F1

Question 1

What should a full set of financial statements include?

Answer 1

• Statement of Financial Position (Balance Sheet)
• Statement of Earnings (The Income Statement)
• Statement of Comprehensive Income
• Statement of Cash Flows
• Statement of Changes in Owner’s Equity

Question 2

What is meant by a “classified” balance sheet?

Answer 2

A classified balance sheet distinguishes current and noncurrent assets and liabilities.

Question 3

Name the expense that each of the following unexpired costs turn into as they expire:
1. Inventory
2. Unexpired prepaid cost of insurance
3. Net book value of fixed assets
4. Unexpired cost of patents

Answer 3

1. Cost of goods sold
2. Insurance expense
3. Depreciation expense
4. Amortization expense

Question 4

Are gains and losses on the disposal of assets shown on a “gross basis” (i.e. where both the sale proceeds and the net book value of the disposed asset are reported) or on the “net basis” (i.e. where only the difference between the sale price and the net book value of the disposed asset is reported?

( G &L )

Answer 4

Gains and losses are reported at their net amounts (i.e. proceeds less net book value)

Question 5

How does a “multiple-step” income statement differ from a “single-step” income statement?

Answer 5

• A multiple-step income statement reports operating revenues and expenses separately from nonoperating revenues and expenses and other gains and losses.
• On a single-step income statement’s presentation of income from continuing operations, total expenses are subtracted from total revenues without separation between operating and nonoperating revenues and expenses.

Question 6

The gain (loss) from discontinued operations can consist of…

Answer 6

1. An impairment loss,
2. a gain or (loss) from actual operations, and
3. a gain or (loss) on disposal.

Question 7

How do we account for subsequent increases in the fair value of a discontinued component?

Answer 7

A gain is recognized for the subsequent increase in fair value minus costs to sell (but not in excess of the previously recognized cumulative loss). The gain is reported in the period of increase.

Question 8

What conditions must be present for a disposal to be reported in discontinued operations?

Answer 8

A disposal of a component, group of components, business activity, or nonprofit activity is reported in discontinued operations if the disposal represents a strategic shift that has or will have a major effect on an entity’s operations and financial results.

Question 9

State two types of foreign currency transactions.

Answer 9

Operating transactions, such as importing, exporting, borrowing, lending, and investing transactions.

Forward exchange contracts, which are agreements to exchange two different currencies at a specific future date and at a specific rate.

Question 10

Where are foreign currency transaction gains or losses reported in the financial statements?

Answer 10

Foreign currency transaction gains or losses are included in determining net income for the period.

Question 11

For operating transactions in foreign currency, detail the recording process.

Answer 11

• Record original transaction at exchange or spot rate on date of transaction.
• At balance sheet date, compute gain/loss on the transaction by recalculating using the current exchange or spot rate.
• On payment date, compute gain/loss on the transaction by using the exchange rate on payment date.

Question 12

List some disclosure requirements for comprehensive income.

(4 Disclosures)

Answer 12

• Tax effects of each component included in current “other comprehensive income”
• Changes in the accumulated balances of components of “other comprehensive income”
• Total accumulated other comprehensive income
• Reclassification adjustments between other comprehensive income and net
  income

Question 13

List the two formats acceptable for reporting comprehensive income.

Answer 13

• Statement of comprehensive income (single statement approach)
• Statement of income followed by separate statement of comprehensive income (two-statement approach)

Question 14

Identify four items included in other comprehensive income.

[ P U F I ]

Answer 14

Pension adjustments
Unrealized gains and losses on available-for-sale debt securities and hedges
Foreign currency translation adjustments and gains/losses on certain foreign currency transactions
Instrument-specific credit risk for liabilities (using FV) and their changes in FV

Question 15

What is the basic formula used for calculating EPS?

Answer 15

Income available to common shareholders / Weighted average number of common shares outstanding

Question 16

Name the potentially dilutive securities or instruments.

Answer 16

• Stock options and warrants and their equivalents
• Convertible securities (bonds or preferred stock)
• Contracts that may be settled in stock or cash
• Contingent issuable shares

Question 17

Compare basic and diluted EPS.

