F1

Question 1

What does a full set of financial statements includes

Answer 1

Statement of financial position (balance sheet)
Statement of earnings (income statement)
Statement of comprehensive income (include net income per the income statement + Other comprehensive income)
Statement of cash flow (indicator of quality of earnings and growth potential)
Statement of owners equity (why stockholders equity changed)
Notes

Question 2

What are the functions of a balance sheet?

Answer 2

Provides lists of assets and liabilities
Types of assets and liabilities (current vs, long-term, tangible vs. intangible)
To evaluate liquidity and long-term solvency (current ratio, quick ratio, degree of financial leverage)
Formula: Assets = Liability - Equity

Question 3

Assets

Answer 3

Current assets are cash and assets that are expected to convert to cash within one year (e.g. cash, receivables, prepaids)
Investments and funds: non-current, not directly used in operations
Property, plant and equipment: tangible, long-lived, used in operations
Intangibles: no physical substance, long-lived, used in operations (patent, copyright, trademark)
Other non-current assets

Question 4

What does liability include?

Answer 4

Current liabilities: obligations to be satisfied with current assets
Long-term liabilities: obligations to be satisfied beyond one year
Equity:
Preferred stock, common stock and additional paid-in capital (contributed equity)
Retained earnings (earned capital)
Treasury stock (reduces stockholders equity)

Question 5

Limitations of Balance Sheets

Answer 5

Amounts on the balance sheet do not represent the market value of the entity
Many assets and equity issuances are measured at historical cost
Some measurements are subjective, making comparison difficult (e.g. LIFO vs. FIFO)
Estimates may be used in preparation of the balance sheet

Question 6

Purpose of the Income Statement

Answer 6

Indicated its performance for a period of time
Helps determine operating risk
Provides information about is Revenues, Expenses, Gains and Losses ( REGL)
Predict information about future cash flows

Question 7

Calculation of Income from Continuing Operations

Answer 7

Operating income (revenues and expenses) + Nonoperating income (gains and losses)
Net gain or loss = Selling price/Net realizable value - book/carrying value

Question 8

Income from discontinues operations

Answer 8

Reported separately on the income statement
Comes after the income from continuing operations in the income statement
Reported as net of tax

Question 9

Components of the Income Statement - Single-Step

Answer 9

All revenues and gains
- All expenses and losses
= Pretax income
- Income tax expense
= Net income
- does not distinguish between core business and incidental business

Question 10

Components of the Income Statement - Multiple-Step

Answer 10

Sales
- Cost of goods sold
= Gross profit
- Operating expenses
= Operating income
- Nonoperating (gains) and (losses)
= Pretax income
+ Other revenue and gains
- Other expenses and losses
= Income before income tax
- Income tax expense
+ Income from continuing operations
- discontinued operations (net of tax)
= Net income

Question 11

Limitations of the Income Statement

Answer 11

Based on accounting methods which include estimates
Revenues and expenses are booked on accrual basis (not when cash is paid/received)
Management Bias - manapulated through assumptions, choices of accounting methods, aggressive (higher revenue, lower expense)/ conservative (lower revenue, higher expense), depreciation (method, useful life and salvage value), bad debts and warranties
Classigication shifting occurs when companies shift

Question 12

Accrual Basis vs. Cash Basis

Answer 12

Accrual Basis:
- not booking revenue when cash is received if goods and/ or services have not been delivered or performed
- gives better assessment of performance
- is subjective
– income smoothings, better indication of performance
Cash Basis:
- booking cash in and cash out as they occur
- is objective

Question 13

Preparation of a Multiple Step Income Statement

Answer 13

Net sales = Gross sales - Return and discounts
Total sales = Net sales + Service revenue + Rental revenue
Cost of sales = Cost of goods sold + cost of services sold + cost of rental income
Gross profit = Total sales - Cost of sales
Total selling expenses = Freight out (selling expense) + Commissions + Advertising + Salaries for salespeople
General and administrative expenses = Insurance expense + Salaries for officers
Nonoperating = Interest revenue, Other revenue, Gain on sale of available-for-sale securities, Interest expense, Loss on sale of fixed assets, Restructuring expense, Loss on discontinued operations

Question 14

Multiple-Step Income Statement

Answer 14

Gross profit margin = Gross profit/Sales
Operating margin = Operating income/ Net sales
Profit margin = Net income/ Net sales
Effective tax rate = Tax expenses/ income before income tax

Question 15

Single-Step Income Statement

Answer 15

Earnings before tax = Total revenues and gains - total expenses and losses other than tax
Tax expense = Earnings before tax * Effective tax rate

Question 16

Types of Entities to Be Considered as discontinued operations

Answer 16

Has been disposed of during that year (regardless of selling date)
or
Is classified as held for sale in that year (even if a buyer is not found yet)
Examples:
Disposal of a major geographical area
Disposal of a major equity method investment
Disposal of a major line of business

