F1 Financial Reporting Full Review

What should a full set of financial statements include?

• Statement of Financial Position (the balance sheet)

• Statement of Earnings (the income statement)

• Statement of Comprehensive Income

• Statement of Cash Flows

• Statement of Changes in Owner’s Equity

What is meant by a “classified” balance sheet?

A classified balance sheet distinguishes current and non current assets and liabilities.

Name the expense that each of the following unexpired costs turn into as they expire:

1. Inventory

2. Unexpired (prepaid) cost of insurance

3. Net book value of fixed assets

4. Unexpired costs of patents

1. Costs of goods sold

2. Insurance expense

3. Depreciation expense

4. Amortization expense

Are gains and losses on the disposal of assets shown on a “gross basis” (ex. where both the sale proceeds and the net book value of the disposed asset are reported) or on the “net basis” (ex. where only the difference between the sale price and the net book value of the disposed asset is reported)?

Gains and losses are reported at their net amounts (ex. proceeds less net book value).

How does a “multiple-step” income statement differ from a “single-step” income statement?

• A multiple-step income statement reports operating revenues and expenses separately from non-operating revenues and expenses and other gains and losses.

• On a single-step income statement’s 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 a disposal to be reported in discontinued operations?

A disposal of a component, group of components, business activity, or 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.

State two types of foreign currency transaction.

• 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 transaction gains or losses are included in determining net income for the period.

For operating transaction 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 transaction by recalculating using the current or spot rate.

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

Define comprehensive income

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

List some disclosure requirements for comprehensive income

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

• Changes in the accumulated balances of components of “other comprehensive income”

• Total accumulated other comprehensive income

• Reclassification adjustments between other comprehensive income and net income

List the two 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)

Identify four items included in other comprehensive income

Remember the PUFI mnemonic:

Pension adjustments

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

Foreign currency transaction adjustments and gains/losses on certain foreign currency transactions

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

What is the basic formula used for calculating EPS?

Income available to common shareholders / Weighted average number of common shares 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

Compare basic and diluted EPS.

Basic: Simple capital structure (only common stock outstanding):

• Income available to common shareholders  / Weighted average common shares outstanding

Diluted: Complex capital structure:

• 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.

List the reporting requirements for EPS.

Face of income statement, with equal prominence 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.

Describe Form 10-K and Form 10-Q. What level of assurance must be provided with the financial statements submitted in these forms?

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.

Define common stock and list the basic properties.

Common stock: Residual ownership interest

Basic rights include:

• Voting rights

• Dividend rights

• Rights to share in distribution of assets if corporation is liquidated, after satisfaction of creditor and preferred stockholders’ claims

List some common properties of preferred stock.

• Convertible, callable

• Redeemable

• Dividends can be cumulative and/or participating

What are the two alternative methods of accounting for treasury stock?

Cost method: Treasury stock is debited at cost of shares repurchased.

Legal (par value method/stated value method): Treasury stock is debited at par value of shares repurchased. 

Remember, no gains/losses are recognized on the income statement; income and retained earnings may never increase by the transaction; Additional Paid-in Capital-Treasury Stock account used to record “gains” and absorb “losses.”

Treasury stock is not an asset; cash and property dividends are not paid on treasury stock; stock dividends may be paid on treasury stock.

Summarize the cost method of accounting for treasury stock.

• Recorded, carried, and reissued at reacquisition cost

• Any “gain" is credited to Paid-in Capital-Treasury Stock

• Any “loss” is charged against previous “gain,” then retained earnings

• Reported as a deduction from total stockholders’ equity

Summarize the par value method of account for treasury stock.

• Recorded at par value with cost of stock that is in excess of par value recorded as a deduction to Paid-in Capital-Treasury Stock and then from retained earnings after Paid-in Capital-Treasury Stock is depleted.

• Reported as a deduction from capital stock.

List the significant dates with respect to cash dividends.

• Date of Declaration: Becomes a liability and reduces retained earnings

• Date of Record: No journal entry, memorandum entry only

• Date of Payment: Actually paid

List five 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 retained earnings, increasing legal capital. Remember, if <20%-25%, record at market value; if >20%-25%, record at par value.

What is the threshold for treating stock dividends as large vs. small stock dividends?

Small stock dividend: <20%-25%

Large stock dividend: >20%-25% 

The treatment of stock dividends on the percentage of the dividend in proportion to the total shares outstanding prior to the declaration of the dividend.

What is the accounting treatment of small stock dividends?

Fair value of additional shares issued at the date of declaration is transferred from retained earnings to capital stock and additional paid-in capital.

What is the accounting treatment of large stock dividends?

Par value of additional shares issued is transferred from retained earnings to