F1 Financial Reporting

Question 1

F1 M1
What is overview and examples of Comprehensive Income “CI”

Answer 1

Changes in equity except those from owners investments and distribution to owners like dividends paid to stockholders. Examples are prior period error correction, unrealized loss on investments, and loss from discontinued operations in net income.

CI will increase when there is an unrealized gain on available for sale security b/c OCI= CI; while a decrease is a unrealized loss on trading security b/c decrease I/S= decrease NI= decrease CI

Question 2

Explain relationship similarities between F/S

Answer 2

Relationship between Net Income and Retained Earnings is the same as relationship between OCI and accumulated OCI

Question 3

The December JE on exchange rate when supplies were bought on credit and the initial entry was made and exchange rate depreciates is

Answer 3

Initial when bought: Debit Supplies and Credit AP

December: Debit AP and Credit Foreign Exchange Transaction Gain

Foreign Currency Transaction is reported and adjusted during 1) purchased 2) year-end 3) paid

Question 4

What is included in accumulated other comprehensive?

Answer 4

a) prior service costs not previously recognized as a component
b) unrealized gains and losses on available for sale debt securities

Question 5

What is an example to calculate other comprehensive income?

Answer 5

+ deferred gain on CF hedge
+ Foreign currency translation gain
- prior service cost not recognized in net periodic pension cost

• unrealized gain on available for sale debt security is also reported in OCI

Question 6

Calculate net gain/loss in I/S for each year

Answer 6

Each year determine operating loss and add gain on disposal..

Question 7

Under I/S when fixed assets used for operations sold greater or less then than carrying amount will be reported as

Answer 7

net concept b/c gain is reported at net amount. total gain is part of continuing operations

Question 8

What is “Held for sale” criteria?

Answer 8

a) management commits to sell
b) component available for immediate sale in present condition
c) active program to locate buyer initiated
d) sale is probable and expected completion in 1 year
e) sale is actively marketed
f) unlikely significant change to sell plan or sale withdrawn

Question 9

Selling expenses include

Answer 9

advertising, freight related to selling, rent of office spice used, sales of salaries & commission

Question 10

Multi Step Income Statement

Answer 10

Sales Revenue (minus returns)
Less: COGS
Equals gross profit
Plus: Operating Expenses
Equals Operating Income
Plus: Non-operating Revenues like interest income and gain in sale of investments
Less: Non-operating Expense like interest expense
Equals Net Income Before Taxes
Less: Loss from Discontinued Operations
Equals Net Income

Question 11

F1 M2
What is the difference between an accelerator and large accelerated filer?

Answer 11

Accelerated filer is a) w/ public float of greater than or equal to $75M b) subject to SEC reg for greater or equal to 12 months c) previously filed @ least 1 report d) not eligible to file quarterly and annual reports on Form 10 QSB/KSB

Question 12

What is time period difference on accelerated, large accelerated, and non-accelerated filer period of 10K and 10Q?

Answer 12

a) Accelerated max # days is 75 days for 10K
b) A large accelerated filler of 10K has a float over $700M and has a filing period of 60 days.
c) Non-accelerated 90 days 10 K
- 10Q large accelerated and accelerated period is 40 days

Question 13

Companies excluded from accelerated filers of Form 10K are:

Answer 13

entities w annual revenues of less than $100M

Question 14

What is dilutive v anti-dilutive security?

Answer 14

Dilutive is when EPS # below basic EPS and comparison is a lower ratio. this will include all potentially dilutive convertible bonds and preferred stock.
Anti-dilutive is when exercise price is greater than market price. When stock options is anti-dilutive don’t include in diluted EPS calculation
Examples are:
a) Basic EPS is $1.29 and tax rate is 30%… $1,000 bonds convertible *10% convertible bonds @ par *(1-30% tax)= $70 /20 shares of common stock = 3.50 which is greater than basic EPS 1.29 meaning anti-dilutive
b) basic EPS is $1.29 and tax rate is 30%… $1,000 bonds convertible *7% convertible bonds @ par *(1-30% tax)= $49 /40 shares of common stock = 1.225 is less than basic EPS 1.29 meaning dilutive
c) when convertible preferred stock is converted= EPS will increase and will be greater than basic EPS meaning anti- dilutive
d) no indication of convertible shares means anti-dilutive

Question 15

Determine weighted average cost of shares outstanding (WACSO)?

