Chapter 11: Valuation Adjustments
1
Chapter 11
Valuation Adjustments
TABLE OF CONTENTS
Overview 3
Relating Accounting for Marketable Securities to Other Balance-Sheet Items
3
Classifying Marketable Securities
4
Classification Consequences for Financial Statements 4
Available-for-sale Securities
4
Trading Securities
5
Held-to-maturity Securities
5
Tax Consequences
A Closer Look at the Key Concepts Example
5
6
6
Assumptions
6
Recording the Purchase
7
Recording Valuation Adjustments
7
Intel’s Related Activity
Realized Gains and Losses
8
10
Example
10
Intel’s Comprehensive Income Footnote
11
Exercise 11.01
12
Exercise 11.02
13
Exercise 11.03
14
Exercise 11.04
16
© 1991–2009 NavAcc LLC, G. Peter & Carolyn R. Wilson
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Navigating Accounting
®
Exercise 11.05
17
Exercise 11.06
18
Exercise 11.07
19
Exercise 11.08
20
Exercise 11.09
21
Exercise 11.10
22
Exercise 11.11
23
© 1991–2009 NavAcc LLC, G. Peter & Carolyn R. Wilson
Chapter 11: Valuation Adjustments
3
OVERVIEW
This chapter examines how investments (also called marketable securities)
affect financial statements and footnote disclosures under US GAAP.
This chapter has two sections: (1) this overview, which summarizes the
key concepts and links them to those you learned in other chapters, and
(2) “A Closer look at the Key Concepts,” which uses an example and
Intel disclosures to develop and illustrate the concepts in the overview.
Skim the overview the first time through the chapter and then reread it
more carefully after you have read “A Closer Look at The Key Concepts.”
One of the learning objectives is to help you better understand the
difference between realized and unrealized gains and losses. Realized
gains and losses arise from selling investments or other assets.
Unrealized gains and losses arise from revaluing unsold investments or
other assets to their fair value at the end of the reporting period.
If you purchase shares of stock in Intel and the value of your shares
increases, you have an unrealized gain. If you sell the shares, you have
a realized gain. Determining unrealized gains and losses on marketable
securities is relatively straightforward. You simply check the price
of recent trades versus the price you paid for your shares. However,
determining the fair values of other assets not traded regularly are more
difficult to assess. Thus, estimating their unrealized gains and losses
reliably is more problematic.
Relating Accounting for Marketable
Securities to Other Balance-Sheet Items
Keep in mind, most balance sheet assets and liabilities have unrealized
gains and losses; their fair values differ from their financial reporting
values. What distinguishes marketable securities from other balancesheet items under US GAAP is marketable securities’s unrealized gains
and losses are recognized in balance sheets; the securities are stated at
their fair market values. The exception is debt securities classified as
securities intended to be held to maturity, meaning the company intends
to hold them until the principal is repaid by the issuer. These securities
are reported at historical cost, with some minor historical-cost based
adjustments not depending on changes in the securities’ values.
© 1991–2009 NavAcc LLC, G. Peter & Carolyn R. Wilson
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Navigating Accounting
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Classifying Marketable Securities
Marketable securities are classified in one of three ways. The three
classifications depend on what management intends to do with the
securities, not on characteristics of the securities themselves:
• Available-for-sale securities: Management has purchased these
securities for liquidity and thus plans to sell them when and if the
company needs cash. Most companies classify most of their securities
as available-for-sale.
• Trading securities: Management has purchased these securities with
a speculative intent. They expect the value of the shares to appreciate
quickly. Companies actively buying and selling shares frequently
often have trading desks where traders speculate on very short-term
opportunities (they buy and sell the same security within a very short
time interval, perhaps a few hours or less). The portfolio of shares
traded by these individuals is typically classified as trading securities.
Some of Intel’s securities are classified this way, but generally only
banks and other financial institutions use this classification.
• Held-to-maturity securities: These are debt maturities management
intends to hold until maturity: until the principal is repaid by the
issuer. These securities are reported at historical cost, with some minor
historical-cost based adjustments not dependent on changes in the
securities’ values.
Classification Consequences for Financial
Statements
The classification decisions can have dramatic financial-statement
consequences, yet the accounting differences are pretty easy to
comprehend if you focus on the big picture and, in particular, on what
happens to both sides of the balance sheet when the securities’ values
change:
Available-for-sale Securities
Available-for-sale securities are recognized at their fair values. Valuation
adjustments are recorded at the end of the period, ensuring the securities
are stated at their fair values.
