31 Analyzing Balance Sheets

Quick Ratio

• The quick ratio is calculated as (Cash + Accounts Receivable + Marketable Securities) / (Accounts Payable + Short-Term Debt)
• Using the provided data: Quick ratio = (100 + 750 + 300) / (300 + 130) = (1150 / 430) = 2.67

Common-Size Balance Sheet

• On a common-size balance sheet, each line item is stated as a percentage of total assets
• For Parker Company, current liabilities would be 2,000 / 10,000 = 20%

Debt Security Classification Under U.S. GAAP

• Under U.S. GAAP, debt securities classified as held-to-maturity are carried on the balance sheet at their amortized cost

Equity Securities Classification Under U.S. GAAP

• Under U.S. GAAP, a firm may classify equity securities with quoted market prices as trading securities only, or as available-for-sale securities only
• Equity securities must be classified as trading securities, unless the firm elects at the time of purchase to classify them as available-for-sale

Revenue Recognition and Deferred Tax Liability

• In Country Norlatia, revenue is recognized when a sale is made
• Taxing revenue when cash is received from the customer would most likely result in a deferred tax liability, as this creates a temporary timing difference

Treatment of Trading Securities

• Trading securities are measured at fair value through profit and loss under both U.S. GAAP and IFRS.
• Any unrealized gain/loss is recognized in the income statement, along with any interest/dividend income and realized gains/losses

Financial Assets and Fair Value Under IFRS

• Under IFRS, firms can make an irrevocable choice to carry any financial asset at fair value through profit and loss

Balance Sheet Goodwill

• Balance sheet goodwill is the amount by which the purchase price of an acquired firm exceeds its identifiable net assets

Impact on Net Income

• Bonds classified as fair value through other comprehensive income or available-for-sale securities mean any interest income will increase net income
• The bonds will be recognized at fair value at the end of the year, and any unrealized loss will be recognized in other comprehensive income

Goodwill Recognition

• Acquiring a firm will result in goodwill being recorded on the balance sheet.
• Internally generated goodwill is expensed on the income statement.

Common-Size Balance Sheet Interpretation

• In common-size balance sheets, each balance sheet item is expressed as a percentage of total assets
• Contributed capital from issuing common shares may be included in common stock (at par value) or additional paid-in capital (for proceeds in excess of par value)

Manipulating Net Income

• Allocating more of the acquisition price to goodwill and less to the acquired identifiable assets will increase net income

Current Ratio

• The current ratio for 2004 is calculated as Current Assets / Current Liabilities = 1,660 / 550 = 3.018

Interest Income from Financial Assets

• Interest income from a financial asset is recorded on the income statement if the underlying financial asset is classified as held to maturity, trading, or available for sale

Financial Assets Classification Under IFRS

• Under IFRS, unlisted equity securities are measured at amortized cost if fair value cannot be reliably determined.
• The default classification for listed equity securities is fair value through profit and loss, but the firm can choose to measure at fair value through other comprehensive income

Delta's Total-Liabilities-to-Equity Ratio

• Delta's total-liabilities-to-equity ratio is 60% / 40% = 1.5 using the fact that for Total assets will equal equity plus total liabilities

Identifiable Intangible Assets

• Identifiable intangible assets are nonmonetary assets that lack physical substance and can be acquired separately; trademarks are examples of this

Fair Value Measurement

• Derivative assets and trading securities will be held at Fair Value Through Profit or Loss (FVTPL) under both IFRS and U.S. GAAP.
• Debt securities held to maturity will be measured at amortized cost under U.S. GAAP.

Intangible Asset Revaluation

• The company may present the intangible asset's value using the revaluation model if it reports its financial statements under IFRS, but not U.S. GAAP

Unrealized Gains and Losses

• Under U.S. GAAP, unrealized gains and losses on trading securities are recognized in the income statement.

Intangible Asset Amortization

• Under U.S. GAAP, intangible assets must be held under the cost model.
• The revaluation model is not allowed therefore, the asset cannot be revalued
• The asset will be recorded on the balance sheet at $80,000

Expensed Items Under IFRS

• Under IFRS, any costs incurred during the research phase should be expensed
• Testing, training costs are always expensed, regardless of whether they are incurred during research or development.

Carrying Non-Current Liabilities

• Non-current liabilities are usually carried at amortized cost, which is the issue price minus any principal payments, plus any amortized discount or minus any amortized premium

Accurate Approach to Adjusting

• When comparing firms, the most accurate approach to adjusting goodwill to enable analysis is to rremove goodwill from the balance sheet and remove any income statement impact.

Amplus Versus Brevis

• Based on common-size analysis of the two firms' balance sheets, it is determined that Amplus Company has a greater investment in working capital than Brevis Company

Unrealized

• Under U.S. GAAP, unrealized gains and losses on available-for-sale securities are recognized in other comprehensive income.

Accounting Goodwill

• The carrying value of good will considers both the past acquisition cost and the future expected performance.

Amortization

• The amortization of a bond issued at a premium will most likely result in an increase to net income

Financial Liabilities

• Derivatives can be financial assets or liabilities and are recognized at fair value on the balance sheet

Common Size

• Balance sheets express all balance sheet items as a percentage of assets