FAR F1

Basic EPS Calculation

(Net Income - Preferred Dividends) / WACSO

Weighted avg. common shares includes share issuance, share repurchases, stock splits / dividends

ADDED TO WACSO (+)

- Newly issued common shares

- Treasury Shares Sold Back to Public

- Stock Dividends

WHAT IS SUBTRACTED FROM WACSO (-)

- Treasury Stock purchased

- Share retired/canceled

Form 10-Q

Filed Quarterly by US Companies

UNAUDITED Financial Statements

Includes Management's Discussion and Analysis (MD&A) and certain disclosures

DEADLINES:

40 days after quarter for large and accelerated filers

45 days for all other registrants

Form 10-K

Filed Annually by US Companies

Contains AUDITED Financial Statements

Includes detailed Management Discussion Analysis (MD&A) and disclosures about market risk

DEADLINES:

60 days for LARGE accelerated filers

75 days for accelerated filers

90 days for all others

Form 8-K

Filed to disclose material events or corporate changes as they occur

Must be filed within 4 business days of event

EXAMPLES

- Bankruptcy

- Acquisition

- Disposition of Assets

- Changes in auditors or management

Comprehensive Income

Total change in equity during a period from non-owner sources.

Includes all changes in equity EXCEPT

- Issuing Stock

- Dividends

Comprehensive Income 2 Components

Net Income

- Traditional profit/loss recorded on income statement including income from continuing and discontinued operations

Other Comprehensive Income (OCI)

- Items excluded from net income but included in comprehensive income such as (PUFI)

Example of Comprehensive Income

Example:

Net Income = $100,000

OCI = $10,000 (unrealized gain on AFS securities)

Comprehensive Income = $110,000

Dividend in Arrears

Unpaid dividends on cumulative preferred stock from prior periods that have not been declared or paid

Must be paid before any dividends can be paid to common shareholders.

- They are NOT recorded as a liability

- They are disclosed in footnotes of financial statements

Gross Profit

Net Sales - COGS

Operating Income

Gross Profit - Operating Expenses (Selling, General, Administrative)

Income Before Tax

Operating Income + Other Income - Operating Expenses

Income Tax Expense

Income Before Tax * Tax Rate

Income from Continuing Operations

Income Before Tax - Income tax Expense

Net Income

Income from Continuing Operations + Gain/Loss from Discontinued Operations (NET OF TAX)

Property Dividend

Dividend paid to shareholders in the form of non-cash assets instead of cash. These assets could be things like inventory, investment securities, land, or other property the company owns.

- Full carrying amount will effectively decrease retained earnings

- Recorded at fair value of the property on the declaration date

- When Property dividend is declared, it must be adjusted from its carrying amount to its fair value

Foreign Currency Transaction

Transactions denominated in a currency other than the company's functional currency

Key Points:

- Record at exchange rate ON transaction date

- Adjust at balance sheet date for changes in exchange rates (unrealized gain/loss)

- Recognize realized gain/loss on settlement

Journal Entries:

(On purchase: 100,000 pesos x $0.10)

Dr. Purchases $10,000

Cr. Accounts Payable $10,000

(At year-end: Exchange rate drops to $0.08)

Dr. Accounts Payable $2,000

Cr. Foreign Exchange Gain $2,000

(On settlement: exchange rate $0.09)

Dr. Accounts Payable $8,000

Dr. Foreign Exchange Loss $1,000

Cr. Cash $9,,000

Foreign Currency Translation

Process of converting the financial statements of a foreign subsidiary from its functional currency into the parent company's reporting currency for consolidated financial reporting

- Gains/Losses arise due to exchange rate changes when consolidating financial statements

- These Gains/Losses are reported in OCI

Continuing Operations

Ongoing activities of a business that are expected to continue into the future

- Includes Revenues, Expenses, Gains and Losses from core business activities and asset disposals that are part of regular operations

- Reported on income statement as part of income from continuing operations

EXAMPLE: Selling an old warehouse and buying a new one - any gain or loss on the sale is part of continuing operations

Discontinued Operations

Results from the disposal or planned disposal of a component of a business that represents a strategic shift

Reporting: (Reported separately on the income statement)

- Shown net of tax below income from continuing operations

- Includes gain/loss on disposal and results of operations of the discontinued component

Journal Entry:

Dr. Cash $50,000

Dr. Loss on Disposal of Component $10,000

Cr. Asset $60,000

Impairment Losses

Occurs when carrying amount (book value) of an asset exceeds its recoverable amount

- Recognized immediately in the period the asset is determined to be impaired

- In discontinued operations, impairment is recognized in the period which the decision to discontinue is made and the asset or component is classified as held for sale.

Cost Method

Records treasury stock at the actual cost paid to repurchase shares, not at par value.

- When company issues stock, record common stock at par value and any excess as additional paid in capital (APIC)

- When the company repurchases treasury stock, debit the treasury stock account for the total cost paid (number of shares × repurchase price). This reduces stockholders' equity.

- When the company resells treasury stock, credit treasury stock for the cost of the shares sold, and any difference between the resale price and cost goes to APIC related to treasury stock.

- Common stock account remains unchanged by treasury stock transactions; it always reflects the total shares issued at par.

Par Value Method

Treasury stock is recorded at the par value of the shares repurchased, not the cost paid.

