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CPA > FAR - Becker F7 > Flashcards

FAR - Becker F7 Flashcards

1
Q

Legal capital stock =

A

Preferred stock outstanding + common stock outstanding

  • this is the amount of money set aside for the protection of creditors
  • CANNOT be used to pay dividend
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2
Q

Additional paid in capital is:

A

The amount of capital in excess of par or stated value

  • an additional contribution
  • not earnings

EXAMPLES:

  • sale of treasury stock at a gain,
  • quasi-reorganization,
  • the issuance of liquidating dividends,
  • conversion of bonds,
  • the declaration of a small stock dividend
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3
Q

Retained earnings is EARNED CAPITAL and have 2 types:

A

Appropriated

And

Unappropriated

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4
Q

What can you pay dividends out of:

A

Retained earnings and

  • also the possibility of paying dividends out of additional paid in capital
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5
Q

Items listed on the stockholders equity:

A 
Preferred stock
\+ common stock
\+ APIC
\+ retained earnings
\+ AOCI
- treasury stock
= Total S/E

+ noncontrolling interest (if owning

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6
Q

Book value per common share is:

A

Book value per common share measures the amount that common shareholders would receive for each share if all assets were sold at their book (carrying values) and all creditors were paid.

FORMULA:

Common shareholders’ equity
——————————————— = BV per book
Common shares outstanding

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7
Q

Common stock,

issued shares - treasury shares (buyback) (repo) =

A

Number of shares outstanding

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8
Q

Common stockholders equity formula is:

A

+ Total shareholders’ equity

  • Preferred stock outstanding (at greater of call price or par value)
  • Cumulative preferred dividends in arrears (paid in future)
    ————————
    = Common shareholders’ Equity
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9
Q

Preferred stockholders do not have rights to vote? T/F?

A

True

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10
Q

Cumulative preferred stock is:

A

The cumulative feature provides that all or part of the preferred dividends not paid in any year “accumulates” and must be paid in the future before dividends can be paid to common shareholders.

  • The accumulated amount is referred to as “dividends in arrears”

– The amount of dividends in arrears is not a legal liability, but it must be disclosed in total and on a per share basis either parenthetically on the balance sheet or in the footnotes

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11
Q

Noncumulative preferred stock is:

A

Non-cumulative preferred stock, dividends not paid in any year “ do not accumulate “. The preferred shareholders lose the right to receive dividends that are not declare

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12
Q

Participating preferred stock:

  • The participating feature provides that preferred shareholders share with common shareholders in dividends in excess of a specific amount

What are the 2 types of participating preferred stock?

A
  1. “Fully participating “ means that preferred shareholders participate in excess dividends without limit.

Generally, preferred shareholders receive their preference dividend first, and then additional dividends are shared between common and preferred shareholders

NOTE: “ Share equally then pro rata”

  1. “Partially participating” means preferred shareholders participate in excess dividends, but to a limited extent (E.G., a percentage limit)
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13
Q

Nonparticipating preferred stocks are:

A

When preferred stock is not participating, preferred shareholders are limited to the dividend provided by their preference.

They do not share in excess dividends

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14
Q

Convertible preferred stocks are:

A

Convertible preferred stock may be exchanged for common stock (at the option of the stockholder) at a specified conversion rate

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15
Q

Callable (redeemable) preferred stocks are:

A

Callable preferred stock may be called “re-purchased” at a specified price “at the option of the issue incorporation.”

The aggregate or the per-share amount at which the preferred stock is callable must be disclosed either on the balance sheet or in the footnotes.

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16
Q

Retained earnings (or deficit) is:

A

Is accumulated earnings (or losses) during the life of the corporation that have not been paid out as dividends

  • The amount of accumulated retained earnings is reduced by distributions to stockholders and transfers to APIC for stock dividends
  • retained earnings does not include treasury stock or AOCI
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17
Q

Retained earnings formula:

A 
Net income/loss 
- dividends (cash, property, and stock) 
\+|- prior period Adjustments 
\+|- accounting changes reported retrospectively
\+ adjustment from quasi-reorganization

= retained earnings

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18
Q

Appropriation of retained earnings is:

A

The purpose of appropriating retained earnings is to disclose to the shareholders (usually the common stock holders) thar some of the retained earnings are not available to pay dividends because they have been restricted for legal or a contractual reasons or as a discretionary act of management for specific contingency purposes

An appropriation of retained earnings may not be used to absorb cost or losses and may not be transferred to income

J/E
DR : Retained earnings (unappropriated)
CR: Retain earnings appropriated for [purpose]

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19
Q

A quasi-reorganization is an accounting adjustment that revises the capital structure of a corporation as though it had been legally re-organize.

