FAR 1

What is a classified balance sheet, and when is a liquidity-based balance sheet permitted?

A classified balance sheet separates current and noncurrent assets/liabilities. A liquidity-based balance sheet is permissible under U.S. GAAP when appropriate (e.g., financial institutions).

What are the four informational purposes of the income statement?

(1) Expenses — uses of funds in income process

(2) Losses — uses of funds never earning income

(3) Revenues — sources of funds from expenses

(4) Gains — sources not associated with earnings process

Multiple-step vs. single-step income statement — key difference?

Multiple-step: separates operating from nonoperating items and gains/losses (multiple subtotals).

Single-step: all revenues minus all expenses (including tax) in one step.

What does the mnemonic PUFI represent?

P — Pension adjustments

U — Unrealized G/L on AFS debt securities and hedges

F — Foreign currency translation items

I — Instrument-specific credit risk

 

These are the five commonly tested OCI components.

What are the two U.S. GAAP presentation approaches for comprehensive income?

(1) One-statement: combined statement of income and comprehensive income.

(2) Two-statement: statement of net income immediately followed by a separate statement of comprehensive income.

Formula: Comprehensive Income

CI = Net Income ± OCI

OCI items are included in equity but excluded from net income. AOCI is the cumulative balance of all OCI components and is reported in stockholders' equity.

Formula: Remeasurement gain/loss on a foreign currency receivable at year-end

G/L = FC Amount × (Year-End Spot Rate − Transaction Date Rate)

Positive = gain (USD equivalent increased). Negative = loss.

Journal entry: Record a foreign currency receivable at transaction date (sale = €100,000, rate = $1.10)

DR  Accounts Receivable (FC)     $110,000

    CR  Sales Revenue                          $110,000

 

Record at spot rate on transaction date.

Journal entry: Year-end remeasurement — FC receivable increased $5,000 in USD value

DR  Accounts Receivable (FC)     $5,000

    CR  Foreign Currency Gain                  $5,000

 

Rate moved favorably; receivable worth more in USD.

Journal entry: Settle foreign currency receivable — rate dropped $3,000 from year-end value

DR  Cash                          $112,000

DR  Foreign Currency Loss          $3,000

    CR  Accounts Receivable (FC)              $115,000

 

Rate moved against us since year-end.

Formula: Basic EPS

Basic EPS = (Net Income − Preferred Dividends) ÷ Weighted Average Common Shares

Cumulative preferred dividends are subtracted whether declared or not.

Formula: Diluted EPS — if-converted method (convertible bonds)

Diluted EPS = (NI − Preferred Divs + After-tax Bond Interest) ÷ (WACSO + Converted Shares)

Add back after-tax interest; add shares that would result from conversion.

Formula: Treasury stock method (options/warrants)

Net new shares = Shares issued on exercise − (Proceeds ÷ Avg. market price)

Only the NET incremental shares increase the diluted EPS denominator.

Formula: Weighted Average Common Shares Outstanding (WACSO)

WACSO = Σ (Shares × Months outstanding ÷ 12)

Stock splits and dividends are applied retroactively to ALL prior periods shown.

Simple vs. complex capital structure — EPS reporting difference?

Simple (only common stock, no dilutive securities): report basic EPS only.

Complex (has convertible securities, options, warrants): report both basic AND diluted EPS.

Form 10-K, 10-Q, and 8-K — key differences and filing deadlines?

10-K (Annual): Large accelerated = 60 days; Accelerated = 75 days; Others = 90 days. Audited financials + MD&A.

10-Q (Quarterly): Large accel./accel. = 40 days; Others = 45 days. Unaudited financials + interim MD&A.

8-K: Filed upon any material event — no set periodicity.

What are the five major components of stockholders' equity?

(1) Capital stock

(2) Additional paid-in capital (APIC)

(3) Retained earnings or deficit

(4) Accumulated other comprehensive income (AOCI)

(5) Treasury stock

 

Consolidated statements also include noncontrolling interest.

Distinguish: authorized, issued, outstanding, and treasury stock

Authorized: max shares permitted by charter.

Issued: shares sold/distributed.

Outstanding: issued shares held by shareholders (not the company).

Treasury: issued but repurchased — NOT outstanding.

Formula: Book value per share

BVPS = Common Shareholders' Equity ÷ Common Shares Outstanding

Common Shareholders' Equity = Total SE − Preferred Claims

Formula: Retained Earnings rollforward

Ending RE = Beginning RE + Net Income − Dividends ± Prior Period Adjustments

Journal entry: Issue common stock above par — 100 shares, $1 par, issued @ $15

DR  Cash                          $1,500

    CR  Common Stock (par $1)                  $100

    CR  APIC — Common Stock                  $1,400

 

Par → Common Stock; excess → APIC.