Answer 15

Example 1
Jan 1 to March 31 = 15K3/12= 3,750
April 1 to May 31 = 12.5K2/12= 2,083
June 1 to Dec 31 = 17K*7/12=9,917
Add each period for total of 15,750

Example 2
Total common stock weighted for EPS: # shares of common stock outstanding + (additional common stock * (July to Dec ie 6/12)

Question 16

Calculate total shares outstanding - issued 6% stock dividend on - outstanding common stock
100,000 shares outstanding

Answer 16

Dividend outstanding + shares outstanding= (6% * 100K) + 100K = 106K

Question 17

Calculate a) basic EPS and b) dilutive EPS

Answer 17

a) Basic EPS: [Net Income - (preferred dividends par $ * # preferred dividends outstanding * % cumulative)] / # common stock outstanding
b) dilutive EPS: adj NI/ adj shares outstanding
- adj net income is [NI + (interest expense by $ convertible bonds * % convertible bonds) - (interest expense * % tax rate)]
- adj shares outstanding is # common stock outstanding + # preferred convertible into common stock + # bonds convertible into common stock

Question 18

F1 M3
Equity under Par Value Method TS:

Answer 18

1) acquisition of treasury stock is reduce APIC by recorded amount when shares originally issued to investors
2) JE for stock repurchase when no balance in APIC - TS is Debit TS, APIC, RE; Credit Cash
3) Gain is credit to APIC-T/S calculated by # sold shares * (sold $ per shares - reacquired $ common stock per share)
4) What is the JE on buyback transaction?
DR TS = current repurchase # of shares * originally issued $ par value
DR APIC = current repurchase # of shares * (current repurchase $ per share - originally issued $ par value)
DR RE of = current repurchase # of shares * (current repurchased $ per share - originally issued $ per share). RE is debited b/c no balance in APIC
CR Cash of = current repurchase # of shares * current repurchase $ per share
5) APIC- C/S @ YE assuming RE not used: original issuance prior year - APIC common stock from Jan buyback above issue price + APIC common stock of December reissue share
a) original issuance prior year= ($ prior year common stock per share - $ prior year issued new shares pare value)
b) APIC common stock from Jan buyback above issue price= Jan repurchased # shares common stock * prior year common stock $ per share
c) APIC common stock of December reissue share = Dec Reissued # shares of common stock * (reissued $ per share - Prior year $ new shares par value

Question 19

How is treasury stock recorded recorded in F/S?

Answer 19

In B/S treasury stock when there is a gain the APIC TS increases and when there is a loss first eliminate balance in APIC TS then decrease leftover from RE.
* T/S transactions are never recorded in NI, RE is never increases.
In I/S treasury stock gain/loss is never recorded.

Question 20

What are difference types of treasury stock JE?

Answer 20

a) When there is a gain from resale amount is difference between resale price and reacquisition price and credited to APIC TS.
b) When sale @ less than cost the 1) original cost of T/S credited 2) any APIC TS and cash is debited 3) excess over APIC will reduce RE by debit
c) Reissue treasury stock is Debit cash of # shares bought back * reissued $ per share; Credit Treasury Stock # of # shares bought back *share bought back $ per share; Credit APIC TS of difference between other 2 items.. No effect on RE
d) Original stock issuance: Debit Cash of common stock $ per share * # common stock shares. Credit Common Stock of $ pare value * # common stock shares and Credit APIC- CS plug in

Question 21

Equity under cost method TS

Answer 21

a) JE to repurchase stock is DR TS by # shares bought back * $ per share; CR cash of same amount
b) TS shares is recorded at reacquisition cost
c) Reissue of TS entries are Debit Cash of (Reissued $ per share * # reissued); Credit TS of ( Repurchased $ per share * # reissued) and Credit APIC TS of (difference of other 2 items)
d) The primary difference between cost and legal method is timing of recognition of gains or losses on transactions

Question 22

How to treat dividends arrays v dividends ?

Answer 22

Dividends arrays are disclosed in F/S while dividends declared are reported as liability in B/S
An example of dividends array in F/S disclosure for Y3 is
Step 1: determine yearly cumulative preferred stock dividends: # of shares * $ par * % cumulative preferred stock outstanding. Cumulative preferred stock dividends is paid on par value.
Step 2: multiply amount of step 1 for each year needed
Step 3 subtract step 2 total by Y3 paid cash dividend $ preferred stock

Question 23

What is the purpose of appropriating retained earnings?

Answer 23

Appropriation is to restore unappropriated RE. The purpose is to disclose/share to shareholders that portion of RE is not available to pay dividends b/c restricted. The JE for appropriation for new plant is Debit RE (unappropriated) and CR RE appropriated for plant construction.

