F1 Flashcards
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Fixed assets reporting
net concept (proceeds-carrying amount)
Reported not net of income taxes. Gain or loss is recognized as part of income from continuing ops.
Not included in OCI. Not included in discontinued ops because it is not considered a component of an entity.
Comprehensive income
Includes all changes in equity except owner contribution/distributions
Prior period error correction is a change in stockholder’s equity–affects CI.
Currency Exchange Gains/Losses
Foreign currency appreciates, less needed to make $1.
Foreign currency Depreciates, more is needed to make a $1.
If the Yen depreciates versus $$, Japan would book a loss.
Euro depreciates versus another currency (more euros are needed to purchase one of the currency) Europe booking a loss
Not book a gain or loss until a transaction settles if it is payable in U.S dollar.
Book a gain or loss on income statement at year-end if transaction is in another currency.
If a US company is payable in another currency: if the foreign currency depreciates and the US company is payable in that currency, then US company will book a loss.
Foreign currency gain/loss when receivable is collected
Gain or loss is calculated using the difference between year end’s rate and the collection date rate. So if the year end rate was $1.50 and the collection date was $2.00, the calculated rate would be $0.05.
Foreign currency gains or losses are recorded in income from continuing ops.
Appropriated (restricted) Retained Earnings
How much retained earnings a company set aside or appropriated for a particular purpose, like the construction of a new plant. Reported on Balance Sheet. Restored to Unappropriated Retained Earnings when the appropriation has been achieved.
The purpose of appropriating Retained Earnings is to disclose to shareholders that some of the retained Earnings is not available to pay dividends and have been restricted to fund a certain project. When that purpose is achieved, the fund is unrestricted and moves to unappropriated retained Earnings.
To record appropriation:
Debit Retained Earnings (unappropriated)
Credit Retained Earnings Appropriated.
Cash restricted reduces regular cash and does not affect retained earnings.
Net Income V. OCI
Net income to Retained Earnings
OCI to AOCI
OCI is not an account. Rather composed of temp accounts that do not carry a balance.
AOCI is permanent and carries a balance.
Discontinued ops is component of NI and not OCI.
AOCI - balance sheet – if it’s a debit it reduces equity. Shown as an asset when balance is a credit. Item of equity following retained earnings.
To Calculate EPS
Preferred stock/shares that’s non convertible are not used to calculate EPS.
preferred stock is not considered because it is nonconvertible.
When calculating weighted average of common shares outstanding for basic EPS, nonconvertible securities/preferred shares are ignored.
When collectability is reasonably assured:
excess of subscription price over the stated value of no par common stock should be recorded to APIC when the subscription is recorded.
Dividend Declaration
Declaring a dividend – liquidating
debit retained earnings (decreasing)
Debit APIC (The liquidating amount–decreasing)
Credit Cash (Dividend payable)
Rule: A “liquidating dividend” is return of capital (decreases APIC) and not a distribution of earnings (decreases Retained Earnings)
Current Assets
12 months or less is current.
Effect of Donated Treasury Stock from a shareholder
– Book value per common share is higher
– Donated stock is recorded at fair value
–Number of shares outstanding declines (with a proportional increase to book value per share)
– results in no change in total Shareholder’s equity on balance sheet.
Gains and Losses from changes in Fair Value in Foreign currency transaction hedges
Gains and Losses from changes in fair Value of foreign currency transaction hedges are reported in “current Income”. Net Investment in OCI.
SEC required forms
Form 10-K : Annual report, audited financials
Form 10-Q: Quarterly Report, unaudited financials
Form 6-K: Semi-Annual report, Unaudited financials
Form 8-K: Does not contain financials. Material Transactions like M&A, etc.
Stock Splits
Stock Splits: No change in equity
To find Par Value after a split:
Do the calculation prior to the split (10,000 shares x $10 per share) = $100,000
After the split: ( if the stock splits 5 for 1. 10,000 shares become 50,000. To keep equity at $100,000: divide 50,000 from 100,000 (100,000 / 50,000 = 2)
The par value of the stock after the split is $2.
Do not require a journal entry as they don’t change the total value of equity.
They increase the number of shares and decrease the par value per share
proportionately.
For example, in a 2-for-1 stock split, the number of shares doubles and the par value per share is halved.
Other Comprehensive Income (OCI)
– Instrument specific credit risk.
