FAR Chapter# 7 Flashcards
FAR 7-1 - STOCKHOLDERS’ EQUITY | Define common stock and list the basic properties.
Common stock: Residual owership interest
Basic rights include:
- Voting rights
- Dividend rights
- Rights to share in distributions of assets if corporation is liquidated, after satisfaction of creditor and preferred stockholders’ claims
FAR 7-2 - STOCKHOLDERS’ EQUITY | List some common properties of preferred stock.
Convertible, callable
Redeemable
Dividends can be cumulative and or participating
FAR 7-3 - STOCKHOLDERS’ EQUITY | Describe the adjustments of a quasi-reorganization.
Assets are restated at fair value (no increase in asset value is permitted, write-downs are charged direclty to retained earnings).
Liabiliities are restated at present value
Retained earnings brought to zero balance by closing to additional paid-in capital or other capital accounts.
Remember to continue to date retained earnings for 3-10 years, as this is a departure from cost principle.
No negative balance in any capital account.
FAR 7-4 - STOCKHOLDERS’ EQUITY | What are the two alternate methods of accounting for treasury stock?
Cost method: Unallocated reduction in stockholders’ equity
Par value method: Deducted from capital stock
Remember, no gains/losses are recognized on the income statement; income and retained earnings may never increase by the transaction; Additional Paid-in Capital - Treasury Stock account used to record “gains” and absorb “losses”.
Treasury stock is not an asset; cash and property dividends are not paid on treasury stock; stock dividends may be paid on treasury stock.
FAR 7-5 - STOCKHOLDERS’ EQUITY | Summarize the cost method of accounting for treasury stock.
Recorded, carried and reissued at reaquisition cost
Any “ gain” is credited to Paid-in Capital - Treasury Stock
Any “loss” is charged against previous “gains,” then retained earnings
Reported as a deduction from total stockholders’s equity
FAR 7-6 - STOCKHOLDERS’ EQUITY | Summarize the par method for accounting for treasury stock.
Recorded at par value with excess to Paid-in Capital - Treasury Stock or deducted from retained earnings after charged to any Paid-in Capital - Treasury Stock
Reported as a deduction from capital stock
FAR 7-7 - STOCKHOLDERS’ EQUITY | List the significant dates with respect to cash dividends.
Date of Declaration: Becomes a liability and reduces retained earnings
Date of Record: No journal entry, memorandum entry only
Date of Payment: Actually paid
FAR 7-8 - STOCKHOLDERS’ EQUITY | List five types of dividends.
Cash
Liquidiating: Return of investment
Property: FMV of assets fiven up with gain/loss recognized
Scrip: Promise to pay a dividend in future
Stock: Results in capitalizing part of retained earnings, increasing legal capital. Remember, if 20-25%, record at par value.
FAR 7-9 - STOCKHOLDERS’ EQUITY | What is the threshold for treating stock dividends as large vs. small stock dividends?
Small stock dividend: < 20-25%
Large stock dividend: > 20-25%
The treatment of stock dividends depends on the percentage of the dividend in proportion to the total shares outstanding prior to the declaration of the dividend.
FAR 7-10 - STOCKHOLDERS’ EQUITY | What is the accounting treatment of small stock dividends?
Fair value of additional shares at the date of declaration is transferred from retained earnings to capital stock and additional paid-in capital.
FAR 7-11 - STOCKHOLDERS’ EQUITY | What is the accounting treatment of large stock dividends?
Par value of additional shares issued is transferred from retained earings to capital stock.
FAR 7-12 - STOCKHOLDERS’ EQUITY | Identify the disclosure requirements about capital structure.
Compensation cost is based on the fair value of the equity instrument awarded, determined by an option pricing model. This cost is expensed and allocated over the service period.
FAR 7-13 - STOCKHOLDERS’ EQUITY | Identify two types of stock options.
