F7 Stockholder's Equity, Cash Flows & Ratio Analysis

Question 1

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

Answer 1

CF from operating activities: income statement activities & current assets/liabilities
CF from investing activities: noncurrent assets
CF from financing activities: debt and equity

Question 2

What is the accounting treatment of large stock dividends?

Answer 2

Par value of additional shares issued is transferred from R/E to capital stock.

Question 3

Summarize the cost method of accounting for treasury stock.

Answer 3

• recorded, carried and reissued at reacquisition cost
• any “gain” is credited to PIC - Treasury Stock\
• any “loss” is charged against previous “gains” then retained earnings
• reported as a deduction from total stockholders’ equity

Question 4

What is the accounting treatment of small stock dividends?

Answer 4

FV of additional shares issued at the date of declaration is transferred from R/E to capital stock and APIC.

Question 5

Define common stock and list the basic properties.

Answer 5

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’ claim

Question 6

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

Answer 6

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 7

Identify the disclosure requirements about capital structure.

Answer 7

• 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 8

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

Answer 8

Small stock dividends: 20% - 25%

The treatment of stock dividends depends on the percentage of the dividend in proportion to the total shares outstanding prior to the declaration of the dividend.

Question 9

Describe the adjustments of a quasi-reorganization.

Answer 9

• assets are restated at FV (no increase in asset value is permitted, write-downs are charged directly to R/E)
• liabilities are restated at PV
• R/E brought to zero balance by closing to APIC or other capital accounts
• Remember to continue to show the date of the adjustment to R/E for 3-10 years, as this is a departure from cost principle
• no negative balance in any capital account

Question 10

What is the basic formula for calculating EPS?

Answer 10

Income available to common shareholders / Weighted average number of common shares outstanding

Question 11

Compare basic and diluted EPS.

Answer 11

Basic: simple capital structure (only common stock outstanding):
- income available to common shareholders / weighted average common shares outstanding

Diluted: complex capital structure:
- income available to common shareholders assuming conversion of all dilutive securities / weighted average common shares outstanding after conversion of all dilutive shares

Question 12

Name the two methods of presentation of cash flows from operating activities. Which method is preferred?

Answer 12

• direct and indirect methods

- direct method is preferred

Question 13

Name the common adjustments made to cash flows from operating activities using the indirect method.
CLAD

Answer 13

Current assets and liabilities
Losses and gains
Amortization and depreciation
Deferred items

Question 14

List the significant dates with respect to cash dividends.

Answer 14

• Date of declaration; becomes a liability and reduces R/E
• Date of record; No journal entry, memorandum entry only
• Date of payment; actually paid.

Question 15

List some common properties of preferred stock.

Answer 15

• convertible, callable
• Redeemable
• Dividends can be cumulative and/or participating

Question 16

Name the potentially dilutive securities or instruments.

Answer 16

• stock options and warrants and their equivalents
• convertible securities (bonds or preferred stock)
• contracts that may be settled in stock or cash
• contingent issuable shares

Question 17

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

Answer 17

• cash received from customers
• cash paid to suppliers and employees
• interest received and paid
• Dividends received
• purchases and sales of trading securities, if appropriate, based on the nature and purpose for which the securities were acquired.
• income taxed paid

Question 18

What is the accounting treatment of small stock dividends?

Answer 18

Fair value of additional shares issued at the date of declaration is transferred from RE to capital stock and APIC.

Question 19

If using the direct method of presenting cash flows from operating activities, what additional items need to be included in the statement of cash flows under US GAAP?

Answer 19

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

Question 20

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

Answer 20

Cost method: unallocated reduction in stockholders equity

Par value method: deducted from capital stock

Remember, no G/L are recognized on the I/S; income and R/E may never increase by the transaction; APIC - treasury stock account used to record “gains” and absorb “losses”

Treasury stock is not an asset; cash and property dividends are not paid on treasury stock; stock dividends may be paid on treasury stock

Question 21

List five types of dividends.

Answer 21

cash liquidating: return of investment

property: FMV of assets given up, with gain/loss recognized
scrip: promise to pay a dividend in the future
stock: results in capitalizing part of R/E, increasing legal capital. Remember of 20% - 25% record at par value

Question 22

Describe the accounting for unexercised, expiring stock options

Answer 22

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

Question 23

What is the antidilution rule?

Answer 23

Any conversion, exercise, or contingent issuance that has an antidilutive effect (increases 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.

Question 24

List the reporting requirements for EPS

Answer 24

Face of income statement , w/ 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 I/S or in the notes of the financial statements

Question 25

Summarize the par value method of accounting for treasury stock.

Answer 25

• recorded at par value with excess to PIC - treasure stock or deducted from R/E after charged to any PIC - treasury stock.
• reported as a deduction from capital stock.

Question 26

Diluted EPS and stock options - relationship

Answer 26

Stock options are only accounted for in diluted EPS if they are in the money. Same with applicable conversions.

Question 27

Interests is recorded on the CF stmnt in what section

Answer 27

CFO

Question 28

Accounting for stock dividends

Answer 28

Not considered revenue - they are increases in share basis and decreases in cost basis