FAR 1 Flashcards
What is included in OCI?
Foreign currency translation adjustments. Pension plan adjustments, unrealized gains and losses on available for sale financial (securities) assets, effective portion of gain losses on hedging instruments (cashflow hedges). Most are non cash, volatile, temporary.
freight out is considered what type of expense?
freight out is a selling expense
the direct method of the exchange rate involves quoting the home currency in:
one unit of the foreign currency
simple capital structure =
an entity that only isues common stock
How are stock dividends received recorded?
There is no impact to record other than your amount of shares went up and decreases the cost basis per share, they are not income.
Where do cash payments made to reduce debt principle get recorded on the cashflow statement?
Financing Activity
Where do Interest income and expense get recorded on the cashflow?
Operating Activity
Does comprehensive income include owner investments or distributions?
No
When do dividends become a liability on the books of the issuing company?
When they are declared, not issued.
What does comprehensive income include?
Net Income and Other Comprehensive Income
When calculating weighted average common shares outstanding how are stock splits and reverse stock splits treated?
Treated as if they happened at the very beginning of the period.
Where does the gain/loss on the sale of treasury stock go?
Gain/loss goes to APIC - Treasury Stock, or if there is not enough APIC it would be subtracted from RE. RE cannot increase from Treasury stock transactions.
Which companies are required to have EPS disclosures?
All companies with publicly traded stock, potential common stock, companies in the process of preparation for public sale of common stock
Common stock and preferred stock are recorded at
par value, any excess of par goes to APIC
EDGAR stands for
Electronic Data Gathering Analysis and Retrieval System
Stockholders Equity is impacted by Treasury Stock as a
reduction
Available for Sale debt securities unrealized gains and losses are recorded in
Other Comprehensive Income
Trading securities (a company plans to buy and sell in the near term) realized and unrealized gains and losses are recorded
on the Income Statement
Stock buy backs are shown on what part of the cashflow
financing outflow
What is the difference between small stock dividend and large stock dividend
One is 25% or less and the other is 20% or more
Small stock dividends are not expected to
impact the market price of the stock
Investments in equity securities are carried at
fair value through net income and included in earnings as they occur.
what are the sizes of filers and their time to file the K?
large accelerated +700M 60/40, accelerated +75M 75/40, non-accelerated -75M 90/45
How do you calculate basic EPS
(net income - preferred dividends)/WACSO
How do you calculate Diluted EPS?
(Net Income + interest on dilutive securities)/WACSO that includes all dilutive securities converted into common stock
What are the causes of a change to retained earnings?
Net Income, dividends declared, prior period adjustments (net of tax), accounting changes (net of tax)
What are the advantages of preferred stock over common?
Dividends (cumulative better than non), participating (in net income/non), liquidation priority on assets
What is the advantage of cumulative preferred stock over non?
It is more valuable because it has the ability to accumulate dividends and is ahead of the line when the Company makes a dividend payment.
What is participating preferred stock?
Participating preferred stock can share in excess dividends and this participation can be full or partial.
How is mandatory redeemable preferred stock booked on the balance sheet?
As a liability
What happens when dividends are declared?
They are reported as a liability
Are treasury stocks impacted by stock splits?
Yes
Which inventory method would result in lower cogs in inflationary times?
FIFO would result in lower inventory turnover and cogs assuming prices are rising
How do you calculate COGS from your inventory balances?
Beginning Inventory + Purchases - ending inventory = COGS
How are precious metals and farm products valued in inventory?
They are valued at Net Realizable Value (NRV = Sales Price - cost to sell (dispose))
Which inventory methodology is calculated the same whether it is perpetual or periodic?
FIFO
How do you calculate inventory turnover?
COGS/average inventory
Net Profit Margin is calculated as:
Net Income/Net Sales
How do you calculate the Current Ratio?
Current Assets/Current Liabilities
How do you calculate Times Interest Earned?
EBIT/Interest Expense
How do you calculate Total Debt Ratio?
Total Liabilities/Total Assets
How do you calculate Quick Ratio (Acid Test Ratio)?
Cash+Net AR+Marketable Securities/ Current Liabilities
How do you calculate Return on Assets?
Net Income/Average Total Assets
What is a bill and hold Arrangement?
When a seller bills the customer for the product but has not delivered the item to the customer, but the customer has obtained control of the product prior to delivery/while still in possession of the seller.
When does a customer obtain control?
The product was identified as belonging to the customer, the product was ready to be transferred to the customer, the seller is not using the product for another customer, there is an arrangement the customer has agreed to.
What is a change of LIFO from another inventory accounting method considered?
It is considered a change in accounting principle but is NOT applied retrospectively
How is a retrospective change in accounting principle shown on the financial statements?
