Lesson 1 MAS: Cost Concepts - Technical

Cost Function:
y = a + bx ;
where:
y = total costs
a = total fixed costs
b = variable cost per unit
x = activity level

Segregating Mixed Costs
1. High Low Method

2. Scatter Graph/Visual Fit Method

3. Least Squares Method/Simple Regression Analysis

 

 where:

y = total cost

a = total fixed cost

b = variable cost per activity level

x = activity level

N = number of observations

4. Multiple Regression Analysis = cost is caused by more than 1 activity measure

5. Other Approaches

     a. Industrial Engineering(Work Measurement Method) = relationship between input and output in physical forms

     b. Conference Method = based on opinions by various departments

     c. Account Analysis Method = based on experience and judgement

Correlation Analysis

r = extend of linear relationship between x and y

 1. No Correlation => r = 0

 2. Perfect Correlation => Positive Perfect (x increases, y increases) r = 1 ; 

                                          Negative Perfect (x increases, y decreases)  r = -1

 3. High Correlation => r > 0.5 ; r > -0.5

 4. Low Correlation => r < 0.5 ; r < -0.5

 

Lesson 8 P2: Business Combination - Notes

Classification of Business Combination
1. Acquisition of Assets
     a. Statutory Merger (merge-Retain one) => A+B=A;  A+B=B
     b. Statutory Consolidation (consolidatio-New corp.) => A+B=C

2. Stock Acquisition => Parent-Subsidiary Relationship
     Matrix
     *Less than 20% = Investment in Stocks (Cost Method)
     *20% - 50% = Investment in Associate (Equity Method)
     *More than 50% = Investment in Subsidiary

*1. Accounting for Acquisition of Assets
     a. Measure Acquired Assets (and Liabilities) at Fair Value

     b. Recognize Goodwill or Gain on Acquisition(Bargain Purchase)
               If Consideration Transferred > Net Fair Value of Interest , GOODWILL
               If Consideration Transferred < Net Fair Value of Interest, GAIN ON ACQUISITION

     c. Expenses in Acquisition
               Direct/Indirect Costs = Expense outright
               Liability Issue Transaction = Liability (Bond Issue Costs)
               Equity Issue Transaction = Deduct from Share Premium or APIC


*2. Accounting for Stock Acquisition(Investment in Subsidiary in Parent's Books)
     a. Parent and Subsidiary maintain separate records

     b. Recognize Goodwill or Gain on Acquisition(Bargain Purchase)
               If Consideration Transferred > Net Fair Value of Interest , GOODWILL
               If Consideration Transferred < Net Fair Value of Interest, GAIN ON ACQUISITION
               *Partial Goodwill = Parent recognizes its share in the Goodwill only.
               *Full Goodwill = Parent recognizes its share
                                             plus non-controlling interest's share in Goodwill.
     c. Expenses in Acquisition
               Direct/Indirect Costs = Expense outright
               Liability Issue Transaction = Liability (Bond Issue Costs)
               Equity Issue Transaction = Deduct from Share Premium or APIC

     d. Consolidation of Financial Statements
           Eliminate INTERCOMPANY Transactions (Either downstream or upstream)
               *Upstream/Downstream Sales
               *Upstream/Downstream Cost of Sales
               *Unrealized Gross Profit, year end (Adjust based on end inventory)
               *Dividend Income from Subsidiary
               *Gain/Loss on Upstream/Downstream Sale of Plant Assets
               *Depreciation Expense (Adjust by eliminating gross profit from sale of plant assets)

*Consider: Consolidated = Interest of Parent (NIATOP) + Non-controlling Interest (NCINAS)

*Consolidated Accumulated Profits = Accumulated Profits of Parent + NCINAS (non-controlling)

*Consolidated Accumulated Profits on the Financial Statement = Accumulated Profits of Parent only

*Test Cash Generating Unit (CGU) for Impairment of Goodwill, but carrying value of an item in the CGU must not be below its recoverable amount.

Lesson 7 P2: Home Office/Branch/Agency - Notes

*Agency = maintains samples of inventory
                = any cash receipt/disbursement accounted for like Petty Cash Fund
                = does not maintain books

*Branch = have their own books
               = capital accounts in books is called "Home Office - Current"
               = Inventory includes Shipment from Home Office and Inventory from Outside Suppliers

*Home Office = accounts an "Investment in Branch" account using the equity method

*Investment in Branch = Home Office - Current

*Consolidation of Home Office and Branch Financial Statements:
    Remove "home office - branch" transactions.
     a. Cost of Shipment to Branch (like Cost of Sales to Branch)
     b. Billings of Shipment to Branch (like Sales to Branch)
           Billed Price = Cost of shipment to branch + Allowance for overvaluation of branch inventory
 
  *Allowance for overvaluation of branch inventory  (like Unrealized Gross Profit)
                  = mark-up of home office on inventory sent to branch.
                  = adjusted to match ending inventory of Shipments to branch/from home office
                      (adjustment is like the Realized Gross Profit)

Lesson 6 P2: Franchise Accounting - Notes

Franchisor Point of View

*Unearned Interest Income if note is non-interest bearing.

