Financial Reporting and Analysis
　　Inventories, Long-lived Assets, Income Taxes, and Non-current Liabilities
　　The readings in this study session examine the financial reporting for specific cat?egories 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 state?ments 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 sales) 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 effect 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 differ?ences in taxes reported in financial statements and taxes reported on tax returns. The reading “Income Taxes” describes several issues relating to deferred taxes.
　　Non-current liabilities affect a company’s liquidity and solvency and have con?sequences for its long-term growth and viability. The notes to the financial state?ments must be carefully reviewed to ensure that all potential liabilities (e.g., leasing arrangements and other contractual commitments) are appropriately *uated for their conformity to economic reality. Adjustments to the financial statements may be required to achieve comparability when *uating several companies.
　　READING ASSIGNMENTS
　　Reading 29 Inventories by Michael Broihahn, CFA
　　Reading 30 Long-lived Assets by Elaine Henry, CFA, and Elizabeth A. Gordon
　　Reading 31 Income Taxes International Financial Statement Analysis, by Thomas R. Robinson, CFA, Jan Hendrik van Greuning, CFA, Elaine Henry, CFA, and Michael A. Broihahn, CFA
　　Reading 32 Non-current (Long-term) Liabilities by Elizabeth A. Gordon and Elaine Henry, CFA
　　LEARNING OUTCOMES
　　READING 29. INVENTORIES
　　The candidate should be able to:
　　a distinguish between costs included in inventories and costs recognized as expenses in the period in which they are incurred;
　　b describe different inventory valuation methods (cost formulas);
　　c calculate cost of sales and ending inventory using different inventory valuation methods and explain the effect of the inventory valuation method choice on gross profit;
　　d calculate and compare cost of sales, gross profit, and ending inventory using perpetual and periodic inventory systems;
　　e compare cost of sales, ending inventory, and gross profit using different inven?tory valuation methods;
　　f describe the measurement of inventory at the lower of cost and net realisable value;
　　g describe the financial statement presentation of and disclosures relating to inventories;
　　h calculate and interpret ratios used to *uate inventory management.
　　READING 30. LONG-LIVED ASSETS
　　The candidate should be able to:
　　a distinguish between costs that are capitalized and costs that are expensed in the period in which they are incurred;
　　b compare the financial reporting of the following types of intangible assets: pur?chased, internally developed, acquired in a business combination;
　　c describe the different depreciation methods for property, plant, and equipment, the effect of the choice of depreciation method on the financial statements, and the effects of assumptions concerning useful life and residual value on deprecia?tion expense;
　　d calculate depreciation expense;
　　e describe the different amortization methods for intangible assets with finite lives, the effect of the choice of amortization method on the financial state?ments, and the effects of assumptions concerning useful life and residual value on amortization expense;
　　f calculate amortization expense;
　　g describe the r*uation model;
　　h explain the imparment of property, plant, and equipment and intangible assets;
　　i explain the derecognition of property, plant, and equipment and intangible assets;
　　j describe the financial statement presentation of and disclosures relating to property, plant, and equipment and intangible assets;
　　k compare the financial reporting of investment property with that of property, plant, and equipment.
　　READING 31. INCOME TAXES
　　The candidate should be able to:
　　a describe the differences between accounting profit and taxable income, and define key terms, including deferred tax assets, deferred tax liabilities, valuation allowance, taxes payable, and income tax expense;
　　b explain how deferred tax liabilities and assets are created and the factors that determine how a company’s deferred tax liabilities and assets should be treated for the purposes of financial analysis;
　　c calculate the tax base of a company’s assets and liabilities;
　　f explain the motivations for leasing assets instead of purchasing them;
　　g distinguish between a finance lease and an operating lease from the perspec?tives of the lessor and the lessee;
　　h determine the initial recognition, initial measurement, and subsequent mea?surement of finance leases;
　　i compare the disclosures relating to finance and operating leases;
　　k compare the presentation and disclosure of defined contribution and defined benefit pension plans;
　　l calculate and interpret leverage and coverage ratios.
　　d calculate income tax expense, income taxes payable, deferred tax assets, and deferred tax liabilities, and calculate and interpret the adjustment to the finan?cial statements related to a change in the income tax rate;
　　e *uate the impact of tax rate changes on a company's financial statements and ratios;
　　f distinguish between temporary and permanent differences in pre-tax account?ing income and taxable income;
　　g describe the valuation allowance for deferred tax assets-when it is required and what impact it has on financial statements;
　　h compare a company’s deferred tax items;
　　i analyze disclosures relating to deferred tax items and the effective tax rate rec?onciliation, and explain how information included in these disclosures affects a company’s financial statements and financial ratios;
　　j identify the key provisions of and differences between income tax accounting under IFRS and U.S. GAAP.
　　READING 32. NON-CURRENT (LONG-TERM) LIABILITIES
　　The candidate should be able to
　　a determine the initial recognition, initial measurement and subsequent measure?ment of bonds;
　　b describe the effective interest method and calculate interest expense, amortisa?tion of bond discounts/premiums, and interest payments;
　　c explain the derecognition of debt;
　　d describe the role of debt covenants in protecting creditors;
　　e describe the financial statement presentation of and disclosures relating to debt;
　　　
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