F1 - Financial Reporting

Question 1

What is the formula for Basic Earnings per Share (EPS)?

Answer 1

(Net Income LESS cumulative preferred stock dividends accumulated OR non cumulative preferred stock dividends declared) DIVIDED BY weighted Average Common Shares Outstanding (WACSO)

Question 2

When should large accelerated, accelerated, and non-accelerated filers file form 10-K?

Answer 2

Large Accelerated = within 60 days of FYE
Accelerated = within 75 days
All other = within 90 days

Question 3

When should large accelerated, accelerated, and non-accelerated filers file form 10-Q?

Answer 3

Large Accelerated = within 40 days of quarter-end
Accelerated = within 40 days
All other = within 45 days

Question 4

What constitutes Large Accelerated, Accelerated, and Non-Accelerated Filers? (According to the SEC)

Answer 4

Large Accelerated - Global Market Value > $700MM
Accelerated - Global Market Value $75MM to $700MM with annual revenue > $100MM
All other (Smaller) - Global Market Value < $75MM with Annual Revenue < $100MM

Question 5

When do stock splits and stock dividends take effect for purposes of determining WACSO in the EPS calculation?

WACSO - “Weighted Average Common Shares Outstanding”
EPS - “Earnings per share”

Answer 5

At the beginning of the period being reported. (NOT when it occurs).

Note: if EPS is being calculated retrospectively for 2 years, a stock split or dividend should be assumed to take effect at the beginning of the first year.

Question 6

How are accumulated dividends reported on a company’s financials before they are declared?

Answer 6

As a disclosure of dividends in arrears.

Note: When the dividends are declared, they are reported as an accrued liability.

Question 7

When a company issues two or more different kinds of stocks for a lump sum, how much should be allocated to each?

Answer 7

Amounts should be allocated based on the fair values.

Example: if 10 common stock & 10 preferred stock are issued for $10 when the market value of the common stock is $1 and the market value of the preferred is $2, then:
Common stock = 10 x $1 = $10
Preferred stock = 10 x $2 = $20
Market value of total stocks issued = $30
$10 issuance x $10/$30 = $3.33 (amount allocated to common stock)
$10 issuance x $20/$30 = $6.67 (amount allocated to preferred stock)

Question 8

Does treasury stock normally have a debit or a credit balance?

Answer 8

Treasury stock normally has a debit balance because it is a contra-equity account?

Question 9

Cost Method:

When treasury stock is sold for more than it was purchased, should the gain be credited to retained earnings or additional paid-in capital TS?

Answer 9

APIC - TS (additional paid-in capital - treasury stock)

Note: whenever a loss occurs on a treasury stock transaction (under cost method), if the LOSS exceeds the balance in the APIC -TS account, then the excess is booked to retained earnings.

Question 10

What is a liquidating dividend?

Answer 10

The amount of a dividend in excess of retained earnings.

Question 11

Are stock dividends reported as income for the recipients?

Answer 11

No. Stock dividends increase the number of shares held and decreased the cost basis per share.

Question 12

When a company declares a stock dividend, how does it affect their equity?

Answer 12

When a stock dividend is under 20%-25% of stock outstanding, it simply transfers the FMV of the stock from retained earnings to capital stock and APIC.

When a stock dividend is “large” (I.e. greater than 25%), then the amount is simply transferred from RE to capital stock at PAR value (nothing goes to APIC).

Question 13

What are the differences between authorized, issued, and outstanding shares?

Answer 13

Authorized: the shares authorized to be issued
Issued: the shares in circulation available for purchase (including treasury stock that has not been retired)
Outstanding: the shares owned by shareholders (excluding treasury stock)

Question 14

If dividends have accumulated, but not been declared, should they be recorded as a receivable?

Answer 14

No. The receivable can be recorded when the dividend is declared.

Question 15

How is dilutive/anti-dilutive nature of a bond determined?

Answer 15

Value of bond x bond % x (1 - tax rate) DIVIDED BY # of shares convertible

Ex. $1000 x 10% x (1 - .30) DIVIDED BY 20 shares = $3.50

If $3.50 is less than basic EPS, then it is dilutive, if $3.50 is greater than EPS, then it is anti-dilutive

Question 16

How is the dilutive/anti-dilutive nature of convertible cumulative preferred stock determined?

Answer 16

Par value x % accumulated DIVIDED BY # of shares convertible

Ex. $100 x 6% DIVIDED BY 4 shares = $1.5 per share.

