CFALEVEL1

STUDYSESSION7,8,9,10

FRA

Copyright (2014), CFA Institute.

Reproduced and republished with permission from CFA Institute. All rights reserved

22. FSAIntroduction

a. Roles of FRand FSA

Role ofFiR Provide info about

Fin position

Fin performance of an entity that is useful to a wide range of users in making economic decisions

Changes in fin position

Roles of FSA

Use info in a company's Fin StatementsUse other relevant infoTo evaluate past, current, and prospective performance and fin position

To make economic decisions. E.g.:

Invest in securitiesRecommend to investorsWhether to extend trade, bank creditAnalysts: form opinions about company's ability to earn profits and generate CF

b. Roleof key FS

Income Statement(financial performance)

RevenuesExpensesGains and Losses

Balance Sheet (financial position) (A=L+OE)AssetsLiabilitiesOwners' equity

CF statementOperating CFInvesting CFFinancing CF

Statement of changes in Owners' equity

c. Importance of

FS notes(footnotes)

accounting methods, assumptions, estimates

Additional items:

acquisitions or disposalslegal actionsemployee benefit planscontingencies and commitmentssignificant customerssales to related partiessegments of firm

are audited

Supplementaryschedules

not auditedoperating income or sales by region or business segmentsreserves for an oil and gas companyinfo about hedging activities and financial instruments

MD&A

assessment of financial performance and condition of acompany from the perspective of its management

Publicly held companies in USResults from operations, with trends in sales and expensesCapital resources and liquidity, with trends in CFGeneral business overview

discuss accounting policies that require significant judgements by managementdiscuss significant effects of trends, events, uncertaintiesliquidity and capital resource issues, transactions or events with liquidity implicationsDiscontinued operations, extraordinary items, unusual or infrequent eventsExtensive disclosures in interim financial statementsdisclosure of a segment's need for CF or its contribution to revenues or profit

d. Auditsof FS

= independent review of an entity's FS

objective: auditor's opinion on fairness and reliability of FS, "no material errors"

Standardauditor'sopinion

3 partsIndependent review though FS prepared by mgmt and are its responsibilityReasonable assurance of no material errors (follow generally accepted auditing standards)FS prepared in accordance with accepted accounting principles, reasonable accounting principles and estimates, consistency

Explanatory paragraph: when a material loss is probable but amount cannot be reasonably estimated. Uncertaintiesmay relate to the going concern assumption --> signal serious problems and need close examination by analyst(under US GAAP): Opinion on internal controls

3 types of OpinionsUnqualified opinion: auditor believes statements are free from material omissions and errorsQualified opinion: if statements make any exceptions to accounting principles --> explain these exceptionsAdverse opinion: if statements are not presented fairly or are materially nonconforming with accounting standards

e. Other info sourcesthan annual FS andsupplementary info

Interim reports Quarterly or Semiannual reports (update FS and footnotes, but not audited)

SEC filings from EDGAR

Proxy statementsto shareholders when there are matters that require a shareholder voteFiled with SECAbout election of board members, compensation, management and qualifications and issuance of stock options

Corporate reports and press releases Viewed as PR or sales materials

f. Steps in FSAframework

State the objective and context

Gather data

Process data

Analyze and interpret data

Report the conclusions or recommendations

Update the analysis

a

23. FinancialReportingMechanics

a. FinStatementelementsandaccounts

5 Elements

Assets

Liabilities

Owners' equity

Revenue

Expenses

b. Accountingequation

Basic form A=L+OW

Extended forms A=L+CC+Ending Retained EarningsA=L+CC+Beginning RE+R-X-D

c. Recordingprocess

Double entry accounting

d. Accrualsand otheradjustments

Accruals

Unearned revenue

Accrued revenue

Prepaid expenses

Accrued expenses

Otheradjustments Historical vs Current costs --> Valuation adjustments

--> income statement or in "other comprehensive income

e. Relationship among IS, BS, CF, OE (p.23)

f. Flow of Info inAccounting system

General Journal (Journal entries)

General ledger (sort entries by account)

Initial trial balance-->adjusted trial balance

FSs

g. Use of results ofaccounting process insecurity analysis

a

1ACCOUNTING PROCESS: The traditional approach

Transaction evidenced by source document

Transaction analysed and recorded in journal

Debits and credits posted from journal to T account in general ledger

1

Balances in ledger accounts summarised in trial balance

Financial statements prepared from ledger information summarised in trial

balance

The journal Used to enter transactions into the Used to enter transactions into the

accounting records.

