1.4 Flashcards
The SEC is comprised of five commissioners, appointed by the President of the United States, and five divisions. Which of the following divisions is responsible for overseeing compliance with the securities acts?
Division of Corporate Finance.
The SEC enforces the corporate registration requirements of the Securities Act of 1933 as one of its principal objectives. These requirements are intended to provide information that enables the SEC to:
Ensure that investors are provided with adequate information on which to base investment decisions.
Even though the SEC delegates the creation of accounting standards to the private sector, the SEC frequently comments on accounting and auditing issues. The main pronouncements published by the SEC are:
Financial Reporting Releases (FRR) and the Staff Accounting Bulletins (SAB)
Which of the following is the annual report that is filed with the United States Securities and Exchange Commission (SEC)?
Form 10-K.
Which of the following is not a required component of the 10-K filing?
Product market share.
Description of the business.
Market price of common stock.
Executive compensation.
Product market share.
Which regulation governs the form and content of financial statement disclosures?
Regulation S-X governs the form and content of financial statements and financial statement disclosures.
Which of the follow is required by Regulation S-K to be included in the Management’s Discussion and Analysis (MD&A) that is part of the 10-K?
Discussion of risks and uncertainties.
The SEC requires that the MD&A provide a “discussion and analysis” on operating results, liquidity, and capital resources, trends, and risks and uncertainties. Where there are significant increases in sales, management must discuss the extent that price, volume, or new products contributed to the increase.
A company that is a large accelerated filer must file its Form 10-Q with the United States Securities and Exchange Commission within how many days after the end of the period?
large accelerated filer is a company with worldwide market value of outstanding voting and nonvoting common equity held by nonaffiliates of $700 million or more. A large accelerated filer must file its 10Q within 40 days after quarter end.
U.S. Securities and Exchange Commission (SEC) regulations for the financial statement presentation and disclosure requirements of SEC filings can be found in
Regulation S-X.
Wood Co.’s dividends on noncumulative preferred stock have been declared but not paid. Wood has not declared or paid dividends on its cumulative preferred stock in the current or the prior year and has reported a net loss in the current year. For the purpose of computing basic earnings per share, how should the income available to common stockholders be calculated?
The dividends on the noncumulative preferred stock and the current-year dividends on the cumulative preferred stock should be added to the net loss.
During the current year, Comma Co. had outstanding: 25,000 shares of common stock, 8,000 shares of $20 par, 10% cumulative preferred stock, and 3,000 bonds that are $1,000 par and 9% convertible. The bonds were originally issued at par, and each bond was convertible into 30 shares of common stock. During the year, net income was $200,000, no dividends were declared, and the tax rate was 30%.
What amount was Comma’s basic earnings per share for the current year?
$7.36
Basic earnings per share = (Net Inc - One year of Preferred stock dividend)/ outstanding shares
The treasury stock method of entering stock options into the calculation of diluted EPS:
Is called the treasury stock method because the proceeds from assumed exercise are assumed to be used to purchase treasury stock.
The following information pertains to Ceil Co., a company whose common stock trades in a public market:
Shares outstanding at 1/1 100,000
Stock dividend at 3/31 24,000
Stock issuance at 6/30 5,000
What is the weighted average number of shares Ceil should use to calculate its basic earnings per share for the year ended December 31?
he stock dividend is considered to be outstanding since the beginning of the year. The weighted average is therefore:
100,000+24,000+ (5,000X6/12) = 126,500.
A firm with a net income of $30,000 and weighted average actual shares outstanding of 15,000 for the year also had the following two securities outstanding the entire year: (1) 2,000 options to purchase one share of stock for $12 per share. The average share price during the year was $20, (2) cumulative convertible preferred stock with an annual dividend commitment of $4,500. Total common shares issued on conversion are 2,900. Compute diluted EPS for this firm.