–Unrealized gains for the year on AFS debt securities (bonds)
— Foreign Currency Translation Adjustments (foreign currency translation adjustment gain)
To calculate OCI: Add deferred gain on cash flow hedge + Foreign currency translation gain - Prior service cost
Prior service cost would be a positive addition to CI in the year it was amortized.
Trading securities goes to Net Income.
Old rule it has to be effective to go through OCI, now it has to be a cash flow hedge to go through OCI.
OCI (other comprehensive income)
-Pension adjustments
-Unrealized gains and losses (AFS and hedges)
-Foreign currency items
-Instrument Specific Credit Risk
PUFI
To calculate issued common stock
Add only the shares issued to find issued (don’t forget stock splits) common stock
To find par value of the issued stock: multiplied issued shares by par value.
To find shares issued/outstanding: Shares issued are also shares outstanding, the difference is that treasury stock affects shares outstanding not shares issued. So, if there’s treasury stock transactions, shares outstanding will be less than shares issued.
Shares held as treasury stock decreases outstanding shares; treasury stock sold increases outstanding shares.
Cash Dividend Declaration
Debit Retained earnings (decrease) and credit Dividend Payable (increase) on the date of declaration.
Record date determine who will receive the dividend.
Payment date declares when the checks will be mailed.
To calculate Shareholder’s Equity
Assets = Liabilities + Shareholder’s Equity
SE: Capital Stock + APIC + Retained Earnings
If expenses are understated, Net Income is overstated and Retained Earnings is overstated. You should subtract to adjust.
Retained Earnings: Beg. RE + Net Income - dividends paid
To find Net Income from SE: If you are given the assets and liabilities, you can subtract liabilities from Assets to find what SE balance should be. Then, you add the SE accounts such as APIC, capital stock and find retained earnings if it’s not given. Now that you know what SE balance should be, subtract the equity balances you are given from the SE balance and whatever that calculation is - is what retained earnings is. To find Net Income within retained earnings, find beg retained earnings - dividends paid. Assume 0 IF beg. retained earnings is not given.
Treasury Stocks
There is no gain or loss on the purchase and/or sale of treasury stock. Any excess or gain goes to APIC, if there isn’t enough in APIC to absorb a loss, the loss would be debited from “retained earnings.
An “excess” or gain from the sale of treasury stock would not reduce the carrying amount of the remaining treasury stock.
Stock splits also increase treasury stock because the state of incorporation protects treasury stock from dilution.
current liabilities
all deferred tax liabilities are classified as non-current.
Dilutive Securities
Income avail. to shareholders + Interest of dilutive securities - preferred dividends / Weighted avg. # of shares + Dilutive Shares from convertible securities
Antidilutive: Interest savings (bond amount x percent in bonds) net of tax/ New number of shares.
Dilutive if the calc. EPS is lower than Basic EPS.
Under Straight-line amortization: The interest expense (face value x stated rate) is reported each period.
Effects on Warrants
The exercise of stock rights increases APIC but has no effect on Net Income.
Rights issued vs. Rights Exercised
No effect on Retained Earnings because it is a capital transaction not operational.
When “Issued” without consideration, no entry (only disclosure) is made by the “issuer” or “recipient”.
When exercised and cash inflow received, APIC is credited if purchase price exceeds par value).
To calculate the after-tax net loss or income from disposal of a division
Calculate the value of the asset:
Buildings
- accumulated depreciation
= value
+ Inventory
+AR
=Total Value
Calculate liabilities:
Mortgage
+ AP
=Total liabilities
Total value (asset) - Total liabilities= Net value (book value)
To calculate loss or income: Sales price - Book value (assets- liabilities)= Before tax income or loss
To calculate after tax income or loss: Before tax income or loss * (1-0.30)
Recognized as an asset from obtaining contract
Commission costs would be recognized as an asset.
Expenses should be recognized as cost of sales related to the contract but not an asset.
Recording Interest Payable: What amount should Pane report as interest payable in its December 31 balance sheet?
- $100,000, 12 percent interest rate, borrowed five years ago on September 30; interest payable March 31 and September 30.
Calculation: 100,000 x 0.12 x 3/12 (Oct-Dec)= 3,000
-$75,000, 10 percent interest rate, borrowed two years ago on July 1; interest paid April 1, July 1, October 1, and January 1.
Calculation: 75,000 x 0.10 x 3/12 (Oct-Nov)= 1,875
–$200,000, noninterest-bearing note, borrowed July 1 of current year, due January 2 of next year; proceeds $178,000.
