SPECIAL ISSUES
ACCOUNTING PROFIT:
It is the profit that is calculated on the income statement.
Accountant use accounting profit.
Accounting profit= revenue – explicit cost
EXPLICIT COST: it involves ash payment
Example: salary paid, rent paid, commission paid, etc
It is recorded on accounting records.
Economic profit:
Economic profit= revenue – total economic cost
OPPORTUNITY COST:
It is the next best alternative that is giving up.
Example: a truck that is carrying a load of aluminum cannot [simultaneously ] at the same time transfer a load of iron.
Comparing how much the tracking companies give up if it
chooses to carry aluminum instead of iron is a part of the determination of
opportunity cost.
Example: interest cost on money that has been invested in
the business instead of elsewhere.
BOOK VALUE:
Book value of a firm = total asset – total liability
Book value of a machine = original cost of the machine –
accumulated depreciation
MARKET VALUE:
Market value per share × number of shares outstanding
Market value also called market capitalization
The market value publicly held firm
It is the market value of its security in the secondary
market.
FAIR VALUE:
It is defined as the price that would be received to
sell an asset in an orderly transaction between market participants.
Note: US GAAP required firms to report the value of investment
securities at the fair value.[usually market
value].
However, fixed assets are still reported at their historical
cost less accumulated depreciation.
THE IMPACT OF FOREIGN CURRENCY EXCHANGE FLUCTUATION:
Fluctuation in foreign exchange rate[ forex] can impact the
financial statement in two ways,
·
Foreign currency gain or loss can arise from
foreign currency transactions.
Example: a US company sold goods to a UK company.
The sales in denominated in British pounds the price is 10,000
Accounting records of US companies are in US dollars.
This invoice will need to be converted into US dollars.
On the date the invoice is issued, the exchange rate is,
1= 1.54
10000= 15400
SPOT RATE:
It is a currency exchange rate to purchase or sell currency
for immediate delivery.
At the preparation of financial statement following the sale.
CONSIDERATION OF FINANCIAL STATEMENTS WITH SUBSIDIARIES USING
DIFFERENT CURRENCIES:
When multinational subsidiaries are located in a different country from the parent company.
And keep their accounting records in a different currency
from a parent currency the consideration of financial statements causes gains and
losses.
The main process is important in the consideration of
financial statements for a multinational firm.
The restatement of the financial statements is prepared by vendor
accounting standards other than US GAAP.
The convection of financial statements prepared in a foreign
currency into the reporting currency [dollar].
3 currencies are,
Currency record :
The currency of record is the currency the foreign entity
used to keep its books.
Functional currency:
It is a currency of the primary economic environment in
which the foreign entity operates.
It is a currency in which the entity generates cash and
expands cash.
Reporting currency:
It is the currency of the parent company.
RE-MEASUREMENT :
The convocation of financial statements from the currency of
record to the functional currency is called re-measurement.
Gain and loss from re-measurement are recorded on the income statement
as income from continued operation.
If the currency of record and functional currencies same then
remeasurement is not needed.
Translation:
Conversion from the functional currency to the reporting
currency is called translation.
Gain or loss from translation is recorded in accumulated comprehensive
income.
If functional currency and reporting currency are the same then the translation is not needed.
REMEASUREMENT OF THE FUNCTIONAL CURRENCY USING THE MONITOR
OR NON-MONETARY OR TEMPORAL METHOD:
Monitory asset and monitory liability:
These are assets and liabilities whose amounts are fixed in terms of a unit of currency without reference to the future price.
Example;
- Cash
- Account receivable[held to maturity debt security]
- Account payable etc.