Rights and privileges of various securities outstanding
Number of shares issued upon conversion, exercise, or satisfaction of required conditions during at least the most recent annual fiscal period and any subsequent interim period presented
Liquidation preference of perferred stock
Redemption requirements related to redeemable stock
FAR 7-14 - STOCKHOLDERS’ EQUITY | Describe the computation and allocation of compensation expense under compensetory stock option plans.
Compensation cost is based on the fair value of the equity instrument awarded, determined by an option pricing model. This cost is expensed and allocated over the service period.
Compensatory: Compensation cost is determined on the grant date, using an option pricing model.
Note: Under IFRS, stock options are generally considered to be compensatory.
FAR 7-15 - STOCKHOLDERS’ EQUITY | Describe the accounting for unexercised, expiring stock options.
Any balance in “additional paid-in-capital - stock options” is reclassified to “additional paid-in-capital - expired stock options”. Previously recognized compensation expense is not adjusted.
FAR 7-16 - EARNINGS PER SHARE | What is the basic formula used for calculating EPS?
Income available to common shareholders / weighted average # of common shares outstanding
FAR 7-17 - EARNINGS PER SHARE | Compare basic and diluted EPS.
Basic: Simple capital structure (only common stock outstanding):
Income available to common shareholders / weighted average common shares outstanding
Diluted: Complex capital structure:
Income available to common shareholders assuming conversion of all dilutive securities / Weighted average common shares outstanding after conversion of all dilutive shares
FAR 7-18 - EARNINGS PER SHARE | Name the potentially dilutive securities or instruments.
Stock options and warrants and their equivalents
Convertible securities (bonds or preferred stock)
Contracts that may be settled in stock or cash
Contingent issuable shares
FAR 7-19 - EARNINGS PER SHARE | What is the antidilution rule?
Any conversion, exercise, or contingent issuance that has an antidilutive effect (increase EPS or decreases loss per share) is not included in the calculation unless the shares have actually been converted, exercised, or satisfaction of the contingency met.
Each potential common share is considered separately in sequence from most to least dilutive, with the money options and warrants generally included first.
FAR 7-20 - EARNINGS PER SHARE | List the reporting requirements for EPS.
Face of income statement, with equal prominence for basic and diluted per-share amounts, for both income from continuing operations and net income.
Per-share amounts for discontinued operations and extraordinary items can be reported on the face of the income statement or in the notes to the financial statements.
FAR 7-21 - STATEMENT OF CASH FLOWS | What are the three sections of the statement of cash flow? What cash flows are included in each section?
Operating activities - cash flows from income statement transactions and current assets/ liabilities
Investing activities - cash flows from noncurrent assets
Financing activities - cash flows from debt and equity
FAR 7-22 - STATEMENT OF CASH FLOWS | Defiine cash equivalents.
Cash equivalents: Cash equivalents are highly liquid investments with maturities of three months or less that are readily convertible into cash with insignificant risk of changes in value.
Note: “Maturities of three months or less” is of original instrument or from purchase date of instrument.
FAR 7-23 - STATEMENT OF CASH FLOWS | Name the two methods of presentation of cash flows from operating activities. Which methods is preferred?
Direct and indirect methods
Direct method is preferred
FAR 7-24 - STATEMENT OF CASH FLOWS | If using the direct method of presenting cash flows from operating activities, what additional item needs to be included in the statement of cash flows under U.S. GAAP?
A reconciliation of net income to net cash provided by operations needs to be provided as a supplemental schedule. (not required under IFRS.)
FAR 7-25 - STATEMENT OF CASH FLOWS | Name the common adjustments made to cash flows from operating activities using the indirect method. CLAD
C - current assets and liabilities
L - losses and gains
A - amortization and depreciation
D - deferred items
FAR 7-26 - STATEMENT OF CASH FLOWS | Name the most common classes of cash receipts and disbursements included in cash flows from operating activities using the direct method.
Cash received from customers
Cash paid to suppliers
Interest received and paid
Dividends received
Purchases and sales of trading securities, if appropriate, based on the nature and purpose for which the securities were acquired
Income taxes paid
