F1 M1

Question 1

What are the 5 main financial statements

Answer 1

1. Balance Sheet (Statement of financial position)
2. Income Statement (statement of earnings)
3. Statement of Comprehensive Income
4. Statement of Cash Flows
5. Statement of owners equity

Question 2

Balance Sheet components

Answer 2

“As of December 31, Year 1”
Assets: current, investments, PPE, intangible, others (pension and deferred income tax)
Liabilities: Current, long-term
Stockholders Equity: Stock, paid in capital, RE, AOCI, treasury stock

Question 3

Definition of cost

Answer 3

the amount of money actually paid or expended for items such as capital assets, services, and merchandise that has been received

Question 4

Definition of unexpired costs

Answer 4

Costs that will expire in future periods and be used to subtract from revenues in the future
Unexpired costs (assets) -> Expired costs (expenses):
1. Inventory -> COGS
2. Unexpired (prepaid) insurance -> Insurance expense
3. Net book value of fixed assets -> depreciation expense
4. Unexpired cost of patents -> Patents expense (amortization)

Question 5

Gross Concept: Revenues and Expense

Answer 5

They are reported at their total amount

Revenues: amount of consideration expected to be collected by the entity in exchange for what they transferred

Expenses: Amount benefiting only the current period or specification of unexpired costs if their benefit was received in the period

Question 6

Net concept: Gains and Losses

Answer 6

Reported at their net amount

Gains: Proceeds less net book value. A gain is the recognition of an asset that is not in the ordinary course of business or was without the incurrence of an expense.

Losses: Proceeds less net book value. A loss is recognized if it is from an event not in the ordinary course of business or it happened without the generation of revenue (abandonment).

Question 7

Components of the Income Statement

Answer 7

For a specific period.
Revenues = Sources of funds
Expenses= uses of funds
Gains = sources of funds not associated the earnings process
Losses = uses of funds that will never be used to earn income
There is multiple step and single step versions

Question 8

Difference in time for income statement and balance sheet

Answer 8

Balance sheet reports “as of” a specific date.
Income statement reports over a specific period “year ending December 31, 2024”

Question 9

Comprehensive Income includes

Answer 9

All changes in equity except those resulting from investments by owners and distributions to owners.

Net income + Other comprehensive income

Question 10

Journal Entry to Pay for the goods purchased on credit in a foreign currency transaction.

Answer 10

Debit Accounts Payable (its net amount)
Credit Foreign Exchange transaction loss (or debit gain)
Credit Cash (orig agreement currency *exchange rate on payment date)

loss amount: orig agreement currency * (BS date rate - payment date rate))

Question 11

Journal Entry for Balance Sheet date of foreign currency purchased on credit denominated goods.

Answer 11

if exchange rate decreased

Debit Accounts Payable
Credit Foreign Exchange Transaction gain

Amount = Orig agreement currency * (orig exchange rate - BS date rate).

Question 12

Journal Entry for purchasing goods on credit in a foreign currency

Answer 12

Debit Purchases (orig agreement currency * exchange rate)
Credit Accounts payable

Question 13

Multiple Step Income Statement

Answer 13

Reports operating revenue and expenses separately from nonoperating and other gains and losses

Benefit: Enhanced user information (easier to calculate analytical ratios)

Question 14

A foreign transaction not settled at balance sheet date.

Answer 14

At balance Sheet date, all gains or losses from a foreign exchange transaction in current net income must be computed on all unsettled transactions denominated in foreign currencies.

Difference between the exchange rate used in recording the transaction and the balance sheet date is the unrealized gain/loss

Question 15

Foreign Currency Transactions: Direct and Indirect Methods and Spot rate

Answer 15

“I directly want 1 of their currency”

Make sure to know whose perspective it is from

Direct method: Domestic price of one unit of another currency. Example: 1 Euro costs $1.47

Indirect method: Foreign price of one unit of the domestic currency. Example: 0.68 Euro costs $1.00

Spot rate: Current exchange rate at current date.

Question 16

Items to be calculated for Discontinued Operations

Answer 16

-Results of operations of the component
-Gain or loss on disposal of the component
-Initial or subsequent impairment losses= any initial or subsequent write down to fair value less the costs to sell.
-Subsequent increases in fair value= gain recognized when there is an increase in fair value less the costs to sell but not in excess of the previously recognized loss.

Question 17

Conditions for Discontinued Operations

Answer 17

When the disposal of a component or group of components represents a strategic shift that has or will have a major effect on operations and financial results.

