Intermediate Financial Accounting Exam 2 Flashcards

Comprehensive vocabulary flashcards covering Intermediate Financial Accounting Exam 2 (Chapters 3, 4, and 5), including the multi-step income statement, earnings per share, ASC 606 revenue recognition, balance sheet classification, statement of cash flows, and time value of money.

Multi-step income statement order

Net sales - COGS = gross profit - operating expenses = income from operations +/- other revenues, gains, expenses, losses = income before tax - tax = income from continuing ops +/- discontinued ops (net of tax) = net income

Net sales

Gross sales minus sales discounts and returns

Single-step vs. multi-step income statement

Single-step subtracts all expenses and losses from all revenues and gains; multi-step separates persistent earnings from one-time items

Discontinued operations presentation

Reported below income from continuing operations, net of tax; operating loss and disposal loss are each shown multiplied by $(1 - \text{tax rate})$

Discontinued operations separate reporting rationale

Separates persistent from transitory (one-time) income so investors can predict future cash flows

Basic EPS formula

$$(\text{Net income} - \text{preferred dividends}) / \text{weighted-average common shares outstanding}$$

Cumulative vs. noncumulative preferred dividends in EPS

For cumulative preferred, always subtract one year's dividend whether paid or not; for noncumulative preferred, subtract only if declared

Preferred dividend amount calculation

$$\text{Preferred shares} \times \text{par} \times \text{dividend rate}$$

Weighted-average shares: issuance and repurchase

Shares issued are added as $+\,\text{shares} \times \frac{\text{months outstanding}}{12}$; shares repurchased are subtracted as $-\,\text{shares} \times \frac{\text{months remaining}}{12}$ (e.g., Apr 1 = $9/12$, Sep 1 = $4/12$)

Stock dividends and splits in WACSO

Treated retroactively by multiplying beginning shares and shares issued before the stock dividend by the adjustment factor (e.g., $1.10$)

Dividends: date of declaration entry

Dr Retained earnings (Dividends) / Cr Dividends payable

Dividends: ex-dividend date

No journal entry; stock must be bought before this date to receive the dividend because trades take days to settle

Dividends: date of record

No journal entry; shareholders identified as owners on this date receive the dividend

Dividends: date of payment entry

Dr Dividends payable / Cr Cash

Ending retained earnings formula

Beginning RE +/- prior-period error corrections + net income - dividends declared (cash and stock)

Treatment of dividends received and revenues in Retained Earnings

Neither is added separately to retained earnings because both are already included inside net income

The five steps of ASC 606

1) Identify contract, 2) Identify performance obligations, 3) Determine transaction price, 4) Allocate price to POs, 5) Recognize revenue when/as each PO is satisfied

Allocating a bundle price (ASC 606)

Each PO = $\text{its standalone price} \times (\text{contract price} / \text{total standalone prices})$

Cash received before performance (ASC 606)

Initial entry: Dr Cash / Cr Unearned revenue. As POs are satisfied: Dr Unearned revenue / Cr Revenue

Expected value method (ASC 606)

Used for many similar contracts with several outcomes; calculated as the sum of $(\text{probability} \times \text{amount})$, not forgetting the leftover percentage at the base price

Most likely amount method (ASC 606)

Used for a single all-or-nothing bonus; included if it is more likely than not ($> 50\%$)

Revenue reversal

Revenue booked so far minus what should have been booked using the actual price

Current assets order of liquidity

Cash -> short-term investments -> accounts receivable -> inventory -> prepaid expenses

Balance sheet measurement: cash and short-term investments

Fair value (held-to-maturity debt at amortized cost)

Balance sheet measurement: accounts receivable

Net realizable value (amount expected to be collected)

Balance sheet measurement: inventory

Lower of cost or market (LCM)

Balance sheet measurement: prepaid expenses

Cost (unexpired)

Balance sheet measurement: land, buildings, and patents

Land: cost. Buildings and equipment: cost minus accumulated depreciation. Patents: amortized cost

Land held for sale and plant expansion fund classification and measurement

Classified as long-term investments (not PP&E); land held for sale is measured at lower of cost or fair value, while a special fund is measured at fair value

Current liabilities classification examples

Wages payable, income tax payable, dividends payable, and unearned revenue maturing in less than 1 year

Long-term liabilities classification examples

Bonds payable and deferred tax liability

Mortgage with 5 years of payments classification

Split into the next 12 months as current liabilities and the remainder as long-term liabilities

Equity accounts classification examples

Treasury stock (contra-equity), accumulated other comprehensive income (AOCI), common stock, and retained earnings