Journal entry: Purchase treasury stock (cost method) — 100 shares @ $20

DR  Treasury Stock               $2,000

    CR  Cash                                  $2,000

 

Treasury stock is a contra-equity account (debit balance).

Journal entry: Reissue treasury stock ABOVE cost — cost $20, reissued @ $25 (100 shares)

DR  Cash                          $2,500

    CR  Treasury Stock (at cost)               $2,000

    CR  APIC — Treasury Stock                    $500

 

Excess above cost → APIC — Treasury Stock.

Journal entry: Reissue treasury stock BELOW cost — cost $20, reissued @ $15 (100 shares)

DR  Cash                          $1,500

DR  APIC — Treasury Stock       $500

    CR  Treasury Stock (at cost)                $2,000

 

Deficit reduces APIC — Treasury Stock first; excess reduces Retained Earnings.

Journal entry: Retire treasury stock — par $1, original issue price $18, cost $20 (100 shares)

DR  Common Stock (par)               $100

DR  APIC — Common Stock          $1,700

DR  Retained Earnings                  $200

    CR  Treasury Stock (at cost)               $2,000

 

Excess of cost over original issue price reduces Retained Earnings.

Small vs. large stock dividend — break point and recording method?

Break point: 20–25% of outstanding common shares.

Small (<20–25%): recorded at FAIR MARKET VALUE on declaration date.

Large (≥20–25%): recorded at PAR VALUE only.

Stock splits: no journal entry; total book value unchanged.

Journal entry: Declare a cash dividend — $5,000

DR  Retained Earnings             $5,000

    CR  Dividends Payable                      $5,000

 

Dividends reduce retained earnings on the DECLARATION date.

Journal entry: Declare a property dividend — carrying value $8,000, FMV $10,000

Step 1 — Write up asset to FMV:

DR  Asset                         $2,000

    CR  Gain on Distribution                  $2,000

 

Step 2 — Record dividend:

DR  Retained Earnings            $10,000

    CR  Property Dividends Payable           $10,000

Journal entry: Small stock dividend — 1,000 shares, $1 par, FMV $12/share

DR  Retained Earnings            $12,000

    CR  Common Stock Distributable ($1 par)    $1,000

    CR  APIC — Stock Dividend                $11,000

 

Then when shares are issued:

DR  Common Stock Distributable    $1,000

    CR  Common Stock                           $1,000

Journal entry: Stock subscription received — 100 shares, $1 par, $15 price

DR  Subscriptions Receivable      $1,500

    CR  Common Stock Subscribed (par)           $100

    CR  APIC — Stock Subscriptions            $1,400

 

When fully paid and shares issued:

DR  Cash                           $1,500

    CR  Subscriptions Receivable              $1,500

DR  Common Stock Subscribed   $100

    CR  Common Stock                            $100

What three components can appear in discontinued operations, and how are they reported?

(1) Gain/loss from current operations of the component

(2) Gain/loss on sale of the component

(3) Impairment loss

 

All are reported NET OF TAX below income from continuing operations.

Six criteria for 'held for sale' classification?

(1) Management commits to a plan to sell

(2) Available for sale in present condition

(3) Active program to locate a buyer initiated

(4) Sale probable within one year

(5) Actively marketed at reasonable price relative to FV

(6) No significant changes to plan expected

How is a component measured once classified as 'held for sale'?

Lower of: (a) Carrying amount, or (b) Fair value LESS costs to sell.

Depreciation CEASES once classified as held for sale. Any write-down is an impairment loss reported within discontinued operations.

What happens if a 'held for sale' component no longer meets the criteria?

Reclassify back to 'held and used.' Remeasure at the LOWER of:

(a) Carrying amount before held-for-sale (adjusted for depreciation that would have been taken), or

(b) Fair value at the date of the decision not to sell.

If criteria are met in Q3, how are Q1/Q2 results treated?

Q1 and Q2 results are RECLASSIFIED as discontinued operations in comparative financial statements for the period the criteria are first met. Prior periods are restated.

Formula: Gain/loss on disposal of discontinued component

G/L on Disposal = Proceeds − Net Book Value of Component

Reported amount = G/L × (1 − Tax Rate)

 

Split between G/L on current operations and G/L on sale as applicable.

