APSN CFA 2013 Level 1 Study Session Assets Inventories, Long-lived Assets, Income Taxes, and Non-current Liabilities

by Sam Gottlieb

The readings in this study session examine the financial reporting for specific categories of assets and liabilities. Analysts must understand the effects of alternative financial reporting policies on financial statements and ratios and be able to execute appropriate adjustments to enhance comparability between companies. In addition, analysts must be alert to differences between a company’s reported financial statements and economic reality.The description and measurement of inventories require careful attention because investment in inventories is frequently the largest current asset for merchandising and manufacturing companies. For these companies, the measurement of inventory cost (i.e., cost of goods sold) is a critical factor in determining gross profit and other measures of profitability. Long-lived operating assets are often the largest category of assets on a company’s balance sheet. The analyst needs to scrutinize management’s choices with respect to recognizing expenses associated with these operating assets because of the potentially large impact such choices can have on reported earnings and the opportunities for financial statement manipulation.A company’s accounting policies (such as depreciation choices) can cause differences in taxes reported in financial statements and taxes reported on tax returns. The reading “Income Taxes” discusses several issues relating to deferred taxes.Non-current liabilities affect a company’s liquidity and solvency and have consequences for its long-term growth and viability. The notes to the financial statements must be carefully reviewed to ensure that all potential liabilities (e.g., leasing arrangements and other contractual commitments) are appropriately evaluated for their conformity to economic reality. Adjustments to the financial statements may be required to achieve comparability when evaluating several companies.

73 pages, Kindle Edition

First published October 2, 2012