Income Taxes (Reading 37)

So far, this is the worst chapter I've seen. The text is poorly written. Seems to me that the authors just lift the text from the technical specification wholesale.



Deferred tax Assets - Is like the company overpaying income tax which it expects a future refund (or a reduction in tax) provided there is future profit to remain taxable.



Deferred tax liability - Is like the company underpaying the income tax which it expects to pay back in later period provided there is future profit to remain taxable.



In the Income Statement: Income tax expense (based on accounting profit) = net increase in deferred tax liablity + tax payable (which is the amount that is going to be paid in cash to the authority)



Tax Base of an Asset = The amount that will be deductible for tax purposes in future periods as the economic benefits become realized. "Deductible" means able to reduce tax payable.



==>I still cannot mechanically understand how to determine the Tax Base of an Asset :(



Tax Base of a Liability = Carrying amount - any amount that will be tax deductible in future.

If the liability is a prepaid revenue, tax base of liability = carrying amount - the revenue that will not be taxable in future.

Completed Inventories (Reading 35)

This was another horrible chapter. The concepts are not difficult to grasp but the chapter was poorly written. Instead of giving a systematic explanation and formulae, it gave many examples instead. With so many figures in the example, it tends to cloud the underlying concepts. I have to make my own summary by extracting from the examples given. This was not a good chapter to read.

By end of this week, I've to complete 3 chapters. It looks to me that it is impossible. I spent one full day on Inventories itself.

Converting a financial statement from LIFO to FIFO

Adjustment for Inventory value in balance sheet:
Inventory (FIFO) = Inventory(LIFO) + LIFO Reserve
Total Assets (FIFO) = Total Asset (LIFO) + LIFO Reserve

Adjustment for Cost of Goods Sold in Income Statement:
Y2006 Cost of Goods Sold (FIFO) = Y2006 Cost of Goods Sold (LIFO) - (Y2006 LIFO Reserve - Y2005 LIFO Reserve)

Call this deltaReserve = (Y2006 LIFO Reserve - Y2005 LIFO Reserve)

Adjustment to Net Income:
Net Income (FIFO) = Net Income (LIFO) + deltaReserve * (1 - tax rate)

Estimated Cumulative tax savings under LIFO vs FIFO:
Cumulative Gross Profit Saved
= Cumulative Gross Profit (FIFO) - Cumulative Gross Profit (LIFO)
= LIFO Reserve

Cumulative tax saved under LIFO = LIFO Reserve * tax rate (assuming constant tax rate in previous years)

Adjustment to Tax Deferred Liability:
Increased in (Debt) tax deferred liability (FIFO) = LIFO Reserve * tax rate

Adjustment to retained earnings:
Increase in retained earnings (FIFO) = LIFO Reserve * ( 1 - tax rate)

LIFO and FIFO ratios:
Inventory turnover ratio (FIFO) = Cost of Goods Sold (FIFO) / Inventory (FIFO)

Number of days of inventory (FIFO) = 365 / Inventory turnover ratio (LIFO)

Gross Profit Margin (FIFO) = Gross Profit / Revenue = (Revenue - Gost of Goods Sold (FIFO) ) / Revenue

Current Ratio (FIFO) = Current Assets / Current Liability = Total Assets (FIFO) / (Total Liability (LIFO) + Increased in (Debt) tax deferred liability (FIFO))

Return On Assets (FIFO) = Net Income / Total Asset = Net Income (FIFO)/Total Assets (FIFO)

Debt To Equity (FIFO)
= Total Liability / Shareholders' Equity
= (Total Liability (LIFO) + Increased in (Debt) tax deferred liability (FIFO)) / (Equity (LIFO) + Increase in retained earnings (FIFO))

Understanding Cash Flow Statements

The Reading 34 turns out to be one of the greatest torture I have to go through. I took more than one and a half week on it. Partly because I had to work and hence could not have a continous study time of straight six hours but partly because the topic turns out to be deadly difficult. What is so difficult about cash flow right? Goodness, you cannnot imagine how accountants have invented horrible things probably just to make sure they keep their jobs! The Net Income to Operational Cash Flow reconciliation turns out to be non-trival. Familiarisation of accurals are extremely important. Determining how much cash the firm receives from sale of an equipment just examining the Income and Balance Sheet was not easy. But there are some standard formulaes that must be committed to the brain. Since my mind is fresh I'll type it here because I am sure these will become alien to me once again a few months down the road when I make my revisions:

Reconcile Net income to Operation Cash Flow:
Start:
+Net Income
- Depreciation Expense (because depreciation is recognised as an expense but there is no outflow of cash)
- Change in Accounts Receivable (because a positive change receivable means revenue but cash has yet to be collected from the customer)
+Change in Accounts Payable (because a positive change payable means expense was recognised but firm has yet to pay cash to suppliers)
- Change in Inventory (a positive change in inventory means cash is been paid to suppliers yet no expense is recognised)
= Cash Flow Due to Operations

Calculating Cash Received from sale of equipment:
First Step: Calculate Historical Cost of equipment sold -

Begin Equipment Historical Cost
+Equipment Purchase during the year
- Ending Equipment Historical Cost
= Historical Cost of equipment sold

Second Step: Calculate depreciation value of equipment sold -

Begin Accumulated depreciation
+Depreciation expense for the year
-ending Accumulated depreciation
= depreciation value of equipment sold

Third Step: Calculate cash received from equipment sold-
Book Cost of equipement sold = Historical Cost of equipment sold -depreciation value of equipment sold
Plus Gain (loss)
= cash received from equipment sold

Calculating cash paid to suppliers, customers, employees, and "other operating expenses", income taxes must be commtited to the brain cells.

Starts FSA-8 tonight

Tonight i'll start on the Study Session 8 of Financial Reporting and Analysis.

So far I am OK with FSA although I am running a little bit behind time. It looks to me that all the hype from the prep providers which have been saying how difficult FSA is isn't that true. In fact, reading the text really give a firm foundation in FSA.

Moved on to FSA

I have already started reading the financial reporting and analysis. Preliminarily, the text are quite easy. The explanations in the text are good enough. Previously I attended a free sample lecture on FSA from Stalla. After reading the text, it seems that the lectures were not relevant at all. It was taught too fast and the lecture spent too much time on debit and credit. In the text, debit and credit are considered optional reading! In fact, the text managed to explain the concepts of double entry accounting without even teaching the T-accounts. After reading Reading 30, I could do basic double entry accounting without figuring out the debits and the credits. I could also answer most of the questions at the end of the Reading. I think I made the right decision that it is not necessary to spent many on those prep-course. Phew!

Completed Quant today

At last I completed the Quant today. I am obviously behind time. These topics are not entirely new to me yet I spent too much time on them. I was slowed down by my lost of hard disk data. I spent a few weeks trying to get back to normality. I am going to move to FSA. I heard that this is the worst part of all the topics in the CFA Program. I hope I don't die of studying these.

I have yet to sign up for any Prep course. I have not sign up for these due to budget reason and partly because I find it hard to believe that these courses are necessary. I have been self-studying all the course i did for ChFC and the regulatory exams and so it is very hard for me to think that the lectures are necessary. Nevertheless, I do need to get my hands on those practice exam questions and mock exams and so paying for those are probably unavoidable.

My version of MiniBomb

Many people lost 100% of their structured products. This has become quite politicised but the emotional hurt is real.

I have my own version of losing 100% of my "structured product." The data from my hard disk crashed could not be retrieved. I have outsourced the risk of losing data to Maxtor's Onetouch 4 Mini. When my hard disk crashed, triggering a "credit event," the SafetyDrill could not restore my replacement hard drive to the original state. After the restoration, it seems that the MBR remains corrupted. I called the Seagate's tech support but was routed to a long-distance call to the US of which the voice quality was poor. The tech support took me to run the Maxtor's Onetouch Manager software instead but I was not able to find a feature to restore my partition images. After struggling for the entire night and the entire day today, I concluded the "credit swap counterparty" has "defaulted" - that is to say that the promise of the backup hard drive delivering its promise of data recovery did not come true. I am so depressed. I really wonder can I sue Maxtor for "breach of contract"? All my clients' personal data gone. It is going to be very hard trying to assemble back their particulars. I think I'll just call it quit for the year and go on a long break and then start the new year from a new like a new adviser.

This reminds me of how important family members are. If I cannot get over the lost of data, I don't think I can withstand the lost of love ones. I will remember to love them more and more even if I need to sacrifice the time delicated to studying the CFA.

Skewness, kurtosis, leptokurtic, platykurtic and mesokurtic

Skewness, kurtosis, leptokurtic, platykurtic and mesokurtic were the statistics concepts I learned in today's reading. These are new concepts to me. Very interesting. Reminds me of good old days when I was in "A" levels and U studying. Nevertheless, am not sure how much I have committed to my brain. Also managed to almost complete studying "Probability Concepts". Looking at the text, those who had no background in statistics will definitely fail the Quant section in their CFA. I don't think reading a zillion times over the text will help. The concepts require a math teacher to teach.