It allows a corporation with a significant deficit in retained earnings to eliminate that deficit and have a “fresh start”. A quasi-reorganization requires formal approval by the shareholders

What is its purpose?

A

The purpose of a quasi-reorganization is to restate overvalued assets to their lower fair value (and thus reduce future depreciation) and to eliminate a retained earnings deficit (and thus facilitate the declaration of dividends)

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20
Q

Steps for quasi-reorganization:

A
  1. Revalue assets to current fair values and liabilities to their present values (no net increase in asset value is permitted, and the write down is charged directly to retain earnings, thus increasing the deficit temporarily)
  2. Bring retained earnings to zero against additional paid in capital. (If additional paid in capital is insufficient to absorb the deficit, more additional paid in capital can be created by reducing the par or stated value of the stock, thus reducing capital stock.)
  3. Following a quasi-reorganization, retained earnings on the balance sheet must be dated to show the date of the adjustment, and that date must continue to be disclosed until such time as it is insignificant (usually 3 to 10 years)
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21
Q

Two methods of accounting for treasury stock are permitted: cost method and par value method

A

The primary difference between the two method is the timing of the recognition of gain or loss on treasury stock transactions

  1. Cost method - (used by entities 95% of the time)
  2. Par value method - (5% usage)
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22
Q

Treasury stock, cost method:

A

The treasury shares are recorded and carried at their re-acquisition costs. A gain or loss will be determined when treasury stock is re-issued or retired, and the original issue price and book value of the stock do not enter into the accounting.

The account “additional paid in capital from treasury stock” is credited for gains and debited for losses when treasury stock is re-issued at prices that differ from the original selling price.

Losses may also decreased retain earnings if the “additional paid in capital from treasury stock” account does not have a balance large enough to absorb the loss.

Net income or retain earnings would never be increased through treasury stock transactions

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23
Q

Journal entries for treasury stock, cost method

  • original issue?
  • buy back above issue price?
  • reissue above cost?
  • reissue below cost?
A
  • Original issue
    DR: Cash
    CR: Common stock
    CR: APIC - common stock ( if over par)
  • Buyback above issue
    DR: Treasury stock
    CR: Cash
  • Reissue above cost
    DR: Cash
    CR: treasury speck
    CR: APIC- treasury stock
- Reissue below cost
DR:    Cash
DR:    APIC - treasury stock 
DR:    Retained earnings
      CR:     Treasury stock
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24
Q

Treasury stock, legal( par/stated value) method:

A

Under the legal method, the treasury shares are recorded by reducing the amount of par value and additional paid in capital received at the time of the original sale

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25
Q

Journal entries for treasury stock, legal (par/stated value):

  • original issue?
  • buy back above issue price?
  • buy back below issue price?
  • reissue above?
  • reissue below?
A
  • Original issue
    DR: Cash
    CR: Common stock
    CR: APIC - common stock ( if over par)
- Buyback above issue
DR:   Treasury stock
DR:   APIC - common stock
DR:   Retained earnings 
     CR:    Cash
- Buyback below issue
DR:   Treasury stock
DR:   APIC - common stock
     CR:    Cash 
     CR:    APIC - T/S
  • Reissue above
    DR: Cash
    CR: Treasury stock
    CR: APIC- C/S
  • Reissue below
    DR: Cash
    CR: Treasury stock
    CR: APIC - C/S
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26
Q

Retirement of treasury stock:

When treasury stock is acquired with the intent of retiring the stock and the price paid is in excess of the par or stated value, that excess must be charged against either:

A

1) all paid in capital arising from past transactions in the same class of stock

Or

2) retained earnings

when the price paid for the acquired treasury stock is less then par or stated value, the different must be credited to paid-in capital

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27
Q

Date of declaration is:

A

The date the board of directors formally approves a dividend. On the declaration date, a liability is created (dividends payable) and retained earnings is reduced (debited).

