CFA 3_FRA Flashcards
Unearned revenue
Liability. Entity has received cash before it provides goods/services.
Accrued revenue
Asset. Entity provides goods/services before it receives payment (accounts receivable).
Prepaid expenses
Asset. Entity pays cash prior to incurring expense.
Accrued expenses
Liability. Entity has incurred expenses but has not paid cash (accounts payable).
Form DEF-14A
Definitive proxy statement. The form used to file a proxy statement with the SEC.
Form 144
Permits sale of unregistered shares to qualified institutional buyers (QIBs) (Rule 144)
Form S-1
Registration statement filed prior to sale of new securities
Fundamental qualitative characteristics (IFRS)
Relevance, Faithful representation
Characteristics that enhance fundamental qualitative characteristics (IFRS)
Comparability, Verifiability, Timeliness, Understandability (enhance Relevance and Faithful representation)
Long-term Contracts (can reliably estimate outcome)
GAAP and IFRS: Use Percentage-of-completion method.
1) (% of completion) = total cost incurred to date / total expected cost of the project
2) Multiply (% of completion in period) by (total expected contract revenue) to get (gross revenue to recognise)
3) Subtract revenue recognised in prior period from (gross revenue to recognise) to get (revenue to recognise in period).
4) Subtract expenses incurred in period from (revenue to recognise in period) to get net income for period.
Long-term Contracts (cannot reliably estimate outcome)
eg total project costs have significant uncertainty
IFRS: Recognise revenue to extent of contract costs, expense costs as incurred, and only recognise profit on completion.
GAAP: Use completed-contract method. Recognise revenue, expense, and profit only when contract is complete.
IFRS and GAAP: If a loss is expected on contract, recognise immediately.
Installment sales
Collectibility certain: Recognise revenue at time of sale (normal treatment).
Collectibility cannot be reasonably estimated: Use installment method. Profit = (cash collected in period) * (total profit / total sale)
Collectibility highly uncertain: Use cost recovery method. Recognise profit only when cash collected exceeds costs incurred.IFRS: discounted PV of installment payments recognised at sale. Difference between PV and contract amount is amortised as interest. If collectibility is uncertain then use similar to cost recovery method.
Barter transactions
GAAP: Revenue can only be recognised at FV if the firm has historically received cash for such goods/services and can use that to determine FV. Otherwise revenue is carrying value of asset surrendered.
IFRS: Revenue based on FV of revenue from similar nonbarter transactions with unrelated parties.
Double declining balance method
Ignores residual value. See DDB method = (2 / useful life) * (cost - accumulated depreciation)
Bad debt expense; warranty expense recognition
The matching principle requires that entities estimate and recognise bad debt expense as EXPENSE in period of sale for applicable goods/services sold; and warranty expense as LIABILITY in period of sale.
Discontinued operations (presentation)
Presented separately, net of tax, after income from continuing operations. Same treatment for extraordinary items (GAAP).
Basic EPS
basic EPS = (net income - preferred dividends) / (weighted avg number common shares outstanding)
Effect of stock dividend or stock split on weighted shares outstanding (EPS)
Apply to (increase) all shares outstanding prior to split/dividend (not to shares issued or repurchased after).
Diluted EPS
diluted EPS = (net income - preferred dividends) + (convertible preferred dividends) + (convertible debt interest net of tax) / (weighted avg shares) + (shares from conversion of conv. pfd. shares) + (shares from conversion of conv. debt) + (shares issuable from stock options [using treasury stock method])
Determining dilution effect of stock options/warrants (treasury stock method)
Only dilutive if exercise prices are less than average market price of stock. Then increase in denominator is # shares created by exercising options less # shares “repurchased” with proceeds of exercise.
Shortcut: (Avg Mkt Price - Exercise Price / Avg Mkt Price) * # shares can convert into
Determining dilution effect of convertible debt/preferred shares
Dilutive EPS should be larger than basic. Convertible debt interest (net of tax) or preferred dividend / # of shares that’ll be created
Gross/net profit margin
Gross/net profit / Revenue
Accounts receivable (measurement)
Measured at net realizable value, with gross amount reduced by allowance for doubtful accounts (increased by bad debt expense)..
Dividends and interest in CF statement
IFRS: Interest/dividends received either operating or investing. Interest/dividends paid either operating or financing.
GAAP: Dividends paid in financing. Rest in operating.