Accounting for Fun and Profit: A Guide to Understanding Advanced Topics in Accounting by Lawrence A. Weiss

Author:Lawrence A. Weiss [Weiss, Lawrence A.]
Language: eng
Format: azw3
Publisher: Business Expert Press
Published: 2016-12-02T05:00:00+00:00

Thus an analyst can estimate a FIFO value from the LIFO information and the LIFO reserve presented in the Notes to the Financial Statements. If the LIFO reserve goes down, it may be due to the firm dipping into the LIFO layers. If the amount is material, the firm must disclose it in the notes.

The Bottom Line

This chapter briefly reviewed accounting for EPS and the price–earnings ratio, foreign currency translations, comprehensive income, fair value accounting, and how to adjust from LIFO to FIFO. The brief presentation is meant to provide the reader with an understanding of how accountants treat each topic and how they should be interpreted.

The next chapter provides a review of financial analysis with two detailed examples and is somewhat of a capstone to the first five chapters. It also includes a discussion on whether models using accounting data can successfully predict whether a firm will be able to meet its future obligations as well as determine the quality of accounting earnings.

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1Note that most ratios discussed in a firm’s annual report are not audited. This is why it is critical for an analyst to prepare her own ratios; it is the only way to know what definitions are being used and to ensure consistency.

2As an aside, some analysts claim that a buying opportunity exists when the market-to-book ratio falls and approaches one. Although this may be true in some instances, it is somewhat questionable. Remember, a market-to-book ratio of one means the market believes there is no value in the firm’s human capital and distribution networks. I submit that a firm without human capital is a dubious investment.

3If the amount remained unpaid at year end, the payable would be adjusted to the year-end exchange rate and the gain or loss would be recorded on the Income Statement. (The inventory value would not be adjusted.)

4It must be a firm commitment (e.g., a future contract purchase) and designated to the specific transaction.

5Accounting Standards Codifications (ASC) 220 effective for fiscal years beginning December 15, 1997.

6Accounting Standards Codifications (ASC) 820 effective for fiscal years beginning November 15, 2007.

7This chapter assumes the reader is familiar with FIFO (inventory costed on a “first-in-first-out” basis) and LIFO (inventory costed on a “last-in-first-out” basis). If not, the reader is encouraged to review a basic accounting book (e.g., Weiss, Lawrence A., 2016, Accounting for Fun and Profit: A Guide to Understanding Financial Statements, BEP).

8This remains true today and is, to this author’s knowledge, the only case in the United States where a firm’s tax accounting choice is linked to the firm’s public reporting choice (i.e., LIFO conformity, IRS Code 472-2(e)).

9See: Gary C. Biddle and Frederick W. Lindahl (Autumn 1982). “Stock Price Reactions to LIFO Adoptions: The Association between Excess Returns and LIFO Tax Savings,” Journal of Accounting Research 20, no. 2.

10See: Kleinbard, Edward D., George A. Plesko, and Corey M. Goodman (October 16, 2006). “Is it Time to Liquidate LIFO,” Tax Notes 113, no. 3, pp. 237–253 and http://ww2.cfo.com/accounting-tax/2006/07/the-battle-to-preserve-lifo/

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