FAR CPA Exam

Using Becker Online Study Materials (no textbook)

full set of financial statements

• Statement of financial position (balance sheet)

• statement of earnings (income statement)

• statement of comprehensive income

• statement of cash flows

• statement of owner’s equity

income from continuing operations

income from operations + income from nonoperations

income from discontinued operations

includes selling off a product line, separate division, or segment of a company’s operations

• reported after income from continuing operations on income statement

• reported net of tax

multiple-step income statement

sales - COGS = Gross Profit - operating expenses = operating income - nonoperating gains/losses = pretax income - income tax expense = net income - discontinued operations

discontinued operations disposal calculation

selling price minus carrying value at time of sale, reported net of tax

impairment loss of discontinued component

calculate net realizable value minus book value, reported net of tax

for multiple years of discontinued operations, calculate:

• impairment loss (to be written down)

• results of operations (to be moved down to discontinuance)

• gain or loss on sale (reported in period in which it occurs)

valuation of discontinued operation on balance sheet

lower of NRV or book value - can be written down or up to adjust but any subsequent increase in fair value can not exceed the impairment loss

direct method of exchange rate

domestic price of one unit of another currency. (ex. one euro equals $1.47)

changes in exchange rate

• adjust to current exchange rate

• recognize gain/loss in income statement

valuation of assets/liabilities resulting from foreign currency transactions

recorded using the exchange rate in effect at date of transaction (historical date) or balance sheet date if payment is not settled. Adjust valuation again on settlement date

comprehensive income calculation

net income + other comprehensive income (OCI)

other comprehensive income components

• pension adjustments

• unrealized gains/losses

• foreign currency items

• instrument-specific credit risk

accumulated OCI

component of equity that includes the OCI for the current period as well as previous periods

statement of comprehensive income presentation methods

• single statement approach (start with revenue, calculate down to net income, ± OCI = comprehensive income, net of tax)

• two-statement approach (present an income statement followed by separate statement of comprehensive income beginning with net income)

required disclosures for comprehensive income

• tax effects of each component of comprehensive income

• tax effects must be allocated to each component on the face of the statement of comprehensive income or in the notes

• must disclose changes in accumulated balance for each component

• total AOCI in the balance sheet

• separate disclosure for significant reclassification adjustments

Form 10-K

annual report of audited financials that must be filed by issuers

filing deadline for Form 10-K

• 60 days for large accelerated filer (issuer with worldwide market value of outstanding common equity of $700 million+

• 75 days for accelerated filer (issuer with worldwide market value of outstanding common equity of $75-100 million and annual revenue of $100 million +

• 90 days for small reporting companies (annual revenue < $100 million)

Form 10-Q

quarterly report of unaudited financials that must be filed by issuers for the first 3 quarters of the year; includes condensed financial statements and other financial information for the quarter

filing deadline for Form 10-Q

• 40 days for large accelerated and accelerated filers

• 45 days for all other

Form 8-K

filed by issuers to disclose material events and corporate changes (ex. bankruptcy, acquisition of company, changes in securities, etc.)

Form 6-K

semi-annual report for unaudited financial statements

simple capital structure

entity has only common stock outstanding

simple capital structure reporting of earnings-per-share

present basic per-share amounts for income from continuing operations and for net income on the face of the income statement

complex capital structure reporting of earnings-per-share

present basic and diluted per-share amounts for income from continuing operations net income on the face of the income statement

basic earnings-per-share formula

income available to common shareholders / weighted average number of common shares outstanding

income available to common shareholders

net income - preferred dividends

cumulative preferred dividends

number of preferred shares x par value per share x rate

noncumulative preferred dividends

declared, no calculation needed

weighted average number of common shares outstanding

shares outstanding at BOY + shares sold during period - shares reacquired during period + stock dividends and stock splits - reverse stock splits

diluted EPS formula

(income available to common stock shareholder + interest on dilutive securities) / weighted average number of common shares

additional shares outstanding formula

number of shares - ((number of shares x exercise price) / average market price)

stock dividends and stock splits in the EPS formula

require restatement of the shares outstanding before the dividend or split; will be treated as if it occurred at the beginning of the fiscal year

antidilutive securities

securities or potential exercise of securities that would increase EPS, rather than decrease (dilute); not used/considered in calculating diluted EPS

out of the money stock options

stock options whose exercise price exceeds the market price and therefore are antidilutive

balance sheet periods on Form 10-Q

if there is a lack of season fluctuations, balance sheet will include the periods for the end of the preceding fiscal year and the most recent quarter. If there is seasonal fluctuations, balance sheet may include the same quarter as of the prior year

interim financial costs benefitting multiple periods

costs should be allocated equally to the respective periods (ex. A $60k cost paid in January benefitting the entire year will be reported as $15k expense per quarter)