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28
Q

Date of record, is:

A

The date of record is the date the Board of Directors specifies at the date the names of the shareholders to receive the dividend are determined

NOTE: no journal entry

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29
Q

Date of payment is:

A

Is the date on which the dividend is actually disbursed by the corporation or its paying agent

30
Q

Scrip dividends are:

A

Are simply a special form of notes payable whereby a corporation commits to paying a dividend at some later date.

Scrip dividends maybe used when there is a cash shortage

On the date of declaration, retained earnings is debited and notes payable is credited

31
Q

Liquidating dividends are:

A

Liquidating dividends occur when dividends to shareholders exceed retained earnings. Dividends in excess of retained earnings would be charged (Debited) first to additional paid in capital and then to common or preferred stock (as appropriate).

Liquidating dividends reduce total paid in capital

32
Q

IFRS in the SEC require public entities to present dividends per-share and in total for each class of shares in the statement of changes in equity or in the notes to the financial statements? T/F?

A

True

33
Q

Stock dividends are:

A

Stock dividends distribute additional shares of a company own stock to its shareholders.

The treatment of stock dividends depends on the size (percentage) of the dividend in proportion to the total shares outstanding before the dividend

NOTE: no dividend income reported by shareholder. Share basis goes down

34
Q

Treatment of a small stock dividend:

A

Small stock dividends are dividends with less than 20 to 25% of the shares previously outstanding are distributed, the dividend is treated as a small stock dividend because the issuance is not expected to affect the market price of the stock

The fair market value of the stock dividend at the date of declaration is transferred from retained earnings to capital stock and additional paid in capital. (Reduce R/E by FMV of stock)

There’s no effect on total shareholders equity as paid in capital is substituted for retained earnings

J/E
DR: r/e
CR: C/S
CR: paid in capital

35
Q

Treatment of a large stock dividend:

A

When more than 20 to 25% of their previously issued shares outstanding are distributed, The dividend is treated as a large stock dividend, as it may be expected to reduce the market price of the stock

The par value of the stock dividend is normally transferred from retain earnings to capital stock in order to meet legal requirements. The amount transferred is the number of shares issued multiplied by the par value of the stock.

However, if state law does not require capitalization of retained earnings for stock dividends, record the stock dividend distribution by changing the number of shares outstanding and the par value per share. (Reduce by par value)

J/E
- to record declaration
DR: R/E (at par)
CR: C/S distributable (at par)

  • to record distribution
    DR: C/S distributable
    CR: Capital stock (at par)
36
Q

Not compensatory stock option for/purchased plans:

A

Certain stock options and employee stock purchase plans are used by a entities to raise capital or diversify ownership among employees or officers

  • no J/E until stock is purchased

Stock option plans that meet the requirements of a noncompensatory plan do not require the recognition of compensation expense by the sponsoring company

37
Q

Under US GAAP, an employee stock purchase plan is non-compensatory if it meets all of the following requirements:

A
  1. Substantially all full-time employees meeting limited employee qualifications may participate. Exclude: officers and employees owning a specific amount of the outstanding stock in the corporation
  2. Stock is offered to eligible employees equally, but the plan may limit the total amount of shares that can be purchased
  3. The time permitted to exercise the rights is limited to a reasonable period
  4. Any discount from the market price is no greater then would be a reasonable offer of stock to shareholders or others
38
Q

Under IFRS, employee stock purchase plans and stock options are generally considered to be:

A

Compensatory

39
Q

Compensatory stock options/ purchase plans

Compensatory stock options and stock purchase plan our valued at:

A

The fair value of the options issued

NOTE: book the compensation expense in the period earned by the employee

40
Q

Compensatory stock options/purchased plans definitions:

A
  1. “option price” (exercise price) - is the price at which the underlying stock can be purchased pursuant to the option contract
  2. ” excessive date” - The date by which the option holder must use the option to purchase the underlying (and typically the date at which the stock options outstanding account is reduce)
  3. “Fair value” - The fair value of the option is determined by an economic pricing models such as the Black-Scholes method (expense to issuer)(compensation expense)
  4. “Grant date” - The date the option is issued ( NO J/E)
  5. “Vesting period” - the period over which the employee has to perform services in order to earn the right to exercise the options (the time from the grant date to the vesting date). Compensation is recognize over the service period, And this is generally the vesting period.
41
Q