Today I felt better physically. I took some painkiller and I felt more energized. Also, the computer man came to replace my hard disk. But I am now trying to restore my hard disk from backup. I was horrified this afternoon to learn that I have accidentality encrypted the data in the backup as my original hard drive was encrypted too. I did not do a security key backup however I do have the partition imaged backup. This hard disk crash is really painful. Thank goodness it was not during my peak period. Restoration is under in progress at this moment in writing. I hope it will turn out well.

Have been feeling really depress recently due to a variety of reasons. One of those reason might be because I felt burn out after working so hard this year and last year. Although I became one of the top-producer in the firm, but I don't think I can consistently do it. For one thing, the number of clients I have now has shot up to more than 100 within just less than 3 years. I don't think I can service so many clients. I've being trying to move up the "value" chain by catering to the high networth individuals. I am currently working on some plans next year which I can earn a decent living yet without accomulating so many clients. That plan will also dependent on my CFA studying progress. I need to plan my work efficiently so that whatever I do is complementary to each other.

Quant Analysis

QA is really really boring. All the stats are too basic for me until I fall asleep easily. However, I just have to force myself to read them at least once. In the meantime, I am slowed down by my tired self. I have sign up for a thorough blood test to see what's wrong with me. My computer has also failed me by breaking down. These irritating matters are really slowing me down.

Sales talk can get rich, CFA Charter getting rich? Nay..

I read in Straits Times about an adviser who is already financially independent. While I have never heard this person speak, my colleague who attended his talk said that he is a typical salesman who compared the 5% Manulife’s SRP to that of the 5% banking preference shares! Hearing that, I did not have good impression. However, looking at the newspaper today, it appeared that he is already a millionaire. Again, I really whether why am I taking the tough and long road to getting the CFA Charter. It is academically rigorous and viewed as the “gold” standard. I know clients don’t care whether an adviser is knowledgeable or not. Clients only like to hear nice things and salestalk. Perhaps that’s why that adviser becomes so successful.

I had always like to academic of things. Since Secondary 1, I had also loved studying. I love studying the CFA but I hope I’ll not end up broke because looking at books do not generate any revenue for me!

Tired and discipline

Have found that my number 1 enemy is my own tiredness. I think it is combination of lack of exercise and eating too much medicine. I am on a long term medication for lipid disorder taking two different types of lipid medication. In additional another plavix for blood thinning. These medicine always make me sick due to its side effect. But what to do? Have a liability to support my family for sometime. I must try to ensure that I am fit to study and take the long exam although I am unsure whether anyone really cares about whether an adviser has a CFA or not.

Updates

I have completed reading Ethics and Economics. The Economics was a rather long read. I do not have much background in Economics except those six months of basic Economics when I was in the University. I did not know Economics can be so interesting. However, it was very dry and I fail asleep frequently. The CFA Program on Economics is mostly based on the text "Economics" written by Pakin 8th Edition. The author has a website with the lecturer's power point slides. I used the powerpoint slides as a guide when I studied the text. It really helps a lot.

I have started to read the quatitative analysis. The time value for money and statistics are really boring. I studied them before and so I was bored. Still they are very important.

I went for the Stella preview talk organized by CFA Singapore and they tried to sell us to sign up for their weekly lectures and materials. I am unsure how useful it will be. After thinking about it for a long time, I decided that I will self-study first and if there is going to be a big problem, I'll sign up for the course later. Anyway the lectures can be bought as CDs and so I need not attend the actual lectures anyway. However, I might buy all the Mock exams and questions from Stella later on. I might also buy this similar set from Schweser too as I foresee I'll need lots of practice.

Registered for CFA Level 1

On 15 Sept 2008 I wanted to register for the Level 1 CFA Program December 2008. This was actually the last day to register. I login and unfortunately I faced some IT problems. By the time I figured out how to rectify, I missed the dateline! On 23 Sept 2008, I managed to register myself for June 2009 CFA Level 1. I received the books on 26 Sept 2008. Looking at the 6 volume books, thank goodness that I am not taking the December 2008 exam! I am not sure whether is this a good decision or not to take this exam. None of my clients demand for such high qualification. In my field of work, a ChFC or CFP is more relevant. I will get my ChFC early next year if there is no mishaps. Still, none of my clients ask for ChFC or CFP because people in Singapore have a rather careless attitudes. I am taking the CFA for personal education and partly I hope to distinguish and differential myself from the crowd.

First posting

This blog is for me to record my struggle in taking the CFA Program. Two-thirds of the students taking the CFA Program will fail. I am an IFA in Singapore but wish to remain anonymous for now. Perhaps if I obtain my CFA Charter one day would I reveal my identity!