds, receivables / payables, and noncurrent unearned revenue. Accounting for income taxes is covered as well. The income recorded before taxes for financial reporting purposes potentially differs from income taxes actually paid. The reasons for these differences is that income recorded before taxes uses FASB (financial reporting) and income taxes paid uses tax reporting standards (which differ). This gives rise to permanent and temporary differences. Permanent differences involve revenues and expenses that appear in financial statements but not in the income tax return. Examples of this include tax-exempt items such as interest from muni bonds. They do not affect the balance sheet. Temporary differences involve revenues and expenses included in both net income and taxable income but in different periods. Examples include depreciation and warranty expenses. They do affect the balance sheet (in the form of an asset or liability). The statement of cash flows is discussed next. Cash equivalents are highly liquid investments, very short-term treasury bills, commercial paper, and money market funds as well as interest and dividends paid. Cash equivalents are essentially items that are readily convertible into cash. Cash flows are NOT equal to income flows. Accrual accounting is used for net income and net income also includes noncash expenses. There are two methods for reporting cash flows - the direct method and the indirect method. The direct method is similar to an income statement, but records on a cash basis. The indirect method begins with the net income provided on the income statement, then adjusts for changes in cash. The indirect method states that there are two categories of adjustments - nonworking capital and working capital adjustments. Non-working capital adjustments include depreciation, deferred income taxes, stock option expenses, gain / loss on disposition of assets, pension cost, and impairment charges. each of these usually increases cash flows over net income. Working capital adjustments, on the other hand, increase current assets (accounts receivable, prepaid expenses, inventories, etc) and increase current liabilities (accounts payable, taxes payable). Valuing Assets & Liabilities -- Relevant / Reliability: 1:52 -- Valuations reflect: 2:44 -- Mixed Attribute Accounting Model: 3:01 -- Valuation Methods Chart: 3:19 Asset & Liability Valuation -- Acquisition Cost: 4:11 -- Adjusted Acquisition Cost - Depreciation: 5:32 -- Initial Present Value of Cash Flows: 6:07 -- Current Value Method: 7:40 Income Recognition: 9:26 Accounting for Income Taxes: 12:09 Permanent vs. Temporary Differences: 12:42 In-class exercises / silence (skip this and go to next marking below): 13:45 CHAPTER 3 BEGINS: 55:09 Assessing Financial Statement Quality: 55:31 Statement of Cash Flows (illustration): 56:16 Statement of Cash Flows (concepts): 56:55 Income Flows vs. Cash Flows: 57:41 (Direct vs. Indirect Methods) Indirect Method: 58:36 Cash Flows from Operations: -- Non-working capital adjustments: 59:10 -- Working capital adjustments: 1:00:08 Life Cycle: Net Income relative to Cash Flows: 1:01:31 Example - PepsiCo: 1:04:54 Statement of Cash Flows (revisited): 1:06:48 CHAPTER 4 BEGINS: 1:12:04 Analyzing Profitability & Risk - Profitability Analysis: 1:12:12 Profitability Analysis (defined): 1:12:51 -- ROA and ROCE / EPS: 1:13:22 Return on Assets (ROA): 1:14:53 -- ROA - Disaggregated: 1:16:57 Three Level Profitability Analysis: 1:19:03 Asset Turnover - Disaggregated: 1:19:39 Three Level Profitability Analysis - Pepsi: 1:20:49 Return on Assets (Industry Attributes): 1:23:12

• published: 11 Jul 2013
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