F7

Question 0

List some common properties of preferred stock.

Answer 0

Convertible, callable, redeemable, dividends can be cumulative and or participating

Question 1

Define common stock and list the basic properties

Answer 1

Common stock: Residual ownership interest. Basic rights include: Voting rights, dividend rights, rights to share in distribution of assets if corporation is liquidated, after satisfaction of creditor and preferred stockholders claims.

Question 2

Describe the adjustments of a quasi reorganization

Answer 2

Assets are restated at fair value (no increase in asset value is permitted, write-downs are charged directly to retained earnings). Liabilities are restated at present value. Retained Earnings brought to zero balance by closing to additional paid in capital or other capital accounts. Remember to continue to show the date of the adjustment to retained earnings for 3-10 years as this is a departure from cost principle. No negative balance in any capital account.

Question 3

What are the two alternative methods of accounting for treasury stock?

Answer 3

Cost method: Unallocated reduction in stockholders equity. Par Value Method: Deducted from capital stock. Remember, no g/l are recognized in income statement. Income & RE may never increase by the transaction APIC - TS account used to record “gains” and absorb “losses”. Treasury stock is not an asset. Cash and property dividends not paid on TS; stock dividends may be paid on treasury stock.

Question 4

Summarize the cost method of accounting for treasury stock.

Answer 4

Recorded, carried, and reissued at reacquisition cost. Any “gain” is credited to Paid-in Capital - TS Any “loss” is charged against previous “gains” then retained earnings. Reported as a deduction from total stockholders equity.

Question 5

Summarize the par value method of accounting for treasury stock.

Answer 5

Recorded at par value with excell to PIC - TS or deducted from RE after charged to any PIC - TS. Reported as a deduction from capital stock.

Question 6

List the significant dates with respect to cash dividends.

Answer 6

Date of declaration - Becomes a liability and reduces retained earnings. Date of Record - No JE, memorandum entry only. Date of Payment - Actually paid.

Question 7

List five types of dividends.

Answer 7

Cash, Liquidating - Return of investment, Property - FMV of asset given up, with G/L recognized Scrip - Promise to pay a dividend in the future. Stock - Results in capitalizing part of RE increasing legal capital. Remember if <20-25% record at FMV if greater than 20-25% record at Par value

Question 8

What is the threshold for treating stock dividends as large vs small dividends?

Answer 8

Small stock dividend 20-25%
The treatment of stock dividends depends on the % of the dividend in proportion to the total shares outstanding prior to the declaration of the dividend.

Question 9

What is the accounting treatment of small stock dividend?

Answer 9

Fair value of additional shares issued at the date of declaration is transferred from retained earnings to capital stock and additional paid in capital.

Question 10

What is the accounting treatment of large stock dividends?

Answer 10

Par value of additional shares issued is transferred from retained earnings to capital stock.

Question 11

Identify the disclosure requirements about capital structure.

Answer 11

Rights and privileges of various securities outstanding. *Number of shares issued upon conversion, exercise, or satisfaction of required conditions during at least the most recent annual fiscal period and any subsequent interim period presented. *Liquidation preference of preferred stock *Redemption requirements related to redeemable stock.

Question 12

Identify two types of stock options.

Answer 12

Non compensatory; Under US GAAP substantially all full time employees may participate; offered equally as a percentage of salary; reasonable exervise period and discount is no greater than that offered to stockholders. Compensatory - Compensation cost is determined on grant date using an option pricing model. IFRS, stock options are generally considered to be compensatory.

Question 13

Describe the computation and allocation of compensation expense under compensatory stock option plans

Answer 13

Compensation cost is based on the fair value of the equity instrument awarded, determined by an option pricing model. This cost is expensed and allocated over the service period.

Question 14

Describe the accounting for unexercised, expiring stock options.

Answer 14

Any balance in “APIC” stock options is reclassified to “APIC - expired stock options” Previously recognized compensation expense is not adjusted.

Question 15

What is the basic formula for calculating EPS?

Answer 15

Income available to common shareholders / WACSO

Question 16

Compare basic and diluted EPS.

Answer 16

Basic - simple capital structure (only common stock outstanding): Income available to common shareholders / WACSO
Diluted - Complex Capital Structure - Income available to common shareholders assuming conversion of all dilutive securities / WACSO after conversion of all dilutive shares.

Question 17

Name the potentially dilutive securities or instruments

Answer 17

Stock options & warrants and their equivalents *Convertible securities (bonds or preferred stock) *Contracts that may be settled in stock or cash *Contingent issuable shares

Question 18

What is the anti-dilution rule?

Answer 18

Any conversion, exercise, or contingent issuance that has an antidilutive effect (^EPS or decreases loss per share) is not included in the calculation unless the shares have actually been converted, exercised, or satisfaction of the contingency met. Each potential CS is considered separately in sequence from most to least dilutive with in the money options and warrants generally included first.

Question 19

List the reporting requirements for EPS.

Answer 19

Face of IS with equal prominence for basic and diluted per share amounts for both income from continuing operations and Net income.
Per share amounts for discontinued operations and extraordinary items can be reported on the face of the IS or in the notes to the financial statements.

Question 20

What are the three sections of the statement of cash flows? What cash flows are included in each section?

Answer 20

Operating activities - cash flows from income statement transactions & CA/CL
Investing activities - cash flow from noncurrent assets
Financing activities - cash flows from debt and equity

Question 21

Define cash equivalents.

Answer 21

Cash equivalents: Cash equivalents are highly liquid investments with maturities of three months or less that are readily convertible into cash with insignificant risk of changes in value. Note: Maturities of three months or less” is of original instruments or from purchase date of instrument.

Question 22

Name the two methods of presentation of cash flows from operating activities, which method is preferred?

Answer 22

Direct & Indirect method / Direct method is preferred

Question 23

If using the direct method of presenting cash flow from operating activities, what additional item needs to be included in the statement of cash flow under US GAAP?

Answer 23

A reconciliation of net income to net cash provided by operations needs to be provided as a supplemental schedule. (Not required by IFRS)

Question 24

Name the common adjustment made to cash flows from operating activities using the indirect method? CLAD

Answer 24

Current assets & liabilities Losses/Gains Amortization & depreciation Deferred items.

Question 25

Name the most common classes of cash receipts and disbursements included in cash flow from operating activities using the direct method.

Answer 25

Cash received from customers, cash paid to suppliers and employers, interest received and paid, dividends received, purchase and sale of trading securities, if appropriate, based on the nature and purpose for which the securities were acquired, income taxes paid.