If $1.50 is less than basic EPS, then preferred stock is dilutive. If $1.50 is greater than basic EPS, then preferred stock is anti-dilutive.

Summary: if preferred stock dividends per share is less than basic EPS, then it is dilutive, if preferred stock dividends per share is greater than basic EPS, then it is anti-dilutive.

Question 17

Are contingent shares included in basic EPS calculation?

Answer 17

If they are dilutive and if all conditions have been met, then yes.

Question 18

Legal/Par Value Method:

When treasury stock is purchased above the original issue price, what is the entry?

Answer 18

Ex. 100 shares, $5 par, $10 orig issue price, $15 purchase

Dr. Treasury Stock (at par value) = $500
Dr. APIC - CS (shares @ issue price LESS shares @ par value) = $500
Dr. APIC - TS (shares @ purchase price LESS shares @ issue price) = $500
Cr. Cash = $1,500

Note: If APIC - TS does not have a credit balance, then the Dr. Is to retained earnings.

Question 19

Legal/Par Value Method:

When treasury stock is purchased below the original issue price, what is the entry?

Answer 19

Ex. 100 shares, $5 par, $15 orig. issue price, $10 purchase price

Dr. TS (@ par value) = $500
Dr. APIC - CS (shares @ issue price LESS shares at par) = $1,000
Cr. Cash = $1,000
Cr. APIC - TS (shares @ purchase LESS shares @ par) = $500

Question 20

Legal/Par Value Method:

When Treasury stock is resold, what is the entry?

Answer 20

Ex. 100 shares, $5 par, $10 purchase price, $15 selling price

Dr. Cash $1,500
Cr. TS $500 (@ par)
Cr. APIC - CS $1,000 (@ selling price LESS par)

Note: Under the Legal/Par method, APIC - TS account is “hit” on the purchase of treasury stock. On the Cost Method, APIC - TS is “hit” on the resale/reissuance.

Question 21

Cost Method:

When Treasury stock is resold, what is the entry?

Answer 21

Ex. 100 shares, $5 par, $10 purchase price, $15 selling price

Dr. Cash $1,500
Cr. TS $1,000 (@ cost)
Cr. APIC - TS $500 (@ selling price LESS cost)

Note: Under the Cost Method, APIC - TS is “hit” on the resale/reissuance of treasury stock. Under the Legal/Par method, APIC - TS account is “hit” on the purchase of treasury stock, and APIC - CS is “hit” on the resale/reissuance.

Also note: if TS is sold below cost, then the debit to APIC - TS would go to RE if the APIC - TS account was empty.

Question 22

Diluted EPS:

When a has stock options outstanding that are “in the money”, detail the “treasury stock method” of accounting for dilution.

Answer 22

If the exercise price of 100 options are $10, and the market price of the options are $20, then the treasury stock method calculates additional shares outstanding assuming that the company buys back as many of the shares as possible at market price.

In this example:
Exercise of option: 100 shares @ $10 = $1,000 received by company
Treasury Stock buyback: $1,000 / $20 market price = 50 shares
100 additional shares LESS treasury stock buyback = 50 remaining additional shares outstanding

Question 23

Property Dividends:

When a property dividend is declared, what is the journal entry?

Answer 23

Dr. Property Asset account (value should be increased from book value to FV)
Cr. Gain on Disposal (difference between book value and FV)

NOTE: If there is a loss, then the property asset account should be credited

Additionally,
Dr. Retained Earnings (fair value of asset transferred)
Cr. Property Dividend Liability account

Question 24

Earnings Per Share:

Is an entity required to disclose EPS when they have made a filing with the SEC in preparation for a sale of public securities?

Answer 24

Yes.

Question 25

Common Stock: When common stock contains an “unconditional redemption” feature, how should this be reported on the issuer’s books?

Answer 25

It should be reported as a liability as of the date of issuance. This is because there is an obligation of a cash outflow in the future that the company has no ability to prevent.

Question 26

Other Comprehensive Income: Are unrealized gains/losses on fair value hedges AND unrealized gains/losses on cash flow hedges both reported under OCI?

Answer 26

No. Only unrealized gains/losses on cash flow hedges are reported under OCI. Gains/losses on a fair value hedge are reported in current income.

Question 27

In a single-step income statement, where are discontinued operations included?

Answer 27

In a single-step income statement, discontinued operations are included after income from continuing operations (net of taxes).

Question 28

Can the dilutive nature of securities change depending on the period being analyzed?

