Finance and Investment Cycle

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Finance and Investment Cycle
I. Introduction
A. Special purpose entities
B. Transaction: less frequent, large and complex
C. Focus of control activities: authorization of transactions & compete of accounting personnel D. Focus of substantive procedures: understanding of the transactions, verifying amounts and calculations, ensuring presentation and disclosures II. Inherent risks

E. Lease accounting
1. The classification of operating or capitalized lease is based on the assumption in ASC840 F. Loan covenants
2. Intend to keep the borrower’s financial position at the same level as it was when the bank initiated the loan 3. Covenants restrict payment of dividends, additional borrowing, use of assets for collateral on other debt 4. If violated, called immediately. If cannot pay, force to bankruptcy G. Related party transactions

5. On that can exert significantly influence over another party H. Complex transactions
6. Managers want to keep risky ventures off the financial statement 7. Transactions: complex, difficult to audit, can be used as vehicles to hide fraud I. Impairments
8. Risk of asset impairments: loss of valuation
9. GAAP requirements: impairments be taken as losses when they occur 10. “Big bath”: writing off assets and building up reserves to reduce expense in future years J. Presentation and disclosure

11. Capital lease: presented in a manner identical to purchased assets 12. Operating lease: disclosed solely in the footnote 13. Fixed assets not used in the operation or projected for future use in the operation should not be classified as PPE, but in “other assets” 14. Impairment of intangible assets must be disclosed III. Typical activities in finance and investment cycle

K. Overview:
15. Accounts and records ranging across: tangible, intangible, LT liabilities, deferred credits, stockholders’ equity, gain and losses, expenses, and income taxes 16. The cycle generally involves: large, infrequent transactions. 17. Auditing focus: substantive procedures

18. Cycle’s major functions: financial planning, raising capital, entering into M&A L. Financing transactions: Debts and stockholder equity capital 19. Transactions: few in number, large in money

20. The highest level of corporate governance authorize and execute transactions M. Financial planning (1)
21. Starts with cash flow forecast by CFO
22. Cash flow forecast informs business plans, prospects for cash flows, needs for cash outflows, integrates with the capital budge, which contains the plans for asset purchase and business acquisition 23. Capital budget approved by the board of directors constitute the authorization for major capital assets acquisitions and investments N. Raising capital (2)

24. Overview:
i. Authorization: board of directors. Must sign registration documents for public securities offering. ii. Authorization delegation: to CFO, treasurer, chair of board of directors, other high-ranking officers iii. Transfer agent: handle company’s bond and stock, tracks securities owners for payments of interest and dividends (bank/trust company) iv. Registrar: keep certificate records, updates records based on information from the transfer agent v. Keep transactions off the balance sheet using SPE -Past 25. Record keeping for long-term liabilities:

vi. Note and bond payable: compare payment notices from lenders to the accounting records, monitor due dates, set up interest in voucher for payment, make accruals for unpaid vii. Only a few bonds, note outstanding: all in general ledger, no subsidiary records viii. Large number...
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