Ace FAR

Question 1

When should F/S of all prior periods presented be restated when there is a “change in entity”?

Answer 1

1. Changing companies in consolidated F/S
2. Consolidated F/S vs. previous F/S

Question 2

What are the steps to compute gross profit earned for the current year of a long-term construction contract?

Answer 2

1) Compute gross profit of completed contract: Contract Price - Cost to Date - Estimated Cost to Complete = Expected Gross Profit
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: Profit to Date - Profit Previously Recognized

Question 3

How do you recognize a current liability at year end (construction contracts), if revenue is recognized over time?

Answer 3

Firstly, identify the current asset amount: CA = (Accumulated Costs + Estimated Earnings) / Related Billings

Secondly, remember a liability only exists when Progress Billings exceeds Costs and Estimated Earnings.

Question 4

When does a seller book the sales transaction of a good as a financing arrangement, if the seller is obligated to repurchase the good?

Answer 4

When the repurchase price is equal to or greater than the original sale price and the expected market value.

Question 5

What is the max number of days each of the three filer types have to file Form 10-K with the SEC after their company’s FY end?

Answer 5

• Large accelerated filers have floats > $700M and file 10-K within 60 days.
• An accelerated filer is identified as an issuer with a public float > $75M and has 75 days to file Form 10-K.
• Non-accelerated filers have annual revenues < $100M and must file 10-K within 90 days.

Question 6

When is the filing of the 10-Q form with the SEC due for Large Accerlerated, Accelerated Filers, and Non-accelerated filers?

Answer 6

• Large Accelerated and Accelerated Filers are boh required to file the 10-Q within 40 days of the period end.
• Non-accelerated filers are required to file form 10-Q within 45 days of period end.

Question 7

How is TS cost method treated for gain/loss?

Answer 7

• Gains and losses on treasury stock transactions are never recorded on the income statement.
• There are no TS gains, but are instead recorded by increasing APIC - TS.
• Losses are recorded by first eliminating any balance in APIC - TS and then decreasing retained earnings.

Question 8

When do you translate exchange rates?

Answer 8

When the company is a U.S. company importing goods in euro payment, for example, its gains and losses will be recorded in U.S. dollars. Lastly, if the exchange rates are quoted in euros, they must be translated into U.S. dollars. This requires $1/euro rate from the two dates mentioned in the question (e.g., transaction date and balance sheet date), taking that euro rate difference and multiplying it by the euro transaction price.

Question 9

When calculating the number of CS shares outstanding, what should you keep in mind for purchased shares, reissued shares, and stock splits?

Answer 9

Regardless of when shares are purchased or reissued, they are considered treasury shares and should be considereing wholly outstanding the entire year. Similarly, stock splits are considered outstanding the entire year too.

Question 10

How are issued stock dividends and stock splits calculated under the current year weighted average shares outstanding method for basic EPS?

Answer 10

They are not calculated, and instead are considered to be outstanding the entire year, regardless of what date in the year they were issued.

Question 11

Explain in-the-money and out-of-the-money when it comes to comparing the average market price of a company’s stock against the strike price for warrants outstanding. How does this affect adjustments needed for diluted EPS?

Answer 11

• If a warrant’s strike price is out-of-the-money, this means the strike price is greater than the average market price of the stock. No adjustments for DEPS is needed.
• Inversely, when a warrant’s strike price is in-the-money, it means the strike price is lesser than the average market price of the stock. This requires an adjustment for DEPS.

Question 12

How do you calculate the amount of dividends payable to C/S shareholders when there are fully participating P/S shareholders?

Answer 12

1) P/S shares x % of cumulative P/S x par value per P/S share
2) C/S shares x same cumulative % x par value of C/S share ([since P/S is fully participating and C/S doesn’t have cumulative %])
3) Whatever remaining declared dividends, use the total weighted relation of par value ([without cumulative percentage]) to find the C/S ratio
4) add 2 & 3

Question 13

How would the purchase of TS affect S/E and EPS?

Answer 13

It would decrease S/E and the number of outstanding shares, thus increasing the amount of EPS.

Question 14

How should Other Comprehensive Income (OCI) items be reported for tax reporting purposes?

Answer 14

OCI items can either be reported individually on a net of tax basis, or each OCI component can be reported before tax basis with one after-tax aggregate amount.

Question 15

How do you adjust Beg. R/E for Year 2 upon discovering the unrecorded inventory for Year 1?

Answer 15

BI + Purchases - COGS = EI

This is an understatement of EI which results in overstatement of COGS which results in understatement of NI for Year 1.

To correct this understatment, you must add back the inventory not recorded (net of tax) to Beg. R/E.

Question 16

What are the required footnote disclosures of concentration vulnerability?

Answer 16

1. Concentration exists as of the F/S date.
2. The concentration makes the entity vulnerable to the risk of a near-term severe impact.
3. It’s at least reasonably possible that the vulnerable events that could cause a severe impact will occur in the near term.

Question 17

What are the main subsequent disclosure diffreences between a company that files with the SEC and a company that does not?

Answer 17

An SEC filer does not need to disclose the subsequent evaluation date, and their evaluation period runs through to the F/S issued date.

A non-SEC filer must disclose the subsequent evaluation date, and their evalution period runs through to when F/S are available to issued (GAAP format and all approvals for issuance obtained).

Question 18

How do you convert accrual basis F/S to (modified) cash basis F/S?

Answer 18

1. For Revenue (AR): ▲Cash = ▲L + ▲E - ▲Other A
2. For Expenses (AP): ▲E = ▲A - ▲L

Question 19

How do you convert (modified) cash basis F/S to accrual basis F/S?

Answer 19

1. For Revenue (AR): ▲E = ▲A - ▲L
2. For Expenses (AP): ▲Cash = ▲L + ▲E - ▲Other A

Question 20

What are common modifications made to caash basis F/S?

Answer 20

Modifications that should have substantial support (logical and equivalent like accrual basis) include:
1) Capitalizing and depreciating fiexed assets.
2) Accrual of income taxes
3) Recording liabilities for LT & ST borrowings with related exp.
4) Capitalizing Inventory
5) Reporting investments at FV and recognizing unrealized gains and losses

Question 21

Formula to calculate days sales in AR.

Answer 21

Net AR / (Net Sales / 365)

Question 22

Calculate days in inventory.

Answer 22

EI / (COGS / 365)