Date A/c title & explanation Ref Debit Credit

2

1 July Cash 10 000Vehicles 5 000

Equity 15 000Being owners investment in the business

The ledger and T accounts Transactions are posted from the Transactions are posted from the

journal to the ledger accounts.Cash

Date Explanation Amount Date Explanation Amount

1 July Equity 10 000

3 4

24. FinancialReportingStandards

a.Objective of Fin statementsImportance of reporting standards in security analysis and valuation

b. Role

Of standard-setting bodies(establishing standards) IASB (International Accounting Standards Board)

US FASB (Financial Accounting Standards Board)

Of regulatory authorities(enforcing standards)

IOSCO (International Organization of Securities Commissions)UK FSA- Financial Services Authority

US SEC- Securities andExchange Commission

Form S-1: registration statement prior to sale of new securitiesForm 10-K: annual financial statements (audited)Form 10-Q: quarterly financial statements (not audited)Form DEF-14A: proxy prior annual meetingForm 8-K: disclose material eventsForm 144: notify about issue of securities to qualified buyersForms 3,4,5: share ownership by officers and directors

c.

Status of global convergence of accounting standardsBarriers to developing one universallyaccepted set of financial reporting standards disagree

standard setting bodiesregulatory authorities

political pressures from business groups and others

d. IFRSframework

Objective of financial statements

Qualitativecharacteristics

Fundamentalcharacteristics

Relevanceinfo can influence users' decisionshave predictive value, confirmatory value (confirm prior expectations)Materiality is an aspect of relevance

Faithful representation complete, neutral (no bias), free from error

Enhancingcharacteristics

Comparability consistent among firms and time periods

Verifiability independent observers with same methods should obtain similar results

Timeliness info. available to decision makers before info is stale

Understandability

Requiredreportingelements

assets, liabilities, equity, income, expenses

Measurementbases

Historical cost: amount originally paid for the assetAmortized cost: historical cost adjusted for depreciation, amortization, depletion, impairmentCurrent cost: would have to pay today for the same assetRealizable value: amount for which firm could sell the assetPresent value: discounted future cash flowsFair value: 2 parties in an arm's length transaction would exchange the asset

Constraints cost-tradeoff of enhancing characteristicscannot capture non-quantifiable info (reputation, brand loyalty...)

Assumptions Accrual basisGoing concern

e. Generalrequirementsfor FinancialStatements

Required financial statements BS, IS, CFS, OE, Explanatory notes (incl. accounting policies)

Features forPREPARING

Fair (faithful) presentationGoing concern basisAccrual basisConsistencyMaterialityAggregationNo offsettingReporting frequency: at least annuallyComparative information for prior periods

Structure &content of FS

Classified balance sheetMinimum information is requiredComparative information for prior periods

f. IFRS vs.US GAAP

Financialstatementelements

PerformanceIASB: income+expensesFASB: Revenues, Expenses, Gains, Losses, comprehensive income

Asset definitionIASB: resource from which future economic benefit is expectedFASB: future economic benefit

"Probable" used by FASB in defining assets and liabilities

Values of assets to beadjusted upward

IASB: allowFASB: not allow

Reconciliationstatement Firms that list their shares in US but do not use US GAAP or IFRS --> required to reconcile FS with US GAAP

g.

Characteristics of a coherentfinancial reporting framework

Transparency full disclosure & fair presentation

Comprehensiveness include all types of transactions

Consistency similar transactions accounted for in similar ways

Barriers to creating acoherent financialreporting framework

Valuation

Standardsetting

Principles-based (IFRS) relies on broad framework

Rules-based (US GAAP before) specific guidance how to classify trx

Objectives oriented (US GAAP now) blend the other two

Measurementasset/liability approach

focuses on BS valuationstandard setters have used largely

revenue/expense approach focuses on IS

h. Importance of monitoring developmentsin financial reporting standards

www.iasb.org, www.fasb.org, www.cfainstitute.org/cfacentre

i. Evaluate companydisclosures of significantaccounting policies & estimates

In the footnotes & in MD&A (management judgment)new accounting standards--> 3 statements

standard does not applywill not affect the FS materiallyare still evaluating the effects of the new standards

a

25. UnderstandingThe IncomeStatement

a. IS

ComponentsRevenuesExpensesGross profit

Presentation formats

b,c. Revenuerecognition

General principles of

Accrual accounting unearned revenue

Revenue recognition

IASBFASB

SEC

evidence of arrangement btw buyer and sellerproduct delivered or service renderedprice is determined or determinableseller reasonably sure of collecting money

