FAR F1

What should a full set of financial statements include?

• Statement of Financial Position (BS)

• Statement of Earnings (IS)

• Statement of Comprehensive Income

• Statement of Cash Flows

• Statement of Changes in Owners’ Equity

What is meant by a “classified” balance sheet?

distinguishes current and non-current assets and liabilites

Name the expense that the unexpired cost turns into as they expire: Inventory

COGS

Name the expense that the unexpired cost turns into as they expire: Unexpired (Prepaid) Cost of Insurance

Insurance Expense

Name the expense that the unexpired cost turns into as they expire: Net Book Value of Fixed Assets

Depreciation Expense

Name the expense that the unexpired cost turns into as they expire: Unexpired Cost of Patents

Amortization Expense

Are gains and losses on the disposal of assets shown on a “gross basis” or on the “net basis”?

Net amount

Gross Basis

where both the sale proceeds and the net book value of the disposed asste are reported

Net Basis

where only the difference between the sale price and the net book value of the disposed asset is reported

Multi Step IS

reports operating revenues and expenses separately from non-operating revenues and expenses and other gains and losses

Single Step IS

on the presentation of income from continuing operations, total expenses are subtracted from total revenues without separation between operating and non operating revenues and expenses

The gain (loss) from discontinued operations can consist of

an impairment loss, a gain (loss) from actual operations, and a gain (loss) on disposal

How do we account for subsequent increases in the fair value of a discontinued component?

a gain is recognized for the subsequent increase in fair value minus costs to sell (but not in excess of the previously recognized cumulative loss). The gain is reported in the period of increase.

What conditions must be present for disposal to be reported in discontinued operations?

A disposal of a component, group of components, business activity, or a nonprofit activity is reported in discontinued operations if the disposal represents a strategic shift that has or will have a major effect on an entity’s operations and financial results

Examples of Foreign Currency Transactions

• operating transactions, such as importing, exporting, borrowing, lending, and investing transactions

• Forward exchange contracts, which are agreements to exchange two different currencies at a specific future date and at a specific rate

Where are foreign currency transaction gains or losses reported in the financial statements?

Foreign currency transactions gains or losses are included in determining net income for the period

For operating transactions in foreign currency, detail the recording process

• record original transaction at exchange or spot rate on date of transaction

• at balance sheet date, compute gain/loss on the transaction by recalculating using the current exchange or spot rate

• on payment date, compute gain/loss on the transaction by using the exchange rate on payment date

Comprehensive Income

change in equity (net assets) that results from transactions and other events and circumstances from nonowner sources

Examples of disclosure requirements for comprehensive income

• tax effects of each component included in current “other comprehensive income”

• changes in the accumulated balances of componets of “other comprehensive income”

• total accumulated other comprehensive income

• reclassification adjustments between other comprehensive income and net income

Formats acceptable for reporting Comprehensive Income

• statement of comprehensive income (single-statement approach)

• statement of income followed by separate statement of comprehensive income (two-statement approach)

Items included in Other Comprehensive Income

Pension adjustments

Unrealized gains and losses on available-for-sale debt securities and hedges

Foreign currency translation adjustments and G/L on certain foreign currency transactions

Instrument-specific credit risk for liabilities (using FV) and their changes in FV

BEPS formula

Income available to common shareholders/ Weighted average number of CS outstanding

Name the potentially dilutive securities or instruments

• stock options and warrants and their equivalents

• convertible securities (bonds or preferred stock)

• contracts that may be settled in stock or cash

• contingent issuable shares

Diluted EPS

Income available to common shareholders assuming conversion of all dilutive securities / Weighted average common shares outstanding after conversion of all dilutive shares

What is the antidilution rule?

Any conversion, exercise, or contingent issuance that has an antidilutive effect (increases EPS or decreases loss per share) is not included in the calculation unless the shares have actually been converted, exercised, or satisfaction of the contingency met.

Each potential common share is considered separately in sequence from most to least dilutive, with in-the-money options and warrants generally included first

Reporting requirements for EPS

Face of income statement, with equal prominenceForm for basic and diluted per-share amounts, for both income from continuing operations and net income.

Per-share amounts for discontinued operations can be reported on the face of the income statement or in the notes to the financial statements.