Question 24

Calculate Retained Earnings?

Answer 24

= Y1 RE + Y2 NI. If treasury stock transactions recorded under cost method have a resale price exceeding acquisition price than no T/S transactions affect RE. Cash restricted for retirement bonds has no affect on RE.

Question 25

How do transactions affect stockholders equity?

Answer 25

a) Increase when there is a sale of TS @ less than cost
b) Decrease loss from foreign currency translation adjusted
c) Decrease declaration of cash dividends
d) Decrease loss on sale of discontinued segment

Question 26

Calculate proceeds allocated to convertible preferred stock?

Answer 26

Common Fair Value = # shares issued at common stock * common stock selling $ per share
Preferred Fair Value = # shares issued convertible * convertible selling $ per share
Total Fair Value = Common Fair Value + Preferred Fair Value
Common allocated basis = common fair value / total fair value
Preferred allocated basis = preferred fair value / total fair value

Question 27

Calculate payables on each class of stock?

Answer 27

a) preferred stock payable: $dividends arrays preferred stock + preferred stock dividends of (# shares outstanding * preferred stock $ pare value * % cumulative preferred stock)
b) common stock payable: cash dividends $ - preferred stock payable

Question 28

Calculate B/S Adj at year end when corporations hold its own stock?

Answer 28

=stockholders equity total minus companies common stock

Question 29

M1 M4
What is the difference between large stock and small stock?

Answer 29

Large stock is stock greater than 20 to 25% and recorded at par value. The treatment of large stock dividends is transfer from RE to capital stock. While small stock is less than 20 to 25% and is recorded at market value, it transfers FMV @ declaration date from RE to capital stock and paid in capital; additional no effect on stockholders equity.

Question 30

Based on items, determine amount reported to RE?

Answer 30

a) total income increases RE
b) Total cash dividend paid and property dividends decrease
c) access of proceeds over cost of TS sold using cost method has no effect

Question 31

Calculate YE balance of total equity?

Answer 31

Step 1: beginning balance using A+L=E
Step 2: equity + credit sales - expenses.. NI goes into RE (equity)

Question 32

What is a liquidating dividend and how to calculate?

Answer 32

A dividend that exceeds RE. To calculate = total cash dividend declared less retained earnings

Question 33

What is the difference in JE for date of records and dividend payment date

Answer 33

Date of records does not record a JE; while dividend on payment date JE is DR dividends payable and CR cash payment. Cash dividends is paid on # of shares outstanding.

Question 34

Explain what is dividend date of declaration and how to calculate dividend declared ?

Answer 34

Date of declaration is when BOD approves dividend, a liability is created ie dividends payable, and RE is reduced ie. debited. All dividends decrease RE. Calculate dividend declared = Jan 1 shares outstanding + amount of 2 for 1 stock split) * declared $ per share cash dividend.

Question 35

What is the effect of property dividends on RE

Answer 35

Property dividends reduce RE by market value on date of declaration. To calculate impact of property dividends on RE after all nominal accounts are closed is = Gain (ie fair value minus market securities carrying amount) less fair value ie property dividends. Another way to calculate property dividend Gain/loss on disposal of asset is BV - FMV. An example calculate gain on disposal of stock = (FMV of stock @ declaration per share - BV of stock per share) * (# shares FMV @ declaration - BV # stock)

Question 36

Calculate Y2 # of shares of common stock issued and outstanding and what is JE?

Answer 36

• shares of common stock issued= Y1 Issued * stock split
• outstanding= [(Y1 outstanding which is issued minus shares held) less distribution ]* stock split than after minus purchase. Another way to calculate = (Y1 outstanding + Y2 stock dividend - TS purchased + TS reissued ) * stock split
• JE for common stock issued and outstanding = DR Cash (# shares originally issued * per share); CR common stock (# shares originally issued * $ stated value, CR paid in capital is plug in value
• JE for preferred stock issued and outstanding = DR Cash (# shares issued * $ per share); CR preferred stock (# shares issued * per value) , CR paid in capital is plug in

Question 37

Calculate dividend income

Answer 37

= # of shares * dividends per share
# of shares = outstanding = purchased + received

Question 38

How does stock dividend affect stockholders equity?

Answer 38

A stock dividend does not increase total equity and simply increases # shares outstanding. For example a 5% stock dividend will decrease RE and has effect to assets nor equity; also the accounting treatment will be DR RE to CR capital (common) stock and APIC. It does not produce income for the recipient.