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(1.1)Accounting (Single-Step Scenarios)

Terms in this set (16)

Income Statement: No changes (since this doesn't affect taxes and since the shares will be around for years to come).
Cash Flow Statement: Cash Flow from Financing is up by $100 due to this share issuance, so cash at the bottom is up by $100.
Balance Sheet: Cash is up by $100 on the Assets side and Shareholders' Equity (Common Stock & APIC) is up by $100 on the other side to balance it.
Intuition: This one does not affect taxesand does not correspond to the current period, so it doesn't show up on the IS - just like similar items, all that changes is Cash and then something else on the Balance Sheet.
10. Let's say we have the same scenario, but now instead of issuing $100 worth of stock to investors, the company issues $100 worth of stock to employees in the form of Stock-Based Compensation. What happens?
Income Statement: You need to record this as an additional expense because it's now a tax-deductible and a current expense - Pre-Tax Income falls by $100 and Net Income falls by $60 assuming a 40% tax rate.
Cash Flow Statement: Net Income is down by $60 but you add back the SBC of $100 since it's a non-cash charge, so cash at the bottom is up by $40. Balance Sheet: Cash is up by $40 on the Assets side. On the other side, Common Stock & APIC is up by $100 due to the Stock-Based Compensation, but Retained Earnings is down by $60 due to the reduced Net Income, so Shareholders'
Equity is up by $40 and both sides balance.
Intuition: This is a non-cash charge, so like all non-cash charges it impacts the IS and affects one Balance Sheet item in addition to Cash and Retained Earnings - in this case, it flows into Common Stock & APIC because that one reflects the market value of stock at the time the stock was issued. The cash increase here simply reflects the tax savings.
First, note that this question does not apply to you if you're outside the US because IFRS does not permit the use of LIFO. But you may want to read this anyway because it's good to know in case you ever work with US-based companies.
LIFO stands for "Last-In, First-Out" and FIFO stands for "First-In, First-Out" - they are 2 different ways of recording the value of Inventory and the Cost of Goods Sold (COGS).
With LIFO, you use the value of the most recent Inventory additions for COGS, but with FIFO you use the value of the oldest Inventory additions for COGS.
Here's an example: let's say your starting Inventory balance is $100 (10 units valued at $10 each). You add 10 units each quarter for $12 each in Q1, $15 each in Q2, $17 each in Q3, and $20 each in Q4, so that the total is $120 in Q1, $150 in Q2, $170 in Q3, and $200 in Q4.
You sell 40 of these units throughout the year for $30 each. In both LIFO and FIFO, you record 40 * $30 or $1,200 for the annual revenue.
The difference is that in LIFO, you would use the 40 most recent Inventory purchase values - $120 + $150 + $170 + $200 - for the Cost of Goods Sold, whereas in FIFO you would use the 40 oldest Inventory values - $100 + $120 + $150 + $170 - for COGS.
As a result, the LIFO COGS would be $640 and FIFO COGS would be $540, so LIFO would also have lower Pre-Tax Income and Net Income. The ending Inventory value would be $100 higher under FIFO and $100 lower under LIFO.
If Inventory is getting more expensive to purchase, LIFO will produce higher values for COGS and lower ending Inventory values and vice versa if Inventory is getting cheaper to purchase.