Answer 28

Yes. Ex. If a company has basic EPS of $1.50 and has $1,000 bonds outstanding at 4% annual interest convertible to 20 shares each. If assessing dilutive nature over a 1-year period: $40 interest / 20 shares = $2 (anti-dilutive) If assessing dilutive nature over a 6-month period: $20 interest / 20 shares = $1 (dilutive)

Question 29

Is foreign currency translation = foreign currency remeasurement?

Answer 29

No. Foreign currency remeasurement converts a foreign currency into a company’s functional currency. Foreign currency translation converts a company’s functional currency into the reporting currency.

Question 30

What is a stock’s book value?

Answer 30

A stock’s book value is what would be leftover if the company liquidated all of its assets at book value (except intangible assets) and paid off all debt.

Question 31

What is book value per common share?

Answer 31

BV / Common Share = Common shareholder’s equity (I.e. book value of company) / # of common shares outstanding Note: the denominator excludes treasury stock

Question 32

What is a forward exchange rate?

Answer 32

A forward exchange rate is the exchange rate existing now for exchanging two currencies at a specific future date, often referred to as the forward rate. Note: Foreign currency payables and receivables are recorded at the current exchange rate or spot rate NOT the forward exchange rate.

Question 33

When a shareholder gives a donation of company’s own stock, what is the accounting treatment?

Answer 33

Dr. Donated Treasury stock (@FMV) Cr. APIC (@FMV) Note: There is no change in equity. Also, this results in a higher book value per share of common stock.

Question 34

Foreign Currency: What is the direct method of expressing an exchange rate?

Answer 34

How many units of the domestic currency it takes to purchase one unit of a foreign currency. Ex. $1.25 purchases 1 euro

Question 35

Foreign Currency: What is the indirect method of expressing an exchange rate?

Answer 35

How many units of a foreign currency that can be purchased with one unit of the domestic currency. Ex. (From American perspective) $1 can purchase .75 euros

Question 36

If a company is not a real-estate investment entity, and it rents out space in a building it owns (i.e. not a part of ordinary business), is their rental revenue included in their operating income?

Answer 36

No. This would be considered “other income.”

Question 37

Other Comprehensive Income: Are gains/losses (i.e. changes in fair value) from the following foreign currency transaction hedges reported in OCI? - Foreign Currency Transaction Hedges classified as Fair Value Hedges - Foreign Currency Transaction Hedges used to hedge a “Net Investment” in a foreign operation.

Answer 37

OCI - Net Investment Hedge Net Income - Fair Value Hedge Note: All fair value hedges are reported under Net Income.

Question 38

What does it mean that a receivable or payable is denominated in a foreign currency?

Answer 38

That means that the receivable or payable will be settled in the foreign currency. Note: If you have a receivable denominated in a foreign currency, then you want that currency to appreciate versus the dollar. If you have a payable denominated in a foreign currency, then you want that currency to depreciate versus the dollar.

Question 39

When a company issues shares in exchange for legal services, is the legal expense recorded at the par value of the shares or the FMV of the legal services?

Answer 39

It is recorded at FMV of the legal services. If the legal expense exceeds the par value of the stocks, then the Credit is to APIC.

Question 40

Is a recovery of accounts written off revenue?

Answer 40

No. A recovery debits AR, and credits allowance for doubtful accounts. When cash is then collected, cash is debited and AR is credited.

Question 41

Foreign Currency Transactions: How does appreciation/depreciation of foreign vs local currency affect receivables and payables?

Answer 41

If a receivable is denominated in a foreign currency, you want the foreign currency to appreciate (versus the dollar). If a payable is denominated in a foreign currency, you want the dollar to appreciate (versus the foreign currency.)

Question 42

Does a discount on bonds payable reduce liabilities?

Answer 42

Yes, because it reduces the book value of the BP.

Question 43

Does a stock dividend reduce equity?

Answer 43

No. It decreases RE and increases stock (& APIC if it is a small stock dividend).

Question 44

When should revenue on a constructed building be recognized in the absence of a contract?

Answer 44

When the sale occurs.

Question 45

Who benefits when a forward exchange rate is set and one of the currencies appreciates?

Answer 45

If one currency appreciates versus the other, the party that benefits is the party using the currency that depreciated. This is because, even though it depreciated, they don’t face the negative repercussions.

Question 46

When disposing of a component of a business, what amounts need to be written off as a loss from discontinued operations for the year?

Answer 46

A. Total operating losses from the component for the WHOLE year PLUS B. Impairment loss (book value LESS fair value) of the component.