CPA FAR

What are the purposes and uses of the Balance Sheet?

What is the accounting equation?

Who gets first claims if the company goes bankrupt?

• Evaluate liquity and solvency

• Assets = Liabilities + Owner’s Equity

• Liabilities get first claim

What are limitations of the BS?

• Don’t tell you market value of assets. Many valued at historical costs. Eg depreciated buildings

• Some measurements subjective. Eg inventory + depreciation

Who are the users of the income statement? What are they looking at?

• External users - investors. ROE, EPS, profitability

• Lenders - EBIT

• Internal users - ROA

What items make up the I/S? 2 Types + how are they reported

REGL - Revenue, Expenses, Gains + Losses

• Operating. Gross amount. Normally rev + exp

• Nonoperating. Net amounts (NRV - book value). Gains + losses

Period vs unexpired cost - what principle, examples

• Period. Expenses immediately + recurring. Eg SG&A costs

• Unexpired. Capitalized as an asset for future. Appears on the BS. Expenses in future periods according to the matching principle. Eg prepaid insurance to insurance expense

Now all unusual or infrequent, or unusual and infrequent items are reported under…

… nonoperating

Income from Continuing Operations Formula

Income from Continuing Operations = Operating Income + Nonoperating Income

Single Step Income benefits + drawbacks

Benefits:

• Simple design

• Does not make 1 item appear more important than another

Drawback:

• Does not distinguish between core business + incidental business

Benefits of the multi-step I/S

• Enhances user info

• Separates operating from nonoperating

• Readily available info for ratio analysis

Multi-Step I/S Format

Limitations of the I/S

• Subjectivity - rev + exp accrual basis. Estimates

• Management bias - choice of accounting methods

• Aggressive v conservative accounting

Accrual v cash basis adv + dis

Accrual adv:

• Income smoothing

• Better performance assessment

Dis:

• Management may alter performance. Eg companies change operating losses to nonoperating to make them look better

2 ways a component can be considered discontinued operations

1. Has been disposed of during that year

2. Is classified as held for sale in that year

6 Criteria for Held for Sale Classification

1. Management commits to a plan to sell the activity

2. Activity is available for immediate sale in its present condition

3. Active program to locate a buyer

4. Sale of activity is probable + expected to occur within a year

5. Acitivity marketed at a reasonable sales price relative to its fair value

6. Significant changes in the plan are not expected to sell

No ___ when segment available for sale

• Depreciation

Impairment loss formula

The impairment loss can’t be reverse more than…

Impairment loss = NRV - book value

… the amount writen down

Discontinued Operations calculation. All amounts should be shown…

Impairment loss + Results of operations + Gain/Loss on sale

… net of tax

Where is discontinued operation disclosed?

• In the face of the FS or in the notes to the FS

Are transactions between a subsidiary and parent considered foreign currency transacations?

No

Direct v indirect exchange rate

• Direct. Domestic price of one unit of another currency. Eg 1 euro costs $1.47

• Indirect. Foreign price of one unit of the domestic currency. Eg 0.68 euros buys $1

• Accounts receivable - If foreign currency increased, gain or loss?

• Accounts payable - If foreign currency increased, gain or loss?

• AR → gain

• AP → loss

Items NOT on the I/S. Only on the Statement of Comprehensive Income

PUFI

• Pension adjustment

• Unrealized gains/losses - Available for sale debt securities + hedges

• Foreing Currency Items

• Instrument Specific Credit Risk

Comprehensive Income Formula

Comprehensive Income = Net Income + Other Comprehensive Income

Accumulated Other Comprehensive Income calc

AOCI = Beginning Balance ± PUFI ± Reclassification Adjustment

2 ways the Statement of Comprehensive Income can be presented. What does each start with

1. Single Statement - starts with revenue

2. 2 Statement - starts with net income

NRV calculation

Sales value - costs to put into sellable condition

Net income is closed into…

Other Comprehesive income is closed into…

• Retained earnings

• AOCI

How to translate euros into dollars? Eg 0.79 euros = $1

1/0.79 = $1.27 USD to 1 euro

Net Income excludes

OCI items

Where does discounts on bonds payable go on the FS?