Applications

Long term contractsPercentage-of-completion methodCompleted-contract method

Installment salesCertain collectibility -> normal methodNot reasonably estimated collectibility -> installment methodHighly uncertain collectibility -> cost recovery method

Barter transactions Round trip transactions

Gross revenue reporting(vs. net revenue reporting)

primary obligatorbear inventory & credit riskability to choose supplierreasonable latitude to establish prices

Implications for Financial Analysis

d. Expenserecognition

Matchingprinciple

Inventories

Long-lived assetsDepreciationDepletionAmortization

Bad debt, warranty expenses estimation

Period costs Admin

Implications for Financial Analysis

e. Financial reportingtreatment and analysisof

Nonrecurring itemsDiscontinued operationsUnusual or infrequent itemsExtraordinary items

Changes in accountingstandards

Change in accounting principleChange in accounting estimatePrior-period adjustment

f. DistinguishOperating components

Nonoperating components

g. EPS

Capital structure SimpleComplex

Basic EPS Formula:Effect of: Stock dividends and Stock splits

Diluted EPSh.

Dilutive securitiesAntidilutive securities

Formula:Treasury stock method

i,j. Common size IS& financial ratios

l. Items excluded from IS but affectOE- other comprehensive income

FX translation gains and losses

Adjustments for minimum pension liability

Unrealized gainsand losses from CF hedging derivatives

Available-for-sale securities

k. Comprehensiveincome: e.g.. on page __

a

26. UnderstandingThe Balance Sheet

a. Elements

AssetsLiabilities

Equity

b1. Uses of BS in financial analysis

b2. Limitations of BSin financial analysis

Various bases for value (historical, amortized, fair)

Unreported assets (reputation, employees)

c. Formats of BS

2 common formats Account formatReport format

Classified BS

d. Classifying

Current vs.non current

Current assetsCurrent liabilitiesNon current assetsNon current liabilities

Liquidity-based presentation

Reporting noncontrolling/ minority interest

e. Measurement bases

Bases

Historical costFair valueReplacement costPV of future CF

Currentassets

Cash and cash equivalentAccount receivable

Inventorieslower of cost or net realizable valuestandard costingretail method

Marketable securitiesPrepaid expenses and others

Currentliabilities

Accounts payableNote payablesCurrent portion of long term debtTax payablesAccrued liabilitiesUnearned revenue/income

Non-currentassets

Tangibleassets

Used in operationsNot used in operation -> investment assets

Intangibleassets

Identifiable (finite period) -> amortizedUnidentifiable (indefinite) -> not amortized,but tested for impairment at least annuallyInternally produced -> not recorded,except legal costs

Non current liab Long term liabDTL (deferred tax liab)

f. Components of OE

Contributed capital

Minority (noncontrolling) interestRetained earnings

Treasury stockAccumulated othercomprehensive income

g. Common-size balance sheet

h. Liquidity & solvency ratios

27.Understanding

The CFStatement

The CF statement

a.

CFO affect Net Income

CFI affect Long term assets andcertain investments

CFF affect capital structure

b. Noncash investing,financing activities

Not reported

Disclosed in footnote or supplemental schedule to CF statement

c. IFRS vs. US GAAP

dividends paid US GAAP: CFFIFRS: CFF or CFO

interest paid US GAAP: CFOIFRS: CFO or CFF

interest anddividendreceived US GAAP: CFO

IFRS: CFO or CFI

taxes paid US GAAP: CFOIFRS: CFO or CFF or CFI

d,e, f,g. CF methods

Direct

Indirect

h. Analyseand interpret

Totalcurrencyamounts

Major sources and uses of cashCFOCFICFF

Common-size CFstatement, divided by

RevenueTotal cash inflow (for inflows) andTotal cash outflow (for outflows)

i.

Free cash flow to Firm: FCFF=NI+NCC+Int*(1-t)-FCInv-WCInv=CFO+Int*(1-t)-FCInv available toStockholdersDebt holders

to Equity: FCFE=CFO-FCInv+NetBorrowing

CF ratios

Performanceratios

CF to revenue =CFO/net revenue

Cash return-on-asset =CFO/average total assets

Cash return-on-equity =CFO/average total equity

Cash-to-income =CFO/Operating income

Cash flow per share=(CFO-preferred dividends)/ Weighted averagenumber of common shares)

