CMA Review Part 1 Flashcards
Name 5 External Users of Financial Statements
- Investors
- Creditors
- Financial Advisers
- Stock Exchanges
- Regulatory Agencies
Why do investors need financial information?
To decide whether to increase, decrease or obtain an investment in the firm.
Why do creditors need financial information?
To determine whether to extend credit and under what terms.
Why do financial advisers need financial information?
Need financial statements to help investors evaluate particular investments.
Why do stock exchanges need financial information?
Need financial statements to evaluate whether to accept a firm’s stock for listing or whether to suspend the stock’s trading
Why do regulatory agencies need financial information?
Need financial statements to evaluate the firm’s conformity with regulations and to determine price levels in regulated industries.
Name 3 internal users of financial statements
- Management
- Employees
- Board of Directors
Why do management and BOD need financial information?
Need financial statements to assess financial strengths and deficiencies, to evaluate performance results and past decisions, and to plan for future financial goals and steps toward accomplishing them.
Why do employees need financial information?
Want financial information to negotiate wages and fringe benefits based on the increased productivity and value they provide to a profitable firm.
A full set of financial statements includes what 5 statements?
- Statement of Financial Position (Balance Sheet)
- Income Statement
- Statement of Comprehensive Income
- Statement of Changes in Equity
- Statement of Cash Flows
Why are financial statement notes important?
Notes are considered part of the basic financial statements because they amplify or explain information recognized in the statements and are an integral part of statements prepared in accordance with GAAP.
What is the first footnote accompanying any set of complete financial statements?
Generally describe significant accounting policies, such as the use of estimates and rules for revenue recognition.
How does net income from the income statement relate to equity on the statement of financial position?
Net income or loss from the statement of income is reported and accumulated in the retained earnings account, a component of the equity section of the statement of financial position.
How does the components of cash and equivalents relate to the statement of cash flows?
The components of cash and equivalents from the statement of financial position are reconciled with the corresponding items in the statement of cash flows.
How are items of equity from the statement of financial position related to the statement of changes in equity?
Items of equity from the statement of financial position are reconciled with the beginning balances on the statement of changes in equity.
How are ending inventories related to the COGS on the statement of income?
Ending inventories are reported in current assets on the statement of financial position and are reflected in the calculation of cost of goods sold on the statement of income.
How is amortization related to the statement of financial position?
Amortization and depreciation reported in the statement of income also are reflected in asset and liability balances in the statement of financial position.
What is accrual accounting?
Accrual accounting records the financial effects of transactions and other events and circumstances when they occur rather than when their associated cash is paid or received.
When do you recognize revenue?
Revenues are recognized in the period in which they were earned even if the cash will be received in a future period.
When are expenses recognized?
Expenses are recognized in the period in which they were incurred even if the cash will be paid in a future period.
What is the statement of financial position?
The statement of financial position is also called the balance sheet and reports the amounts of assets, liabilities, equity, and their relationships at a moment in time, such as at the end of the fiscal year.
What is the basic accounting equation?
Assets = Liabilities + Equity
The entity’s resources consist of the assets the entity deploys in its attempts to earn a return. The capital structure consists of the amounts contributed by outsiders (liabilities) and insiders (equity)
Name 4 examples of Assets
- Inventory
- Accounts Receivable
- Investments
- PPE (Property Plant & Equipment)
How are assets/liabilities separated on the Balance Sheet?
Into 2 categories:
- Current
- Non Current
Name 3 examples of liabilities
- Loans Payable
- Bonds issued by the entity
- Accounts Payable
List 5 examples of current assets
- Cash
- Certain investments
- Accounts and Notes receivable
- Inventories
- Pre-paid expenses
List 4 examples of non current assets
- Certain investments and funds
- PPE (Property Plant Equipment)
- Intangible assets
- Other non current assets
List 3 examples of current liabilities
- Accounts payable
- Current notes payable
- Current maturities of non current liabilities
List 2 examples of non current liabilities
- Non current notes payable
2. Bond payable
What are the 5 classifications of the Balance Sheet?
- Equity
- Investments by owners
- Retained earnings
- Accumulated other comprehensive income
- Non controlling interest in a consolidated entity
List 3 examples of Equity
- Common stock
- Preferred stock
- Retained earnings
What are investments by owners?
Increases in equity of a business entity. They result from transfers of something of value to increase ownership interests. Assets are the most commonly transferred item, but services also can be exchanged for equity interests.
What are distributions to owners?
Decreases equity. They result from transferring assets to owners. A distribution to owners decreases the ownership interest in the company.
How are assets/liabilities classified as current and non current?
They are classified as current if it is expected to be realized in cash or sold or consumed within the entities operating cycle or 1 year, whichever is longer. Non current do not qualify as current.
List 4 major items of equity
- Capital contributions by owners – Par value of common and preferred stock issued and additional paid-in capital.
