Day 37 in MIT Sloan Fellows Class 2023, Financial Accounting
In this lecture, we need to use GAAP certified by FASB and enforced by SEC.
There are a couple of differences between GAAP and IFRS, a different standards accepted by the majority of international companies and countries outside the US.
As the major difference, only GAAP allows companies to use LIFO to evaluate inventory.
Under inflation, LIFO tends to underestimate inventory value, thus evaluate COGS much higher. So LIFO has a significant tax reduction effect and that's why a lot of American companies prefer LIFO to FIFO or other methodology.
What we learned
Here is what I have learned.
- B/S, I/S
- Revenue recognition
- A/R, ADA
- Depreciation
- Inventory evaluation(LIFO, FIFO)
- Cashflow(CFO, CFI, CFF)
- Shareholders' Equity
- Passive investment
- Goodwill
Some minor topics really appealed to me such as Marketable securities and APIC.
Terminologies
- On account: 掛け
- Amortization: 償却 for intangible asset
- Depreciation: 償却 for tangible asset
- Impairment: 減損
- Proceeds
Key Formula
- Gross Profit Margin = (Revenue – COGS)
- Revenue
- Operating Income Margin = (Revenue – Operating Expenses)
- Revenue
- ROE = Net Income / Average (Equity)
- ROA = Net Income / Average (Assets)
- Profit Margin = Net Income / Sales
- Leverage = Average (Assets) / Average (Equity)
- Additional Formulas:
- ADA(end) = ADA(start) + BDE – Uncollectible
- AR(end) = AR(start) + Sales – Write Off – Collectibles
- NI (FIFO) = NI (LIFO) + (1 – Tax rate) x Change in LIFO reserve
- FIFO = LIFO + LIFO reserve
- LIFO Reserve = Inventory (FIFO) – Inventory (LIFO)
- Inventory (FIFO) = Inventory (LIFO) + LIFO Reserve
- Cost of Revenue under FIFO = LIFO Cost – Change in LIFO Reserve
- Goodwill = Purchase price – Fair Value of net assets acquired
- Goodwill impairment = Carrying Value (aka BV) – Fair Value of the reporting unit
- Working Capital = Current Assets – Current Liabilities
- Accrual = Effect on Net Income – Effect on CFO (on aggregate: Accruals = Net Income – CFO)
- Total Useful Life = Gross PPE / Depreciation Expense
- Remaining Years = Net PPE / Depreciation Expense
- Current Age = Useful Life – Remaining Years
- Beginning inventory + Additions = COGS + Ending Inventory
- Deferred tax asset for depreciation expense
