total debt
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no_tension
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Assets = Total Debt + Total Equity.
Am I right here?
Am I right here?
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Thank you, lola. I am working on solving problem 2 at the end of Reading 38 of CFAI textbook. There is no info about leases in the problem. long-term debt = 625, deferred taxes = 100, current liabilities = 350. In the solution for CF-to-total debt they have total debt = 975 and they have no explanation of how they calculated it. The only way I can think of would be to add long-term debt and current liabilities, but I'm afraid it might be just a coincidence. what do you think?
Guys, sorry but I need to correct you.
It's more an issue of different uses of terminology in the accounting and finance worlds. For purposes of CFAI debt generally refers to borrowed money, not trade payables, deferered taxes, etc.
Debt includes long-term debt, current portion of long-term debt, lease related debt, and insome cases they will throw in short term loans and commercial paper issued. A good rule of thumb would be to ask yourself, does it have an associated interest charge ? If it does then it is debt.
It's more an issue of different uses of terminology in the accounting and finance worlds. For purposes of CFAI debt generally refers to borrowed money, not trade payables, deferered taxes, etc.
Debt includes long-term debt, current portion of long-term debt, lease related debt, and insome cases they will throw in short term loans and commercial paper issued. A good rule of thumb would be to ask yourself, does it have an associated interest charge ? If it does then it is debt.
thanks for chiming in, Super.
I guess the confusion on my part stems from the fact that Schweser includes deferred taxes in LT debt. Last I checked DT is not an interest bearing liability. Any thoughts on that?
maratikus, I just had a look at the problem and I don't think it's a coincidence. It looks like total debt is just LT debt for 2007 ($625) + total current liabilities ($350) = $975.
I guess the confusion on my part stems from the fact that Schweser includes deferred taxes in LT debt. Last I checked DT is not an interest bearing liability. Any thoughts on that?
maratikus, I just had a look at the problem and I don't think it's a coincidence. It looks like total debt is just LT debt for 2007 ($625) + total current liabilities ($350) = $975.
They're talking about CFO and it looks like they did the indirect method.
I haven't done it for this problem, but it should be:
1. start with net income ($129)
2. add back depreciation ($125)
3. adjust for all changes in operating accounts (i.e. subtract increases in A/R and inventories, add increases in A/P, etc.)
Now why do they start with $130 as net income instead of $129, I have no clue.
Sorry I can't help more.
I haven't done it for this problem, but it should be:
1. start with net income ($129)
2. add back depreciation ($125)
3. adjust for all changes in operating accounts (i.e. subtract increases in A/R and inventories, add increases in A/P, etc.)
Now why do they start with $130 as net income instead of $129, I have no clue.
Sorry I can't help more.
hiredguns1
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lola, to add another point to Super's post: the future profitability of the firm plays into how deferred taxes are treated. If the liability isn't expected to reverse (i.e. the firm will not generate positive earnings), the deferred tax liability should be considered part of shareholder's equity for analytical purposes.
Similarly, deferred tax assets are only valuable if the firm can actually use them, which requires that they have positive earnings in the future. Otherwise, there's a "valuation allowance" reserve against deferred tax assets, based on the likelihood they won't be realized.
These are details I'd expect to see come up on your exam, so pay attention to any evidence CFAI offers towards a firm's future profitability. Just my $0.02.
Similarly, deferred tax assets are only valuable if the firm can actually use them, which requires that they have positive earnings in the future. Otherwise, there's a "valuation allowance" reserve against deferred tax assets, based on the likelihood they won't be realized.
These are details I'd expect to see come up on your exam, so pay attention to any evidence CFAI offers towards a firm's future profitability. Just my $0.02.
Thanks, hiredguns1. I appreciate your post.
Regarding the profitability issue you are raising, I understand that if DTL/DTA are permanent then they should be flipped to equity. If those amounts are transient they stay with liabilities, but even then they shouldn't be included in total debt as Schweser suggests. Even temporary, DT is non-interest bearing. I guess there are too many definitions on the go.
I guess the main point is: when asked a ratio question the exam, do you include deferred taxes in total debt or not? I think I'll follow CFAI notes/SuperI and exclude it.
Regarding the profitability issue you are raising, I understand that if DTL/DTA are permanent then they should be flipped to equity. If those amounts are transient they stay with liabilities, but even then they shouldn't be included in total debt as Schweser suggests. Even temporary, DT is non-interest bearing. I guess there are too many definitions on the go.