Here is how these adjustments affect the balance sheet equation:
Assets
• The securities’ values increase (decrease) by the adjustment needed to
state them at their fair values.
© 1991–2009 NavAcc LLC, G. Peter & Carolyn R. Wilson
Chapter 11: Valuation Adjustments
5
Equities
• If the adjustment increases (decreases) the value of the securities,
a deferred tax liability (asset) is recognized to reflect the tax
consequences that would occur if the securities were sold at their
current values in the future.
• If the adjustment increases (decreases) the value of the securities,
other comprehensive income (OCI) reflects the after-tax gain (loss) that
would accrue to owners if the securities were sold at their current
values. OCI is closed to accumulated OCI at the end of the reporting
period.
Trading Securities
The accounting for trading securities is similar to available-for-sale
securities except the after-tax effects of valuation adjustments effect net
income rather than OCI. Thus, unrealized gains and losses associated with
trading securities are recognized in income.
Held-to-maturity Securities
Held-to-maturity securities are not adjusted for increases in fair value but,
like all other assets, are adjusted for impairments (significant declines)
based on the “lower of cost or market” principle.
Tax Consequences
Realized gains and losses affect the current provisions of tax expenses, just
as they do for PP&E disposals. Thus, these tax effects are included in the
entry recording the tax expense.
Unrealized gains and losses also have tax effects that depend on the way
the investments are classified. As indicated earlier, unrealized gains and
losses of investments classified as trading assets are recognized in financial
reporting income. Generally, these unrealized gains and losses are not
recognized for tax reporting until they are realized. Thus, unrealized gains
and losses on trading assets recognized in financial reporting income
generally affect the deferred tax provision.
Unrealized gains and losses on available-for-sale investments are not
recognized in financial reporting income, but they are recognized in
owners’ equity. Intel mentions the tax consequences of these unrealized
gains and losses in the Investments section of the Accounting Policies
footnote (underline added for emphasis):
Investments designated as available-for-sale are recorded at fair
value, with unrealized gains and losses, net of tax, recorded in
accumulated other comprehensive income.
Page 54, Intel’s 2006 Annual Report
© 1991–2009 NavAcc LLC, G. Peter & Carolyn R. Wilson
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Navigating Accounting
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A CLOSER LOOK AT THE KEY
CONCEPTS
Accounting for realized investment security gains and losses is similar
to accounting for PP&E disposals. PP&E disposals have the following
consequences:
• cash (or other proceeds) increases from selling PP&E,
• the historical cost of the PP&E is removed from the books,
• the accumulated depreciation associated with the disposal is removed
from the books, and
• a gain or loss is recorded, depending on whether the cash received
exceeds, or is less than, the PP&E’s book value (historical cost less
accumulated depreciation).
The realized gains (losses) are determined essentially the same way
for marketable securities as for PP&E, but several accounts related to
unrealized gains and losses must be removed when securities are sold. To
this end, you must first learn how unrealized gains and losses are recorded.
The realized gain (loss) from selling or otherwise disposing of an asset is
the fair value of the proceeds received (e.g., cash) less the cost-based value
of the disposed asset.
The cost-based value is (1) the historical cost of the asset, less (2) a
contra account such as accumulated depreciation or amortization (if one
exists), plus (3) accrued interest income that has not been collected. In
studying marketable securities and other balance-sheet items reported
at fair value, you must be careful to distinguish cost-based values from
market-based values (fair values), which continually change with stock or
debt prices.
As indicated earlier, unrealized gains and losses differ from realized ones
in that the related asset has not been sold. Otherwise, the definition is
essentially the same: the unrealized gain (loss, if negative) of an asset is its
fair value less its cost-based value. Realized and unrealized gains and losses
are defined similarly for liabilities.
Example
Assumptions
• XYZ Company buys a share of another company’s stock for $1 at the
start of XYZ’s first year of operations.
• XYZ classifies the stock as available-for-sale.
© 1991–2009 NavAcc LLC, G. Peter & Carolyn R. Wilson
Chapter 11: Valuation Adjustments
7
• The market value of the share is $4 at the end of the first year.
• XYZ sells the stock for $5 one month into its second year.
Recording the Purchase
When the security is purchased, XYZ records:
• a $1 cash decrease, and
• a $1 increase to a cost-based marketable security asset account
classified as available-for-sale. As is true for gross PP&E, the amount
in this cost-based account remains unchanged so long as XYZ owns
the security.