Form 10-K

Filed annually by U.S. registered companies. Includes a summary of financial data, MD&A, and audited financial statements prepared using U.S. GAAP

Form 10-Q

Filed quarterly by U.S. registered companies. Includes unaudited financial statements, interim MD&A, and certain disclosures

Common Stock

Residual ownership interest

Basic rights include:

• voting rights

• dividend rights

• rights to share in distributions of assets if corporation is liquidated, after satisfaction or creditor and preferred stockholders’ claims

Preferred Stock

• convertible, callable

• redeemable

• dividends can be cumulative and/or participating

Accounting for Treasury Stock

Cost Method

Legal (par value method/stated value method)

Treasury Stock

No G/L is recognized on the income statement; income and RE may never increase by the transaction; APIC-TS account is used to record gains and absorb losses

• not an asset

• cash and property dividends are not paid on it

• stock dividends may be paid on it

Cost Method

• recorded, carried, and reissued at reacquisition cost

• any gain is credited to PIC-TS

• any loss is charged against previous gains, then RE

• reported as a deduction from total stockholders’ equity

Legal (par value method/stated value method)

• recorded at par value with cost of stock that is in excess of par value recorded as a deduction to PIC-TS and then from RE after PIC-TS is depleted

• reported as a deduction from capital stock

Significant dates with respect to cash dividends

• Date of Declaration: Becomes a liability and reduces RE

• Date of Record: No JE, memorandum entry only

• Date of Payment: Actually paid

Examples of Types of Dividends

1. Cash

2. Liquidating: Return of investment

3. Property: FMV of assets given up, with gain/loss recognized

4. Scrip: Promise to pay a dividend in future

5. Stock: Results in capitalizing part of RE, increasing legal capital.

• if <20%-25% record at market value

• if >20%-25%, record at par value

Small Stock dividend

<20%-25%

Large Stock Dividend

>20%-25%

What is the accounting of small stock dividends?

fair value of additional shares issued at the date of declaration is transferred from RE to capital stock and APIC

What is the accounting of large stock dividends?

Par value of additional shares issued is transferred from RE to capital stock

Reporting Unusual & Infrequent gains

reported as income from continuing operations

Form 10-K filing deadlines

• 60 days for Large Accelerated Filers

• 75 days for Accelerated Filers

• 90 days for everyone else

Large Accelerated Filers

market cap $700 mil

Accelerated Filers

annual revenue of $100mil and $75m to $700 mil market cap

Every other Filer

Annual revenue of $100 mil or less

Form 10-Q Filing deadlines

• 40 days for Large Accelerated filers

• 45 days for all other filers

Income available to common shareholders

net income - preferred dividends

Purchase Price

Cash paid + debt issued + fair market value of the stock issued

Diluted EPS

(Income available to the CS shareholder + interest on dilutive securities) / WACSO

Dilutive Securities

• convertible securities

• warrants & other options

• contracts that may be settled in cash or stock

• contingent shares

Additional Shares Outstanding

number of shares - [ (# of shares * exercise price) / avg mkt price ]

Common Shareholders Equity

assets - liabilities - preferred equity - dividends in arrears

Common shares outstanding

number of shares issued - # of shares repurchased

Book Value per Share

Common shareholders equity / common shares outstanding

Cost Method JEs - shares bought and sold

Cash (par value* shares) xx

• C.S. (share price *shares) xx

• APIC-CS xx

Cost Method JEs - buy back shares above issue price

T.S. (share price *shares) xx

• Cash xx

Cost Method JEs - Reissue above cost

Cash (resold price *shares) xx

• T.S (shares* repurchase price) xx

• APIC-TS xx

Cost Method JEs - Reissue below cost

Cash (sold price *shares) xx

APIC (sold price - repurchase price *shares). xx

RE xx

• TS (repurchase price *shares) xx

Legal (Par/Stated Value) Method - shares bought and sold

cash (selling price *shares) xx

• CS (par value *shares) xx

• APIC-CS xx

Legal (Par/Stated Value) Method - repurchased above cost

TS (par value*shares) xx

APIC-CS (par value - selling price *shares). xx

RE xx

• Cash (selling price *shares) xx

Legal (Par/Stated Value) Method - repurchased below cost

TS (par value *shares) xx

APIC-CS xx

• APIC -TS (OG selling price-selling price *shares) xx

• Cash (shares *selling price) xx

Legal (Par/Stated Value) Method - reissued shares

Cash (resold price *shares)

• TS (par value *shares)

• APIC -CS (resold price - par value *shares)

Sale of Subscription

Subscription Receivable. xx

• CS Subscription xx

• APIC xx

JE upon collection of Subscription

Cash xx

• Subscription Receivable xx

JE of issuance of stock previously subscripted (@ par)

Capital Stock Subscripted xx

• CS xx

What will never be increased through TS transactions?

Net income or RE