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Category: Level I Financial Reporting and Analysis
Tax Bases
The tax base (it used to be tax basis, but somehow it changed to tax base; I think the reason is that the plural for each word is “bases” (pronounced <base-eez> and <base-ezz>, respectively), that someone mistook “bases” (plural of “basis”) to be “bases” (plural of “base”), and the error caught on) of an asset…
Accounting Taxes vs. Tax Return Taxes
One of the reasons that Level I candidates find income taxes confusing is that the Income Tax Expense shown on a company’s income statement generally is not equal to the tax liability that is shown on their income tax return. The fact that they are different from each other is a little easier to understand…
Income Taxes – General
I debated for a long while whether to write a single article about taxes, or to write separate articles about each of the bits that go into taxes I think that separate articles is the way to go. So this is the general article that ties it all together, and provides definitions for all of…
FCFF vs. FCFE
Occasionally, you will need to know how to compute free cash flow to equity (FCFE) given free cash flow to the firm (FCFF), or how to compute FCFF given FCFE. The formulae are relatively easy, but for sake of completeness I thought that I’d write a short article on them Recall that the formula for…
Free Cash Flow to Equity (FCFE)
The idea of free cash flow is fairly straightforward: it’s cash flow that a company may use in any way it chooses (within reason, of course; for example, we’ll consider only legal uses here). There are several types of (and, consequently, definitions for) free cash flow. In this article, I’ll describe one of those: free…
Free Cash Flow to the Firm (FCFF)
The idea of free cash flow is fairly straightforward: it’s cash flow that a company may use in any way it chooses (within reason, of course; for example, we’ll consider only legal uses here). There are several types of (and, consequently, definitions for) free cash flow. In this article, I’ll describe one of those: free…
Conservative Accounting Methods vs. Aggressive Accounting Methods
No discussion of conservative methods vs. aggressive methods would be complete without a clear definition of what we mean by these two categories of methods. Therefore, let’s start there: Conservative accounting methods are those that report lower net income in the current period, and (potentially) higher net income in future periods. Aggressive accounting methods are…
Inventory Methods: FIFO vs. LIFO vs. Average Cost vs. Specific Identification and Periodic vs. Perpetual
I apologize in advance: this article’s long. Every inventory method has two important characteristics: How will costs be assigned to cost of goods sold (COGS) and ending inventory (EI)? When will those costs be assigned to COGS and EI? There are four possible answers to the first question: First-in, first-out (FIFO) Last-in, first-out (LIFO) Average…
Simple Cash Flow Statement
A useful skill to develop is that of writing out a quick, simple, general cash flow statement. Here is an example that you should be able to reproduce in 10 – 15 seconds during the exam: \begin{align}&\ \ \ \ \ \ Cash\ Flow\ from\ Operations\ (CFO)\\ &+\ Cash\ Flow\ from\ Investing\ (CFI)\\ &\underline{+\ \…
Simple Balance Sheet
A useful skill to develop is that of writing out a quick, simple, general balance sheet. Here is an example that you should be able to reproduce in 10 – 15 seconds during the exam: \begin{align}&Current\ Assets\\ &PP\&E\\ &\underline{Intangible\ Assets}\\ &=\ Total\ Assets\\ \\ &Current\ Liabilities\\ &\underline{\ Long-term\ Liabilities}\\ &=\ Total\ Liabilities\\ \\ &Capital\ Stock\\…