M7: Investments

1
M7 Investments

• Passive (lt20)market value if known
• Tradinggains/losses to income statement
• Available for saleOther Cons. Income, Equity
• Operating (gt20 lt50)Equity Method
• Add share of income less share of dividends
• Majority (gt50)Consolidateadd together as if
  one company
• Goodwillpayment for future earnings and control
• Purchase price minus FMV of Assets
• Written down if FMV lt BV
• Discontinued Operationsreported separately

2
M8 Liabilities

• ALOE
• Liabilitiesall probable estimable
• APSuppliers, AP Turnover (CGS/avg AP), Leaning
  on the Trade
• AccruedEmployees, interest, warranties
• Possible INCOME misstatements (ethics)
• Big Bath

3

• Financial Obligations
• Notes Payableoften from banks
• Bonds Payablecovenants
• Discountrecog. interest gt face
• Premiumrecog. interestltface
• Gain/loss on repurchase
• Credit ratingsMoodys, SP, Fitch
• Business/Financial risks
• liquidity, solvency, earnings

4
M9 Owners Financing

• Preferred Stockdividends, liquidation,
  restrictions on management
• Often issued in acquisitions
• Equity Carve-outs
• Sell-offsell for cash
• Spin-offissue shares of sub as dividend
• Split-offtrade shares for common stock
• Convertible debt/preferred stockdilutes owners
  upside
• Foreign currencygains or losses as US currency
  losses or gains valuereport in Other comp.
  Income in owners equity section

5
M10 Off Balance Sheet

• Window dressingmaking the balance sheet look
  better by moving liabilities (assets)
• Leases Rental agreements
• Operating (lt75 life,lt90 PV)expense as paid
• Capitalasset (depreciation), liability
  (interest)
• Pensionsdefined contribution, def. benefit
• Show as net of Assets minus Obligation
• Asset--BBGainsContr-Benef paidEB
• ObligationBBSCIntActurial G/LEEAmort
• Special Purpose Entities (move assets/liabilities)
  
• Qualifiedmust be independent, bankruptcy remote

6
M14 Costs

• Cost behaviorfixed, variable, mixed, step
• FC can be committed (depreciation) or
  discretionary (advertising)
• Cost estimation FCVCUnits
• VCDif. in Costs/Dif. In Units
• FCTotal Costs VCUnits
• Cost terms
• Production unit, batch, product, facility
• Customer units, order, customer, market

7
M15 CVP Analysis

• CVP is used to determine for a given volume the
  costs, revenues, and profits
• Assumptions Fixed/Variable costs (linear),
  relevant range, constant mix or single product,
  single volume measure

8

• Difference in income statements used
• Rev-VCCM-FCIBT
• BEFC/CMU, Q(FCRI)/CMU
• Before Taxes After Tax/(1-Tax Rate)
• Operating Leverage CM/IBT
• Margin of Safety Ratio (EV-BE)/EV