Compensatory stock option J/E:

  • when options are granted?
  • when options are exercised?
A
  • when options are granted (NO CHANGE IN EQUITY)

DR: Compensation exp (FMV amount)
CR: Paid in capital stock options outstanding

  • when options are exercised

DR: Cash
DR: Paid in capital stock options outstanding
CR: Common stock(at par)
CR: Paid in capital in excess of par(squeeze)

42
Q

The exercise of stock right increases additional paid in capital, but has no effect on net income? T/F?

A

True

43
Q

What happens when the purpose of the appropriation has been achieved:

A

It should be restored to unappropriated retained earnings

44
Q

Net income or retained earnings will never be increased through treasury stock transactions? T/F?

A

True

45
Q

Intrinsic value method is:

A

Number of share options x market price of the stock on the date of grant LESS exercise price of the share option.

46
Q

Under both US GAAP and IFRS, All public entities are required to present earnings-per-share on the face of the income statement? T/F?

A

True

47
Q

What are the differences between simple and complex capital structure for earnings-per-share?

A
  1. Simple - simple capital structure only has common stock outstanding the entity presents basic per-share amounts for income from continuing operations and for net income on the face of the income statement
  2. Complex - all other entities present basic and diluted per-share amounts for income from continuing operations and for net income on the face of the income statement (or statement of income and comprehensive income and the entity is using the one statement approach) with equal prominence

NOTE: if the entity report is a discontinued operation or extra ordinary item, the entity presents the basic and diluted per-share amounts for those items either on the face of the income statement or in the notes to the financial statements

48
Q

Simple Capital structure (report basic EPS only) formula:

A

Income available to common shareholders (NI - preferred dividends)

———————

Weighted average number of common shares outstanding

WACSO

Shares outstanding at the beg
+ shares sold during the period (time average)
- shares reacquired during the period
+ stock dividends and stock splits (retrospectively)
- reverse stock splits
= WACSO

49
Q

Complex capital structure (report basic and diluted EPS) formula:

A

Potentially dilutive securities include:

  • convertible securities
  • warrants and other options
  • contract that maybe settled in cash or stock and
  • contingent shares

Formula:

Income available to commons shareholders + interest on dilutive securities
——————-————————————–
WACSO , assuming all convert to common stocks

50
Q

The dilutive effect of options and warrants in their equivalent is applied using the treasury stock method:

A

The treasury stock met that assumes that the proceeds from the exercise of stock options, Lawrence, and their equivalent will be used by the company to repurchase treasury shares at the prevailing market price, resulting in an incremental increase in shares outstanding, but not the full amount of shares that are issued on exercise of the Comstock equivalents

Any canceled or issued options or once during the period shall be included in the denominator of diluted EPS for the period They were outstanding

51
Q

Diluted versus anti-dilutive:

A

Dilutive- when the average market price of the underlying common stock exceeds the exercise price of the options awards but it is unlikely that they would be exercise if the exercise price or higher in than market price

“In the money” avg price > strike/exercise price

52
Q

Treasury stock method for complex EPS formula:

A

Numbers of shares issued - (# of shares x exercise price / average market price)

53
Q

Dilution from convertible securities (bonds or preferred stock) EPS formula:

A

“If converted “method assumes that the securities were converted to common stock at the beginning of the period.

  1. Add to the numerator the interest expense, net of taxes, due to the assume conversion of bonds to common stock
    (interest expense x (1-tax rate))
  2. Add to denominator the number of common shares associate it with the assumed conversion
54
Q

Convertible preferred stock EPS adjustments:

A
  1. Adjust the numerator (as preferred stock dividends do not affect the net income)
  2. Add to the denominator the number of shares associated with the assume conversion
  3. anti-dilution rules apply to convertible preferred stock
55
Q

Examples of contingent shares for purposes of computing EPS:

A

Shares issuable upon the passage of a specific period of time,

shares issuable upon achieving a specific net income target,

shares issuable upon the issuance of a patent

56
Q

Shares issuable upon the exercise of a stock option are not consider contingent shares because;

A

The option holder is required to pay the strike price to exercise the options

57
Q

A statement of cash flow’s is a required part of a full set of financial statements for a business enterprise. The purpose of the statement of cash flow’s is to:

A

Is to provide information about the sources of cash and cash equivalents and the uses of cash and cash equivalents including

  1. “operating cash flows” -cash receipts and disbursements from: 1) transactions reported on the income statement 2) current assets and current liabilities (excluding current notes payable and the current portion of LT debt, which are reported in financing cash flows
  2. “Investing cash flows” - cash receipts and disbursements from: 1) noncurrent assets
  3. “Financing cash flows” - cash and disbursements from: 1) debt (including noncurrent liabilities) 2) equity
58
Q

Cash and cash equivalents are:

A

Cash is the define as actual cash

Cash equivalent are defined as short-term, liquid investments that are:

  1. Quickly convertible into specific amounts of cash and
  2. So near maturity that the rest of changes in the value because of interest rate changes is insignificant
59
Q

Under US GAAP, bank overdraft are excluded from cash and are classified as financing cash flows.

Under IFRS, cash may include bank overdraft repayable on demand if they are an integral part of an entity’s cash management

T/F?

A

True

60
Q

Direct method- of statement of cash flow’s

A

Under the direct method, operating activities section of the statement of cash flow’s shows the major classes of operating cash receipts and disbursements. 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. A reconciliation of net income to net cash flow’s from operating activities is required to be provided in a separate schedule under US GAAP. This reconciliation is not required under IFR S

61
Q

Indirect method: for statement of cash flows

A

Companies that choose not to use the direct method are required to report the same amount of net cash flows from operating activities indirectly, by Adjusting net income to reconcile it to net cash flows from operating activities as follows:

Net income
+ noncash expenses/losses
- noncash income/gains
+ increases(decreases) in operating liab/(asset)
- increases (decrease) in operating asset/(liab)

62
Q

Under US GAAP, dividends received is reported in the operating section of the statement of cash flow

And dividends payable or paid is included in the financing part of the statement of cash flow

T/F?

A

True

63
Q

Cash paid to suppliers calculations for statement of cash flows

Direct method

A 
COGS
\+ increase in inventory
- decrease in inventory 
\+ decrease in accounts payable
- increase in accounting payable
= cash paid to suppliers
64
Q

Cash paid to
Employees calculation for statement of cash flows:

Direct method

A

Salaries and wages expense
- increase in wages payable
+ decrease in wages payable
= cash paid to employees

65
Q

Cash paid for other expenses calculation for statement of cash flows

Direct method

A 
Other operating expenses
- decrease in prepaid expenses
\+ increase in prepaid expenses
\+ decrease in accrued liabilities 
- increase in accrued liabilities
= cash paid for other expense
66
Q

Indirect method - for statement of cash flows:

Operating activities

A 
Net income per I/S
\+ depr. & amortization (discount)
\+ losses
- gains & amortized (premium)
- equity earnings affiliate 
- assets going up
\+ assets going down
\+ liabilities going up
- liabilities going down
67
Q

Proceeds on sale of non inventory goes in which section of the statement of cf?

A

Investing activity section

68
Q

Gain and loss is only relevant for which method of statement of cash flow?

A

Indirect method

69
Q

Cash flow Classification differences between US GAAP and IFRS:

A
  1. Interest received
    US GAAP = CFO
    IFRS = CFO or CFI
  2. Interest paid
    US GAAP = CFO
    IFRS = CFO or CFF
  3. Dividends received
    US GAAP = CFO
    IFRS = CFO or CFI
  4. Dividends paid
    US GAAP = CFF
    IFRS = CFO or CFF
  5. Taxes paid
    US GAAP = CFO
    IFRS = CFO, CFI, CFF
70
Q

Notes payable fall under ______ activities in the statement of cash flows?

A

Financing activities

71
Q

Collection of a note receivable from a related party is a/an ________ activity for statement of cash flows?

A

Investing

72
Q

Payments of interest on bonds payable is reported as an _______ cash outflow?

A

Operating

Although it relates to financing

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