FAR 7

Question 1

Income Statement

Answer 1

On the Income Statement:

Revenues and expenses are from direct business activities and gains and losses result from non-business activities - like selling old equipment

The income statement is organized to show a company’s activities for the year with the end result being net income

Question 2

What is in a single Step Income Statement

Answer 2

It is very simplified and lumps Revenue and Gains together and then expenses and losses together

These are netted leaving net income

Question 3

How is a multiple Step Income Statement organized

Answer 3

Sales
- COGS
= Gross Incomes

Gross Income
- Selling Expense
- G&A
- Depreciation
= Operating Income

Operating Income
+/- non Operating Income
= Income before tax

Income Before Tax
- Income tax expense
= Income from continuing operations

Income from Continuing Operations
+/- Discontinued Operations (net of tax)
= Net Income

Question 4

Gross Margin

Answer 4

Ratio used to analyze income statement

Gross profit / Net Sales= gross margin

Gross profit = Sales - COGS = Gross profit

This measures the percentage of sales available for expenses and profit after subtracting COGS

Question 5

Gross Profit

Answer 5

Sales - COGS - Gross Profit

Question 6

Profit Margin

Answer 6

Net Income / Net sales

This measures the percentage of sales that become profit

Question 7

Earnings per share

Answer 7

Net Income / weighted avg. # of common shares outstanding

Question 8

How are equity securities recorded

Answer 8

They are always recorded at fair value when fair value can be readily determined with some exceptions

Question 9

When are investments in equity security not carried at fair value

Answer 9

• When there is significant influence over the invest and you use the equity method
• When the investment is consolidated
• When Fair value can not be readily determined - then you record it at cost and adjust for any impairments

Question 10

How do you value an equity investment when fair value can not be readily determined

Answer 10

The investment is recorded at cost and adjusted for any impairment

Any dividends received are included in net income

Question 11

JE for Equity security at purchase, at B/S date when fair value goes up, receive a dividend, when fair value goes down, and when sold

Answer 11

At Purchase: 10 shares of XYZ for $1000:

dr. Investment XYZ $1,000
cr. Cash $1,000

At B/S date when Fair Value of XYZ is $1,250:

dr. Investment in XYZ $250
cr. Unrealized gain $250

If receive a dividend:

dr. Cash $50
cr. Dividend income $50

If at next B/S date XYZ investment is now worth $950:

dr. unrealized loss $300
cr. Investment in XYZ $300

When XYZ share are sold for $900:

dr. cash $900
dr. realized loss $50
cr. Investment in XYZ $950

Question 12

When you have equity securities carried at cost (because Fair value can not be determined) when/how do you evaluate them for impairment

Answer 12

They are evaluated for impairments when:

• there has been a turndown in the earnings performance, credit rating, business outlook of the invest, or if they have going concern issues
• if there has been a downturn in the economic, regulatory, or market conditions in which the investee operates

If it has been determined that assets are impaired:

carrying value - fair value = the impairment loss

Question 13

What are debt securities and examples of them

Answer 13

This is a debt instrument that can be bought or sold between two parties

Examples:

• Bonds - gov., corp, muni, zero coupon
• Debentures
• promissory notes

Question 14

If you have Debt Securities - how can you elect to carry them on you books?

Answer 14

1. You can choose to let the fair value option and carry it at fair value
2. You can carry it to maturity (HTM) - must have intent and ability - concurrent asset
3. AFS - Held for less than maturity, but don’t tend to sell immediately= can be current asset or non current asset
4. T/S - immediate sale - current asset on B/S

Question 15

How are changed to the value of Trading Security carried at fair value recorded?

Answer 15

T/S - change to fair value are recorded in earnings

interest income is also recognized in net income

Question 16

How is interest income from any debt security recognized

Answer 16

Any interest income from debt securities is recognized in net income.

Question 17

Can T/S have impairment adjustments?

Answer 17

No - because they are carried at fair value

Question 18

How are unrealized gains and losses on AFS reported at fair value classified on the balance sheet?

Answer 18

They are reported in OCI - NOT earnings

Question 19

Are AFS securities evaluated for impairment

Answer 19

YES -

If a decline in the fair value of AFS is considered permanent and is below the amortized cost it is considered a realized loss in earning

the investment is then written down to FV

Example: FV of XYZ investment goes down to $800/ You now have a recognized loss in earning of $200.

Question 20

AFS securities - how are they carried on the B/S and how are unrealized gain losses reported. and JE for purchase, B/S date with a gain and loss in fir value

Answer 20

AFS are reported on the B/S at fair value with unrealized gains and losses reported in OCI

Example: At Purchase: 10 shares of XYZ for $1000:

dr. AFS Securities $1000
cr. Cash $1,000

At B/S date if fair value is now $1,250

dr. AFS securities $250
cr. Unrealized holding gain losses (OCI) $250

At next B/S date if bond is now worth $950:

dr. Unrealized holding loss (OCI) $300
cr. AFS securities $300