- When company issues stock, record common stock at par value and any excess as APIC (same as cost method)

- When company repurchases treasury stock, debit treasury stock at PAR VALUE of shares repurchased

- Debit APIC for original APIC related to those shares (based on the original issuance)

- If repurchase price is higher than the original issue price, debit retained earnings for the difference (loss)

- When treasury stock is resold, credit treasury stock at par value, and credit APIC for any excess over par received.

Gross Concept

Report proceeds from sale as revenue & separately report the carrying amount (book value) of the asset sold as an expense.

Net Concept

Reports the gain or loss as a single net amount, which is the difference between the proceeds from the sale and the carrying amount of the asset.

EXAMPLE: If you sell a fixed asset for $100k, and its carrying amount is $80k, the gain reported is $20k

Stock Split

Increases the number of shares outstanding by issuing additional shares to existing share holders.

Stock Subscription

A promise or agreement by an investor (subscriber) to buy a certain number of shares from a company at a specified price, often paid over time rather than all at once

Book Value Per Share

Total stockholders' equity / Number of common shares outstanding

Scrip Dividend

A dividend that is paid by issuing a promissory note to its shareholders, promising the payments of dividends at a future date instead of paying cash immediately

- This is done often when a company is low on cash

Other Comprehensive Income (OCI)

PUFI

- Pension Adjustments

- Unrealized Gains/Losses on Available for Sale Debt Securities

- Foreign Translation Gain/Loss

- Instrument to Specific Credit Risk

General & Administrative Expenses

- Accounting & Legal Fees

- Officers' salaries and wages

- Rent and Utilities

- Insurance

- Office Supplies & Equipment Depreciation

- Administrative Salaries

- Professional fees

Stockholder's Equity

Represents owner's residual interest in the company after liabilities are deducted from assets.

It includes common stock, retained earnings, additional paid-in capital, and accumulated other comprehensive income

Income Statement

A financial statement showing the revenue and expenses for a fiscal period.

Key Terms:

Revenues: Inflows from primary operations

Expenses: Outflows or costs incurred to generate revenues

Gains/Losses: Increases/Decreases from peripheral or incidental transactions

Liquidating Dividend

A return of capital which essentially decreases additional paid in capital (APIC) and not a distribution of earnings which would decrease retained earnings.

Retained Earnings Appropriation

A portion of retained earnings is set aside (restricted) for a specific purpose. This makes the amount unavailable for dividend distribution to shareholders.

Cumulative Preferred Stock

If a company does not declare dividends in a given year, those dividends accumulate as dividends in arrears.

- These dividends must be paid before any dividends can be paid to common shareholders

- Dividends are NOT guaranteed, thus NOT a liability

Dividends from Preferred Stock

Always considered income and reported on the income statement

Stock Dividend

Not considered income, they simply increase the number of shares owned and reduce the per share cost basis

Small Stock Dividend (< 20-25% of shares outstanding)

- Recorded at FMV of shares issued

Large Stock Dividend (≥ 20-25% of shares outstanding)

- Recorded at par value of shares issued

Multi-Step Income Statement

Breaks down a company's income into multiple sections to provide more detail about how profit is generated

It includes:

- Gross Profit

- Operating Income

* Selling Expenses

* General and Administrative Expenses

Dividend Income

Is recognized ONLY when a cash dividend is received.

Dividend Income = No. of shares * dividend per share

Example:

- No. of shares purchased: 10,000

- Stock Dividend received: 2,000

- Cash dividend paid: $2 per share

10,000 + 2,000 = 12,000

Dividend Income = 12,000 x $2 per share

ANSWER: $24,000

Accumulated Other Comprehensive Income (AOCI)

A component of Stockholder's Equity on the balance sheet that represents cumulative total of OCI items over multiple periods.

- Gains and Losses that are excluded from net-income but still affect equity

REMEMBER: AOCI = AN EQUITY ACCOUNT (CREDIT)

Direct Method (Foreign Exchange)

How much domestic currency is needed to buy one unit of foreign currency

Example: If you are in the U.S., and exchange rate is 1 euro = $1.47, the direct method quote would be $1.47 per 1 euro

Indirect Method (Foreign Exchange)

How much foreign currency you get for one unit of domestic currency

Exchange: If you are in the U.S., and the exchange rate is 1 euro = $1.47, the indirect method quote would be $1 per 0.68 euro

Bad Debt Expense

Estimated cost of accounts receivable that a company does not expect to collect

Example:

A company has $700,000 in accounts receivable but estimates that $265,000 will not be collected based on past experience and aging analysis. The company records a bad debt expense of $71,000 for the year to adjust the allowance for doubtful accounts accordingly

Journal Entry:

Dr. Bad Debt Expense $71,000

Cr. Allowance for Doubtful Accounts $71,000

Allowance for Doubtful Accounts

Contra-Asset account on the balance sheet that reduces the total accounts receivable balance to reflect the amount the company realistically expects to collect

Diluted EPS

(Income available to common shareholders + Interest on Dilutive Securities (net of tax) / (WACSO + Shares from conversion of dilutive securities)

Example:

Net Income = $1,000,000

Interest on Convertible Bonds (net of tax) = $30,000

Weighted Avg. Shares = 200,000

Shares from conversion = 50,000

Diluted EPS = (1,000,000 + 30,000) / (200,000 + 50,000)

= 4.12