Recording Valuation Adjustments
On the asset side of the balance sheet, valuation adjustments are recorded
in adjunct or contra accounts. An adjunct account is the opposite of
a contra account; a companion account increasing the value of an asset,
liability, or owners’ equity item above its cost. In contrast to PP&E,
many of these adjunct and contra accounts are not disclosed separately
in financial reports. Rather, as we shall see for Intel, they are used to
accumulate data needed to meet GAAP disclosures.
On the equity side of the balance sheet, valuation adjustments are
recorded as [unrealized] gains/losses in other comprehensive income.
These are closed into accumulated other comprehensive income at the
end of the reporting period.
Under GAAP, XYZ reports a $4 asset for this marketable security on its
end-of-year-one balance sheet. Stated alternatively, the recognized “book
value” is the market-based or fair value of $4. The cost-based value is
still $1, but there is an unrealized gain of $3: the market-based value of
$4 less the cost-based value of $1. Unrealized gains and losses change
daily with stock prices, but typically they are only updated in accounting
systems at the end of accounting periods. There are exceptions; some
financial institutions and other companies with large investment holdings
update these accounts daily to facilitate internal investment decisions.
How is the $3 unrealized gain recorded? Assuming a $40% future tax
rate, the entry to record the gain is:
• increase the marketable security asset adjunct account by $3 (the
pretax unrealized gain),
• increase other comprehensive income by $1.80 (the after tax
unrealized gain), and
• increase the deferred tax liability by $1.20 (the tax that will be paid
in the future, if the share is sold for $4, which equals 40% of the $3
gain).
© 1991–2009 NavAcc LLC, G. Peter & Carolyn R. Wilson
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Navigating Accounting
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• Other comprehensive income is closed into Accumulated other
comprehensive income at the end of the period.
Intuitively, the government and owners of XYZ both benefit from the
gain, but neither will receive cash until the gain is realized (assuming the
stock price does not drop).
In the MMS model, we split this event into two parts: (1) record the $3
pretax unrealized gain (event MMS51), and (2) record the $1.20 related
tax consequences (event MMS56). Thus, first increase the equity adjunct
account by the pretax gain of $3 and then decrease it by the $1.20 tax
consequences.
The $3 in the adjunct asset account is added to the $1 in the cost-based
marketable security account to get the $4 “fair value” recognized on
the balance sheet. The $3 unrealized gain is typically reported in the
footnotes. If the share price had dropped from $1 to $0.25, a contra
account would be used to record a $0.75 unrealized loss.
Intel’s Related Activity
Next we will relate the example to Intel. Intel reports $178 year-end
unrealized gains and ($1) of unrealized losses for 2006 as summarized
below. Thus, Intel recognizes a pretax net unrealized gain of $177 ($178 $1) in its balance sheet for 2006. Intel recognized a pretax net unrealized
gain of $159 ($164 - $5) one year earlier.
The following table summarizes the pretax unrealized gains and losses on
Intel’s available-for-sale securities:
Intel's Pretax
Available-for-Sale Unrealized Gains/Losses
End of 2006
End of 2005
Increase (decrease)
Unrealized gains
Unrealized losses
Net gains
$178
$164
$14
($1)
($5)
$4
$177
$159
$18
Page 68, Intel’s 2006 Annual Report
These net gains, which pertain to the available-for-sale investments only,
are recognized in Intel’s balance sheet, but not recognized in its income
statement. The unrealized gains and losses associated with these availablefor-sale securities affect other comprehensive income, rather than net
income. In contrast, unrealized gains and losses associated with trading
securities are recognized in income.
© 1991–2009 NavAcc LLC, G. Peter & Carolyn R. Wilson
Chapter 11: Valuation Adjustments
9
• Considerable judgment is required to classify securities
and managers are not indifferent about the outcome.
Intel, would have reported about five billion dollars
less pretax income in 2000 if it had been required to
recognize unrealized losses on available-for-sale securities.
• As a user of financial statements, especially for banks and
companies with large securities holdings, you need to
understand the consequences of these judgments on net
income and know how to assess their appropriateness.
Recall from the XYZ example, a deferred tax liability recognizes the
income taxes that will be due if unrealized gains are realized, and a
deferred tax asset recognizes tax benefits if unrealized losses are realized.