I guess the main point is: when asked a ratio question the exam, do you include deferred taxes in total debt or not? I think I'll follow CFAI notes/SuperI and exclude it.
hiredguns1 Wrote:
-------------------------------------------------------
> lola, to add another point to Super's post: the
> future profitability of the firm plays into how
> deferred taxes are treated. If the liability
> isn't expected to reverse (i.e. the firm will not
> generate positive earnings), the deferred tax
> liability should be considered part of
> shareholder's equity for analytical purposes.
I am often confused with this classification between debt and equity. Can you explain this in more details?
Thanks!
-------------------------------------------------------
> lola, to add another point to Super's post: the
> future profitability of the firm plays into how
> deferred taxes are treated. If the liability
> isn't expected to reverse (i.e. the firm will not
> generate positive earnings), the deferred tax
> liability should be considered part of
> shareholder's equity for analytical purposes.
I am often confused with this classification between debt and equity. Can you explain this in more details?
Thanks!
I'm not sure if you have started studying yet, but this is a pretty basic question and the first pages in the Notes will touch a bit on that. Furthermore, any introductory accounting text will discuss this in great detail.
Basically debt is the stuff that the company OWES to others, while equity is the stuff that it OWNS. I can't think of a simpler way to put it.
There are a few accounts that are common place and you'll get more comfortable with those as you go along. For example, you know that Accounts Payable, Deferred Taxes, ST debt are things the company owes to others, i.e. it's a liability. While Common and Preferred Stock, Additional Paid-in-Capital, Retained Earnings is something the company owns.
In the case of Deferred taxes, you know that this is the difference between income tax expense (as per financial statements) and taxes payable (on the company's tax return), and those usually will have to be paid at a later date, i.e. they are deferred. The company OWES them to the government, therefore, they are a liability. In some situations, those deferred taxes will not have to be paid, so the company can include those in equity (the stuff it owns).
I'm not sure if this helps much, but trust me you'll get more comfortable with this as you go along.
Basically debt is the stuff that the company OWES to others, while equity is the stuff that it OWNS. I can't think of a simpler way to put it.
There are a few accounts that are common place and you'll get more comfortable with those as you go along. For example, you know that Accounts Payable, Deferred Taxes, ST debt are things the company owes to others, i.e. it's a liability. While Common and Preferred Stock, Additional Paid-in-Capital, Retained Earnings is something the company owns.
In the case of Deferred taxes, you know that this is the difference between income tax expense (as per financial statements) and taxes payable (on the company's tax return), and those usually will have to be paid at a later date, i.e. they are deferred. The company OWES them to the government, therefore, they are a liability. In some situations, those deferred taxes will not have to be paid, so the company can include those in equity (the stuff it owns).
I'm not sure if this helps much, but trust me you'll get more comfortable with this as you go along.
hiredguns1
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disptra, here's a perspective that works for me, but I'm a crazy SOB so this may not make sense to anyone else 
Think of the deferred tax liability as value to which the government is entitled, contingent upon my company generating profits in the future (in order to fund the liability). If my company isn't going to be profitable, it's not going to have to pay those deferred taxes, and so the this value is never transferred to the government.
Okay so but if the government doesn't receive this value, who gets it? The company's shareholders essentially keep it, never having transferred it to the government via payment of taxes, hence the adjustment from a liability to equity...
Think of the deferred tax liability as value to which the government is entitled, contingent upon my company generating profits in the future (in order to fund the liability). If my company isn't going to be profitable, it's not going to have to pay those deferred taxes, and so the this value is never transferred to the government.
Okay so but if the government doesn't receive this value, who gets it? The company's shareholders essentially keep it, never having transferred it to the government via payment of taxes, hence the adjustment from a liability to equity...
Keep up the good work!
I have a somewhat limited background as well (did econ in college), but there are lots of knowledgeable folks around here, so if you have any questions, I'm sure someone will be able to help. Posting questions here is a great way to learn.
Edited 1 time(s). Last edit at Thursday, July 19, 2007 at 05:40PM by lola.
I have a somewhat limited background as well (did econ in college), but there are lots of knowledgeable folks around here, so if you have any questions, I'm sure someone will be able to help. Posting questions here is a great way to learn.
Edited 1 time(s). Last edit at Thursday, July 19, 2007 at 05:40PM by lola.