It will be reflected by adjusting retained earnings in the earliest year presented and fully in the financials thereafter.
What are the entries to account for small stock dividend?
Debit retained earnings for the FMV, credit common stock for the par value, credit to APIC to balance the entry, Small stock dividends are under 25%
What does it mean if a preferred stock is cumulative?
The dividends accumulate and are made before any dividends are paid to common stock.
When is a cumulative effect accounting change reflected?
In the prior period as a restatement or in beginning year retained earnings for the current period.
When are dividends reported as a liability?
When they are declared.
What are liquidating dividends?
Dividends that exceed retained earnings. They then charge APIC. Usually part of a company going out of business.
How does treasury stock get booked using the par method?
It hits APIC and treasury stock based on original APIC/common stock allocation splits with the difference going to RE.
How does treasury stock sold under the par method get posted?
It hits treasury stock and the delta goes to APIC.
How are cash dividends recorded?
When declared Company DR RE and CR Div Payable, when paid DR Div Payable CR cash.
A dilutive security will produce an EPS number
below basic EPS
How is WACSO calculation impacted if a preferred stock is cumulative?
Calculate the dividend requirement for that period, when they are paid or declared is irrelevant.
If a convertible bond is dilutive to diluted eps calculation what must you add to NI to calculate the new EPS?
The interest payment that goes away.
How do you determine if a convertible preferred stock is dilutive?
Take the impact of the dividend savings to NI divided by the amount of common shares to be issued.
When the effect of a change in accounting principle is inseparable from the effect of a change in accounting estimate…
the reporting treatment for the overall effect is as a change in estimate, and treated prospectively.
If comparative financial statements are presented, the cumulative effect of a change in accounting principle is
presented net of tax as an adjustment to beginning retained earnings in the statement of stockholders’ equity.
Where are accounting policy disclosures normally?
Note 1, but that is a (reasonable and very general) practice and not a “rule” dictated by GAAP. It does make sense to disclose the “why” before the “what.”
Where is the the summary of significant accounting policies?
it is typically the first note provided after the financial statements and will include components such as: measurement bases, accounting principles and methods, criteria, and policies such as basis of consolidation, depreciation methods, revenue recognition, etc.
What is the criterion in determining whether to disclose information in the footnotes to the financial statements about vulnerability to a concentration?
The concentration exists as of the financial statement date. The concentration makes the entity vulnerable to the risk of a near-term severe impact. It is at least reasonably possible that the events that could cause a severe impact from the vulnerability will occur in the near term.
For entities that do not file financial statements with the Securities and Exchange Commission, the subsequent event evaluation period runs through
the date the financial statements are available to be issued, and that date is defined as the date when the financial statements are in a form and format that comply with GAAP and by which all approvals for issuance have been obtained. It is not necessary that the financial statements have actually been issued.
For entities that file financial statements with the Securities and Exchange Commission, the subsequent event evaluation period
runs through the date the financial statements are issued. Financial statements are considered issued on the date when the financial statements are in a form and format that comply with GAAP and by which the financial statements have been widely distributed to financial statement users. There is no requirement for any shareholders to have acknowledged receipt of the financial statements.
How do you determine the fair value of the stock.
If there is no principal market, then the price in the most advantageous market is the fair value of the stock. The most advantageous market is the market with the best price after considering transaction costs.
What are entities that do not file their financial statements with the SEC required to disclose relating to evaluation of subsequent events?
Both the date through which subsequent events have been evaluated along with whether that date is the date that the financial statements were issued or the date that the financial statements were available to be issued.
What are the definitions of the 3 levels of fair value inputs?
Level 1 inputs are quoted prices in active markets for identical assets and liabilities on the measurement dates when no adjustments are required.
Level 2 inputs are inputs other than quoted market prices that are directly or indirectly observable for the asset or liability. Level 2 inputs include quoted prices for similar assets or liabilities in active markets.
Level 3 inputs are unobservable inputs for the asset or liability, reflecting the entity’s judgment about the assumptions that a market participant would use (like projected cashflows)
What is OCBOA?
It is a special purpose framework, Other comprehensive basis of accounting (OCBOA). The modified cash basis of accounting is a special purpose framework.
Stock is always reported at
fair value unless using the equity method.
Investments in bonds that are held to maturity should be reported at
amortized cost, not fair value.
What financial statements should OCBOA financial statements include?
OCBOA financial statements should include financial statements equivalent to the accrual basis balance sheet and income statement. A statement of cash flows is not required.
What is the definition of working captial?
current assets minus current liabilities.
What is Working capital turnover?
Sales divided by average working capital. Working capital, in turn, is defined as current assets minus current liabilities.
What is Return on equity?
Return on equity is calculated as [net income – preferred dividends] divided by average total equity.