For Intel, assuming a 35% tax rate, and multiplying the numbers in the
previous table by this rate, yields the deferred tax assets and liabilities
associated with Intel’s available-for-sale investments:
Intel's Taxes
Available-for-Sale Unrealized Gains/Losses
End of 2006
End of 2005
Increase (decrease)
Deferred tax liability
Deferred tax asset
$62.30
$57.40
$4.90
($0.35)
($1.75)
$1.40
Net deferred tax
liability
$61.95
$55.65
$6.30
Subtracting the table above from the earlier one yields the after-tax
consequences for accumulated other comprehensive income associated
with Intel’s available-for-sale investments:
Intel's Net of Taxes
Available-for-Sale Unrealized Gains/Losses
End of 2006
End of 2005
Increase (decrease)
Unrealized gains
Unrealized losses
$115.70
$106.60
$9.10
($0.65)
($3.25)
$2.60
Accumulated other
comprehensive
income
$115.05
$103.35
$11.70
Above, we estimate Intel recognized $12 of other comprehensive income
associated with available-for-sale investments (the change in accumulated
other comprehensive income). This estimate is very close. Intel reports a
$13 ($113 - $100) change in Accumulated net unrealized holding gain
on available-for-sale investments at the bottom of its Comprehensive
income footnote (page 71, Intel’s 2006 Annual Report). Importantly, the
$13 represents the change in the unrealized gains and losses during 2006,
net of taxes, not the year-end balance.
© 1991–2009 NavAcc LLC, G. Peter & Carolyn R. Wilson
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Navigating Accounting
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Note Intel reports a $184 decrease in Total accumulated other
comprehensive income (loss) for 2006 (- $57 - $127), including the
impact of available-sale investments, derivatives and pension liability. This
$184 change is also reported in the bottom panel on Intel’s Statement of
stockholders’ equity ($26 - $210) (page 52, Intel’s 2006 Annual Report).
The deferred tax table on page 74 of Intel’s 2006 Annual Report shows a
$149 net deferred tax liability for Unrealized gains on investments. Thus,
our $62.30 deferred tax liability year-end 2006 estimate (in our earlier
tax table) is not precise. Similarly, the $57.40 year-end 2005 estimate in
the table is imprecise: Intel shows $123 in the footnote. Thus, we must
conclude that some other event or circumstance is affecting the year-end
balances (perhaps the tax consequences of derivative gains).
Later, we will see evidence suggesting deferred taxes were likely affected by
unrealized gains and losses associated with financial derivatives.
Realized Gains and Losses
Example
When XYZ sells the security for $5 one month into the second year, the
realized gain is $4 = $5 - $1. This is also the unrealized gain immediately
before the sale. However, the recognized, unrealized, value is still $4, (the
amount recognized at the end of the first year).
What is the entry to record this sale? Like recording PP&E disposals, all
of the accounts related to this security must be removed from the books
and the cash proceeds and gain must be added to the books:
• cash increases by $5,
• marketable securities at cost decreases by $1,
• the asset adjunct account decreases by $3,
• accumulated other comprehensive income decreases by $1.80,
• deferred taxes decrease by $1.20, and
• a $4 realized gain is recorded.
• At the end of the year, the tax effect of this entry would be recorded
implicitly to the current provision, along with the other items
affecting taxable income.
Recording realized gains and losses is considerably easier for MMS.
Because they are in their first year, no unrealized gains and losses have
been recognized when the securities are sold. Suppose, for example, XYZ
© 1991–2009 NavAcc LLC, G. Peter & Carolyn R. Wilson
Chapter 11: Valuation Adjustments 11
company had sold its marketable security just before the close of the
first year, and in particular, before recording unrealized gains and losses.
XYZ would have recorded: (a) a $4 increase in cash, (b) a $1 decrease in
marketable securities at cost, and (c) a $3 realized gain.
Intel’s Comprehensive Income Footnote
Intel’s Comprehensive income footnote (Page 71 of its 2006 Annual
Report) presents two tables that can be interpreted in light of our earlier
estimates. The first table reports two entries associated with unrealized
gains netting to $13 of other comprehensive income:
• $61 Change in net unrealized holding gain on investments, net of tax
of $(33) for 2006
• less: ($48) adjustment for net realized gain or loss on investments
included in net income, net of tax of $27 for 2006
The ($48) represents a transfer from Accumulated other comprehensive
income to income on the income statement. Because it decreased other
comprehensive income, as indicated in the table, the offsetting entry
must have increased net income (to keep the balance-sheet equation
balanced). Thus, $48 was a net gain recognized in net income.
The two tax entries disclosed in the table total ($6), which is ($33)
associated with the first row in the table and $27 associated with the
second row. Thus, our $6.30 estimate of the change in net deferred tax
liabilities associated with available-for-sale investments is fairly precise.
The first table in the Comprehensive income footnote reports flows
- other comprehensive income. By contrast, the second table reports stocksaccumulated other comprehensive income. Notice the $113 Accumulated
net unrealized gain on available-for-sale investments reported in the
second table is close to the $115.05 estimate for year-end 2006.
