lec17_securities - Accounting for Marketable Securities...

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1 Accounting for Marketable Securities 15.511 Corporate Accounting Summer 2004 Professor SP Kothari Sloan School of Management Massachusetts Institute of Technology July 7, 2004
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2 Marketable Securities: Agenda ± Understand when accounting departs from the “transactions- based” model and towards market-driven valuations ± Illustrate the role of judgment in applying the lower-of-cost- or-market (LCM) rule for inventory ± Understand how marketable securities are valued on companies’ Balance Sheets ± Understand the Income Statement effects of valuation adjustments
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3 Should changes in market value be recognized? ± Accounts receivable ± Estimates of uncollectibles ± Changes in credit risk ± Inventory ± Purchase/production cost ± Changes in input prices, obsolescence ± Fixed Assets ± Acquisition cost (historical basis) ± Obsolescence
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4 Lower of cost or market rule for Inventory ± When Market Value of Inventory < Capitalized Cost ± Loss on inventory write-down = Capitalized cost - Market Value ± This is added to Cost of Goods Sold, expense increases, income decreases ± Market value = Lower of the replacement cost and selling price ± Once inventory is written down in the balance sheet, it cannot be “written up” in subsequent periods ± Reliable evidence is absent to write up inventory ± Issues ± Susceptibility to write-downs of LIFO vs. FIFO ± “Hidden reserves” and income smoothing
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5 Valuation Adjustments: K-Mart On July 25, 2000, Kmart announced strategic actions designed to make its stores, inventory, and information systems more effective. It took a $290 million pretax charge “to state the inventory at its net realizable value” and $75 million “to reflect the anticipated loss in value of inventory at the closed locations. ..” Total is $365 million. - Source: Kmart Corporation Press Release. “Kmart Corporation Announces Strategic Actions to Enhance Financial Performance.” 25 July 2000. http://www.kmartcorp.com/corp/story/pressrelease/archive_00/news/pr000725.stm (accessed July 12, 2004).
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This note was uploaded on 04/05/2010 for the course FINANCE AN FRE6003 taught by Professor Marshall,ingridm during the Spring '09 term at NYU Poly.

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lec17_securities - Accounting for Marketable Securities...

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