AFM123 Lecture Notes - Lecture 1: Capital Asset, 6 Years, A Question Of Balance

68 views3 pages

marooncaribou68

28 May 2016

School

University of Waterloo

Department

Accounting & Financial Management

Course

AFM123

Professor

Peter Blake

For unlimited access to Class Notes, a Class+ subscription is required.

Document Summary

Tangible assets that will provide future economic benefits, will last for greater than 1 year, are held for use in production, administration or for rental purposes, and are not for sale in ordinary course of business. Components are disclosed separately based on whether they are tangibly different, have different useful lives, or different patterns of use (e. g. land, buildings, machinery and equipment, office equipment: calculating cost. The basic test as to what costs get included or excluded is the following. Any reasonable expense that is incurred to bring an asset to its intended use gets included in the cost of that capital asset. Examples of costs that would be included in the cost of a capital asset (in addition to its invoice cost) are: Non-refundable sales taxes (recall gst is usually refundable) Asset additions capitalize and amortize over useful life.

Related Questions

Read the 2015 annual report of Air France â KLM and answer the 20 questions asked regarding the accounting issues. Link is provided below:

http://www.airfranceklm.com/sites/default/files/publications/afkl_registration_doc_2015.pdf

1. Air France-KLM reports âConsolidated statement of recognized income and expensesâ for the year ended December 31, 2015. If this statement was a U.S. GAAP statement, what would be the title of this statement?

a. Consolidated statement of total net income

b. Consolidated statement of other comprehensive income

c. Consolidated statement of comprehensive income

d. Consolidated statement of recognized net income

2. What method does Air France-KLM use for the Statement of Cash Flows?

a. Indirect method

b. Direct method

c. Gross method

d. Net method

3. The basic and diluted earnings per share for the year ended December 31, 2015, indicates that Air France-KLM has:

a. no convertible debts.

b. some dilutive securities.

c. no preferred stocks.

d. some treasury stocks.

4. What method is used to account for investments in companies over which Air France-KLM can âexercise significant influence on financial and operating policy decisions?â

a. Cost method

b. Liability method

c. Equity method

d. Fair value method

5. Sale of passenger tickets is accounted for at the time of ticket sale as:

a. Sales revenue

b. Deferred revenue

c. Contingent asset

d. No recognition

6. How does Air France account for business combination costs other than those related to the issuance of debt or equity securities?

a. Expensed as incurred

b. Capitalized as incurred

c. Included in goodwill

d. Used to offset fair value of the acquisition

7. Which of the following is not an âaccumulated other comprehensive incomeâ item among those reported in the âreserves and retained earningsâ in the 2015 consolidated balance sheet of Air France-KLM?

a. Available for sale securities reserves.

b. Derivatives reserves.

c. Legal reserves.

d. Pension defined benefits reserves.

8. What is the carrying amount of investments in debt and equity securities that are classified as available-for-sale?

a. Fair value Cost

b. Amortized cost

c. Lower of cost or market

9. Inventories are carried at:

a. The lower of the first-in-first-out cost or net realizable value.

b. The first-in-first-out cost.

c. The lower of the weighted-average cost or net realizable value.

d. The weighted-average cost.

10. Air France-KLM classifies its frequent flyer programs as:

a. Noncurrent liability

b. Current liability

c. Current asset

d. Other debt

11. The followings are included in Air France-KLMâs intangible assets, except for:

a. Trademarks

b. Leased aircraft

c. Customer relationships

d. Slots for takeoff and landing

12. Air France-KLM reports bank overdrafts as:

a. A contra account to cash and cash equivalents.

b. A current liability.

c. An expense.

d. A bank deposits in transit.

13. Which method does Air France-KLM use to record depreciation expense for its flight equipment?

a. The activity-based method.

b. The sum-of-yearsâ-digit method.

c. The straight-line method.

d. The group method.