Answer 17

Basic: Simple capital structure (only common stock outstanding):

Income available to common shareholders / Weighted average number of shares outstanding

Diluted: Complex capital structure:

Income available to common shareholders assuming conversion of all dilutive securities / Weighted average number of shares outstanding after conversion of all dilutive securities

Question 18

What is the antidilution rule?

Answer 18

Any conversion, exercise, or contingent issuance that has an antidilutive effect (increases EPS or decreases loss per share) is not included in the calculation unless the shares have actually been converted, exercised, or satisfaction of the contingency met.

Each potential common share is considered separately in sequence from most to least dilutive, with in-the-money options and warrants generally included first.

Question 19

Describe Form 10-K and Form 10-Q. What level of assurance must be provided with the financial statements submitted in these forms?

Answer 19

Form 10-K:

Filed annually by U.S. registered companies. Includes a summary of financial data, MD&A, and audited financial statements prepared using U.S. GAAP.

Form 10-Q:

Filed quarterly by U.S. registered companies. Includes unaudited financial statements, interim MD&A, and certain disclosures.

MD&A: Managment Discussion and Analysis

Question 20

Define common stock and list the basic properties.

Answer 20

Common stock: Residual ownership interest

Basic rights include:

• Voting rights
• Dividend rights
• Rights to share in distribution of assets if corporation is liquidated, after satisfaction of creditor and preferred stockholders’ claims

Question 21

List some common properties of preferred stock.

Answer 21

• Convertible, callable
• Redeemable
• Dividends can be cumulative and/or participating

Question 22

What are the two alternative methods of accounting for treasury stock?

Answer 22

Cost method: Treasury stock is debited at cost of shares repurchased (gain or loss only calculated on reissue)

Legal (par value method/stated value method): Treasury stock is debited at par value of shares repurchased. (gain or loss calculated when purchased)

Remember, no gains/losses are recognized on the income statement; income and retained earnings may never increase by the transaction; Additional Paid-in Capital—Treasury Stock account used to record “gains” and absorb “losses.”

Treasury stock is not an asset; cash and property dividends are not paid on treasury stock; stock dividends may be paid on treasury stock.

Question 23

Summarize the cost method of accounting for treasury stock.

Answer 23

• Recorded, carried, and reissued at reacquisition cost
• Any “gain” is credited to Paid-in Capital—Treasury Stock
• Any “loss” is charged against previous “gains,” then retained earnings
• Reported as a deduction from total stockholders’ equity

Question 24

Summarize the par value method of accounting for treasury stock.

Answer 24

• Recorded at par value with cost of stock that is in excess of par value recorded as a deduction to Paid-in Capital—Treasury Stock and then from retained earnings after Paid-in Capital—Treasury Stock is depleted.
• Reported as a deduction from capital stock.

Question 25

List the significant dates with respect to cash dividends.

Answer 25

• Date of Declaration: Becomes a liability and reduces retained earnings
• Date of Record: No journal entry, memorandum entry only
• Date of Payment: Actually paid

Question 26

List five types of dividends.

[ C L P S S ]

Answer 26

Cash: Distribution of profits
Liquidating: Return of investment
Property: FMV of assets given up, with gain/loss recognized
Scrip: Promise to pay a dividend in future
Stock: Results in capitalizing part of retained earnings, increasing legal capital. Remember, if <20%–25%, record at market value; if >20%–25%, record at par value.

Question 27

What is the threshold for treating stock dividends as large vs. small stock dividends?

Answer 27

Small stock dividend: <20%–25%
Large stock dividend: >20%–25%

The treatment of stock dividends depends on the percentage of the dividend in proportion to the total shares outstanding prior to the declaration of the dividend.

Question 28

What is the accounting treatment of small stock dividends?

Answer 28

Fair value of additional shares issued at the date of declaration is transferred from retained earnings to capital stock and additional paid-in capital.

Question 29

What is the accounting treatment of large stock dividends?

Answer 29

Par value of additional shares issued is transferred from retained earnings to capital stock.