Passive equity investment (< 20%) accounting

Balance sheet: fair value. Income statement: dividend income plus change in fair value

Equity method (20-50%, significant influence)

Carrying value = Cost + investor's % of investee net income - investor's % of dividends; dividends reduce the investment rather than counting as income

Debt investments: HTM / AFS / Trading

HTM: amortized cost. AFS: fair value with changes reported in OCI. Trading: fair value with changes reported in net income

Operating activities (professor's rule)

Income-statement related cash flows: cash received from customers; cash paid for inventory, salaries, and rent; interest paid or received; and dividends received

Investing activities

Cash flows from buying or selling PP&E, buying or selling investments, and loans made to others (e.g., to the CEO)

Financing activities

Cash flows from issuing or repurchasing own stock, issuing or repaying bonds and loan principal, and dividends paid

Cash flow equation

Operating + investing + financing = change in cash = ending cash - beginning cash

Missing cash flow determination method

Solve for the missing amount, then match the amount, the direction (in/out), and the category

Indirect method: depreciation, amortization, and losses

Added back to net income

Indirect method: gains on sale

Subtracted from net income

Indirect method: current operating asset changes

Increases are subtracted from net income; decreases are added to net income (includes deferred tax assets)

Indirect method: operating liability changes

Increases are added to net income; decreases are subtracted from net income

Indirect method: non-operating financing and investing items

Bonds payable, treasury stock, stock issued, and dividends are ignored in operating cash flows because they belong to financing or investing

Direct method: cash collected from customers

Revenue minus increase in accounts receivable (or plus decrease in accounts receivable)

Direct method: cash paid for inventory

COGS + increase in inventory - increase in accounts payable (inventory)

Direct method: cash paid for salaries

Salary expense minus increase in salaries payable (or plus decrease in salaries payable)

Three questions to pick a TVM table

1) One amount or a series? 2) Value today (PV) or later (FV)? 3) Annuity paid at the end (ordinary) or beginning (due)?

PVSS

Present value of a single sum: one future amount worth today

FVSS

Future value of a single sum: one amount today grown to the future

PVOA

Present value of an ordinary annuity: equal payments at the end of each period worth today (e.g., loans, notes, bond interest)

PVAD

Present value of an annuity due: equal payments at the beginning of each period worth today (e.g., retirement withdrawals at start of year)

FVOA

Future value of an ordinary annuity: equal deposits at the end of each period valued later

FVAD

Future value of an annuity due: equal deposits at the beginning of each period valued later

Payment amount calculation (TVM)

Target divided by table factor (e.g., $\$3,000,000 / \text{FVAD factor}$)

Quarterly payments parameter conversion (10 years at 6%)

$n = 40$, $i = 1.5\%$

Loan payment split calculation

Interest = beginning balance multiplied by interest rate; Principal = payment minus interest

Bond price valuation formula

$\text{Face} \times \text{PVSS} + \text{periodic interest} \times \text{PVOA}$, evaluated at the market rate per period

Assets move ___ to cash

opposite

Liabilities move ___ cash

with

Asset or Liability:

ends in payable

Liability

Indirect Method:

1. Net income

2. + Depreciation

3. - Gains / + Losses

4. Assets (opposite)

5. Liabilities (same)

6. =Operating cash flow

Treasury Stock

re-purchased shares of your own stock

EPS

Earnings per share

EPS: cumulative preferred stock. Subtract the preferred dividend?

Yes, always, whether it’s paid out or not.

EPS: noncumulative preferred stock. Subtract the preferred dividend?

Only if it was declared this year.

Preferred is cumulative and no dividends were declared this year. What goes in the EPS numerator?

Net income - the full preferred dividend. Cumulative means you always subtract it.

Basic EPS =

(Net income - Preferred dividends) ÷ Weighted-average common shares outstanding

Basic EPS numerator

earnings available to come and shareholders

Preferred dividend =

preferred shares × par value × dividend rate

EPS denominator

Weighted-average shares

Weighted-shares =

Beginning × 12/12 + issued × (months/12) - repurchased × (months/12)

How do you find (months/12) for basic EPS?

Count back from December 31

ASC 606

GAAP core principle: Revenue Recognition

“recognize revenue when or as control of promised goods or services transfers to the customer, in an amount that reflects the expected consideration.”

ASC 606: Identify the contract

Step 1

ASC 606: Identify the performance obligations

Step 2

ASC 606: Determine the transaction price

Step 3

ASC 606: Allocate the price

Step 4

ASC 606: Recognize revenue

Step 5