FAR 7 Flashcards by Luis Espinosa

Major Components of Stockholder’s Equity

Capital stock
APIC
Retained earnings or deficit
AOCI
Treasury stock

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Common stockholders’ equity formula

Total shareholders’ equity
- Pref stock outstanding ( at greater of call price or par)
- Cumm preferred div in arrears
= Common shareholders’ equity

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BV per common share formula

Common SE equity/ Common shares outstanding

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Cumulative preferred stock

All or part of pref div not paid in any year accumulates b/f div can be paid to common shareholders.

Also called dividends in arrears

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Participating Pref Stock

Provides that pref SE share with common SE in dividends in excess of a specific amount.

“Share equally then pro rata”

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Examples of transactions including APIC

Sale of treasury stock at a gain
Quasi-Reorg
Issuance of liquidating dividends
Conversion of bonds
Declaration of small stock div

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Retained Earnings Formula

Net income/loss
- Div (cash, property, stock) declared
\+/- prior period adjustments
\+/- accounting changes reported retrospectively
\+ adjustment from quasi reorg
= RE

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Quasi Reorg - Summary/Purpose

Accounting adjustment, eliminate deficit in RE, “fresh start”.

Restate overvalued assets to their lower FV (reduce depreciation) eliminate RE deficit

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Quasi Reorg- Procedures

Revalue assets to current FV and liabilities to PV (no net increase in asset value permitted, write-down charged to RE.

Bring RE to zero against APIC

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Quasi Reorg - J/E to eliminate deficit in RE

Dr. Common stock
Cr. Retained Earnings
Cr. APIC

In essence, you will reduce APIC by lowering par value of common stock to wipe away RE deficit.

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2 Methods of Treasury Stock Accounting

Cost Method - majority of time used

Legal or Par/Stated Value Method

Direct adjustment to SE not included in determination of NI

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Treasury stock - cost method

Treasury stock recorded and carried at their re-acquisition cost. Gain/Loss determined when treasury stock is reissued or retired. Never hits NI.

Ex: Reissue above cost

Dr. Cash
Cr. Treasury stock (qty x buy back price)
Cr. APIC (difference b/t buy back price and sale price)

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Treasury stock - Legal Par/Stated Value Method

Reduce amounts of par value and APIC received at time of original sale.

Ex: Buy back above issue

Dr. Treasury stock (qty x par)
Dr. APIC (same rate as when sold)
Dr. RE (only if no balance in APIC)
Cr. Cash

Ex Buy back below issue price

Dr. Treasury stock (qty x par)
Dr. APIC (same rate as when sold)
Cr. Cash
Cr. APIC - T/S

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Sale of subscriptions J/E & Issuance of Stock Previously Subscribed J/E

Dr. Subscriptions receivable
Cr. Common stock subscribed
Cr. APIC

Dr. Common stock subscribed (use par)
Cr. Common stock (issued)

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Exercise of Stock Rights

Dr. Cash
Cr. Common stock (par value)
Cr. APIC (residual)

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Dividend Date of Declaration

Date board of directors formally approves dividend.

Dr. RE
Cr. Liability (dividends payable)

Liquidating Dividends

Occur when dividends to SE exceed RE. Dividends in excess of RE first debited to APIC and then to common or pref stock.

Reduce total PIC.

Treatment of Small Stock Dividend

< 20%-25% of shares previously outstanding, transfer from RE to common stock & APIC

Dr. RE (# of shares x FMV)
Cr. Common stock
Cr. APIC

Treatment of Large Stock Dividend - > 20-25%

J/E at declaration

Dr. RE
Cr. Common stock distributable (use qty x par)

J/E to record distribution

Dr. Common stock distributable
Cr. Capital stock, par

EPS - Income Available to Common Shareholders Formula

Net income

div declared on non-cumm pref stock (regardless if paid)
div accum on cumm pref stock (regardless if declared)

Basic EPS Formula

Income available to common shareholders/

Weighted avg # of common shares outstanding

Stock dividends & splits regarding weighted average common shares outstanding

Must be treated as though they occurred at the beginning of the period.

If occurs after end of period but b/f FS issued, retroactively state as well.

Diluted EPS Formula

Income available to common stock shareholders + interest on dilutive securities/

WA # of common shares, assuming all dilutive securities are converted to common stock

Dilutive Effect on weighted average common shares

Only dilutive when “in the money”

Difference b/t # of shares assumed issued and # of shares assumed to be purchased with proceeds should be included in # of shares (denominator) for diluted EPS.

Diluted EPS and formula to computer additional shares for options & similar instruments (denominator)

Number of Shares - of shrs x exercise price/ avg market price = additional shares outstanding

Convertible Bonds - Dilution

if converted method, assumed converted to common stock at beginning of period or at the time of issue if later Add to numerator (income)- interest expense, net of tax, due to the assumed conversion of bonds to common stock - basically as if it did not happen

Antidilution

Use results of assumed conversion only if diluted. Each potential dilutive security used separately in determining dilution or antidilution. Tests for dilutive or antidilutive effects based on income from continuing operations Diluted EPS > Basic EPS, antidilutive, DO NOT USE

Convertible Pref Stock & Dilution Calculation

Does not affect numerator but does affect denominator

Categories of Statement of Cash Flows

Operating - Income Statement, CA & CL excluding current notes payable and current portion of L/T debt Investing - Inv Securities & Noncurrent Assets Financing - Noncurrent liabilities & Equity

Similarities & Differences between Direct & Indirect Method related to SCF

Presentation wise.... Operating activities differ Investing & Financing activities are the same

Direct Method

Non-cash items such as depreciation, amortization, depletion, and income from affiliates under the equity method do not appear in direct method operating cash flow.

Relationship of Assets, Liabilities, Equity to operating cashflows- Indirect

Assets = Inverse relationship Assets increase = outflow Assets decrease = inflow Liabilities & Equity = Direct relationship Liabilities & Equity up = inflow of cash Liabilities & Equity down = outflow of cash

Direct Method - Cash Received from Customers

Report separately- Assets- inverse liabilities - direct ``` Revenues - Increase in receivables + Decrease in receivables + Increase in unearned revenue - Decrease in unearned revenue = Cash received from customers ```

Direct Method - Cash paid to suppliers (outflow)

Assets - direct, Liabilities - inverse ``` COGS + increase in inventory - decrease in inventory - increase in A/P + decrease in A/P = Cash paid to suppliers ```

Direct Method - Cash paid to employees

Liabilities - inverse Salaries & Wages Expense - increase in wages payable + decrease in wages payable = Cash paid to employees

Indirect Method - Short - Cut Cash Flow Effects

Changes in debit balance accounts = inverse relationship Changes in credit balance accounts = direct relationship

Indirect Method - Gains/Losses in Ops Activities

Gains - Usually out of ops to investing Subtract from net income Losses - Usually out of ops into investing Add to net income

Items to remember are included in operating cashflow

Collecting interest on an investment Collecting dividends on an investment Paying interest on debt

IFRS Differences on cash flows

Transaction - mainly more tied to source, more options ``` Interest Received- CFO or CFI Interest Paid - CFO or CFF Div Received - CFO or CFI Div Paid - CFO or CFF Taxes Paid - CFO, CFI, CFF ```