Becker FAR F1

U.S. GAAP Full set of financial statements

1. Balance Sheet (statement of financial position)

2. Income Statement (earnings, P&L)

3. Statement of Comprehensive Income

4. Statement of Cash Flows

5. Statement of Stockholders' Equity

Liquidity

CA/CL

Solvency

Debt/Equity

Contributed Capital

Earned Capital

Contra-Equity

Common Stock and Preferred Stock

Retained Earnings and AOCI

Treasury Stock

Purpose of Balance Sheet

classified list of assets and liabilities, used to evaluate liquidity and LT Solvency

Assets

Liabilities

Equity

Generate revenue, future economic benefit

Future sacrifice, maturity date

Think financing (P/S, C/S, T/S, R/E, AOCI, APIC)

Limitations of Balance Sheet

Doesn't represent market value of entity

Numerous assets and equity measured at historical cost

Purpose of Income Statement

Show the revenues, expenses, and operating profit of the financial year

REGL

Determines Operating Risk

Period vs Capitalized Cost

Period: expensed immediately, recurring in nature

Capitalized: capitalized as asset, unexpired cost, MATCHING PRINCIPLE

Matching Principle common costs

Inventory: COGS

Prepaid Insurance: Insurance expense

PPE: Depreciation Expense

Unexpired Patents: Amortization Expense

Non-operating items on Income Statement

-write downs

-write offs

-Sale of PPE

-Sale of investment

-unusual or infrequent

Income from Continued Operations

Income from Discontinued Operations

Operating Income (R&E) + Non-operating income (G&L)

After income from continuing operations, NET of Tax

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 nonoperating 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 nonoperating revenues and expenses.

Multi-Step Income statement formula

Sales

-COGS

=GP

-Operating Expenses

= Net Operating Income

+/- Non-operating items

=Pretax income

-Income tax expense

=Net Income from operations

+/- Discontinued operations, Net of tax

= NET INCOME

Aggressive vs Conservative Accounting

Aggressive = Higher revenue, lower expenses, Higher profit (today, capitalize

Conservative = Lower revenue, higher expenses, lower profit, book

Discontinued Operations

Disposed segment or Held for Sale

must report...gain or loss from disposal (selling price - carry value),

impairment loss,

and gain or loss from operations

State two types of foreign currency transactions.

-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

For operating transactions in foreign currency, detail the recording process.

1. Record original transaction at exchange or spot rate on date of transaction.

2. At balance sheet date, compute gain/loss on the transaction by recalculating using the current exchange or spot rate.

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

Direct method (foreign currency transactions)

domestic price of another currency ($/Euro) - look at numerator

Indirect method (foreign currency transactions)

foreign price of domestic currency (Euro/$) - look at numerator again

Assets denominated in foreign currency (A/R)

Foreign currency UP, Assets UP = GAIN

Foreign currency DOWN, Assets DOWN = LOSS

Liabilities denominated in foreign currency (A/P)

Foreign currency UP, Liability UP = LOSS

Foreign currency DOWN, Liability DOWN = GAIN

Comprehensive Income

= Net Income + OCI

Encompasses all changes in equity EXCEPT investments by owners and distributions to owners

Net Income =

OCI =

NI = REGL (Revenue, expenses, gains, losses)

(Income from cont. ops. + income from discont. ops.)

OCI = PUFI

Pension adjustments

Unrealized gains and losses (AFS debt securities, hedges)

Foreign currency items (transactions and translations)

Instrument specific credit risk (change in discount rate and FV )

AOCI equation

Beginning OCI and PUFI Items

+/- PUFI gains and losses

+/- Reclassification adjustments (add loss, subtract gain)

= ENDING AOCI (part of Stockholders' Equity)

If starting point is Revenue...

If starting point is Net Income...

Single Statement Approach

Two-statement Approach

Where is OCI reported?

PUFI can eiter be reported separately net of tax, or summed up as one to income tax expense.

Can be shown on the face of the financial statement OR in the notes of the financial statements

Required disclosures for Comprehensive Income

-tax effect of each component of OCI

-tax effects allocated to each component

-change in accumulated balances for each of OCI

-change in reclassification adjustment

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

10-K: form filed annually by U.S. registered companies. Includes a summary of financial data, MD&A, and audited financial statements prepared using U.S. GAAP.

10-Q: form filed quarterly by U.S. registered companies. Includes unaudited financial statements, interim MD&A, and certain disclosures.

10-K Filing Deadline

10-Q Filing Deadline

10K: 60 days for Large accelerated filers = $700M market value

75 days for Accelerated filers = $75-$700M MV and >$100M revenue

90 days for All Others = Less than $100M revenue

10Q: 40 days for LARGE Accelerated and Accelerated Filers

45 days for ALL Others

What's the purpose of a Form 8-K?

Discloses a material event such as a change in officers, change in auditor, bankruptcy, merger, etc.