Coverageratios

Debt coverage =CFO/Total debt

Interest coverage =(CFO+Interest paid+taxes paid)/interest paid

Reinvestment ratio =CFO/cash paid for long term assets

Debt payment ratio =CFO/cash long term debt repayment

Dividend payment =CFO/dividends paid

Investing andfinancing ratio

=CFO/cash outflows frominvesting and financing activities

a

EXAMPLE: CASH FLOW STATEMENT

28.FinancialAnalysis

Techniques

a. Analyses

Ratio analysis

Common size VerticalBalance sheetIncome statement

HorizontalCharts: stacked column graph, line graph

Regression analysis

Ratioanalysis

b,c. Classesof ratios

Activity

Receivablesmanagement

Receivables T.O = annual sales/average receivablesDays of sales outstanding or average collection period = 365/ receivables T.O

Inventory managementInventory T.O = COGS/average inventoryDays of inventory on hand = 365/inventory T.O

Trade credit managementPayables T.O = purchases/average trade payablesNumber of days of payables = 365/payables T.O

Total assets management Total asset T.O = revenue/average total assets

Fixed assets management Fixed asset T.O = revenue/average net fixed assets

Working capital management Working capital T.O = revenue/average working capital

Liquidity

Current ratio = current assets/current liabilitiesQuick ratio = (cash + marketable securities + receivables)/current liabilitiesCash ratio= (cash + marketable securities)/ current liabilitiesDefensive interval= (cash + marketable securities + receivables)/ average daily expendituresCash conversion cycle = days sales outstanding + days of inventory on hand - number of days of payables

Solvency

Use of debt financing

Debt-to-equity = D/E

Debt-to-capital = D/(D+E)

Debt-to-assets = D/A

Financial leverage = A/E

Ability to repaydebt obligations

Interest coverage = EBIT/Interest payments

Fixed charge coverage= (EBIT + lease payments) / (interest payments+lease payments)

Profitability

Net profit margin= Net income/ Revenue

Operatingprofitability

Gross profit margin= (Net sales - COGS)/ RevenueOperating profit margin = EBIT/ RevenuePretax margin= EBT/ Revenue

Profitabilityrelative to funds

ROAFormula 1: ROA= Net income/ Average total assetsFormula 2: ROA= (Net income + int exp (1- tax rate))/ Average total assets

Operating ROA = EBIT / Average total assetsROTC (Return on Total Capital) = EBIT/ Average total capitalROE = Net income/ Average total equityReturn on common equity = (Net income - preferred dividends)/ Average common equity

Valuation Sales per share, EPS, P/CF ... (in Equity study section)

Example

d. DuPont analysisOriginal approach

Extended (5-way) DuPont

e. Ratios used in

Equity analysis

Valuation ratiosDividends and Retention Rate

Industry-specific ratios

Net income per employeeand Sales per employee

for service and consulting firms

Growth in same-store sales for restaurants and retail industries

Sales per square foot for retail industry

Business riskCoefficients ofvariation of

RevenueOperating incomeNet income

For Banks, Insurancecompanies, financial firms

Capital adequacyVaRReserve requirementsLiquid asset requirementNet interest margin

Credit analysisRatios: interest coverage ratios, return on capital, debt-to-assets, CF to total debt ...Altman Z-score

Segment analysisBusiness segmentGeographic segment

f. Segment ratios

g. Model andforecast earnings

Using ratio analysisUsing techniques: sensitivity analysis, scenario analysis, simulation

a

28. Financial analysis techniques

INCOME STATEMENT VNDSales: 1 laptop per day, P=10m 3,650

Cost of goods sold: Cost=5m (1,825) -50.0%

SG&A (210) -5.8%

EBIT 1,615

Interest expense (15)

EBT 1,600

Income tax 25% 400

Net income 1,200

Dividends 100% 1,200

Increase/Decrease in Retained earnings -

BALANCE SHEET Cash 105 2.9%

Account receivable 7 days on credit 70

Inventory 5 days in store 25

Total current assets 200

Net PPE 300 8.2%

Total assets 500

Account payable 10 days 50 1.4%

Short-term debt 150

Long-term debt -

Equity 300

Total liabilities+equity 500

29.Inventories

Inventory accounting

Inventory cost flow methods

Inventory valuation methods IFRS-> Lower of cost or NRVUS GAAP -> LCM=lower of cost or market

ending = beginning + purchases - COGS

a. IFRS & GAAPrules for determiningInventory cost

product cost --> capitalized

period cost --> expensed

b,c. Computingending inventoryand COGS

Specification Indication

FIFO

LIFO

Weighted average cost

d. Inventorysystems

Periodic

Perpetual

e. Effects of differentinventory accountingmethods on

COGS

Inventory balances

Other FS items: taxes , net income , working capital , cash flows

f. Inventoryreporting

IFRS Lower of cost or NRV

GAAP Lower of cost or marketNo write-up

Exception Commodity-like products

g. FR presentation &disclosures of inventories

h. Effects of differentinventory accountingmethods on

Profitability

Liquidity

Activity

Solvency a

a

30.1. Long-livedAssets- Part1-Capitalization

a1. Accountingstandards

Capitalize

Expense

a2. Effects ofcapitalizing vsexpensing on

NI

Shareholders' equity

CFCFOCFI

Financialratios Profitability

Interest coverage ratio

Implications for analysis

a3. Capitalizedinterest

Interest incurred duringconstruction --> capitalize required by both US GAAP & IFRS