Calculation: No interest payable will be recorded for the noninterest bearing note, as the interest is implicit in the face value of the note and will already be accounted for in the carrying value of the note payable on the balance sheet.
Hail damages that are common occurrence
The actual hail damage loss should be recorded in continuing ops with no separate disclosures since it is a common occurrence.
Recognizing revenue from bill-and hold arrangement
To obtain control of a product in a bill-and-hold arrangement all of these criteria must be met:
- Must be substantive reason for the arrangement (good reason customer asking for the company to hold)
-Product has been separately identified as belonging to a customer
-Product ready for transfer to customer
-Entity cannot use the product or direct it to another customer.
-A company should recognize revenue form a bill-and hold arrangement once the items are completed and ready to transfer not when they are delivered.
Recorded as a liability on the date of issuance
Common stock that contains an unconditional redemptive feature should be reported on the issuer’s books as a lability because there is an obligation of a cash outflow in the future that the company has no ability to prevent.
Preferred stock/cumulative that is convertible to common stock is recorded in the equity section not as a liability.
Presentation of comprehensive income
Does not have to be shown on the face of the income statement but may be shown on the face of a combine “statement of income and comprehensive income” a separate section below net income, or in a separate “statement of comprehensive income”.
Income tax expense or benefit allocated to components must be disclosed on the face of the statement or in the notes.
Acquisition of treasury stock at a price less than their book value
Decrease stockholder’s equity. All treasury stock transaction decrease total equity.
Increase Book value per common share
Stock dividend
Common stock increases because of a stock dividend. Retained earnings decreases.
Entry for large stock dividend
more than 20-25% of the outstanding shares.
If a stock dividend is greater than 20-25% then it is considered large.
Entry:
Debit retained earnings by the par value (30% x 1,000 shares x $1.00 par value)
Credit Common stock to be distributed
Entry for small stock dividend
If a stock dividend is smaller than 20-25% then it is considered a small dividend.
Entry:
Debit Retained Earnings (30% x 1,000 shares x $10.00 fair value)
Credit Common stock to be distributed (30% x 1,000 shares x 1.00 par)
Credit APIC from stock dividend 2,700
To calculate interest revenue from investments
They give you the beg and ending interest receivable and they provide cash collections for interest throughout the year.
-Beg. balance 38,000
Ending balance 46,500
capital gains distributions 145,000
Interest 152,000
To calculate how much should be reported as interest revenue from investments:
46,500= 38,000+x-152,000
You have to solve for x
46,500+152,000-38,000=160,500
Interest revenue= 160,500.
EPS CALC
Step 1: calculate income available for common stock
Net income - preferred dividends paid
330,000- 60,000=270,000
270,000/330,000= 0.90
Recording stock issuance, reacquisition at under par value method
Under the par value method, the acquisition of treasury stock is recorded by reducing APIC by the amount recorded when the shares were originally issued to investors.
At issuance:
Debit cash (orig. issue price x number of shares)
Credit common stock (number of shares x par value)
Credit APIC (difference)
At reacquisition:
Debit Treasury Stock (selling price x number of shares)
Debit APIC (same plug at issuance)
Debit Retained Earnings ((Orig. price - selling price) x number of shares)
Credit Cash (plug)
Diluted EPS
Incentive stock options: If the exercise price exceeds the market price, the stock options are out of the money or antidilutive so do not include in calculation.
Treasury Stock
Net Income or Retained Earnings will never be increased through treasury stock transactions.
A gain or loss should never be recognized under net income or retained earnings for treasury stock transactions.
Subtract treasury stock if it is not eligible for stock dividend.
10-Q
If a company is not subject to seasonal fluctuations: They are required to file quarterly and present Balance Sheets from the prior fiscal year in addition to the most recent quarter end.
Calculate Retained Earnings and Stockholder’s Equity at year end
-Calculate capital stock (common stock); 300,000 (10,000 x $30 par per share)
-APIC: 200,000 (10,000 shares x (sell price-par price)
-Retained Earnings: (Year 1 + Year 2 Net income) - dividends paid
Stockholders equity= Capital Stock + APIC + Retained Earnings
Recording entry for foreign transactions
ex: Corp purchased 800,000 yen. Transaction occurred April 20 and was settled May 20. The exchange rate on April 20 was 80 yen per U.S Dollar, but exchange rate changed to 82 yen per U.S dollar on May 20th.