When at acquisition a business meets the criteria to be classified as “held for sale”

Question 18

Single step income statement

Answer 18

Formatted as all revenues and then all expenses including income tax expense

Benefits = simple design and shows user there is no type of revenue or expense more important than another

Question 19

What is the journal entry when accounts written off are recovered?

Answer 19

First: Debit Accounts Receivable
Credit: Allowance for doubtful accounts

Then, to record the collection of cash:
Debit: Cash
Credit: Accounts Receivable

Question 20

What is included in a single step income statement for the total revenues?

Answer 20

Total revenues= Sales of goods, services, and rentals

Purchase Discounts are not included but instead reduce costs of goods sold.

The recovery of accounts written off does not hit the revenue account.

Question 21

Selling a fixed asset that was used in operations for greater than its carrying amount is reported where and how?

Answer 21

On Income Statement

The gain as continuing operations and not net of income taxes.

Discontinued operations is net of income taxes.

Question 22

Other Comprehensive Income

Answer 22

Items excluded from net income under GAAP

PUFI:
Pension Adjustments = until recognized as pension expense on IS
Unrealized gains and losses = impacts from available for sale debt securities and hedges
Foreign Currency Items: Hedges of foreign currency transactions that have adjustments or gains/losses
Instrument specific credit risk = changes in fair value

Question 23

Tax reporting issues pertaining to OCI items

Answer 23

Company either report the components of OCI on an Individual net of tax basis or each component on a before tax basis with one amount shown after for the aggregate tax effects.

Question 24

Specific Impacts to OCI

Answer 24

Increased by deferred gain on cash flow hedge.
Increased by foreign currency translation gain
Decreased by prior service cost not recognized in net periodic pension costs. if it was amortized in the year its positive.

Question 25

If you need to change the exchange rate currency in a foreign exchange transaction, do this:

Answer 25

If it says the exchange rate is 0.79 euro take 1/0.79 = $1.27 USD to 1 Euro.

You would do this if a US company imported goods for euros and were given euro exchange rates but you need USD rates.

Question 26

Foreign currency gains/losses recorded where?

Answer 26

-on the income statement
-foreign currency translation gains and losses are reported in OCI and recognized as a separate component of SE.

Question 27

Knowing when to book a gain in Foreign Exchange transaction.

Answer 27

Look at perspective of who is answering

A U.S. company would record a gain if it takes them fewer Dollars to convert to the foreign currency to pay for goods.

Question 28

Reporting loss from discontinued operations that incurred impairment loss the year earlier.

Answer 28

Year 1 impairment loss when decided to discontinue operations:
Debit Loss from impairment of Discontinued Operations
Credit Assets

Year 2 when operations are actually discontinued and there was further loss from a greater difference in carrying amount:
Debit Cash (final carrying amount)
Debit Loss from sale (disposal) of discontinued ops (the difference between year 1 and 2)
Credit Assets (what it was wrote down to in year 1)

Question 29

When calculating net income…

Answer 29

Calculate income before discontinued operations then +/- discontinued items net of tax

Prior year adjustments will be reflected in RE, not on IS.

Unrealized gains or loss for available for sale debt security will be reported in OCI.

Question 30

Freight out is….

Answer 30

A selling expense

along with these examples: salaries, advertising, their portion of rent..

Freight out is the cost of delivering finished goods to a customer.

Question 31

Current Liability balance consist of…

Answer 31

All payables due within 1 year

Discounts on a payable decrease the value.

Question 32

Comprehensive Income excludes changes in equity resulting from?

Answer 32

Dividends paid to stockholders

No change in equity caused by owner investments and distributions to owners is included.

Question 33

Reporting comprehensive income

Answer 33

2 options:
Single Statement: net income process above and other comprehensive listed out below by component

Two statement: has other comprehensive income on another statement immediately after IS.

All reported net of tax= (1-%)*Amount

Question 34

Pass Key for AOCI

Answer 34

At the end of each accounting period all components of comprehensive income are closed to the balance sheet. net income is closed to retained earnings, and OCI is closed to AOCI.

Question 35

Foreign Currency Transaction vs. Translation?

Answer 35

a transaction happens when you do business with someone. A translation is when you convert the cash in the bank to see how much it’s really worth.

Your understanding for transaction is correct. Just remember that you have to occasionally look at what your cash is really worth in dollars. When that happens you translate it to see what’s going on.

Transactions actually happened, so they naturally go to income. Translations are important but not as tangible so they get sent to OCI.