What interestrate to use?

i/r on debt related to construction

if no construction debtoutstanding-> based onexisting unrelated borrowings

Interest costs in excessof project construction-> expensed

reported in FSs

b. Intangibleassets

Unidentifiable:Goodwill GW=Purchase price -Fair value

Not amortized but impairment test

Identifiable

Created internally -->EXPENSED except for

IFRS: R&D anythingR: ExpenseD: Capitalise

US GAAP: R&D softwareSoftware for sale--> similar to IFRS

Before technical feasibility: expenseAfter technical feasibility: capitalize

Software for use Capitalize all

Purchased externally --> CAPITALIZED (asset at cost)

Obtained in business acquisitionUSGAAP --> expense

IFRS --> not expense

30.2. Long-livedAssets- Part2 -

Depreciation AndImpairment

c1. Concepts

Carrying Value (or Book value)

Historical cost

Economic depreciation

d. Depreciationmethods

SL (Straight Line)

Accelerated depreciation DDB (Double Declining Balance)depr=2/n* book valueorfinal year: depr=book value - salvage

Units-of-production

c2. Effect on net income

c3. Useful lives andSalvage Values

Component depreciation

e,f. Amortization ofintangible assets

g. IFRS

Cost model

Revaluation model(land, buildings...) Reversal of previous loss --> gain in IS

Above historical cost --> revaluation surplus in equity

h. Impairment

IFRS Recoverable amount = max (value in use, fair value - selling cost) Value in use = PV of future CF stream

If carrying value > recoverable amount --> impair

US GAAP Tangible assetsStep 1: Recoverability test

Step 2: Loss measurementIntangible assets

Reversing animpairment loss Asset for sale

Asset held for use

i. Derecognition of PPE& intangible assets

Sales --> Gains/ Losses

Abandoned --> no proceeds, loss=carrying value

Exchange --> equivalent to sell and buy another

j. FS presentation &disclosures of PPE &intangible assets

IFRS

US GAAP

k. Financial reporting ofinvestment property

31. IncomeTaxes

a. Terminology

TAX RETURN

Taxable income

Taxes payable current tax expense

Income tax paid actual cash flow

Tax loss carryforward =past or current loss --> create DTA

Tax base = net amount of asset/liability used for tax reporting purposes

FINANCIALREPORTING

Accounting profitIncome before taxEarnings before tax

Income tax expense =Taxes payable + change in DTL - change in DTA

DTL= Income tax expense - Taxes payableCause: depreciation

DTA=Taxes payable - income tax expenseCauses: Warranty expenses, Tax-loss carry forwards

Valuation allowance: contra account to DTACarrying value = net balance sheet value of asset/liabilityPermanent difference vs. Temporary difference

b.

DTL Income tax exp. > Current tax exp.Revenues/Gains recognized in IS before in tax returnExpenses/Losses tax deductible before recognized in IS (depreciation)

DTA Income tax exp. < Current tax exp.

Revenues/Gains taxable before recognized in ISExpenses/Losses recognized in IS before tax deductible (warrantyexpenses, post-employment benefits)Tax loss carryforwards

Treatment for analytical purpose: DTL not expected to reverse --> equity

c. Taxbase of

Assets

Definition

ExamplesDepreciable equipmentR&DAR

Liabilities

Definition

ExamplesCustomer advanceWarranty liabilityNote payable

d. Calculation

e. Income taxrate changes

Adjustment to FS =Taxes payable + change in DTL - change in DTA

Impact on FS and ratios

f. Differences

Temporarydifferences

between tax base and carrying valuewill reverseresult in DTA or DTL

Permanentdifferences

between taxable income and pretax incomenot reversemakes effective tax ratedifferent from statutory tax rate

effective tax rate = income tax expense / pretax income

g. Valuation allowance for DTA>50% probability

h. Deferred tax items

Depreciation --> DTL (if reverse, if not --> equity)

Impairments --> DTA

Restructuring --> DTA

LIFO, FIFO

Post-employment benefits and deferred compensation --> DTA

Unrealized gains/losses on available-for-sale marketable securities

i

Analyze disclosures relating to deferred tax itemseffective tax rate reconciliation

How disclosures affect FS and ratios

j. IFRS vs. US GAAP (see table in Schweser)

a

2006 overpayment credited to 2007

OMB No. 1545-0123 U.S. Corporation Income Tax Return

1120

Form For calendar year 2007 or tax year beginning , 2007, ending , 20

Department of the TreasuryInternal Revenue Service

See separate instructions. B

Employer identification number

Name

Check if: Use IRS

label.Otherwise, print ortype.