Question 17

Accounting Rules for Discontinued Operations Calculations

Answer 17

Results of Discontinued Operations:
- all results for a product line sold during the year at the end of the year
- all results of operations for that period will be moved down and classified as gain or loss on operations
Gain or loss on disposal of the component:
- date of product line does not matter, as long as it was sold during the year
- calculated based on the selling price vs. the carrying value at the time of sale
- would be reported unter the heading “discontinued operations”
Impairment loss :
- Initial and Subsequent Impairment Losses = Recording the impairment of the component (any initial or subsequent write-down to fair value - costs to sell)
- Subsequent Increases in Fair Value
= Gain is recognized for any subsequent increase in fair value - costs to sell

Question 18

Measurement and Valuation of Discontinued Operations

Answer 18

Measurement is NRV = Fair value - Cost of sell
Impairment loss is = NRV - Book value
Subsequent increase = not more than NRV
Impairment gains = not more than impairment loss

Question 19

Foreign Currency Terminology

Answer 19

Direct Method = Domestic price of one unit of another currency = $1.47/€1 = $1.47 buys 1€ or 1€ buys $1.47
Indirect Method = €1/$1.47 = 0.68€ buys 1$ or 1$ buys 0.68€

Question 20

Comprehensive Income

Answer 20

Change in equity (net assets) of a business enterprise during a period from transactions and other events and circumstances from nonowner sources.
Includes all changes in equity during a period except those resulting from investments by owners and distributions to owners.

Question 21

Other Comprehensive Income (PUFI)

Answer 21

Pension Adjustments
Unrealized Gains and Lossess (Available for Sale Debt Securities and Hedges)
Foreign Currency Items
Instrument Specific Credit Risk

Question 22

Accumulated Other Comprehensive Income

Answer 22

Includes the total of other comprehensive income for the current period and all previous periods. Other comprehensive income for the current period is closed to this account, which is reconciled each period similar to the manner in which retained earnings are reconciled.

Question 23

Comprehensive Income

Answer 23

Sum of all Net Income +/- Other Comprehensive Income

Question 24

Accumulated Other Comprehensive Income

Answer 24

Beginning +/- Current Year +/- Reclassification Adjustments

Question 25

Two Statement Approach for Comprehensive Income

Answer 25

1. Income Statement from Revenue to Net Income
2. Net Income +/- other comprehensive income, net of income tax

Question 26

Accumulated Other Comprehensive Income on Balance Sheet

Answer 26

Accumulated other Comprehensive Income
+/- PUFI adjustments
+/- Reclassification adjustment
= Ending accumulated other comprehensive income

Question 27

Required Disclosures of Comprehensive Income

Answer 27

-Tax effects of each component of comprehensive income
- Tax effects must be allocated to each component (either on the face of the statement of comprehensive income OR in the notes)
- Changes in Accumulated balances for each of the components of other comprehensive income
- Change due to reclassification adjustments, even if there were not any current year adjustments
- Reclassification adjustments to avoid double counting –> need to reverse any gain or loss that previously went direct to equity

Question 28

Changes in Accumulated Other Comprehensive Income

Answer 28

Beginning Balance
+/- Other comprehensive income before reclassifications
+/- amount reclassified from AOCI (could have a seperate disclosure, if the amount is significant)
+/- net current period other comprehensive income
= ending balance

Question 29

Single-step income statement

Answer 29

Include in total revenues all sales of goods, services and rentals. Purchase discounts are not included, but instead reduce cost of goods sold. Recovery of accounts written off does not hit the revenue account.

Question 30

Comprehensive income

Answer 30

Includes all changes in equity during a period except those resulting from owner investments and distributions to owners.

Question 31

Foreign currency transaction loss

Answer 31

Liability in 31.12. - Liability in year

Question 32

Liabilities

Answer 32

Current liabilities consist of all payables due within one year
Deferred income tax payable = non-current liability

Question 33

Net Income calculation

Answer 33

Net sales (=gross sales - sales returns)
- cost of goods sold
= Gross profit
- selling and administrative
= operating income
+ other income
= income from continuing operations
- income tax expense (income from continuing operations *tax)
= income before discontinued operations
+ gain from discontinued segments (gains * tax)
= net income

Question 34

Point of time when component of an entity can be reported in discontinued operations

Answer 34

When component meets the “held for sale” criterias:
- management commits to a plan to sell the component
- the component is available for immediate sale in its present condition
- an active program to locate a buyer has been initiated
- the sale of the component is probable and the sale is expected to be completed within one year
- the sale of the component is being actively marketed
- it is unlikely that significant change to the plan to sell will be made or that the plan will be withdrawn.

Question 35

Net income and OCI

Answer 35

Net income is closed to retained earnings in the same way that other comprehensive income is closed to accumulated other comprehensive income. Retained earnings and acculumated other comprehensive income both serve to sum up the undistributed earnings of a corporation over its operating life