© 1991–2009 NavAcc LLC, G. Peter & Carolyn R. Wilson
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Navigating Accounting
R
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P
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ssets
=
iabilities
+O
wners'
liabilities + permanent OE+
E
quities
temporary OE
Zero
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t
r
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Tr Bal
Cls IS
Cls RE
End Bal
Direct Cash Flows
R
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P
O
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=L
cash +other assets
Beg Bal
Zero
Balance Sheets
Income Statements
Operating
Assets
Investing
Liabilities
Expenses
Financing
Owners' Equity
Gains & Losses
Revenue
®
Exercise 11.01
Record events MMS 7, 48-51 and 56 and explain how these events affect
the three financial statements.
How do these events relate to Intel?
Net Income
Cash change
Reconciliations
Net Income
Adjustments
Operating Cash
Where would you search for related disclosures in Intel’s 2006 Annual
Report?
Record Keeping
and Reporting
Icon
This exercise helps
you meet the insider
record keeping and
reporting challenge.
© 1991–2009 NavAcc LLC, G. Peter & Carolyn R. Wilson
Chapter 11: Valuation Adjustments 13
R
E
C
O
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K
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P
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A
ssets
=
iabilities
+O
wners'
liabilities + permanent OE+
E
quities
temporary OE
Zero
E
n
t
r
i
e
s
Tr Bal
Cls IS
Cls RE
End Bal
Direct Cash Flows
R
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P
O
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=L
cash +other assets
Beg Bal
Zero
Balance Sheets
Income Statements
Operating
Assets
Investing
Liabilities
Expenses
Financing
Owners' Equity
Gains & Losses
Revenue
Net Income
Cash change
Reconciliations
Exercise 11.02
The goals of this exercise are: (1) to give you an opportunity to practice
the entries discussed in the text from the perspective of an insider, and (2)
introduce a template we will modify slightly in the next exercise to reverse
engineer entries from the perspective of an outsider.
Net Income
Adjustments
Operating Cash
Record Keeping
and Reporting
Icon
This exercise helps
you meet the insiders’
record keeping and
reporting challenge.
You will need to open the following Excel file to complete this exercise:
Ex_11.02.xls.
Required
Given the assumptions below, complete the entries and year-end balances
in the Insiders_Val_Adj_ Template worksheet of Ex_11.02.xls.
Assumptions for years 1 and 2
• The tax rate is 35%
• All securities are classified as available for sale
Year-1
• Purchase $1,000 of securities
• Sell securities costing $175 for $200 prior to these securities being
written to fair value for the first time at year-end. Thus, there were
no previously recognized unrealized gains or losses associated with
the sold securities.
• At year end, the investment portfolio has $300 of unrealized gains
and $100 of unrealized losses.
Year-2
• Purchase $1,100 of securities
• Sell several securities during the year with a total historical cost
of $250 for $400. Some of these securities had a total of $120
unrealized gains, others had a total of $20 of unrealized losses,
and the remainder had no previously recorded unrealized gains or
losses.
• At year-end, management concluded part of the portfolio had a
$40 other-than-temporary loss. Management’s policy is to charge
other-than-temporary losses directly to the historical cost securities
account.
• At year end, the investment portfolio has $430 of unrealized gains
and $150 of unrealized losses.
© 1991–2009 NavAcc LLC, G. Peter & Carolyn R. Wilson
14
Navigating Accounting
R
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=L
=
iabilities
+O
wners'
liabilities + permanent OE+
E
quities
temporary OE
Zero
E
n
t
r
i
e
s
Tr Bal
Cls IS
Cls RE
End Bal
Direct Cash Flows
R
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P
O
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T
I
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ssets
cash +other assets
Beg Bal
Zero
Balance Sheets
Income Statements
Operating
Assets
Investing
Liabilities
Expenses
Financing
Owners' Equity
Gains & Losses
Revenue
Net Income
Cash change
Reconciliations
Net Income
Adjustments
Operating Cash
Record Keeping
and Reporting
Icon
This exercise
helps you meet the
outsiders’ record
keeping and reporting
challenge — reverse
engineering entries.
®
Exercise 11.03
The goal of this exercise is to introduce a template we will use to reverse
engineer available-for-sale-investments’ entries from the perspective of an
outsider.
You will need to open the following Excel file to complete this exercise:
Ex_11.03.xls.
