Chapter 1 - External Financial Statements and Revenue Recognition Flashcards
Off Balance-Sheet Financing (examples)
- Operating leases
- Factoring receivables
- Special purpose entites.
- Joint ventures: accounted on equity basis.
Treasury Stock Accounting
Treasury stock is a contra equity account (reduces the balance when debited):
>> When recorded at cost (full cost of purchase), an unallocated reduction of total equity happens, goes directly to cash impact.
Debit Treasury Stock , Credit Cash
>> When recorded at par value, a reduction of the equivalent contributed capital account happens.
DOES NOT AFFECT RETAINED EARNINGS
COGS for Retailer
vs
COGS for Manufacturer
COGS for Retailer = BI + Net Purchases & Freight - Ending Inventory
COGS for Manufacturer (based on 4 cascading formulas)
- *DM** = BDM + P - EDM
- *TMC** = DM + DL + MO (F&V)
- *COGM** = BWIP + TMC - EWIP
COGS = BFG + COGM - EFG
Other Comprehensive Income (& reporting structure)
NI +
- Gain or loss in hedging instrument.
- Unrealized holding gains due to change in value (this can be linked for example due to debt reclassification)
- Translation gains and losses due to FX.
- Certain amounts associated to pension schemes.
All items of comprehensive income are recognized for the period either:
1) One continuous financial statement.
2) Two separate financial statements.
Cash Dividend (timing and recording)
and
Stock Dividend
and
Stock Split
1. Cash Dividend
When a company declares dividend, retained earnings (IT IMPACTS LIABILITY ON DECLARATION, NOT NECESSARILY ON THE PAYOUT DATE UNLESS IS THE SAME) reduce and dividends payable increase. Dividends payable are then reduced and cash is reduced too when it is effectively paid out.
2.Stock Dividend and Split (only reclassification of equity accounts to common stock)
a. Stock Dividend (less than 25%) - FAIR VALUE
Debit Retained Earnings on Full Fair Value
Credit Common Stock at Par Value
Credit paid-in capital (difference)
b. Stock Split in the form of dividend (more than 25%) - PAR VALUE >>
Debit Retained Earnings on Par Value
Credit Common Stock at Par Value
Credit
3. Stock split reduces par value of each stock and increases the number of shares outstanding.
Stock Authorized
Stock Issued + Stock Outstanding
Issuance of Stock (Transactions)
Issuance of stock: impact on BS. 50K stocks at 1 par value and market price 17.
Cash - credit 850k Common stock: debit 50k / Additional paid-in capital: debit 800k*
Direct cost of issuing stocks must NOT be expensed, it is REDUCED from net proceeds or paid in capital
Indirect Method of CF
Operating activities:
NI
+ - non cash transactions =
- ( Increase in Assets imply in negative impact since if accounts receivable increase i collected less cash than supposed, or if inventories increased, i have more cash retained than wanted )
- Increase in Liabilities imply on positive
- D&A (negative)
- Premium / discount from bond ammortization (negative and positive)
- Gain/loss on sale of assets (negative and positive) since it is an investing activity item.
Revenue Recognition (Concepts)
* The core principle is that an entity recognizes revenue for the transfer of promised goods or services to customers in a amount that reflects the consideration to which the entity expects to be entitled in the exchange
AN ENTITY RECOGNIZES REVENUE WHEN (OR AS IT) SATISFIES A PERFORMANCE OBLIGATION BY TRANSFERRING A PROMISSED GOOD OR SERVICE TO A CUSTOMER.
* Identify a contract - A contract is an agreement between 2 or more parties that creates enforceable rights and obligations. Revenue is recognized for a contract with a customer if ALL the following criteria are met:
1) The contract was approved by the parties
2) The contract has commercial substance
3) Each party rights regarding goods and service to be transferred and the payment terms can be identified
4) It is probable that the entity will collect substantially all the consideration
- If the criteria above are NOT MET, the consideration received is recognized as LIABILITY and NO REVENEUE is recognized. However, even when the criteria not met, revenue in the amount of nonrefundable consideration received is recognized if at least one of the following has occurred:
1) The contract has been terminated
2) Control over the goods was transferred to the customer and the entity has stopped transferring additional goods or services
3) The entity has no obligation to transfer goods or service and has received ALL consideration from the customer
. In addition, any consideration payable to the customer, such as coupons, credit, or vouchers, reduces the transaction price.
When a contract should not be adjusted for time value of money?
Time between payment and delivery is less than 1 year
Customer paid in advance and the transfer of goods is at the discretion of the customer.
A substantial amount is variable and not controllable by entity or customer (royalties)
Recognition of Revenue Over Time (Input vs Output Method)
Input Method
Based on costs incurrred
>> Labor hours expended
>> Resources consumed
>> Time Elpased
Output Mehod
Based on value of goods or services transferred to customer
>> Milestones REACHED
>> Units produced
>> Units delivered
Retained Earnings Formula
BRE
+ Net Income
- Dividends (cash or not = distributed or declared)
+- prior preriod adjustments
= ERE (or Retained Earnings Balance)
The amount of total dividends declared during the year can be calculated as follows:
Beginning retained earnings
$100,000
Net income for the year
40,000
Ending retained earnings
(125,000)
Dividends declared during the year
$ 15,000
Since $8,000 is the amount of stock dividends declared, the amount of cash dividends declared this year is $7,000 ($15,000 – $8,000). The amount of cash dividends paid during the year can be calculated as follows:
Decrease in the cash dividends payable account during the period
$ 5,000
Cash dividends declared during the year
7,000
Cash paid for dividends during the year
$12,000
NOTE: Stock dividends declared does not affect the dividends payable account.
Note on prior period adjustment:
- Changes in accounting principles (like change in inventory valuation method) or corrections of prior-period financial statements errors require retrospective application, that is, carry amount from previous periods must be adjusted until relevant reporting date.
- Changes in accounting estimtes (bad debt percentage as of sales) require prospective application so it does not impact here.
BS benefits:
A statement of financial position allows investors to assess all of the following except the (A, B and C but not D)
A.
Capital structure of the enterprise.
B.
Efficiency with which enterprise assets are used.
C.
Liquidity and financial flexibility of the enterprise.
D.
Net realizable value of enterprise assets.
Recognizing Revenue/Profits Over Time (Exception)
As soon as estimated loss on any project becomes apparent (check total costs minus total revenue expected), it must be recognized in full.
Revenue can be recognized to the extent of the cost incurred (ZERO PROFIT MARGIN) if…
An entity is not able to reasonably measure the outcome of a performance obligation.
