FAR 1 Module 1

Question 1

What are the key elements of multistep income statement

Answer 1

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Sales
- COGS
——————-
Gross profit
-
Operating expenses
———————————-
Operating income
-
Non operating (gains) and (losses)
——————————————-
Pretax income
-
Income Tax expense
——————————
Net income
+/- Discontinued Operations (Net of tax)
———————————————–
Net income

Question 2

Are Purchase discounts and recovery of accounts written off considered revenue in an income statement?

Answer 2

No purchase discounts reduce COGS and Recovery of accounts written off does not hit the revenue account

Question 3

What are the most common securities?

Answer 3

Stocks, bonds, preferred shares and ETFS

Question 4

What’s the difference with Common stock and preferred stock?

Answer 4

While preferred stock may offer a steady source of income compared to common stock, its share price normally has less growth potential.

Question 5

What is included in accumulated other comprehensive income?

what is AOCI vs OCI?

Answer 5

AOCI accumulates gains/losses from OCI across periods

OCI = current year gains/losses

Prior service costs not previously recognized as a component of net periodic pension cost

PUFI

Question 6

What happens when a transaction is denominated in a foreign currency?

Answer 6

The transaction would be recorded at the spot rate on the date of the transaction.

Question 7

What is the connection between net income and retained earnings similar to?

Answer 7

This is similar to Other comprehensive income and Accumulated other comprehensive income

OCI & AOCI are similar like NI and RE

Question 8

What is the Retained Earnings Formula

Answer 8

RE = Beginning Period Retained Earnings
+ Net income/loss
- Cash Dividends
- Stock Dividends

Question 9

Which statement would an adjustment for a prior year understatement of amortization expense go?

Answer 9

This would go in the beginning of the Retained earnings (RE),

Amortization expenses examples:

Patents
Copyrights
Trademarks (if finite life)
Franchise Rights

Question 10

How is Discontinued operations reported on the income statement?

Answer 10

Discontinued operations is separately reported from the results of continuing operations. It is net of tax.

So a gain on disposal of a discontinued business will be (Amount X (1-Tax Rate))

Question 11

What are examples of a selling expense?

Answer 11

Advertising, freight out, Rent for office space, Sales salaries and commissions

Note: interest is not a selling expense and loss on sale of long-term investment is not a selling expense

Question 12

What are the following regulations
S-X
S-T
S-K
S-B

Answer 12

S-X Regulation S-X sets forth the form and content of and requirements for interim and annual financial statements to be filed with the SEC.

S-T sets forth rules governing electronic filings.

S-K Regulation S-K sets forth non-financial reporting requirements for various SEC filings used by public companies.

S-B Regulation S-B sets forth the disclosure requirements for small business issuers.

Question 13

What does net of tax mean?

Answer 13

Net of tax is the amount of money you have after subtracting taxes.

Question 14

Straight line depreciation formula

Answer 14

Annual depreciation =
(cost of the asset - estimated salvage value)
______________________________________
Estimated useful life of an asset

Question 15

Briefly explain the following forms

Form 8-K
Form 10-K
Form 10-Q
Form S-1

Answer 15

Form 8-K: Major corporate events

Form 10-K: Annual financial report

Form 10-Q: Quarterly financial report

Form S-1: Initial registration form required by the SEC for public companies that want to issue new securities