- Retained Earnings – Accumulated net income not yet distributed to owners
- Treasury stock – is the firms own stock that has been repurchased
Reported either at cost (as a deduction from total equity) or at par (as a direct reduction of the relevant contributed capital account) Is reported as a reduction of the total equity - Accumulated other comprehensive income – items not included in net income
What are the 3 limitations to the balance sheet
- A balance sheet shows a company’s financial situation at a single point in time; accounts may vary significantly a few days before or after
- Many balance sheet items, such as fixed assets, are valued at historical costs, which may not equal their fair value
- The preparation of the balance sheet requires estimates and management judgment
What is off-balance sheet financing
May be used when a business is close to its borrowing limit and wants to purchase something, as a method of lowering borrowing rates, as a way of managing risk, or to improve debt-to-equity and leverage ratios
List 4 examples of off-balance sheet financing
- Operating leases – the asset itself is kept on the lessor’s balance sheet and the lessee reports only the required rental expense for use of the asset
- Factoring receivables with recourse – The firm remains contingently liable to the finance company in the case of debtor default and the contingent liability does not have to be reported on the company’s balance sheet.
- Special purpose entities – A firm may create another firm for the sole purpose of keeping the liabilities associated with a specific project off the parent firm’s books.
- Joint venture – Generally accounted for on the equity basis; hence, the joint venture’s debts are not reflected as debt of the members of the joint venture
What is the income equation?
Income (Loss) = Revenues + Gains – Expenses – Losses
What are the 4 elements of the income statement?
- Revenues – are inflows or other enhancements of assets or settlements of liabilities (or both) from delivering or producing goods, providing services, or other activities that qualify as ongoing major or central operations.
- Gains – increases in equity (or net assets) other than from revenues or investments by owners
- Expenses – outflows or other usage of assets or incurrences of liabilities (or both) from delivering or producing goods, providing services, or other activities that qualify as ongoing major or central operations
- Losses – are decreases in equity (or net assets) other than from expenses or distributions to owners.
All transactions affecting the net change in equity during the period are included in income except:
- Transactions with owners
- Prior-period adjustments (such as error correction or a change in accounting principle)
- Items reported initially in other comprehensive income
- Transfers to and from appropriated retained earnings
Revenues, expenses, gains, and losses are recorded in Temporary (nominal) accounts because they record the transactions, events, and other circumstances during a period of time. These accounts are closed (reduced to zero) at the end of each accounting period, and their balances are transferred to real accounts.
For example, income or loss for the period is closed to retained earnings at the end of the reporting period.
Typical Items of Cost and Expense - COGS
Cost of Goods Sold For a retailer, cost of goods sold is calculated based on changes in inventory: Beginning Inventory $10,000 Plus: Net purchases $14,000 Plus: Freight-in $1,000 Good available for sale $25,000 Minus: Ending Inventory ($5,000) Cost of Goods Sold $20,000
Typical Items of Cost and Expense - COGS
For a manufacturer, cost of goods sold is calculated as follows:
Beginning raw materials inventory $3,000
Purchases during the period $3,000
Ending raw materials inventory ($1,000)
Direct materials used in production $5,000
Direct labor costs $5,000
Manufacturing overhead costs (fixed + variable)
$4,000
Total manufacturing costs $14,000 *TAKEN FROM SECOND COLUMN
Beginning work-in-process inventory $5,000
Ending work-in-process inventory $ (4,000)
Cost of goods manufactured $15,000
Beginning finished goods inventory $ 6,000
Ending finished goods inventory $(11,000)
Cost of goods sold $10,000
Common share-based payment arrangements between employers and employees include:
- Call options that give employees the right to purchase an entity’s shares in exchange for their services
- Share appreciation rights that entitle employees to cash payments calculated by reference to increases in the market price of an entity’s shares, and
- Share ownership plans where employees receive an entity’s shares in exchange for their services.
List the 2 income statement formats
- Single-Step provides one grouping for revenue items and one for expense items.
- Multiple-Step presents operating revenues and expenses in a section separate from non-operating items.
Example of a multiple-step income statement
Income Statement Net Sales $200,000 Cost of goods sold $(150,000) Gross Profit $ 50,000 Selling Expenses $ (6,000) Administrative Expenses $ (5,000) Income from Operations $ 39,000 Other revenues and gains $ 3,500 Other expenses and losses $ (2,500) Income before Taxes $ 40,000 Income taxes $ (16,000) Net Income $ 24,000
Discontinued Operations
- When an entity reports a discontinued operation, it must be presented in a separate section after income from continuing operations
- Discontinued operations, if reported, may have 2 components
Income or loss from operations of the component that has been disposed of or is classified as held for sale from the first day of the reporting period until the date of disposal (or the end of the reporting period if it is classified as held for sale)
Gain or loss on the disposal of this component. - An entity is required to separately present items that are of an unusual nature and/or occur infrequently on a pre-tax basis within income from continuing operations. The standard took effect for fiscal years beginning after December 15, 2015.