Usually occurs within 4 days after announcement, like a press release

Simple Capital Structure

Only C/S outstanding (no convertible bonds, options warrants, or preferred equity)

-Use Basic EPS

Basic EPS

(Net Income - Preferred Dividends)/(Weighted Average of Shares Outstanding)

Numerator is actually called "Income available to common shareholders"

Preferred Dividends

Cumulative: (# preferred shares par rate)

Non-cumulative: (Amount declared)

WACSO Calculation

Shares outstanding at beginning of period

+ shares sold during period (time weighted basis)

- shares reacquired during period

+ stock dividends and splits (retroactive adjustments)

- reverse stock splits

= WACSO

Complex Capital Structure

Capital structure that includes outstanding rights or options to purchase common stock, or securities that are convertible into common stock

Must show basic and diluted EPS

Dilutive if Market price > Exercise price

Diluted EPS

(Income available to C/S holder + Interest on Dilutive Securities)

/

(WACSO, with all securities converted to CS)

Treasury stock Method

A method for accounting for the effect of options (and warrants) on earnings per share (EPS) that specifies what EPS would have been if the options and warrants had been exercised and the company had used the proceeds to repurchase common stock.

Additional shares = # of shares - [(#shares * exercise price) / (average mkt price)]

If-Converted Method (Convertible Bonds) - Dilutive EPS

assumes securities were converted to C/S at beginning of period

1. Add interest expense, net of tax to numerator

2. Add # of C/S shares associated to denominator (bonds times c/s per bond)

3. If issued, assume stock is for WACSO

If-Converted Method (Convertible Preferred Stock) - Dilutive EPS

1. Adjust numerator, add back pref div. to numerator

2. Add # c/s shares converted to denominator

Name the potentially dilutive securities or instruments.

MOST to LEAST DILUTIVE

1. Stock options and warrants and their equivalents

2. Convertible securities (bonds or preferred stock)

3. Contracts that may be settled in stock or cash (Rights and warrants)

4. Contingent issuable 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.

What is Capital Stock?

Legal Capital. The owners' claim to Net Assets

A-L = NA

Capital Stock CANNOT be used to pay dividends

What should be disclosed for shares (Auth, Iss, Out)?

Shares Authorized = amount may be issued legally

Shares issued = stock that's been issued

Shares Outstanding = [Issued - Treasury] (issued, not repurchased)

Details of Common Stock

-Basic ownership interest

-Bears greater risk of loss, receive the ultimate benefits of success

-NO guarantee of dividends and assets

-given the right to vote

-right to share in ownership, have "last claim"

Book Value per Share

Common stockholders' equity / Number of common shares outstanding

Common Stockholders' Equity

Assets-Liabilities-Preferred Equity-Dividends in Arrears (if cumulative)

Common shares outstanding

(shares issued - shares repurchased in Treasury)

cumulative preferred stock

Preferred stock on which undeclared dividends accumulate until paid; common stockholders cannot receive dividends until cumulative dividends are paid.

noncumulative preferred stock

preferred stock for which passed (unpaid) dividends do not accumulate

Participating preferred stock

Preferred stock that shares with common stockholders any dividends paid in excess of the percent stated on preferred stock.

Fully = participates in excess Dividends without a limit

Partial = participates in excess dividends with a % limit

T/F - Preference upon liquidation must be disclosed if larger than Par

TRUE

Mandatorily Redeemable Preferred Stock

-similar to debt, must be bought back by the company on the maturity debt

-classified as a liability

convertible preferred stock

Preferred stock with an option to exchange it for common stock at a specified rate.

callable preferred stock

issuing corporation can "call" or buy back issued shares at predetermined price

APIC

(shares issued * selling price) - (par)

Retained Earnings

Accumulated Earnings or losses during life of the corporation that have NOT been paid out as dividends

-does NOT include Treasury Stock or AOCI

-Negative R/E is known as Deficit

R/E Formula

Net Income

- Dividends Declared

+/- PPA

+/- Accounting changes retrospectively

= R/E

Appropriated Retained Earnings

A retained earnings account that is restricted for a specific use, usually to comply with contractual requirements, board of directors' policy, or current necessity.

J/E for Appropriated R/E

Dr. R/E - Unappropriated

Cr. R/E - Appropriated for purpose

AOCI

-Gains or losses not on the income statement

-CY G & L = OCI, think PUFI from OCI in Comprehensive Income

AOCI Formula

Beg. AOCI

+/- CY G & L

+/- CY Reclassifications

= Ending AOCI (part of Stockholders' Equity, earned capital)

Treasury Stock

A corporation's own stock that has been issued to shareholders and subsequently reacquired (but NOT retired).

-No right to vote, no right for dividends

Issued - Repurchased = Outstanding

Both Cost Method and Par Method have what in common...