Consolidated return(attach Form 851)

A

Number, street, and room or suite no. If a P.O. box, see instructions.

C

Date incorporated

Personal holding co.(attach Sch. PH)

2

Personal service corp.(see instructions)

3

City or town, state, and ZIP code

D

Total assets (see instructions)

$ E

1c

1a

Gross receipts or sales

b Less returns and allowances

c Bal 2

Cost of goods sold (Schedule A, line 8)

2 3

Gross profit. Subtract line 2 from line 1c

3 4

Dividends (Schedule C, line 19)

4 5

Interest

5 6

Gross rents

6 7

Inco

me

7

Gross royalties 8

8

Capital gain net income (attach Schedule D (Form 1120)) 9

9

Net gain or (loss) from Form 4797, Part II, line 17 (attach Form 4797) 10

Other income (see instructionsattach schedule)

10 Total income. Add lines 3 through 10

11

11 12

Compensation of officers (Schedule E, line 4)

12 13

Salaries and wages (less employment credits)

13 14

Repairs and maintenance

14 15

Bad debts

15 16

Rents

16 17

Taxes and licenses

17 18

Interest

18 19

Charitable contributions

19 20

Depreciation from Form 4562 not claimed on Schedule A or elsewhere on return (attach Form 4562)

20 21

Depletion

21 22

Advertising

22 23

Pension, profit-sharing, etc., plans

23 24

Employee benefit programs

24 25

Other deductions (attach schedule)

26 27

Total deductions. Add lines 12 through 26

27 28

Taxable income before net operating loss deduction and special deductions. Subtract line 27 from line 11

28 29a

Less: a Net operating loss deduction (see instructions)

29 D

educ

tio

ns (

See

ins

truc

tio

ns f

or

limit

atio

ns o

n d

educ

tio

ns.)

Special deductions (Schedule C, line 20)

29c

29b 30

Taxable income. Subtract line 29c from line 28 (see instructions)

30 31

Total tax (Schedule J, line 10)

31 32a

32 32b

2007 estimated tax payments

b ( )

d Bal

32d

32c

2007 refund applied for on Form 4466

c 32e

Tax deposited with Form 7004

e 32f

Credits:

f 33

Estimated tax penalty (see instructions). Check if Form 2220 is attached

33 T

ax a

nd P

aym

ents

34

Amount owed. If line 32g is smaller than the total of lines 31 and 33, enter amount owed

34 35

Overpayment. If line 32g is larger than the total of lines 31 and 33, enter amount overpaid

35 Enter amount from line 35 you want: Credited to 2008 estimated tax

36

36

1a

Refunded

b

(1)

Initial return

(2)

Final return

(3)

Name change

(4)

Address change

Under penalties of perjury, I declare that I have examined this return, including accompanying schedules and statements, and to the best of my knowledge and belief, it is true,correct, and complete. Declaration of preparer (other than taxpayer) is based on all information of which preparer has any knowledge. Sign

Here Title

Date

Signature of officer Date

Preparers SSN or PTIN

Preparerssignature

Check ifself-employed

PaidPreparersUse Only

Firms name (oryours if self-employed),address, and ZIP code

EIN Phone no. ( )

Cat. No. 11450Q Form 1120 (2007)

May the IRS discuss this returnwith the preparer shown below(see instructions)?

Yes No

For Privacy Act and Paperwork Reduction Act Notice, see separate instructions.

Schedule M-3 attached

4

Check if:

26

Domestic production activities deduction (attach Form 8903)

25

(1) Form 2439

(2) Form 4136

a

32g

2007 Life/nonlife consoli-dated return

b

32.1.Long-termLiabilities-

Part1-FinancingLiabilities

Bond terminology

a,b.Recognition&measurement

BS IS CF

Par bond

Premium bond

Discount bond (incl.zero-coupon debt)

b.

Amortization methodsIFRS: effective interest rate method

US GAAPprefers: effective interest rate methodallows: straight line depreciation

Issuance costs IFRS: decrease liability --> increase effective i/rUS GAAP: capitalize as an asset (prepaid exp.)