• Contra liability to bonds payable - subtracted

The income tax benefit/expense from discontinued operations is calculated by?

• Gains/losses from discontinued operations x tax rate

What does the form 10k disclose?

Annual

• The business of a company + risks

• Financial + operating results

• Perspecitve of its executive leadership

Filing deadline for form 10k relative to fiscal year end

• 60 days for large accelerated filers - $700+ million market value

• 75 days for accelerated filers - $75-700 million market value AND annual rev of $100+ mil

• 90 days for all other

What does Part II, Item 7 on the Form 10k include?

Management’s Discussion and Analysis

• Management’s assessment

• Critical accounting estimates + assumptions

• Summarized financial trends

What does Part II, Item 7A on the Form 10k include?

Market risk due to changes in:

• Interest rates

• Exchange rates

• Other factors like inflation or war

3 ways you can disclose market risks

1. Tabular presentation

2. Sensitivity analysis

3. Value at risk disclosures

What does Part II, Item 8 on the Form 10k include?

Financial Statement + Supplementary Data

• Audited FS + Notes

• BS for the 2 most recent fiscal years

• Everything else 3 fiscal years

• Auditor’s report

• Certifications from the CEO + CFO

What is the form 10-Q? Filing deadlines?

The quarterly report that must be filed by US registered companies for each of the first 3 quarters of every fiscal year

• 40 days for large accelerated + accelerated filers

• 45 days for others

What does Part I, Item 1 on the Form 10-Q include?

Financial Statements

• Similar to Form 10-K, Part II, Item 8 except generally unaudited

• BS at the end of the most recent fiscal quarter + end of the preceding fiscal year

• I/S + Comprehensive Income + CF - the most recent fiscal quarter + end of the preceding fiscal year and end of most recent fiscal quarter + corresponding periods of the preceding fiscal year

• Detailed decsription of the nature + amounts of adjustments that are not normal + recurring

What does Part I, Item 2 on the Form 10-Q include?

Management’s Discussion + Analysis of Financial Condition + Results of Operations

• Similar to Form 10-K, Part II, Item 7

What does Part I, Item 3 on the Form 10-Q include?

Quantitative and Qualitative Disclosures about Market Risk

• Similar to Form 10-K, Part II, Item 7A

What is Form 8-K? How many days do companies have to file this form

• Changes in material events

• Eg bankruptcy, changes in accounting firm

• 4 days to file

Under US GAAP, all public entities are required to present EPS on…

An entity has a simple capital structure if it only has…

… the face of the Income Statement

… common stock outstanding

The simple entity presents basic per share amounts…

All other entities must present…

If an entity reporst a discontinued operation, the entity must present…

… for income from continuing operations AND for net income on the face of the I/S

… basic AND diluted per share amounts for income from continuing operations AND for net income on the face of the I/S

… the basic + diluted per share amounts either on the face of the I/S OR in the notes to the FS

Basic EPS Formula. Numerator breakdown. Preferred dividends 2 types

Income Available to Common Shareholders/ Weighted Average # of Common Shares Outstanding (WACSO)

Income available = net income - preferred dividends

Cumulative = # of preferred shares x par value x rate. What was owed.

Noncumulative = what was declared

Weighted Average # of Common Shares Outstanding calculation

• Which ones are retroactively adjusted?

Beginning shares outstanding

+ Shares sold during the period

- Shares reacquired

+ Stock dividends + splits (retroactively adjusted)

- Reverse Stock splits (retroactively adjusted)

= WACSO

An entity has a complex capital structure when it has securities that:

Examples

• Can potentially be converted to common stock

• Dilute EPS

• Eg convertible securities, warrants, contracts that may be settled in cash or stock, contingent shares

Diluted EPS formulas

Income Available to the CS shareholder + Interest on dilutive securities/ WACSO (assuming all dilutive securities are converted to CS)

Options and similar instruments are only dilutive when…

If they are antidultive what do you record?

the average market price of the CS > exercise price of the option

The same as the EPS

Treasury Stock Method. Used for what?