Gains increase Equity

Losses decrease Equity

Gains and losses are recorded as a direct adjustment to S.H.E. and are NOT included in income. Gains NEVER increase Retained Earnings

T/S is not considered outsanding

COST METHOD

-Used 95% of the time

-Treasury shares are recorded and carried at Reacquisition cost

-G/L is determined when reissued or retired (Reissue price - Repurchase cost)

G/L effect from Cost Method

Losses: Decrease PIC-T/S, decrease Excess R/E

Gains: Increase PIC-T/S

Cost Method Original Issuance J/E

Dr. Cash

Cr. C/S

Cr. APIC - C/S

J/E Cost Method - Reissue above cost

Cost Method Reissue below cost

Dr. Cash

Cr. T/S

Cr. APIC - T/S

Dr. Cash

Dr. R/E

Dr. APIC - T/S

Cr. T/S

J/E Cost Method - Buy back above issue price

Dr. T/S

Cr. Cash

PAR METHOD

-used 5% of the time

Calculate gains and losses IMMEDIATELY upon repurchase

Steps of Par Method

1. Calculate Gain or Loss... = (Original purchase price - Repurchase price)

2. Reverse original entry for shares repurchased; Debit Treasury Stock at Par

3. Credit Cash Paid

J/E PAR Method - Original Issuance - T/S

Dr. Cash

Cr. C/S

Cr. APIC - C/S

J/E PAR Method - Buy back below Issue Price (GAIN)

J/E PAR Method - Buy back above Issue Price (LOSS)

Dr. T/S

Dr. APIC - C/S

Cr. APIC - T/S

Cr. Cash

Dr. T/S

Dr. APIC - C/S

Dr. R/E

Cr. Cash

J/E PAR Method - Reissue shares

Dr. Cash

Cr. T/S

Cr. APIC - C/S

JE - Retired Treasury Stock (Cost and Par)

COST

Dr. C/S

Dr. APIC - C/S

Cr. T/S

PAR

Dr. C/S

Cr. T/S

Donated Stock J/E

Dr. Donated Treasury Stock

Cr. APIC

When selling, Dr. Cash, Cr. Donated Treasury Stock, and balance with a Loss or gain through the APIC account

Stock issuance above par (Premium) - JE

Dr. Cash

Cr. C/S

Cr. APIC - C/S

Stock issued at par - JE

Dr. Cash

Cr. C/S

Stock issued below par (Discount) - JE

Dr. Cash

Dr. APIC - C/S

Cr. C/S

Stock Subscriptions

A contractual agreement to sell a specified number of shares at an agreed upon price on credit is entered into.

Upon full payment of the subscription, a stock certificate evidencing ownership in the corporation is issued.

Record Subscriptions Receivable - JE

Dr. Subscriptions Receivable

Cr. C/S Subscribed

Cr. APIC - C/S

Collection of Subscriptions JE

DR: Cash

CR: Subscriptions Receivable

Issuance of Subscriptions JE (only those fully paid)

Dr. C/S Subscribed

Cr. C/S Issued

Both at Par!

Stock Subscription Default Options

1. Issue stock in proportion to amount paid

2. Refund the partial payment

3. Retain the partial payment with APIC

Stock Rights

Existing stockholders have the right (preemptive privilege) to purchase newly issued shares in proportion to their holdings.

-Memo entry only until rights are exercised!

Dr. Cash

Cr. C/S

Cr. APIC

Outside Services stock at FMV - JE

Dr. Expense

Cr. C/S

Cr. APIC

Dividend

Pro-rata distribution based off shares

-Comes from Retained Earning

- Cash dividends are most common

-Preferred is usually fixed

DIVIDENDS ARE NOT LEGALLY REQUIRED

Date of Declaration

the date on which a board of directors votes to distribute a dividend

Dr. R/E

Cr. Dividends payable

Date of Record

Date directors specify for identifying stockholders to receive dividends. - MEMO ENTRY ONLY

Date of Payment

Date the corporation makes the dividend payment.

Cash Dividends

distributions of cash to stockholders that reduce retained earnings

-Only paid on Authorized, Issued, and Outstandings shares...NO TREASURY STOCK

Property (In-Kind) Dividends

distribute noncash assets to shareholders

Scrip Dividends

-Cash shortage!

-Special type of Notes Payable, commits to paying dividend at some later date

Dr. R/E

Cr. Notes payable

Liquidating Dividend

A dividend declared out of paid-in capital.

(Dividends to S.H. exceed R/E)

Stock Dividend

Distribute additional shares of a company's own stock to its shareholders

-Treatment depends on size of company, which dictates amount to reduce R/E

Small Stock Dividend

A stock dividend of less than 20% to 25% of the issued and outstanding stock.

R/E decreased by FMV, includes APIC in journal entry

Large Stock Dividend

A stock dividend greater than 20% to 25% of the issued and outstanding stock

R/E decreased by Par

Stock Split

occurs when a corporation issues additional shares of its own stock to current shareholders and reduces par value proportionately

-No change in BV of outstanding shares

-Only # of shares and par value change, no impact to R/E or SHE

Reverse Stock Split

Reducing amount of shares outstanding and increasing par proportionately

-Only way to reduce is to 1. Recall outstanding stock certificates or 2. Issue new certificates

-NOT applied to Treasury Stock