Fair value reporting option

c. Derecognition of debt

d. Debt covenants

e. Presentation and disclosures

a

32.2.Long-termLiabilities-

Part2- Leases& Pension

Plans

f. Motivationsfor leasing vs.purchasing

Less costly financing

Reduced risk of obsolescence

Less restrictive provisions

OBS financing

Tax reporting advantages

g. Types oflease

Operating lease

Finance lease(capital lease)

Lessee

US GAAP: If meetsone of the criteria

Transfer of titleBargain purchase optionLease period >=75% economic lifePV(lease pmts)>=90% fair value

IFRS: similar to US GAAP but less specific, with 1additional criterion: leased asset is specialized

Lessor

US GAAP: like lesseewith added conditions:

collectability of lease paymentsis reasonably certainlessor has substantiallycompleted performance

IFRS: like lessee with added condition: substantially allrights & risks of ownership are transferred to lessee

h1. Reportingby Lessee

Operatinglease

Financelease

FS & ratio effectsof finance leasecompared tooperating lease

Balancesheet

Incomestatement

Cashflow

h2. Reportingby Lessor's

Financelease

Sales-typelease

Directfinancinglease

Operatinglease

i. Disclosures of lease

PensionPlans

j. Two types

Definedcontribution

Definedbenefit

Service costInterest costExpected return on plan assetsActuarial G/LPrior service costs

k. Presentation & disclosure

l. Leverage & coverage ratios

LEASE n=2years PMT= i= 13%1.Ordinaryannuity PV= 100Operatinglease Financiallease Operatinglease Financiallease

Yr1 Yr2 Yr1 Yr2 Yr1 Yr2 Yr1 Yr2Asset 0 0 Asset Asset ???

Beg. 100 50 Beg. 100 50 Beg. 100 53()Depr 50 50 ()Depr 50 50 (+)Int.rev 13 7End 50 0 End 50 0 ()Receipt 60 60

End 53 0

Liability 0 0 Liability Liability 0 0 Liability 0 0Beg. 100 53(+)Int.exp 13 7()Pmt 60 60End 53 0

Leaseexp 60 60 Deprexp 50 50 Leaserev. 60 60 Int.rev. 13 7Int.exp 13 7 Deprexp 50 50

63 57 10 10

CF? 60 60 CF? 13 7 CF? 60 60 CF? 13 7CF? 47 53 CF? 47 53

60 60 60 60Note:ifsalestypelease>justaddgrossprofit

2.Annuitydue PV= 113Financiallease Financiallease

Yr1 Yr2 Yr1 Yr2Asset Leasereceivable

Beg. 113 56.5 113 60()Depr 56.5 56.5 ()Receipt 60 60End 56.5 0 Beg 53 0

(+)Int. 7 0End 60 0

Liability Liability 0 0113 60

()Pmt 60 60Beg 53 0(+)Int. 7 0End 60 0

Deprexp 56.5 56.5Int.exp 7 0

63.4 56.5 Int.rev. 7 0

CF? 7 0 CF? 7 0CF? 53 60 CF? 53 60

60 60 60 60

60

LESSEE LESSOR

LESSEE LESSOR

PENSION1.PBO(ProjectedBenefitObligation)isaLiability;CSC(CurrentServiceCost)isanexpense

Salary: g=5.2611%80

60m 400m=last salary f=1%perworkingyear22 23 24 60 61

Salary: g 5.2611%1styr(23) Discountrater=10%

2ndyr(24)PBO=1m

CSC=1.1m 4m 4mPBO=2xCSC=2.2m=PreviousPBO+CSC+Intcost

60m 400m=lastsalary f 1%perworkingyearCSC=1m 4m 4m

2.Planasset(moneycontributiontotrust+investmentreturn) Longtermexpectedreturn: 15%1styr(23) Contribute

PlanassetCFO

1m1m R=12%(actualreturn)1m

Intcost=DiscountratexPreviousPBO=0.1m

CFO

2ndyr(24) (assumingContribution=0)inIS:E(R)=0.15min OCI: Actuarial loss:0.03m

1mPensionexp=1.00m

Planasset=1.12m

=PlanassetPBO=CSC+IntcostE(R)

Reporting InBS:USGAA i li b 1 08 OCI 0 03

inOCI:Actuarialloss:0.03mFundedstatus=1.08mInIS:Pensionexp=1.05m

USGAAP:Netpensionliab:1.08m;OCI:0.03mIFRS:Netpensionliab:1.05m(noOCI)