preemptive right to stock

gives a shareholder the right to maintain their proportional ownership by purchasing newly issued shares before they are offered to the general public or new investors

book value per common share

common shareholders’ equity / common shares outstanding

common shareholders’ equity

assets - liabilities - preferred equity - dividends in arrears

cumulative preferred stock

all or part of the preferred dividend not paid in any year accumulates and must be paid in the future before dividends can be paid to common shareholders; accumulated amount is called dividends in arrears

participating preferred stock

preferred shareholders share (participate) with common shareholders in dividends in excess of a specific amount

convertible preferred stock

may be exchanged for common stock (at the option of the stockholder) at a specified conversion rate

callable (redeemable) preferred stock

may be called (repurchased) at a specified price (at the option of the issuing corporation)

retained earnings ending balance

beginning retained earnings - dividends declared ± prior period adjustments ± accounting changes reported retrospectively

components of AOCI

• pension adjustments

• unrealized gains and losses on available-for-sale debt securities and hedges

• foreign currency translation adjustments

cost method of accounting for treasury stock

gain or loss is calculated upon reissuance of the treasury stock and adjusts stockholders’ equity, not net income

legal (or par/state value) method of accounting for treasury stock

gain or loss is calculated immediately upon repurchase and adjusts stockholders’ equity, not net income

treasury stock is reacquired

Dr. Treasury Stock, Cr. Cash

gains/losses resulting from reissued treasury stock that differ from reacquisition cost

gains/losses hit the “APIC from Treasury Stock” account. Gains credit (increase) the account, losses debit the account. If nothing in this account or have excess losses, remaining reduces retained earnings

steps for legal (par) method of treasury stock

1. calculate gain or loss immediately upon repurchase: original selling price - repurchase price

2. reverse original entry for shares repurchased: debit treasury stock at par value

3. credit cash for price paid

4. debit “APIC - common stock” for original surplus in excess of par

retirement of treasury stock under cost method

Dr. Common stock at par value

Cr. Treasury stock at repurchase price

Dr. APIC - common stock if original sale price exceeded par value

Dr. Retained Earnings for difference

retirement of treasury stock under par method

Dr. Common Stock at par value

Cr. Treasury Stock at par value

stock subscriptions

a contractual agreement to sell a specified number of shares at an agreed-upon price on credit; upon full payment of the subscription, a stock certificate is issued

accounting for sale of stock subscriptions

Dr. Subscriptions Receivable (a contra-equity account) for shares x sales price

Cr. Common Stock Subscribed for shares x par value

Cr. a regular APIC account for remaining

• if subscriptions are paid after year-end but before the FS are issued, the receivable account may be reported as an asset and will increase APIC at year-end

accounting for collection of stock subscriptions

Dr. Cash for payment received

Cr. Subscriptions receivable

accounting for issuance of stock previously subscribed

Dr. Common stock subscribed at par value

Cr. Common stock at par value

stock rights

• provides an existing shareholder with the opportunity to buy additional shares

• no journal entry until right is exercised

  Dr. Cash for amount received

  Cr. Common Stock at par value

  Cr. APIC for remaining

date of dividend declaration

date the BoD formally approves a dividend

Dr. Retained Earnings

Cr. Dividends Payable

date of dividend record

date the BoD specifies as the date the names of the shareholder to receive the dividend are determined

date of dividend payment

date on which the dividend is actually disbursed by the corporation or its paying agent

property dividend

nonreciprocal transfers of nonmonetary assets from the company to its shareholders; use the fair market value for valuation and record any gain/loss on income statement (gain/loss = FMV - book value)

scrip dividends

special form of notes payable whereby a corporation commits to paying a dividend at some later date. On date of declaration,

Dr. Retained Earnings

Cr. Notes payable

liquidating dividends

• occur when dividends exceed retained earnings

• after debiting retained earnings, Dr. APIC first and then common/preferred stock

stock dividend

• distribute additional shares of a company’s own stock

• treatment of stock dividend depends on size of dividend in proportion to total shares outstanding before dividend

treatment of small stock dividend (<20-25%)

Dr. Retained earnings for fair market value

Cr. Common Stock at par value

Cr. APIC for remainder

treatment of large stock dividend (>25%)

Dr. Retained Earnings at par value

Cr. Common stock at par value

recognizing long-term construction gross profit/loss in each period

1. compute gross profit of completed contract (contract price - estimated total cost)

2. compute percentage of completion (total cost to date / total estimated cost of contract)

3. compute gross profit earned to date (step 1 x step 2)

4. compute gross profit earned for current year (PTD at current FYE - PTD at beginning of period)

estimated loss for construction contracts

recognized immediately in the year it is discovered and any previous gross profit or loss reported in prior years must be adjusted for when calculating total estimated loss

estimated total costs

total costs for a long-term contract from inception to completiones

estimated costs to complete

added to costs incurred to date to arrive at estimated total costs

calculating expected loss on total contract

1. add estimated costs to complete to recorded costs to date to arrive at total contract costs