Formula: Impairment loss when component is written down to held-for-sale

Impairment Loss = Carrying Amount − (Fair Value − Costs to Sell)

If FV − Costs to Sell > Carrying Amount → No impairment

Formula: Net income presentation with discontinued operations

Income from Continuing Ops (net of tax)

± Discontinued Ops (net of tax)

= Net Income

 

Per-share amounts for discontinued ops must also be disclosed.

Journal entry: Write down held-for-sale component — book value $500,000, FV less costs to sell = $420,000

DR  Impairment Loss — Disc. Ops  $80,000

    CR  Accumulated Impairment / Asset         $80,000

 

Loss is part of discontinued operations, reported net of tax.

Journal entry: Sell a discontinued component — net assets = $300,000, proceeds = $350,000, tax rate 25%

DR  Cash / Receivable            $350,000

    CR  Net Assets of Component               $300,000

    CR  Gain on Disposal — Disc. Ops           $50,000

 

Then record tax:

DR  Income Tax Expense            $12,500

    CR  Taxes Payable                          $12,500

 

After-tax gain = $37,500 reported on income statement.

Journal entry: Operating loss from discontinued component — $40,000, tax rate 25%

DR  Loss from Disc. Ops (pre-tax)  $40,000

    CR  Various operating accounts             $40,000

 

Then record tax benefit:

DR  Tax Benefit Receivable         $10,000

    CR  Income Tax Benefit                     $10,000

 

After-tax loss = $30,000 reported within discontinued operations.

Foreign currency TRANSACTION vs. TRANSLATION — key difference?

Transaction (remeasurement): Individual FC-denominated receivables/payables remeasured at spot rate → G/L goes to NET INCOME.

Translation: Entire foreign subsidiary's financials translated into parent's reporting currency → G/L goes to OCI (cumulative translation adjustment), NOT net income.

What exchange rate is used at each stage of a foreign currency transaction?

Transaction date: SPOT rate on day of transaction (initial recognition)

Balance sheet date: CURRENT spot rate (remeasurement)

Settlement date: SPOT rate on day cash is exchanged (final G/L)

USD strengthens vs. weakens — effect on foreign currency receivable and payable?

USD STRENGTHENS (FC buys fewer dollars):

• FC Receivable → LOSS

• FC Payable → GAIN

 

USD WEAKENS (FC buys more dollars):

• FC Receivable → GAIN

• FC Payable → LOSS

 

Trick: Strong dollar = bad for exporters, good for importers.

Where are foreign currency transaction gains/losses reported?

In NET INCOME — typically as a nonoperating item ('Foreign currency gain/loss').

This is DIFFERENT from foreign currency translation adjustments (consolidating foreign subsidiaries), which go to OCI.

Formula: Remeasurement G/L on FC receivable at year-end

G/L = FC Amount × (Year-End Spot Rate − Transaction Date Rate)

Positive = gain. Negative = loss.

Formula: Settlement G/L on FC receivable (after year-end remeasurement)

G/L at Settlement = FC Amount × (Settlement Rate − Year-End Rate)

Captures rate change ONLY since last remeasurement, not since original transaction.

Formula: Total G/L on FC transaction over full life

Total G/L = FC Amount × (Settlement Rate − Transaction Date Rate)

           = Year-End G/L + Settlement G/L

Full example: Sell goods 11/1 for €100,000. Rates: 11/1=$1.10, 12/31=$1.15, 2/1=$1.12. Record all entries.

11/1 — Record sale:

DR  AR (€100K × $1.10)           $110,000

    CR  Sales Revenue                          $110,000

 

12/31 — Remeasure (gain, rate rose $0.05):

DR  AR                             $5,000

    CR  FC Gain (€100K × $0.05)               $5,000

 

2/1 — Settle (loss, rate fell $0.03 from year-end):

DR  Cash (€100K × $1.12)         $112,000

DR  FC Loss (€100K × $0.03)    $3,000

    CR  AR                                    $115,000

Journal entry: Year-end remeasurement — FC payable increased $2,500 in USD (USD weakened)

DR  Foreign Currency Loss          $2,500

    CR  Accounts Payable (FC)                 $2,500

 

Payable grew in USD terms — costs more to settle → LOSS.

Journal entry: Settle FC payable when USD strengthened — AP was $62,500, paid $61,000

DR  Accounts Payable (FC)         $62,500

    CR  Cash                                   $61,000

    CR  Foreign Currency Gain                  $1,500

 

Paid less than carrying amount → GAIN.

Journal entry: Record foreign currency translation adjustment (OCI) for a foreign subsidiary

DR  Cumulative Translation Adjustment (OCI)  $XXX

    CR  Investment in Foreign Sub / Net Assets          $XXX

 

Translation adjustments go to OCI, not net income. Offset is the CTA account in AOCI.