14. Which accounting standards does Air France-KLM use?

a. U.S. GAAP

b. French GAAP

c. Netherlands GAAP

d. International Financial Reporting Standards

15. As of December 31, 2015, what assets are held for sale?

a. Land

b. Aircraft

c. Equipment

d. Buildings

16. Which of the following is included in âincome from operating activitiesâ but not in âincome from current operations?

a. Sale of aircraft equipment

b. Research and development costs

c. Bad debt expense

d. Interest revenue

17. Which of the following is not true about accounting treatment for the overhaul cost of major airframe and engine?

a. The cost is treated as separate asset component.

b. The cost is capitalized.

c. The cost is depreciated over the remaining useful life.

d. The cost is expensed as incurred.

18. How are financial assets accounted for if the Air France-KLM intends to sell them in the near future to realize capital gains?

a. At fair value with fair value changes recognized in the current period profit and loss

b. At fair value with fair value changes recognized as other comprehensive income

c. At cost with no recognition of fair value changes

d. At amortized cost with no recognition of fair value changes

19. Which of the following is not true about impairment test?

a. Tangible fixed assets, intangible assets, goodwill, and other assets with indefinite useful life are subject to an impairment test.

b. The impairment test is done at least once a year.

c. Recoverable value is the lower of the net realizable value and value in use.

d. The value in use is determined according to the discounted future cash flow method.

20. Which of the following is not an âother non-current income and expensesâ item?

a. Restructuring costs

b. Gains and losses on disposal of shares available for sale

c. Gains and losses on disposal of subsidiaries and affiliates

d. Gains and losses on sale of trading securities

Part A

(a) How does the materiality of a condition that might lead to a departure affect the auditorâs choice of audit opinions? Discuss in detail naming the various types of audit opinions that may be issued given the different amounts of misstatements detected. (10 marks)

(b) For each of the following independent situations, indicate the type of audit report you would issue and provide your reasons. You may assume that each item is material. (10 marks)

(i) On 2 January 2017, the Hot Wheels Auto Parts Limited received a notice from its primary supplier that, effective immediately, all wholesale prices would be increased by 10%. On the basis of this notice, Hot Wheels Auto Parts revalued its 31 December 2016 inventory to reflect the higher costs. The inventory constituted a material proportion of total assets; the effect of the revaluation was material to current assets but not to total assets. The increase in valuation is adequately disclosed in the notes to the financial statements.

(ii) Your client holds a significant investment in Iraq. Due to recent political instability sparked off by a series of terrorist acts by the militants, Iraqâs communication with the outside world has been completely cut-off. You are thus unable to obtain sufficient and appropriate evidence regarding your clientâs investment in Iraq.

Part B

During an examination of financial statements, an auditor needs to verify managementâs assertions that are part of the financial statements. In doing so, the auditor must choose the quality and quantity of evidence, and the timing of the tests to be performed.

(a) Describe five factors that influence the quality or appropriateness of audit evidence. (5 marks)

(b) Why is it necessary to obtain corroborating evidence for inquiry and for observation? (5 marks)

(c) Describe the highest quality form(s) of evidence an auditor would normally obtain to verify each of the following assertions. Be sure to state the type of audit evidence/audit procedure technique being used, e.g. inquiry. (10 marks)

(i) ownership of share certificates held in a safe deposit box

(ii) valuation of gross trade accounts receivable

(iii) completeness of additions of fixed assets

(iv) validity of trade accounts payable

(v) valuation of finished goods inventory

Part C

An auditor is required to obtain sufficient understanding of each element of a companyâs internal control system in order to properly plan the audit of the companyâs financial statements and to assess control risk for the assertions included in the account balances.

How does the quantity of evidence differ between procedures to obtain an understanding of internal control and tests of internal controls? (4 marks)

(b) Distinguish between a compliance/reliance strategy and a substantive strategy. (6 marks)

(c) For each of the following, give an example of a physical control the client can use to protect the asset or record: (5 marks)

(i) cash received by retail clerks

(ii) accounts receivable records

(iii) raw material inventory

(iv) manufacturing equipment

(v) marketable securities

(d) Explain what is meant by independent checks on performance! (5 marks)

performance review and give two specific examples.

raspberryferret514

Trump Pump Company (FIN5303-01; Spring 2017)

Although you were hired as a financial analyst after completing your MBA, your first assignment at Trump Pump is with the firmâs marketing department. Part of the âMake Great Pumps Even Greater Againâ campaign includes your boss lending you to the marketing department to help them develop some analytical procedures that the sales force can use to demonstrate the financial benefits of buying Trump Pumpâs products. Trump pumps cost more because they use no parts from Mexico. To offset the price, each pump comes a coupon for a free tax credit on the next purchase from Trump Pump, a round of golf a Mar a Lago and a 14 ct. gold leaf âTrumpâ logo sticker for the front office door.

