FAR 7 - Equity, EPS, Cash Flows

Question 1

Basic EPS

Answer 1

Income available to common shareholders (NI-PD) / Weighted average number of common shares outstanding (WACSO)

Question 2

Treasury Stock Method - EPS

Answer 2

*Occurs for options
*If average market price > exercise (strike) price
*Add to denominator:
Additional shares outstanding = Number of shares - (Number of shares x Exercise (strike price) / average market price)

Question 3

If Converted Method - EPS

Answer 3

*Add to denominator the converted number of common shares
Convertible Bonds:
Adjust net income for interest expense net of taxes (interest x (1-Tax))
Convertible Preferred Stock:
Do not reduce income available to common shareholders by ps, instead pretend they were already converted.

Question 4

Dilutive vs. Antidilutive

Answer 4

DO NOT report any anti dilutive EPS figures, aka any basic EPS that goes up due to options/conversions

Question 5

Cash equivalent

Answer 5

Maturity date within 3 months of purchase date

Question 6

Methods to find cash flow from operation (and their definitions)

Answer 6

1) Direct method - Cash collected from customers - cash paid for operating expenses
2) Indirect method - Net income is the starting point

Question 7

Operating Activities

Answer 7

Changes in Operating Assets & Operating Liabilities

Question 8

Operating Assets

Answer 8

All Current Assets except cash & cash equivalents

Question 9

Operating Liabilities

Answer 9

All accruals (payables) except interest bearing liabilites

Question 10

Most common interest bearing liabilites

Answer 10

Notes, Debt, Bonds, Debentures (finance liabilities)

Question 11

What is included in the operating activities section using the Direct Method

Answer 11

1) Cash received and paid
2) Interest received and paid
3) Dividends received / Income taxes paid
4) Cash received and paid for trading securities only
5) Other cash received and paid for SG&A items

Question 12

What is included in the operating activities section using the Indirect Method

Answer 12

Net income
\+Depreciation/Amortization
\+Losses
-Gains
-Equity earnings
- (+/-) changes in operating assets
\+ (+/-) changes in operating liabilities

*If assets go up = outflow (subtract) = indirect relationship
If liabilities go up = inflow (add) = direct relationship

Question 13

Investing Activities

Answer 13

Changes in non-current assets

Question 14

Financing Activities

Answer 14

Change in own debt and own equity

Question 15

Material non cash activities

Answer 15

Provided separately in supplemental disclosure

Question 16

Major difference of direct & indirect method

Answer 16

1) Format of operating activities section
2) Supplemental disclosures section
* If Indirect - include cash paid for tax & interest
* If Direct - reconciliation of indirect method

Question 17

How to find cash paid for a specific payable (including dividend payable)

Answer 17

BACK INTO IT USING A T ACCOUNT
Beg balance
\+CY exp / dividend declared
-cash paid
=Ending balance

Question 18

Requirements for defined benefit pension plans

Answer 18

1) Statement of Net Assets Available for Benefits
2) Statement of Changes in Net Assets Available for Benefits
3) Statement of Accumulated Plan Benefits
4) Statement of Changes in Accumulated Plan Benefits
* includes change in actuarial assumptions

Question 19

Requirements for defined contribution pension plans

Answer 19

1) Statement of Net Assets Available for Benefits

2) Statement of Changes in Net Assets Available for Benefits

Question 20

Common Stockholders’ Equity formula

Answer 20

Total shareholders’ equity
-Preferred stock outstanding
-cumulative preferred dividends in arrears
=Common shareholders’ equity

Question 21

Book value per common share formula

Answer 21

Common shareholders’ equity/common shares outstanding

Question 22

Cumulative vs. Noncumulative Preferred Stock

Answer 22

Cumulative - provides that all or part of the preferred dividend not paid accumulates and must be paid before dividends can be paid to common shareholders
*Accumulated amount = dividends in arrears
Noncumulative - dividends don’t accumulate and preferred shareholders lose the right to receive dividends that are not declared

Question 23

Legal Capital (capital stock)

Answer 23

Amount that must be retained by the company

par value of common shares + par value of preferred shares

Question 24

Fully Participating Preferred Stock

Answer 24

Share dividends equally then pro rata the remainder.

1) Preferred stock gets paid first based on outlined percentage. Be sure to account for dividends in arrears if cumulative
2) Subtract CS based on same percentage preferred received
3) Divide remaining amount based on proportion of PS & CS to Legal Capital (Capital Stock)

Question 25

Change in Retained Earnings Formula

Answer 25

Net income
-Dividends declared (cash, property, and stock)
+/- Prior period adjustments (errors)
+/- Accounting changes reported retrosepctively (excluding to LIFO & Depreciation changes)
= Change in Retained Earnings

Question 26

Cost Method - TS

Answer 26

1) Record at reacquisition cost
2) G/L calculated at time of reissuement
3) Gain goes to APIC, Loss comes out of RE once APIC is cleared

Question 27

Legal (Par/Stated Value) Method - TS

Answer 27

1) Record TS at par value
2) G/L immediately calculated upon repurchase
3) Reverse APIC at time of buy back
4) When reissuement occurs, no G/L, just credit TS at par value

Question 28

Retirement of Treasury Stock

Answer 28

Cost Method - Credit TS at cost

Par Method - Credit TS at par value

Question 29

Donated Stock

Answer 29

Recorded at FMV

Question 30

Stock Issued Below Par Value

Answer 30

Difference is debited to APIC to reflect a discount. This is a contingent liability to the original owners

Question 31

Stock subscription

Answer 31

A contracted agreement to sell a specific number of shares at an agreed upon price.

Dr Subscriptions Receivable (contra-equity)
CR CS
CR APIC

Question 32

Date of Declaration

Answer 32

Date the BOD approves a dividend.
**JE:
Dr Retained Earnings
Cr Dividends Payable

Question 33

Property Dividends

Answer 33

Restate property at fair value on DATE OF DECLARATION. Any gain or loss is recognized in income
**JE:
Dr Retained Earnings (Fair Market Value)
Dr Accumulated Depreciation
Cr Cost
Cr Gain/Loss (Plug)

Question 34

Stock Dividends

Answer 34

1) <20% - Debit Retained Earnings at FMV of stock

2) >25% - Debit Retained at par value of stock

Question 35

Noncompensatory Stock Options

Answer 35

No JE until employee buys stock, no compensation expense

Question 36

Compensatory Stock Options

Answer 36

Book compensation expense evenlySt over the service period at fair value of the option. Fair Value is calculated at the GRANT DATE. When the option gets exercised:
*JE:
Dr   Cash (at STRIKE price)
Dr   APIC - stock options
Cr          CS
Cr          APIC - excess of par

Question 37

Stock Appreciation Rights (SARs)

Answer 37

Entitles an employee to receive an amount equal to the excess of the market price of a stock. Debit compensation expense evenly for the increase in market price over the service period (credit Liability for SAR Plan)