3.Planamendment Year2:increasefto2%2ndyr(24) 8m

PBO=2xCSC=4.4m=PreviousPBO+CSC+Intcost+???CSC=2.2m 8m

=CSC+IntcostE(R)+Priorservicecost (optional:10%corridor)

4.ABO&VBO Year2:employeequits

PBO 2xCSC 4.4m PreviousPBO+CSC+Intcost+???Intcost=0.1mPriorservicecost=1.1mInIS:Pensionexp=3.25m

4.ABO&VBO Year2:employeequits2ndyr(24) Lastsalary

CSC=0.158m 0.632m 0.632mPBO=2xCSC=0.316m=ABOIfvested5years>VBO=1/5xABO=0.063m

63m

33. FinancialReporting

Quality

a. Distinguishfinancial reporting quality

Quality of earning

b. Spectrum for assessing financial reporting quality

c. Distinguishconservative accountingaggressive accounting

Low quality financial reportd. Motivatione. Opportunity

f. Discipline financialreporting quality

mechanismlimitation

g. Presentation choice influence analyst's opinion

h. Accountingmethod used tomanage earning,CF and BS items

Rev recognitionEstimate of credit lossValuation allowanceDepreciation methods and estimatesAmortization and ImpairmentInventory methodRelated party transactionCapitalizationOther CF effects

i. Commonaccountingwarning signs

Revenuerecognition

change rev recognition methoduse of bill-and-hold transactionuse of barter transactionuse of rebate programrev growth out of line with peerreveivable turnover decrease over periodsTATO decreaseinclusion of nonoperating item orsignificant one-time sale in revenue

Inventory inventory turnover declinesdraw down inventory level (LIFO liquidation)

Capitalization policies capitalize expense

Relationship ofrev and CF CFO/IN persistently

34. FSA:Applications

a. Past financialperformance of acompany

Evaluating

Reflecting company's strategy

b. Basic projection offuture net income and CF

c. FSA inassessingcredit qualityfor DEBTinvestment

Three C'sCharacter

Collateral

Capacity

Credit ratingagencies useformulas thatinclude

Scale and diversification

Operational efficiency

Margin stability

Leverage

d. FSA in screening forEQUITY investments

e. Adjustments forcomparing differentcompanies

a

FRA cover222324252627282930.130.23132.132.2333435

f1_01(0): f1_02(0): f1_03(0): f1_04(0): f1_05(0): f1_06(0): c1_01(0): c1_13(0): c1_02(0): c1_08(0): c1_03(0): f1_07(0): f1_08(0): f1_09(0): f1_10(0): f1_11(0): c1_04(0): c1_05(0): c1_06(0): c1_07(0): f1_12(0): f1_13(0): f1_14(0): f1_15(0): f1_16(0): f1_17(0): f1_18(0): f1_19(0): f1_20(0): f1_21(0): f1_22(0): f1_23(0): f1_24(0): f1_25(0): f1_26(0): f1_27(0): f1_28(0): f1_29(0): f1_30(0): f1_31(0): f1_32(0): f1_33(0): f1_34(0): f1_35(0): f1_36(0): f1_37(0): f1_38(0): f1_39(0): f1_40(0): f1_41(0): f1_42(0): f1_43(0): f1_44(0): f1_45(0): f1_46(0): f1_47(0): f1_48(0): f1_49(0): f1_50(0): f1_51(0): f1_52(0): f1_53(0): f1_58(0): f1_59(0): f1_60(0): f1_61(0): f1_62(0): f1_63(0): f1_64(0): f1_65(0): f1_66(0): f1_67(0): f1_68(0): f1_69(0): f1_56(0): f1_55(0): f1_70(0): f1_71(0): f1_72(0): f1_73(0): f1_74(0): f1_75(0): f1_76(0): f1_77(0): f1_78(0): f1_79(0): f1_80(0): f1_81(0): f1_82(0): f1_83(0): f1_84(0): f1_85(0): f1_86(0): f1_87(0): f1_88(0): f1_89(0): f1_90(0): f1_91(0): f1_92(0): f1_93(0): f1_97(0): f1_54(0): f1_57(0): f1_98(0): f1_94(0): f1_95(0): f1_117(0): f1_99(0): c1_09(0): f1_100(0): f1_101(0): f1_102(0): f1_103(0): f1_104(0): f1_105(0): f1_106(0): f1_96(0): f1_107(0): f1_108(0): f1_109(0): c1_11(0):

c1_10(0): f1_110(0): f1_111(0): f1_112(0): f1_113(0): f1_114(0): f1_115(0): f1_116(0):