Trump Pump manufactures pump systems that are used in a wide variety of applications including water distribution, sewage treatment, petroleum refining, and pipeline transmission. The complete systems include sophisticated pumps, sensors, valves, and control units that continuously monitor the flow rate and the pressure along a line and automatically adjust the pump to meet pre-set pressure specifications. Most of Trump Pumpâs systems are made up of standard components, and most complete systems are priced from $600,000 to $1,000,000. Because of the technical nature of the products, the majority of Trump Pumpâs salespeople have a background in engineering, not finance and marketing.

As you think about this assignment, you quickly come to the conclusion that the best way to âsellâ a system to a cost-conscious customer is to conduct a capital budgeting analysis to demonstrate the cost effectiveness of the system. Further, you conclude that the best way to begin is with an analysis for one of Trump Pumpâs actual customers.

From discussions with the firmâs salespeople, you determine that a proposed sale to the Oklahoma City Water Department is perfect to use as an illustration. OKC Water is considering the purchase of one of Trump Pumpâs standard water pump systems which costs $850,000, including delivery. It will cost OKC Water another $8,000 transportation and $40,000 to install the equipment. This expense (transportation and installation) will be added to the price of the equipment to determine the depreciable basis of the system. Also, the new pump will require an increase in working capital of $35,000. OKC Water will depreciate the pump system to zero using straight-line method for six years. They plan to sell the system at the end of nine years for $450,000. After the first year, OKC Water will be required to pay $11,000 per year for a service and maintenance contract with payments at the beginning of each year.

The system from Trump Pump would replace a pump that OKC Water is now using. That pump has been depreciated to a book value of zero but will be sold for $70,000 if the new system is purchased. OKC Water recently spent $70,000 just one year ago to upgrade their existing pump system. (OKC Water believes the $55, 000 for repairs should be a cost to the present evaluation because it did not increase the salvage value of their current pump.) By replacing the old pump, OKC Water should save $380,000 annually in pre-tax operating costs. OKC Water estimates that its cost of capital is 12% and its tax rate is 34%. If purchased, the new pump will be housed in a building owned by OKC Water and currently leased to a fishing guide service which pays OKC Pump $26,000 at the beginning of each year to use the building. Because of the noise, the fishing guide service will have to move out of the building.

After developing a capital budgeting analysis for the pump system, write a description of the analysis to be used by Trump Pump sales representatives to help sell the system to OKC Water. Remember that the analysis will be used to help non-finance sales representatives sell equipment to non-finance customers. The analysis must be understandable and clear. Show each step and calculation such that an intelligent person not trained in finance can understand. Also, include a spreadsheet that calculates your results (template included). Calculate Payback Period, Net Present Value, Internal Rate of Return, Profitability Index, and Modified Internal Rate of Return.

What is the projectâs NPV? Could the NPV of this project be different for OKC Water than for some other company if both companies expect the same cash flows? Explain

What is the projectâs IRR? Assuming the same cash flows, could the IRR for this project differ for OKC Water compared to another company? Explain.

Calculate the payback period. What are the disadvantages of the payback period? Does payback period provide any useful information regarding capital budgeting decisions?

Calculate the projectâs MIRR. Why is MIRR considered to be superior to the IRR? How does MIRR differ from IRR?

Calculate the projectâs Profitability Index.

Should OKC Water purchase the new pump system? Why?

plumgerbil49

AFM123 Lecture Notes - Lecture 1: Capital Asset, 6 Years, A Question Of Balance

Document Summary

Get access

Related Documents

AFM123 Lecture 5: WEEK 5

AFM123 Lecture Notes - Lecture 5: Canada Revenue Agency, 6 Years, Capital Asset

AFM123 Lecture Notes - Lecture 7: Capital Cost, Income Statement

Related Questions