F1 M1 Flashcards
BS, IS, and Comprehensive Income
What are the 5 main financial statements
- Balance Sheet (Statement of financial position)
- Income Statement (statement of earnings)
- Statement of Comprehensive Income
- Statement of Cash Flows
- Statement of owners equity
Balance Sheet components
“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
Definition of cost
the amount of money actually paid or expended for items such as capital assets, services, and merchandise that has been received
Definition of unexpired costs
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)
Gross Concept: Revenues and Expense
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
Net concept: Gains and Losses
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).
Components of the Income Statement
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
Difference in time for income statement and balance sheet
Balance sheet reports “as of” a specific date.
Income statement reports over a specific period “year ending December 31, 2024”
Comprehensive Income includes
All changes in equity except those resulting from investments by owners and distributions to owners.
Net income + Other comprehensive income
Journal Entry to Pay for the goods purchased on credit in a foreign currency transaction.
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))
Journal Entry for Balance Sheet date of foreign currency purchased on credit denominated goods.
if exchange rate decreased
Debit Accounts Payable
Credit Foreign Exchange Transaction gain
Amount = Orig agreement currency * (orig exchange rate - BS date rate).
Journal Entry for purchasing goods on credit in a foreign currency
Debit Purchases (orig agreement currency * exchange rate)
Credit Accounts payable
Multiple Step Income Statement
Reports operating revenue and expenses separately from nonoperating and other gains and losses
Benefit: Enhanced user information (easier to calculate analytical ratios)
A foreign transaction not settled at balance sheet date.
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
Foreign Currency Transactions: Direct and Indirect Methods and Spot rate
“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.
Items to be calculated for Discontinued Operations
-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.
Conditions for Discontinued Operations
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”
Single step income statement
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
What is the journal entry when accounts written off are recovered?
First: Debit Accounts Receivable
Credit: Allowance for doubtful accounts
Then, to record the collection of cash:
Debit: Cash
Credit: Accounts Receivable
What is included in a single step income statement for the total revenues?
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.
Selling a fixed asset that was used in operations for greater than its carrying amount is reported where and how?
On Income Statement
The gain as continuing operations and not net of income taxes.
Discontinued operations is net of income taxes.
Other Comprehensive Income
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
Tax reporting issues pertaining to OCI items
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.
Specific Impacts to OCI
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.
If you need to change the exchange rate currency in a foreign exchange transaction, do this:
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.
Foreign currency gains/losses recorded where?
-on the income statement
-foreign currency translation gains and losses are reported in OCI and recognized as a separate component of SE.
Knowing when to book a gain in Foreign Exchange transaction.
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.
Reporting loss from discontinued operations that incurred impairment loss the year earlier.
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)
When calculating net income…
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.
Freight out is….
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.
Current Liability balance consist of…
All payables due within 1 year
Discounts on a payable decrease the value.
Comprehensive Income excludes changes in equity resulting from?
Dividends paid to stockholders
No change in equity caused by owner investments and distributions to owners is included.
Reporting comprehensive income
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
Pass Key for AOCI
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.
Foreign Currency Transaction vs. Translation?
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.
