By: Se Kim

1. By: Se Kim By: Se Kim Module 11: Adjusting Accounting Information April 7th, 2014

2. Agenda • Inventory • Operating Leases • Special Purpose Entity – no mention in the 10-k • Employee Stock Options (ESO)

3. Inventory • LIFO -> FIFO • FIFO numbers are more meaningful when comparing companies • However, doesn’t disclose any financials about inventory methodology • “As of Jan. 31st, our inventories valued at LIFO approximated those inventories as if they were valued at FIFO.” (10-k)

4. Operating Leases • Absence of operating lease liability -> more financial leverage • Moving “Off-balance-sheet financing” back into the Balance Sheet

5. Step 1: Impute an implicit rate

6. Step 2: PV of operating leases

7. Step 3 & 4: Adjustments • Adjust NEA upward by $8,665 • Financing Liabilities increases by $8665 • Current: $660 • Noncurrent: $8,005 • Remove $1,734 from SG&A and reclassify: • Interest expense: $1,076 • Depreciation: $660 • Net increase to EPAT: $720.65 • ($1,734-$660)*(1-.329)

9. Employee Stock Options (ESO) • Under ASC 718-10-25-2, expense FV of options at grant date • However, use of grant date omits any changes in value of the ESO between the grant date and exercise date • Goal of adjustment -> measure liability and realize additional expense at exercise date

11. Measuring the Adjustments

12. Adjusting – cont.

14. Questions??