Find exchange rate: 1/80=$0.0125 (800,000 x 0.0125= $10,000)
1/82= $0.0122 (800,000 x 0.0122= $9,760)
10,000-9,760= 240 (gain)
April 20th purchase:
Debit Purchases 10,000 (800,000 x 0.0125)
Credit Accounts Payable 10,000 (800,000 x 0.0125)
Settled on May 20th:
Debit Accounts Payable 10,000
Credit exchange transaction gain 240
Credit Cash 9,760
Discontinued Ops
With discontinued Ops, losses and gains are presented after the income tax expense line item on the income statement, presented net of taxes.
Entry to record impairment loss:
Debit Loss from impairment of discontinued ops
Credit Assets
To calculate loss from discontinued ops:
What is the operating loss for the year you are calculating the loss for?
- 500,000
Find the impairment loss: (how much it was sold for - fair value)
Add into the operating loss x net of tax
Ex: 500,000 + 100,000= 600,000 x 0.7= 420,000
Treasury Stock Transactions recorded at Cost Method
—If the resale of treasury stock was at a price higher than its acquisition price, retained earnings would not be affected.
You would calculate retained earnings:
Beg retained earnings + Net Income - Dividends paid
Cash dividend
Debit (decrease) Retained earnings for cash amount
Credit Cash
Dividends in Arrears
Calculate cumulative preferred stock dividends:
Shares outstanding - cash dividends paid= dividends in arrears
Common Stock
Increases by # of shares issued x Par value
AR Turnover
Sales (net)/ Account receivable average, net (Subtract Allowance for doubtful accounts)
5% stock dividend
A stock dividend less than 20-25% of the stock outstanding transfers the FMV of the stock dividend at declaration date from RE to capital stock and paid-in-capital. no effect on Stockholder’s equity.
no effect on Assets, no effect on stockholder’s equity and decreases RE.
Treasury Stock Transactions
Treasury stock reduces total stockholder’s equity as well as total capital available, resulting in a higher debt-to-equity ratio since total debt remains unchanged.
Cumulative preferred stock dividends
Cumulative preferred stock dividends are paid on par value (not sales price) of preferred stock and have a “preference” over common stock dividends until all past preferred stock dividends are paid.
Sims: To calculate gain or loss from discontinued ops for year 1 and 2
Operating gain or loss is also known as “Income before Taxes”.
Impairment loss: Book value (Asset-liability) - Expected sell price
You do not need to record or calculate impairment loss in the year that the asset is sold.
Do not record Gain or loss on disposal until it is sold. So don’t record it for the years it is not sold.
Gain or loss on disposal on the year it is sold: Actual selling price - commission costs - Expected price to sell = Gain (loss) on disposal on the year it is sold.
If there’s a loss, calculate income tax benefit and add it. If it is a gain, subtract income tax expense to get total gain/loss from discontinued operations.
2% stock dividend declared/paid
Stock dividends and stock splits
Are not recorded at fair value by investors because they are not considered income under cost/equity method.
–They reallocate the investment account balance over more shares to that the value per share decreases.
Treasury stock transactions
Corporations are not allowed to report income statement gains/losses from treasury stock transactions.
Gains/losses from Treasury Stock transactions are reported as adjustments to stockholder’s equity by adjusting APIC- Treasury Stock.
Gains are recorded by crediting APIC- Treasury Stock. Losses are recorded by reducing any existing APIC- Treasury stock to $0, then debiting any additional loss to Retained Earnings.
Repurchase of Treasury Stock
Debit Treasury Stock
Credit Cash
Resell Treasury Stock
Debit Cash
Credit Treasury Stock
Credit APIC- Treasury Stock
Calculating loss from discontinued ops
Loss for the year + the loss from selling or disposing of the asset.
Ex:
240,000 loss for the year + 135,000 pre-tax loss from the sale = 375,000 x 0.7 (net of tax) = 262,500.
Exchange rate using the direct method
Current exchange rate is 1.59 U.S dollar per British pound. If a retailer in Great Britain were to quote using the direct method:
– Direct method: Quoting the exchange rate involves quoting the domestic price of one unit of another currency. 0.63 British pounds are equal to 1 U.S Dollar (1/1.59=0.63)
So, if it is a foreign country, U.S dollar will always $1.
To calculate retained earnings
Retained earnings= Beg. retained earnings + Net Income - dividends paid
Revenue - expenses = pre-tax income - tax expense= net income + Beg retained earnings = ending retained earnings
Unconditional redemption feature
- reported on the issuer’s books as a liability on the date of issuance (there is an obligation of a cash outflow that is unpreventable).
