Financial Statement Analysis Acct 592 July 15, 2003

Revenue Vs. Income Measurement options During production? At completion of production? At time of sale Vs. contract signing? At cash collection?

Compounding Factors FASB –Earnings Process is completed and –Monies are realizable Realization Vs. Recognition Right of Return –software and publishing –complication for e-commerce

Revenue Warning Signs Uncollectible accounts receivable High rate of returned goods Increased warranty expenditures

Long-term Construction Projects Revenue when earned? –At completion of the project? Revenue as earned? –During project? Construction in-process (CIP/WIP) –Percent of profit associated with percent of work completed

Matching Principle Statement of Financial Accounting Concepts –The FASB conceptual framework Match Expenses with Revenues Question of Recognition, not Realization

Inventory Management FIFO - first in, first out LIFO - last in, first out LCM - lower of cost or market LIFO Reserve and LIFO liquidation

Depreciation Methods Straight-line Method Accelerated Methods –Declining Balance –Sum-of-Years’ Digits

Intangibles Goodwill Patents Copyrights R&D Software Development Costs

Goodwill Rather than being amortized to earnings, new rules call for goodwill to be reviewed for impairment. Thus, it would be recorded and expensed only when book value exceeds fair value.

Goodwill (con’t) Record goodwill as an asset No longer amortize goodwill Examine goodwill each period Mark BV of GW to perceived FMV of GW Therefore, only record amortization expense occasionally