1. Check average market price > exercise price

2. How many shares can be repurchased. (Number of shares x exercise price)/ average market price

3. Additional shares outstanding = Number of shares - Step 2

Options + warrants

The “if-converted method” convertible bonds. Also applies to

• Add to the numerator the interest expense, net of tax

• Add to the denominator the # of bonds x # of CS per bond

… convertible preferred stock

Earnings per share disclosures:

1. Weighted average

2. Options + Warrants

3. Convertible Bond

4. Converible Preferred Stock

5. Contingent issues

1. Disclose

2. Treasury stock method if diluted

3. If-converted method if diluted

4. If-converted method if diluted

5. Disclose if conditions have been fully satisfied

Stock dividends and stock splits are treated as if

they had occured at the beginning of the fiscal year (retroactively)

Stockholders’ Equity Section Format

Capital Stock:

Preferred

Common Stock

Additional Paid in Capital

Retained Earnings

Accumulated Other Comprehensive Income

Less: Cost of shares in treasury

Total Capital Corp. shareholders’ equity

Noncontrolling interest

Total Equity

3 Classifications of Common Stock

1. Authorized - what a company may legally issue

2. Issued - what stock is issued

3. Outstanding - what stock is issued minus treasury stock

Common Shareholders v Preferred

Common:

• Right to vote

• Right to share earnings

• Right to share in assets upon liquidation after creditors + preferred

Preferred:

• Normally no voting rights

• Right to share in assets upon liquidation after creditors

Preferred stock:

• Cumulative v noncumulative

• Participating v nonparticipating

• Preference upon liquiation

• Convertible

• Callable

• Mandatorily Redeemable Preferred Stock

• Cumulative - preferred dividends not paid in any year accumulate + must be paid in the future before dividends can be paid to commons shareholders

• Participating - preferred shareholders can share with common shareholders in dividends in excess of a specific amount. May be full or partial

• Preference upon liquiation - preference to assets. Must be disclosed

• Convertible - may be exchanged for common stock at a specified conversion rate

• Callable - may be repurchased at a specific price. Must be disclosed

• Mandatorily Redeemable Preferred Stock - Liability. Must be bought back by the company on the maturity date

Is additional paid in capital only from contributed capital in excess of par?

No! Can arise from other transactions. Eg liquidating dividends

Retained Earnings Formula

Net Income/ (loss)

- Dividends

+- Prior period adjustment

+- Accounting changes retrospectively

= Retained Earnings

2 Classifications of Retained Earnings

• Appropriated → disclose to shareholders why it isn’t paid as dividends. Restricted due to legal or contractual reasons

• Unappropriated → available to shareholders as dividends

What is treasury stock? What are the two methods of accounting? Gain or loss calculated when?

• Treasury stock - corp’s own stock that has been issued to shareholders and subsequently reacquired

1. Cost method. Gain or loss calculated upon reissue

2. Legal. Gain or loss calculated immediately upon repurchase

Cost Method Treasury Stock Calculation

1. Gain or loss = Reissue price - Repurchase cost

• Losses: decrease paid-in capital treasury stock, excess decrease retained earnings

• Gains: increase paid-in capital treasury stock

Legal Method Treasury Stock Calculation

1. Gain or loss = Original selling price - Repurchase price.

• Losses: decrease APIC - C/S, excess decrease retained earnings

• Gains: increase APIC - C/S

2. Reverse original entry for shares repurchased. Debit treasury stock at par

3. Credit cash price paid

Retirement of Treasury Stock

• When price paid for TS less than par

• When price paid for TS greater than par

Cost method v Par Value method entry

• CR Paid-in capital

• DR Paid-in capital OR retained earnings

Cost:

DR CS (par)

DR APIC (excess)

DR R/E (excess)

CR TS

Par Value:

DR CS (original price)

CR TS

Journal Entries for donated stock + when it is sold

DR Donated Treasury Stock (FMV)

CR APIC (FMV)

Sold:

DR Cash (sales price)

DR APIC (if SP < FMV)

CR APIC (if SP > FMV)