2. adding to advances any additional revenue expected to arrive at total contract revenue

3. subtracting 1 from 2 to arrive at total estimated loss on contract

long-term construction revenue recognition at a point in time

nothing is recognized until the contract is completed or a loss is incurred

journal entry to record construction costs incurred (both over time and point in time methods)

Dr. Construction in progress

Cr. Materials, cash, etc.

journal entry to record billings on contract (both over time and point in time methods)

Dr. Accounts Receivable

Cr. Progress billings on construction contract

journal entry to record payments received (both over time and point in time methods)

Dr. Cash

Cr. Accounts receivable

journal entry to record estimated gross profit during construction (over time method only)

Dr. Cost of long-term construction contracts

Dr. Construction in progress

Cr. Revenue from LT construction contracts

journal entry to close construction accounts (over time method only)

Dr. Progress billings

Cr. Construction in progress

journal entry to close billings to revenue (point in time method only)

Dr. Progress billings

Cr. Revenue

journal entry to close construction in progress to expense (point in time method only)

Dr. Cost of LT construction contract

Cr. Construction in progress

balance sheet presentation for long-term construction contracts

if CIP > progress billings, report current asset

if CIP < progress billings, report current liability

incremental costs of obtaining a contract

• costs incurred that would not have been incurred if the contract had not been obtained and they are recognized as an asset if the entity expects that it will recover these costs

• entity will recognize an expense if the costs would have been incurred regardless of whether the contract was obtained

costs to fulfill a contract: capitalized

costs that are incurred to fulfill a contract that are not within a scope of another standard if they meet all of the criteria:

• relate directly to a contract

• generate or enhance the resources of the entity

• are expected to be recovered

costs to fulfill a contract: expensed

SG&A, wasted labor and materials costs, and costs tied to satisfied performance obligations

principal indicators

• entity is primarily responsible for fulfilling the contract

• entity bears inventory risk

• entity as the right to establish the price of the goods or services

agent indicators

• another party (the principal) is primarily responsible for fulfilling the contract

• entity does not have inventory risk

• entity does not have discretion in establishing prices for the other party’s goods or services

types of repurchase agreements

• forward: entity’s obligation to repurchase the asset

• call option: entity’s right to repurchase the asset

• put option: entity’s obligation to repurchase the asset at the customer’s request

accounting for forward or call options

depends on whether the entity can repurchase the asset for

• less than the original selling price (treated as a lease) or

• equal to/greater than the original selling price (treated as a financing arrangement)

accounting for forward/call options treated as financing arrangements

entity will recognize the asset, recognize a financial liability for any consideration received from the customer, and recognize as interest expense the difference between the amount of consideration received from the customer and the amount of consideration to be pad by the customer

accounting for put options: repurchase price is less than original selling price

accounted for as either:

• a lease (if customer has a significant economic incentive to exercise the right)

• a sale with a right of return (if customer does not have a significant economic incentive to exercise the right)

accounting for put options: repurchase price is equal to or greater than the original selling price

accounted for as either:

• a financing arrangement (if repurchase price is more than expected market value of the asset) or

• sale with a right of return (if repurchase price is less than or equal to the expected market value of the asset and the customer does not have a significant economic incentive to exercise the right)

bill-and-hold arrangements

contracts in which the entity bills a customer for a product that it has not yet delivered to the customer

consignment arrangement

when the dealer or distributor has not been obtained control of the product. Revenue is recognized when the dealer/distributor sells the product to a customer or obtains control of the product

indicators of consignment arrangement

• entity controls the product until a specified event occurs (the sale of the product to the customer or a specified time period expires)

• dealer does not have an unconditional obligation to pay the entity for the product

• entity can require the return of the product or transfer the product to another party

warranties: customer can purchase warranty separately

warranty will be considered a distinct service because it is promised to the customer in addition to the product covered by the contract. warranty is accounted for as a performance obligation and allocate a portion of the overall transaction price to that obligation

sales with a right of return

recognize:

• revenue for transferred products equaling the amount of consideration the entity expects to be entitled to receive

• refund liability'

• asset related to the subsequent recovery of products when the refund liability is settled

events resulting in estimate changes

• changes in lives of fixed assets

• adjustments of year-end accrual of officers’ salaries and/or bonuses

• write-downs of obsolete inventory

• economic conditions

• product demand

• settlement of litigation

• changes in accounting principle that is inseparable from a change in estimate

  • change TO LIFO

  • depreciation method

change in accounting estimate

• does not affect prior periods

• only applies to current year and beyond

change in accounting principle

• general rule = retrospective approach

• always adjust beginning retained earnings, net of tax

change in accounting principle rule of preferability

cannot change accounting principles without justification

• required by GAAP

• alternative principle is preferred and presents the information more fairly