1. Reasonably Assured Collection = recognize Notes Receivable
     a. Accrual Method
            Unearned Franchise Revenue                   XX
                  Franchise Revenue                                      XX

2. Doubtful Collection = Notes Receivable NOT recognized
     a. Installment Method
     b. Cost Recovery Method = Non-IFRS

A. Initial Franchise Fee = recognized when
     a. Services are substantially performed (or when business commences)
     b. Non-refundable initial payments

*Can partially recognize initial franchise fee for the partial services rendered as long as initial payments are non-refundable.

B. Continuing Franchise Fee = recognize revenue when earned, expense when incurred

Lesson 5 P2: Construction Accounting - Notes

Construction Contracts
1. Fixed Price Contract
2. Cost Plus Contract = reimburse costs plus a percentage of profit

Methods of Construction Accounting
A. Percentage of Completion

*If computation for Estimated Gross Profit turns out to be a loss, recognize the loss 100% as a Loss earned this year.

B. Cost Recovery Method/Hybrid/Zero-Profit Approach = recognize all costs before any profit.

Lesson 4 P2: Installment Sales - Notes

1. Gross Profit Rate (GPR)

2. Realized Gross Profit (RGP)
        RGP, end = Collections x GPR
         *Collections does not include unpaid defaults.

3. Deferred Gross Profit (DGP)
       DGP, end = Installment A/R, end  x  GPR
or;
       DGP, end = DGP, beg - RGP

4. Repossession

5. Trade-in

         *Fair Value/True Worth of Repo and Trade-in have the same computation.

*Cost Recovery Method = used when collectibility is highly uncertain.

Lesson 3 P2: Joint Arrangements - Notes

Joint Arrangements = 2 or more parties have joint control

Types of Joint Arrangements
1. Joint Operation = joint control over assets and liabilities
        *Accounting for Joint Operation
           a. Separate records = similar to equity method             

          b. No separate records = maintain a capital account           

2. Joint Venture = joint control over net assets
        *Accounting for Joint Venture = Equity Method  

Lesson 2 P2: Corporate Liquidation - Notes

Formulas to remember and understand:

Priority of Payments
1. Unsecured creditors with priority
2. Fully secured creditors
3. Partially secured creditors (the secured amount)
4. Unsecured liabilities without priority

*Free Assets usually do not include prepayments because they are being used up during liquidation or are part of fixed contracts.

Lesson 1 P2: Partnership - Notes

Partnership Formation and Operation
Distribute:
1. Interest
2. Salaries
3. Bonus (only when there is excess/profit)
4. Residual

Partnership Dissolution
A. Admission of a New Partner
     1. Purchase of Interest = assets and liabilities will not change
                                          = reclassify old partner's account
                                          = excess and deficiency within and among parties involved
     2. Admission by Investment of Additional Assets
             a. Bonus Method = given to old/new partner for excess/deficiency in percentage contribution
             b. Goodwill Method = not used in practice; recognized in acquisition of business only

B. Withdrawal of a Partner = payment excess/deficiency means bonus to retiring/remaining partners

C. Incorporation of Partnership
     1. Retain Books = close capital accounts, open a share capital account
     2. New Books = close old books, open a new book

Partnership Liquidation
A. Lump Sum Distributions
     1. Sell Non-cash Assets (NCA)
     2. Satisfy Creditors
     3. Distribute residue to partners
*right of offset doctrine = offset loans to/from partnership and capital balances

B. Installment Distribution = Cash Priority Program or Schedule of Safe Payments

Partners                                     A                              B                                C
Balance before realization         30K                           20K                           10K
Divided by: P/L ratio                 50%                           25%                          25%
Loss Absorption Capacity         60K                            80K                           40K
Priority 1                                                                (20K)                                
Difference                               60K               =          60K                 ;         40K
Priority 2                                (20K)                         (20K)                               
Difference                               40K               =          40K                =         40K

Priority 1 = 20K*25% = 5K
*The first 5K realization must go to B.

Priority 2 = 20K*25% + 20K*50% = 5K + 10K = 15K
*The next 15K realization will be divided among A and B
*The total realization in excess of 5K until 20K will be divided by A and B according to their P/L ratio

Last Priority
*Anything in excess of 20K (5K+15K) will be divided among the partners according to their P/L