CR Donated Treasury Stock

Direct Retirement of Stock Journal Entries

Originally: 10,000 shares $10 par value CS sold for $15/share

1. 200 shares were acquired and immediately retired for $20/share

2. 200 shares were acquired and immediately retired for $8/share

1. DR CS (200 × 10) 2000

DR APIC - C/S (200 x (15-10)) 1000

DR R/E (200 x (20-15)) 1000

CR Cash (200 × 20) 4000

2. DR CS (200 × 10) 2000

DR APIC - C/S (200 x (15-10)) 1000

DR R/E (200 x (15-8)) 1400

CR Cash (200 × 8) 1600

Treasury Stock Journal Entries Differences Par Value v Cost Method

• Issuance

• Buy Back

• Re-sell

• Issuance same

Par Value Buy back:

DR TS (par)

APIC - C/S (original APIC)

R/E (difference)

CR Cash (full amount)

Cost buy back:

DR TS (full)

CR Cash (full)

Par Value Re-sell:

DR Cash

CR APIC - C/S

TS

Cost Re-Sell:

If SP < Repurchase price

DR Cash (selling)

R/E (difference)

CR TS (repurchase)

If SP < Repurchase price

DR Cash (selling)

CR APIC - T/S (difference)

TS (repurchase)

If stock is issue above par value journal entry

DR Cash

CR Common Stock

CR APIC

Journal entries for:

1. Sale of subscriptions

2. Collection of subscriptons

3. Issuance of stock previously subscribed

1. DR Subscriptions Receivable (sales price)

CR CS subscribed (par)

CR APIC (excess)

2. DR Cash

CR Subscriptions Receivable

Only if fully paid

3. DR Common Stock Subscribed

CR Common Stock

Journal entry for default/forfeiture of a subscription options

1. Issue stock in proportion to amount paid

DR Common Stock Subscribed

CR Common Stock

2. Refund the partial payment

3. Retain the partial payment as liquidating damages

DR Common Stock Subscribed

CR APIC

Define:

1. Date of declaration

2. Date of record

3. Date of payment

1. Date the BOD approves a dividend. Liability credited

2. Date the BOD specifes the names of shareholders to receive dividends

3. Date dividend actually distributed

Property (In-Kind) Dividends Journal Entry On the date of declaration

DR Retained Earnings (residual)

DR Acc Dep

CR PPE

CR Gain (FMV - NBV)

What are scrip dividends? Journal on date of declaration

• Used when there is a cash shortage. Company expected to pay a dividend but doesn’t

DR Retained Earnings

CR Notes Payable

What are liquidating dividends? Journal entry

Occur when dividends to shareholders exceed retained earnings

DR Retained Earnings

DR APIC

DR CS

CR Cash

What makes it a small stock dividend? Journal entry?

• Less than 20% of shares oustanding are distributed

• FMV

DR Retained Earnings (FMV)

CR CS (par)

CR APIC (plug)

What makes it a large stock dividend? What value do you record at? Journal entry for declaration + distribution

• More than 25% of shares outstanding are distributed

• Par value

Declaration:

DR Retained Earnings

CR Common Stock Distributable

Distribution:

DR Common Stok Distributable

CR Capital Stock

A stock split normally does not affect…

Retained earnings or total shareholders’ equity

If dividends are declared on Feb 1 2026, and FS are Dec 31 2025 what do you record?

Nonrecognized subsequent event. No liability recorded, but disclosed

Stock splits occuring in subsequent years what does it affect?

• EPS in prior years

What happens to total stockholder’s equity due to donation of its own stock from a stockholder?

No effect. No cost to the corporation

Income available to common shareholders is determined by deducting dividends on non cumulative vs cumulative stock?

• Non cumulative → declared

• Cumulative → regardless of whether they’ve been declared

Regulation _-_ sets forth the form and content of and requirements for interim and annual financial statements to be filed with the SEC.

S-X

Revenue recognition occurs when…

… an entity satisfies a performance obligation br transferring either a good or service

5 Step Approach for Revenue Recognition

I STAR

1. IDENTIFY the contract with the customer

2. Identify the SEPARATE performance obligations

3. Determine the TRANSACTION price

4. ALLOCATE the transaction price to the separate performance obligations

5. RECOGNIZE revenue when the entity satisfies each performance obligation

If the criteria for identifying the contract are not met but consideration has been paid by the customer, an entity can recognize revenue if:

If not recognized as a revenue:

• Consideration is nonrefundable AND

• No remaining obligations to transfer goods or services OR contract has been terminated

If not recognized as a revenue:

DR Cash

CR Unearned Revenue

What should be used to determine the transaction price?

