FAR CPA Lessons 20-33 Flashcards
1
Q
Describe the form and content of the Income Statement
A
It presents accrual-based performance over a period of time.
- Reports all revenues, expenses, gains, and loses that were incurred during the period
- Certain items are excluded from the invoice statement and reported in comprehensive income
2
Q
Describe the form and content of the Balance Sheet
A
Reports economic resources and obligations as of ONE specific date. It shows what i own and what i owe TODAY
- Assets are presented in order of liquidity
- Liabilities are presented in order of maturity
3
Q
Describe the form and content of the Statement of Cash Flows
A
Reports changes in cash over a period of time
- 3 sections:
1. Operating cash flows
2. Investing cash flows
3. Financing cash flows
4
Q
Describe comprehensive income
A
Reports NONOWNER changes to equity over a period of time.
- Unrealized gains/loses on investments in AFS (Available For Sales) securities
- Certain pension adjustments
- Foreign currency translation adjustments
- Certain hedge accounting adjustments
5
Q
Explain Operating cash flows
A
cash flows related to income statement transactions
6
Q
Explain Investing cash flows
A
cash flows related to long-term assets and investments
7
Q
Explain Financing cash flows
A
cash flows related to liabilities and owner’s equity
8
Q
Describe the statement of shareholders’ equity
A
Reports the changes related to owners’ equity over a period of time
-Presented in order of permanence -
-Contributed capital (Common stock) shown first
because it will not be returned to shareholders
9
Q
Explain the importance of Notes and supplementary schedules for financial statements
A
- Notes supplement understanding of the financial statements and present information not captured on the statements
- Auditor opinions present conclusions on conformity with GAAP
10
Q
Describe the account format for a balance sheet presentation
A
the assets are shown on the left side of the page, and the liabilities and owners’ equity are shown on the right side. This format emphasizes the balance sheet equation: A = L + OE
11
Q
Describe the report format for a balance sheet presentation
A
the most popular form, the three categories of accounts are listed from top to bottom, as in a report, with assets always shown first
12
Q
Define Current Assets
A
Assets that are in the form of cash, or will be converted into cash, or consumed within one year or the operating cycle of the business, whichever is longer.
13
Q
Define Current Liabilities
A
Liabilities that are due in the upcoming year or in the operating cycle of the business, whichever is longer, and that will be met through the transfer of a current asset or the creation of another current liability.
14
Q
What is the measurement type for PP&E?
A
Historical Cost & Depreciated/Amortized Historical Cost
15
Q
What is the measurement type for Receivables?
A
Net Realizable Value
16
Q
What is the measurement type for Inventory?
A
Lower of cost or market
17
Q
What is the measurement type for Investments in Marketable Securities?
A
Market Value
18
Q
What is the measurement type for Liabilities?
A
Present Value
19
Q
What is the measurement type for Owners’ Equity?
A
Historical Value of Cash Inflows and Residual Valuation
20
Q
Define Revenue
A
Revenues represent increases in net assets or settlements of liabilities by providing goods and services. Revenues are related to the company’s primary business operations.
21
Q
Identify the difference between economic income and accounting income
A
Accounting Income: Revenues less expenses plus gains less losses.
Economic Income: The change in the net worth of a business enterprise during an accounting period. The net worth of a business enterprise is described as the fair value (FV) of net assets
22
Q
Define Gains
A
Gains represent increases in equity or net assets from peripheral or incidental transactions.
23
Q
Define Losses
A
Losses represent decreases in equity or net assets from peripheral or incidental transactions. Losses do not provide value or benefit to the firm.
24
Q
Explain Multi Step Income Statement
A
Uses subtotals to make easier to read
25
Explain Multi-Step Income Statement
Uses subtotals to make easier to read and understand
26
Explain Single-Step Income Statement
Lists in order of revenue, then expenses then net income
27
Interest Income to Revenue Ratio
Interest Income divided by Revenue
28
Change in Revenue from year 1 to year 2 ratio
(Year 2 - year 1) divided by year 1
29
Gross Profit Margin
Gross Profit divided by Revenue
30
Comprehensive Income Equals
Net Income + Other Comprehensive Income
31
Equation to determine the Fair Value of net assets at Dec 31st
Fair value of net assets at Jan 1. + Net income for year + Owners Investments - Dividend & Stock Repurchases
32
Identify the measurement bases used to measure the items on the Balance Sheet.
Historical Cost - The price paid for the item
Net Book Value - Historical cost less depreciation
Fair Value
Net Realizable Value - The net value the entity thinks it will receive
Present Value - Projection of cash flows discounted back to today (Bonds)
33
Distinguish between a current and noncurrent asset or liability.
Asset - Current - Those expected to be realized in cash or consumed within one operating cycle or year
Liability - Current - Obligations expected to be extinguished with current assets or another liability within one operating cycle or year
34
Are contra accounts added or subtracted?