What is Accounts receivable turnover?
Accounts receivable turnover is calculated as sales (net) / average accounts receivable (net).
What is Days in Inventory?
Days in Inventory = Ending inventory / (Cost of goods sold/365 days)
What are the reporting requirements for pledging receivables?
Pledging receivables requires a footnote disclosure
Discounting is the process of converting
notes receivable, not accounts receivable, to cash.
What is factoring receivables without recourse?
Factoring receivables without recourse is a sales transaction. Factoring without recourse transfers the risk of uncollectible accounts to the buyer.
FIFO and weighted average use which valuation methods?
FIFO and weighted average use lower of cost or NRV, NRV = Selling - cost to complete
LIFO and Retail inventory use which valuation methods?
LIFO and Retail inventory use Lower of Cost or Market (middle value).
Net Realizable Value =
Selling price - cost of disposal or cost to sell
Investments in equity securities are carried at
Investments in equity securities are carried at fair value through net income (FVTNI). Unrealized holding gains and losses on equity securities are included in earnings as they occur.
Shipping costs between warehouses is considered
an inventory cost.
Before posting any material changes to an asset
You should always true up your amortization and depreciation expense for the period.
Money market accounts are generally viewed as what type of accounts?
Cash and equivalents
When do you accrue for loss contingencies?
When the loss is probable and the loss can be reasonably estimated.
How do you treat an intangible that has a renewal period that is expected to be renewed indefinitely?
Because it is expected to be renewed indefinitely, there will be no amortization expense on the books. Amortization is only recorded for intangible assets with a definite life.
Intangible assets should be amortized over
the lesser of the useful economic life or the legal life.
Excavation is what type of expense?
Excavation is a building expense, not land.
Which amortization increases the interest expense for a bond? Discount or premium?
Discount
How do you calculate the interest payable on a bond?
Take the face value of the bond at the beginning of the period and multiply by the contracted interest rate.
What is the amortization of a par value bond?
There is none as there is no premium or discount to amortize.
What is a bond sinking fund?
A fund that a company contributes cash to each period so that it has enough to pay of the bond at maturity.
What is a serial bonds?
Serial bonds are pre-numbered bonds that the issuer may call and redeem a portion by serial number. Serial bonds are bonds that mature in installments.
What is a term bond?
Term bonds are bonds that have a single fixed maturity date.
What are unsecured bonds called?
Debentures are unsecured bonds.
What is another name for the stated interest rate for a bond?
The stated interest rate for a bond is also known as the nominal or coupon rate.
Where do coupon payments of bonds go on the cashflow?
Operating outflow
The discount on a note payable should be reported on the balance sheet as a direct reduction from the
face amount of the note.
What kind of liability is the unamortized discount on a bond payable?
The unamortized discount on bonds payable is a contra liability
How are bond issuance costs treated?
Bond issue costs reduce the initial carrying value (legal, accounting, underwriting, comms ,printing) and amortized as interest costs
How are “reasonably possible” (not “probable”) losses reported?
Only footnote disclosure is required for a “reasonably possible” (not “probable”) loss. The disclosure should include the range and indicate the best estimate.
How are gain contingencies reported?
Gain contingencies are not recognized in the financial statements because to do so may cause recognition of revenue prior to its realization. Gain contingencies are recorded when the gain is realized. Gain contingencies should be disclosed with care taken not to mislead users of the financial statements as to the likelihood of realization.
When are contingent liabilities recorded on the balance sheet?
When a loss is “probable,” an amount must be accrued on the balance sheet. The amount to accrue is the best estimate of the loss, but if there is no best estimate, the lower bound of the estimated range is the appropriate amount to accrue.
The effective interest rate is also known as the
Market rate.
Gain contingencies should be disclosed in the notes unless
the likelihood of the gain being realized is remote. The full range of possible settlements should be disclosed. The actual settlement did not occur until after the financial statements were issued.
Bond interest expense each period is equal to the combination of
interest payable and the amortization of any premium or discount. If there is no premium or discount to amortize (which is the case for par value bonds), interest expense will equal interest payable.
How are shares that are mandatorily redeemable and transferable at a specific date represented on the balance sheet?
They are presented as liabilities and not equity according to U.S. GAAP.
How do you determine the market price of a bond?
To determine the market price of a bond, the present value of the principal is added to the present value of all interest payments, using the market interest rate.
How would you allocate issue price for detachable warrants that come with bonds?
Because the warrants are detachable, the issue price of the bonds and warrants together should be allocated based on each component’s fair values on the issuance date. If only one fair value is known, the remainder of the issuance price not allocated to the known is allocated to the other.
What interest rate is imputed on AR and AP arising from transactions in the normal course of business?