• Variable consideration → expected value or range

• Significant financing → time value of money

• Noncash considerations → fair value

• Consideration payable to a customer → reduction in the transaction price

What is the transaction price?

$4000, interest free credit. %. 3 years

4000 × 1/(1.08)³

Step 5 Revenue Recognition

Performance obligations may be satisfied either:

• Over time →

  • Output methods → value to the customer of the goods/services transferred to date. Eg units produced

  • Input methods → entity’s efforts to the satisfaction of the performance obligation. Eg costs incurred relative to total expected costs

• At a Point in Time → when customer obtains control of the asset

On Jan 1, Anderson enters into a noncancelable contract with Tanner for the sale for $350k. Excavator will be delivered to Tanner on April 1. Contract requires Tanner to pay the 350k in advance on Feb 1. Tanner makes the payment on March 1. Journal entries

Feb 1

DR Receivable 350k

CR Contract Liability 350k

Mar 1

DR Cash

CR Receivable

April 1

DR Contract Liability

CR Revenue

Construction Contract Revenue Recognized Over Time

1. Compute gross profit of completed contract. Contract price/gross profit

2. Compute percentage of completion. Total cost to date/total estimated cost of contract

3. Compute gross profit earned. Step 1 x Step 2 = Profit to Date

4. Compute gross profit earned for the current year. PTD/Current Year to Date Gross Profit

Construction estimated loss is recognized over time…

Any previous gross profit reported in prior years…

immediately in the year it is discovered

Must be adjusted when calculated the total estimated loss

Construction estimated profit is recognized at a point in time…

Unless

when the contract is completed

Unless a loss is recognized, then recognize

Construction Over Time vs a Point in Time Journal Entries

• Costs incurred

• Billings on contract

• Record payments received

• Record estimated gross profit during construction

Both:

DR Construction in progress

CR Materials

DR AR

CR Progress billings

DR Cash

CR AR

Just Over time:

DR Cost of long-term construction contracts (actual costs incurred)

DR Construction in progress (gross profit)

CR Revenue from LT construction contracts (% of contract price completed)

Over time v point in time. Construction in progress includes

Over time: costs incurred + estimated gross profit earned to date

At a point in time: costs incurred

Over time v point in time. Construction Completed journal entries

Over Time:

DR Progress Billings

CR Construction in Progress

Point in Time:

DR Progress billings

CR Revenue

DR Cost of LT construction contract

CR Construction in progress

Other Rev Recognition - how are they classified?

1. Incremental costs of obtaining a contract

2. Costs to fulfill a contract

1. Costs incurred if the contract have not been obtained → asset. Eg commission

Costs would have incurred regardless of whether a contract was obtained → expense. Eg salary

2. Asset if they relate directly to the contract, generate or enhance the entity resources, expected to be recovered

Agent vs Principal. Revenue recognition?

1. Who is responsible for fulfilling the contract?

2. Who has inventory risk?

3. Who has the right to establish the price?

Agent:

• Arranges for the other party to provide the good or service to the customer

• Revenue recognized → commission fee

Principal:

• Entity controls the good or service before it is transferred to the customer

• Revenue recognized → gross consideration

1. Principal

2. Principal

3. Principal

Forward or call option what is it? Journal entries:

• Recognize financial liability

• Interest expense

• Records sale

Forward → entity’s obligation to repurchase the asset

Call → entity’s right to repurchase the asset

DR Cash

CR Financial Liability

DR Interest expense

CR Financial Liability

DR Financial Liability

CR Revenue

What is a put option? How does the entity account for it if the repurchase price is more/less than expected market value?

Entity’s obligation to repurchase the asset at the customer’s request

• More → financing agreement

• Less → sale with a right of return

What is a bill and hold arrangement? Generally ___ can’t be recognized unless

Contract in which an entity bills a customer for a product that it has not yet delivered

• Revenue … unless substantive reason. Eg customer has requested because they don’t have space for the product. And product currently ready for transfer + entity can’t transfer to another customer