The options and convertible preferred stock are potential common stock (PCS). First compute basic EPS as the basis for diluted EPS, and also as a benchmark for determining whether the two potential common stock securities are dilutive. Basic EPS = ($30,000 – $4,500)/15,000 = $1.70. The preferred dividend is subtracted from income because the preferred is cumulative. Then determine the numerator and denominator effects of the PCS to enter them into diluted EPS in the order of lowest ratio of numerator to denominator effect (n/d) first. The option’s numerator effect is zero; the denominator effect = 2,000 – (2,000)$12/$20 = 800. 2,000 shares would be issued upon exercise but under the treasury stock method the firm is assumed to apply the proceeds from exercise (2,000 × $12) and purchase shares of the firm’s stock for $20 each. Thus, the n/d for options = 0/800 = 0. The n/d for the convertible preferred stock is the ratio of dividends that would not have been declared if the stock converted, to the common shares assumed issued on conversion. n/d = $4,500/2,900 = $1.55. Enter the options into diluted EPS first, because the options have the lower n/d. DEPS tentative = ($30,000 − $4,500)/(15,000 + 800) = $1.61. The convertible preferred is dilutive because its n/d ratio of $1.55 is less than $1.61, the tentative or first-pass amount for diluted EPS. DEPS final = ($30,000 – $4,500 + $4,500)/(15,000 + 800 + 2,900) = $1.60.
AB Company reported earnings per share of $10.50 on income before discontinued operations, ($2.00) on income (loss) attributed to discontinued operations, and $8.50 on net income. Which EPS figure is more relevant to a potential investor?
Potential investors and current investors are interested in the future earnings potential of the entity. Thus, they are interested in the earnings per share on continuing income, not including the EPS on discontinued operations. The EPS attributed to discontinued operations cannot be used in predicting future earnings, as they are one-time events.
For which of the following income statement sections is earnings per share calculated?
Income before discontinued operations.
A public entity sells steel for use in construction. One of its customer’s accounts for 43% of sales, and another customer accounts for 40% of sales. What should the entity disclose in its annual financial statements about these two customers?
The amount of the entity’s revenue from each of the two customers
Opto Co. is a publicly traded, consolidated enterprise reporting segment information. Which of the following items is a required enterprise-wide disclosure regarding external customers?
Correct! This is one of the disclosures required in FAS 131. The identity of the customer does not need to be disclosed, but the segment reporting the revenue must be identified. Such a segment would meet one of the three quantitative thresholds for reporting segment information. The three thresholds are 10% of revenue, income, and assets.
he following information pertains to revenue earned by Timm Co.’s industry segments for the year ending December 31, 2005:
Segment Sales to unaffiliated customers Intersegment sales Total revenue Alo $5,000 $3,000 $8,000 Bix 8,000 4,000 12,000 Cee 4,000 - 4,000 Dil 43,000 16,000 59,000 Combined 60,000 23,000 83,000 Elimination - (23,000) (23,000) Consolidated $60,000 - $60,000 ======== ======= ======= In conformity with the revenue test, Timm's reportable segments were
Alo does not meet the test.
To meet the revenue test, an operating segment must have total sales (including intersegment sales) of 10% or more of the combined segment sales (including intersegment sales). $83,000 is the test number.
Alo has only $8,000 in sales, which is less than 10% of $83,000.
What information should a public company present about revenues from foreign operations?
Disclose separately the amount of sales to unaffiliated customers and the amount of intracompany sales between geographical areas.
Yellow Co. received a large worker’s compensation claim of $90,000 in the third quarter for an injuryoccurring in the third quarter. How should Yellow account for the transaction in its interim financial report?
Recognize $90,000 in the third quarter.
How are discontinued operations that occur at midyear initially reported?
Included in net income and disclosed in the notes to interim financial statements. (Keyword is initially)
An inventory loss from a permanent market decline of $360,000 occurred in May Year 1. Cox Co. appropriately recorded this loss in May Year 1 after its March 31, Year 1, quarterly report was issued.
What amount of inventory loss should be reported in Cox’s quarterly income statement for the three months ended June 30, Year 1?
Unless temporary, declines in the market value of inventory should be recognized in full in the interim period in which they occur. They should not be deferred to a later period. In this way, the quarterly financial statement reports a significant event for that quarter. This is an example of an exception to the overall view adopted by the APB with regard to interim reports: that interim reports should be an integral part of the annual period.
The $90,000 answer recognizes only 1/4 of the loss, yet the entire loss incurred in the second quarter.
An inventory loss from a market price decline occurred in the first quarter, and the decline was not expected to reverse during the fiscal year.
However, in the third quarter, the inventory’s market price recovery exceeded the market decline that occurred in the first quarter.
For interim financial reporting, the dollar amount of net inventory should:
Decrease in the first quarter by the amount of the market price decline and increase in the third quarter by the amount of the decrease in the first quarter.
The recovery exceeded the decline in absolute value. The recovery is limited to the amount of the previously recognized loss.