No interest rate is imputed when the terms do not exceed one year.
How should a contingent liability that is probable but cannot be reasonably estimated be disclosed in the financial statements?
A contingent liability that is probable but cannot be reasonably estimated should be disclosed in the financial statements but not recorded as an adjustment in the financial statements. If a reasonable range of the loss cannot be estimated, then a statement saying such must be included in the notes.
How should you report revenue associated with a coupon discount to a company’s customers?
The transaction is recorded at the cash received amount (coupon sales price), because it is more objective than the retail price of the merchandise for which it can be exchanged.
How do you properly record the sale of PPE in a journal entry?
To properly record the sale of PPE in a journal entry, both the historical cost of the machine and the associated accumulated depreciation must be individually removed in the journal entry.
Where are Gains/losses on a cash flow hedges reported?
Gains/losses on a cash flow hedges are deferred and reported as a component of other comprehensive income until the hedged transaction impacts earnings.
Where are Gains/losses on a fair value hedges reported?
Gains/losses on a fair value hedge are reported in current income.
What does PUFI stand for in relation to OCI?
Pension adjustments, Unrealized Gains and Losses (Avail for sale debt securities and hedges, Foreign currency Items, Instrument specific credit risk
How do you treat assets that are transferred in a troubled debt restructuring?
When assets are transferred in a troubled debt restructuring, the asset is adjusted to fair value and a gain or loss is recorded.
What is the difference between the carrying amount of the payable and the fair value of the asset transferred in a troubled debt restructuring?
The difference between the carrying amount of the payable and the fair value of the asset transferred is equal to a gain on the restructuring.
When is it more likely for an issuer to call a bond? When interest interest rates move lower or higher?
When interest rates move lower, it becomes more attractive for the borrower to “refinance” the debt at lower rates. Because a callable bond provides an early redemption option to the issuer, it is more likely to “call” a bond as rates move lower (in the hopes of reissuing debt at now lower rates).
What happens when a bond is redeemed below par for a bond that was issued above par?
If a bond is issued above par and redeemed below par, this will result in a gain, which the issuer will book in income from continuing operations. The issuer is effectively paying less than par to remove a liability that is on the books at a price above par.
Where are bond redemption gains and losses booked?
Both gains and losses on bond redemptions are booked on the income statement.
If a company extinguishes long-term debt prior to maturity as a method of managing financial risk where will it be booked?
Many companies and agencies extinguish (or refund) long-term debt prior to maturity as a method of managing financial risk. The gain (retirement price less carrying amount of the old debt) will be included as part of continuing operations.
What is an in-substance defeasance?
The borrower remains legally liable to the lender in an in-substance defeasance. An in-substance defeasance does not extinguish the liability itself; it merely “freezes” the payments of principal and interest until a later time. The debtor is still the primary obligor, so the liability remains on the debtor’s books.
When is the acquisition method needed?
The acquisition method is needed when an investor owns more than 50 percent of the voting stock, as this will require the preparation of consolidated financial statements.
What is the general rule for significant influence?
Although “significant influence” may be evident based on qualitative factors, the general rule is that a company that owns between 20 to 50 percent of the voting stock of another investee company is able to exercise significant influence.
When can an investor turn back on the equity method if they have incurred losses past the point of their original investment?
At the point at which the investor’s carrying amount of the investment is reduced to zero due to investee losses, the application of the equity method is suspended. The investor can resume applying the equity method once the investee has returned to profitability and any net losses allocated to the investor during the suspension period are covered by the investor’s share of the investee’s net income.
How do you record a stock dividend when using the equity method?
Record the stock dividend received with a memorandum entry that reduces the unit cost of all stock owned. The total investment will simply be spread over a larger amount of shares, thereby reducing the unit cost of all stock owned.
How are cash dividends recorded if using the equity method?
Cash dividends are treated as a return of capital rather than investment income.
How are liquidating dividends recorded with equity securities?
Dividend income from an equity security investment is recognized in net income, unless the dividend is a liquidating dividend. The dividend accounted for as a reduction of the investment account.
How is goodwill treated in an equity method investment?
Any goodwill created in an investment accounted for under the equity method is ignored. It is neither amortized nor tested for impairment. The entire investment (using the equity method) is subject to the impairment test.
What does goodwill represent?
The amount of goodwill recorded on the balance sheet by an acquiring firm for a business combination represents the excess of the price paid over the fair value of the identifiable net assets acquired.
In what instance would an investment of less than 20% result in use of the equity method?
The equity method is used to account for investments when the investor can exercise significant influence over the investee. While 20 percent to 50 percent voting common stock ownership typically indicates the need for the equity method, the key is whether significant influence exists. Even when an investor owns less than 20 percent, if they exercise significant influence, they will use the equity method.