Subtracted
35
Are adjunct accounts added or subtracted?
Added
36
Define Measurement Base
The attribute of an account being measured and reported
37
What is the Current Ratio?
Current Assets/Current Liabilities
This ratio is primarily used to measure liquidity. Many analysis use a minimum if 2
38
What is the Quick or Acid-Test ratio?
(Cash + Short-term investments + AR)/Current Liabilities
This ratio provides a more rigorous test of liquidity.
39
Examples of Noncurrent Assets
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Long-term investments
property
plant
equipment
intangibles
“other“ assets (including long-term prepaids)
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40
Examples of Current Assets
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Cash & cash equivalents
short-term investments
accounts receivable
other receivables
inventories
prepaids
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41
Examples of Current Liabilities
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Accounts payable
accrued liabilities
unearned revenue
income tax payable
notes payable
current portion of long-term debt
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42
Examples of Noncurrent Liabilities
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Notes payable
bonds payable
lease liabilities
pension liabilities
postretirement healthcare liabilities
deferred taxes.
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43
Examples of Owner's Equity
Contributed Capital
| Retained Earnings
44
Define Debt Disclosures
They indicate a quantifiable financial risk faced by the firm in the future.
45
Define Account Form
the term applied to the balance sheet format that shows assets on the left and liabilities and equity on the right.
46
Define “comprehensive income.”
Net Income plus other comprehensive income
47
List the components of other comprehensive income.
1. Unrealized gains and losses on available-for-sale debt securities
2. Certain gains and losses from pension costs
3. Foreign currency translation adjustments
4. Unrealized gains and loses on certain derivative transactions
48
Illustrate the reporting alternatives for comprehensive income.
One-Statement approach - In combination with in the income statement
Two-Statement approach - A separate statement of comprehensive income
49
Define “accumulated other comprehensive income.”
Shown on the statement of shareholders' equity - shown as separate line items - beginning balance, net change, ending balance
It is the amount carried over from the previous period and then either increased or decreased during the current period. This total is the running total of other comprehensive income items through the Balance Sheet date
50
Describe the disclosure requirements for comprehensive income
Details on the components of current year changes
51
What are stranded tax effects?
Typically, when there is a change in tax laws or rates, an entity must remeasure deferred tax assets and liabilities and present the changes in net income. If the item that originated the deferred tax difference was in AOCI at the old rate, that amount will remain in AOCI even though the related deferred tax asset or liability will be adjusted through net income.
52
Identify the components included in the Statement of Owners' Equity.
- Stock (Common & preferred) (# and $)
- Additional paid-in capital
- Retained Earnings
- Treasury Stock
- Accumulated other comprehensive income
53
What is the purpose of the Statement of Owners' Equity?
Provides beginning balances, changes during the year and ending balances for all the components of owner's equity
54
Describe the purpose of a Statement of Cash Flows.
Provides information so users can assess past ability to generate and control cash inflows and outflows and assess probably future ability to generate cash inflows sufficient to meet future obligations - Assess the likelihood of future borrowing
55
Define and identify cash equivalents and restricted cash.
Cash Equivalents:
- Short-term, highly liquid investments
- Readily convertible to known amounts of cash
- Bear no interest risk (Original maturing is less than 90 days)
Restricted Cash:
-Cash that is help for special purposes and not freely available for the entities use. It might be designated for special projects, compensating balance account or as collateral
56
List the categories included in a Statement of Cash Flows.
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Operating Activities
Investing Activities
Financing Activities
Effects of Foreign currency translation
Reconciliation of net cash inflows/outflows
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57
Define the direct method for reporting operating activities
Directly shows the amount of cash inflows and outflows from operating. It shows cash received from sales and cash paid in operations
58
Define the indirect method for reporting operating activities
A reconciliation of the accrual-based net income to derive cash flows from operations
59
Distinguish what items are included in cash flows from operations using the direct method.
**Things that impact the income statement**
Cash Inflows from:
- customers
- interest income or dividend income
- Sale of debt securities classified as trading
Cash Outflows to:
- Suppliers (goods and services)
- Employees (Payroll)
- Government (Taxes)
- Interest or other operational expenses
- Purchases of debt securities classified as trading
60
Distinguish what items are included in cash flows from investing activities.
Cash Inflows & Outflows from:
- Sale of Property Plant or Equipment
- Sale of debt or equity securities of other entities
- Collection of loan principal
61
Distinguish what items are included in cash flows from financing activities.
Cash Inflows from:
- Sale of equity securities
- Issuance of debt (Bonds or notes)
Cash Outflows to:
- Shareholders as dividends
- Redeem long-term debt
- Re-aquire capital stock
62
Describe the reason for footnote disclosures.
To achieve the objectives of the full disclosure principle
63
List the disclosures required in the footnotes.