Template Modifications
As indicated below, the events here are the same as those in Exercise
11.02. However, the outsider template introduced here combines some
of the accounts and entries we used in Exercise 11.02. Specifically, the
template:
• Has 14 unknown items, X1-X14, and contains a general structure
for available-for-sale-investments’ valuation adjustments based on the
entries in Exercise 11.02.
• Records securities sales in one entry rather than three.
• Nets the deferred tax assets and liabilities into a single net deferred tax
liability account: NetDTL = DTL - DTA.
• Nets unrealized gains and losses into a single net unrealized gains
account: Neturg = Msurg - Msurl.
Assumptions
The assumptions are the same as those in Exercise 11.02:
Assumptions for years 1 and 2
• The tax rate is 35%
• All securities are classified as available for sale
Year-1
• Purchase $1,000 of securities
• Sell securities costing $175 for $200 prior to these securities being
written to fair value for the first time at year-end. Thus, there were
no previously recognized unrealized gains or losses associated with
the sold securities.
• At year end, the investment portfolio has $300 of unrealized gains
and $100 of unrealized losses.
Year-2
• Purchase $1,100 of securities
© 1991–2009 NavAcc LLC, G. Peter & Carolyn R. Wilson
Chapter 11: Valuation Adjustments 15
• Sell several securities during the year with a total historical cost
of $250 for $400. Some of these securities had a total of $120
unrealized gains, others had a total of $20 of unrealized losses,
and the remainder had no previously recorded unrealized gains or
losses.
• At year-end, management concluded part of the portfolio had
a $40 other-than-temporary loss. Management’s policy is to
charge other-than-temporary losses directly to the historical cost
securities account.
• At year end, the investment portfolio has $430 of unrealized gains
and $150 of unrealized losses.
Required
The template in Ex_11.03.xls has 14 variables X1-X14 in cells related to
available-for-sale investments entries or balances. An outsiders’ challenge
in reverse engineering entries is to locate or estimate as many of these
variables as possible. This following questions aim to prepare you for this
challenge.
(a) Record entries into the template by replacing variables with numbers
determined by the above assumptions.
(b) Determine the beginning and ending balances by replacing variables
with numbers.
(c) If you were an outsider who did not know the assumptions behind
the entries, what variables or combinations of variables in the
template might you expect to find in a company’s annual report and
where would you expect to find them?
© 1991–2009 NavAcc LLC, G. Peter & Carolyn R. Wilson
16
Navigating Accounting
®
Exercise 11.04
This exercise pertains to investments and valuation adjustment questions
on the 2007 final exam, which was based on a supplement from
Motorola’s fiscal 2006 annual report.
Search Icon
This exercise
requires you
to search for
information.
R
E
C
O
R
D
K
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P
I
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A
=L
=
iabilities
Answer final exam 2007 questions 1h, 3e, and 4d.
+O
wners'
liabilities + permanent OE+
Beg Bal
E
quities
temporary OE
Zero
E
n
t
r
i
e
s
Tr Bal
Cls IS
Cls RE
End Bal
Direct Cash Flows
R
E
P
O
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T
I
N
G
ssets
cash +other assets
Required
Zero
Balance Sheets
Income Statements
Operating
Assets
Investing
Liabilities
Expenses
Financing
Owners' Equity
Gains & Losses
Revenue
Net Income
Cash change
Reconciliations
Net Income
Adjustments
Operating Cash
Record Keeping
and Reporting
Icon
This exercise
helps you meet the
outsiders’ record
keeping and reporting
challenge — reverse
engineering entries.
Usage Icon
This exercise helps
you learn how
accounting reports
are interpreted and
used by outsiders.
© 1991–2009 NavAcc LLC, G. Peter & Carolyn R. Wilson
Chapter 11: Valuation Adjustments 17
Exercise 11.05
This exercise pertains to investments and valuation adjustment questions
on the 2006 final exam, which was based on a supplement from HewlettPackard’s (HP’s) fiscal 2005 annual report. HP’s fiscal 2005 year started
on November 1, 2004 and ended on October 31, 2005.
Search Icon
This exercise
requires you
to search for
information.
R
E
C
O
R
D
K
E
E
P
I
N
G
A
ssets
cash +other assets
=
iabilities
Answer final exam 2006 questions 3c, 3k, and 4h.
+O
wners'
liabilities + permanent OE+
Beg Bal
E
quities
temporary OE
Zero
E
n
t
r
i
e
s
Tr Bal
Cls IS
Cls RE
End Bal
Direct Cash Flows
R
E
P
O
R
T
I
N
G
=L
Required
Zero
Balance Sheets
Income Statements
Operating
Assets
Investing
Liabilities
Expenses
Financing
Owners' Equity
Gains & Losses
Revenue
Net Income
Cash change
Reconciliations
Net Income
Adjustments
Operating Cash
Record Keeping
and Reporting
Icon
This exercise
helps you meet the
outsiders’ record
keeping and reporting
challenge — reverse
engineering entries.
