FAR 1 Financial Reporting Laurence

Question 1

Definition of Treasury Stock

Answer 1

Own stock that has been issued to shareholders and subsequently reacquired (but not retired). Not entitled to vote or dividend.

Question 2

How is Treasury stock shown in the B/S

Answer 2

Shown as a reduction in stockholders’ equity on the B/S.

Question 3

How to tell if they use the Cost Method or the Legal Par Value Method

Answer 3

If Treasury Stock is subtracted from Common Stock at par, then you know they use the Par Value Method.

Question 4

How to calculate Net Income

Answer 4

1. Sum of operating result: P&L from continuing and operating core business (R/E)
2. Sum of continuing and non-operating results (GL interest, other)
3. Highly irregular discontinued operations (net of tax)

Question 5

How to calculate Comprehensive income

Answer 5

Net income (REGL)
plus
OCI: PUFI (gains and losses that go directly to equity and not to NI).

Pension adjustments, Unrealized gains and losses on avail for sale debt securities, Foreign currency translation method items, Investment specific credit risk (effective portion of CH hedges)

Question 6

how to set up the Statement of Comprehensive Income

Answer 6

OCI and PUFI items (to date as beginning of the year)
+/- PUFI gains and losses in current year
+/- reclassification adjustments
= Ending accumulated other comprehensive income

Question 7

Equity comprises of

Answer 7

1. Paid in capital Treasury Stock
2. Earned Capital (retained earnings)
3. Ending Accumulated Other Comprehensive Income

Question 8

Anti-dilution rule of conservatism

Answer 8

Use results of each assumed conversion only if it results in dilution (EPS decrease).
Dilutive only if average market price > strike (exercise price): In the Money, if not ignore

Question 9

Does Stock Dividend increase the total equity?

Answer 9

No, Stock Dividend only increases the number of shares outstanding

Question 10

When Treasury Stock is resold, how to treat the stock?

Answer 10

Stock is regarded as outstanding because after the sale the stock becomes stock held by other shareholders than the corporation itself

Question 11

When sale of Treasury Stock is below cost, what happens

Answer 11

This will result in a net increase in stockholders equity: Original cost TS is credited, only APIC-TS is debited, excess would reduce retained earnings. However net impact to stockholders equity would still be positive as long as cash is received from sale of treasury stock.