Usage Icon
This exercise helps
you learn how
accounting reports
are interpreted and
used by outsiders.
© 1991–2009 NavAcc LLC, G. Peter & Carolyn R. Wilson
18
Navigating Accounting
®
Exercise 11.06
This exercise pertains to questions involving investments and
comprehensive income on the 2005 final exam, which was based on a
supplement from Boston Scientific’s fiscal 2004 annual report.
Search Icon
This exercise
requires you
to search for
information.
R
E
C
O
R
D
K
E
E
P
I
N
G
A
=L
=
iabilities
+O
wners'
liabilities + permanent OE+
Beg Bal
E
quities
temporary OE
Zero
E
n
t
r
i
e
s
Answer final exam 2005 question 1c, 1d, 1i, 4e, 4h, and 5a. Be sure to
read the directions for question 4 on the top of page 8, which specifies
how account names should be chosen.
Tr Bal
Cls IS
Cls RE
End Bal
Direct Cash Flows
R
E
P
O
R
T
I
N
G
ssets
cash +other assets
Required
Zero
Balance Sheets
Income Statements
Operating
Assets
Investing
Liabilities
Expenses
Financing
Owners' Equity
Gains & Losses
Revenue
Net Income
Cash change
Reconciliations
Net Income
Adjustments
Operating Cash
Record Keeping
and Reporting
Icon
This exercise
helps you meet the
outsiders’ record
keeping and reporting
challenge — reverse
engineering entries.
Usage Icon
This exercise helps
you learn how
accounting reports
are interpreted and
used by outsiders.
© 1991–2009 NavAcc LLC, G. Peter & Carolyn R. Wilson
Chapter 11: Valuation Adjustments 19
Exercise 11.07
This exercise pertains to questions involving investments and
comprehensive income on the 2004 final exam, which was based on a
supplement from AMD’s fiscal 2003 annual report.
Search Icon
This exercise
requires you
to search for
information.
R
E
C
O
R
D
K
E
E
P
I
N
G
A
ssets
=
iabilities
+O
wners'
liabilities + permanent OE+
Beg Bal
E
quities
temporary OE
Answer question final exam 2004 1b, 1d, 4b, and 4g. Be sure to read
the directions for question 4 on the top of page 8, which specifies how
account names should be chosen.
Zero
E
n
t
r
i
e
s
Tr Bal
Cls IS
Cls RE
End Bal
Direct Cash Flows
R
E
P
O
R
T
I
N
G
=L
cash +other assets
Required
Zero
Balance Sheets
Income Statements
Operating
Assets
Investing
Liabilities
Expenses
Financing
Owners' Equity
Gains & Losses
Revenue
Net Income
Cash change
Reconciliations
Net Income
Adjustments
Operating Cash
Record Keeping
and Reporting
Icon
This exercise
helps you meet the
outsiders’ record
keeping and reporting
challenge — reverse
engineering entries.
Usage Icon
This exercise helps
you learn how
accounting reports
are interpreted and
used by outsiders.
© 1991–2009 NavAcc LLC, G. Peter & Carolyn R. Wilson
20
Navigating Accounting
®
Exercise 11.08
This exercise pertains to questions involving investments and
comprehensive income on the 2003 final exam, which was based on a
supplement from Gateway’s fiscal 2002 annual report.
Search Icon
This exercise
requires you
to search for
information.
R
E
C
O
R
D
K
E
E
P
I
N
G
A
ssets
=
iabilities
+O
Answer final exam 2003 questions 1b, 2a and 2i.
wners'
liabilities + permanent OE+
Beg Bal
E
quities
temporary OE
Zero
E
n
t
r
i
e
s
Tr Bal
Cls IS
Cls RE
End Bal
Direct Cash Flows
R
E
P
O
R
T
I
N
G
=L
cash +other assets
Required
Zero
Balance Sheets
Income Statements
Operating
Assets
Investing
Liabilities
Expenses
Financing
Owners' Equity
Gains & Losses
Revenue
Net Income
Cash change
Reconciliations
Net Income
Adjustments
Operating Cash
Record Keeping
and Reporting
Icon
This exercise
helps you meet the
outsiders’ record
keeping and reporting
challenge — reverse
engineering entries.
Usage Icon
This exercise helps
you learn how
accounting reports
are interpreted and
used by outsiders.
© 1991–2009 NavAcc LLC, G. Peter & Carolyn R. Wilson
Chapter 11: Valuation Adjustments 21
Exercise 11.09
This exercise pertains questions involving investments and comprehensive
income on the 2000 final exam, which was based on a supplement from
Cisco’s fiscal 2000 annual report.
Search Icon
This exercise
requires you
to search for
information.
R
E
C
O
R
D
K
E
E
P
I
N
G
A
ssets
=
iabilities
Answer final exam 2000 questions 3i and 5.
+O
wners'
liabilities + permanent OE+
Beg Bal
E
quities
temporary OE
Zero
E
n
t
r
i
e
s
Tr Bal
Cls IS
Cls RE
End Bal
Direct Cash Flows
R
E
P
O
R
T
I
N
G
=L
cash +other assets
Required
Zero
Balance Sheets
Income Statements
Operating
Assets
Investing
Liabilities
Expenses
Financing
Owners' Equity
Gains & Losses
Revenue
Net Income
Cash change
Reconciliations
Net Income
Adjustments
Operating Cash
Record Keeping
and Reporting
Icon
This exercise
helps you meet the
outsiders’ record
keeping and reporting
challenge — reverse
engineering entries.
Usage Icon
This exercise helps
you learn how
accounting reports
are interpreted and
used by outsiders.
© 1991–2009 NavAcc LLC, G. Peter & Carolyn R. Wilson
22
Navigating Accounting
®
Exercise 11.10
Search Icon
This exercise requires you
to search for information.
R
E
C
O
R
D
K
E
E
P
I
N
G
A
ssets
=
iabilities
+O
wners'
liabilities + permanent OE+
E
quities
Zero
Required
Tr Bal
Cls IS
Cls RE
End Bal
Zero
Balance Sheets
Income Statements
Operating
Assets
Revenue
Investing
Liabilities
Expenses
Financing
You are to search for information in Intel’s 2004 annual report.
temporary OE
E
n
t
r
i
e
s
Direct Cash Flows
R
E
P
O
R
T
I
N
G
=L
cash +other assets
Beg Bal
This goal of this exercise is to help you learn how to reverse engineer as
many entries and related information about available-for-sale investments
as possible from Intel’s 2004 annual report, using the “outsiders” template
developed in Exercise 11.03. A copy of this template is included in
Ex_11.08.xls, which you will use for this exercise.
Owners' Equity
Gains & Losses
Net Income
Cash change
Reconciliations
Net Income
Locate or estimate as many of the 14 unknowns in the outsiders’
valuation adjustment template in Ex_11.08.xls as you can. Replace the
template variables with the numbers you estimate or locate.
Adjustments
Operating Cash
Record Keeping
and Reporting
Icon
This exercise
helps you meet the
outsiders’ record
keeping and reporting
challenge — reverse
engineering entries.
Usage Icon
This exercise helps
you learn how
accounting reports
are interpreted and
used by outsiders.
© 1991–2009 NavAcc LLC, G. Peter & Carolyn R. Wilson
Chapter 11: Valuation Adjustments 23
Exercise 11.11
Search Icon
This exercise requires you
to search for information.
R
E
C
O
R
D
K
E
E
P
I
N
G
A
ssets
=
iabilities
+O
wners'
liabilities + permanent OE+
E
quities
temporary OE
Zero
E
n
t
r
i
e
s
Tr Bal
Cls IS
Cls RE
End Bal
Direct Cash Flows
R
E
P
O
R
T
I
N
G
=L
cash +other assets
Beg Bal
Zero
Balance Sheets
Income Statements
Operating
Assets
Investing
Liabilities
Expenses
Financing
Owners' Equity
Gains & Losses
Revenue
This goal of this exercise is to help you learn how to reverse engineer as
many entries and related information about available-for-sale investments
as possible from Cisco’s fiscal 2000 annual report using the “outsiders”
template developed in Exercise 11.03. A copy of this template is included
in Ex_11.09.xls, which you will use for this exercise.
Required
Locate or estimate as many of the 14 unknowns in the outsiders’
valuation adjustment template in Ex_11.09.xls as you can. Replace the
template variables with the numbers you estimate or locate.
Net Income
Cash change
Reconciliations
Net Income
Adjustments
Operating Cash
Record Keeping
and Reporting
Icon
This exercise
helps you meet the
outsiders’ record
keeping and reporting
challenge — reverse
engineering entries.
© 1991–2009 NavAcc LLC, G. Peter & Carolyn R. Wilson