- Summary of significant accounting policies
- Related-Party Transactions
- Liability disclosures
- Capital structure
- Errors & Irregularities
- Illegal acts
64
Explain the Summary of significant accounting policies disclosure
the principles and methods chosen by management where GAAP allows a choice. Such disclosure is required in annual reporting, not required in interim statements if the policies have not changed.
- The chosen depreciation method
- The chosen method of valuing inventory
- The securities classified as cash and cash equivalents
- The basis for consolidation:
- Amortization policies
- Revenue recognition policies
65
Explain the Related-Party Transaction disclosure
Companies must disclose the following information:
- The nature of the relationship between the related entities
- The nature of the relationship between the related entities
- The dollar amounts of the related-party transactions
- any receivables or payables from or to related parties
66
Explain Liability disclosures
Companies are required to disclose the following information about liabilities:
- Combined aggregate amount of maturities on borrowings for each of the five years following the balance sheet
- Sinking fund requirements
- The aggregate amount of payments for unconditional obligations to purchase fixed or minimum amounts of goods or services
- The fair value of each financial debt instrument in the financial statements or in the notes
- The nature of the firm's liabilities, interest rates, maturity dates, conversion options, assets pledged as collateral, and restrictions
67
Explain Capital structure disclosures
Companies are required to provide the following information related to capital structure:
- Rights and privileges of outstanding securities
- Liquidation preference of preferred stock
- Aggregate or per-share amounts at which preferred stock can be called or is subject to redemption through sinking fund operations
- Aggregate or per-share amounts of arrearages for cumulative preferred stock
- Redeemable preferred stock—For each of the five years following the balance sheet date
68
Explain disclosures for Errors & Irregularities
Errors are unintentional but Irregularities are intentional
-If prior-year income is affected, a prior-period adjustment is recorded that corrects the beginning balance of retained earnings and any other accounts affected in the year of discovery.
69
Define Nominal Dollars
Measurements in the price level in effect at a transaction date. These measurements are not adjusted for inflation.
70
Define Constant Dollars
Measurements in the general price level as of a specific date. Constant dollar measurements reflect an adjustment for inflation and allow comparisons using dollars with the same purchasing power.
71
Define Purchasing Power
The purchasing power of an asset is the amount of goods and services that can be obtained by transferring the asset to another party.
72
Define Monetary items
The specific price of monetary items cannot change
- Cash
- most receivables
- accounts payable
- all liabilities payable in fixed dollar amounts
- certain investments in debt securities.
73
Define Non-Monetary items
The specific price of nonmonetary items can change.
- Inventory
- plant assets
- investments in equity securities
- unearned rent
- other liabilities payable in goods and services
74
Define Current Cost Accounting
A method of valuing and reporting assets, liabilities, revenues, and expenses at their current cost at the balance sheet date or at the date of their use or sale.
75
Explain the scope of the required disclosures and the kinds of risks and uncertainties that are required to be disclosed.
The disclosures are primarily concerned with risks and uncertainties that could materially affect financial statement amounts within one year of the date the financial statements are issued.
76
Identify the five areas of required disclosure.
1. Nature of the entity's operations
2. Use of estimates in financial statements
3. Certain significant estimates
4. Current vulnerability due to significant concentrations in certain aspects of operations
5. The entity's ability to exist as a going concern
77
Define and describe the four concentrations within the significant concentration areas of disclosure.
1. Concentrations in the volume of business with a particular customer, supplier, lender, grantor, or contributor.
2. Concentrations in revenue from specific products, services, or fund-raising sources.
3. Concentrations in specific sources (suppliers) of services, materials, labor, licenses or other rights used in operations.
4. Concentrations in the market or geographic area of operations.
78
Describe the nature of the entity's operations disclosure
Knowledge of the firm's (1) products and services, (2) geographical locations and (3) principal markets will assist users in assessing risks concerning the firm's operations.
79
Describe the use of estimates in financial statement disclosure
The firm must communicate that:
(1) use of estimates is inescapable in preparing financial statements that conform with GAAP
(2) the use of estimates results in approximate amounts, not certainty
(3) estimates involve assumptions about future events.
80
Describe the Certain significant estimates disclosure
Disclosure about an estimate is required when information available before the financial statements are issued or are available to be issued indicates that the following two criteria are met:
1. It is at least reasonably possible that an estimate will change in the near term;
2. The effect of the change would be material.
- Materiality is based on the effect of using the new estimate on the financial statements.
81
Describe the Current vulnerability due to significant concentrations in certain aspects of operations disclosure
Disclosure of a concentration is required if all the following criteria are met. These concentrations are called disclosable concentrations.
1. The concentration exists at the balance sheet date;
2. The entity is vulnerable to the risk of a near-term severe impact because of a concentration and
3. It is at least reasonably possible that events capable of causing a severe impact will occur in the near term. (Note: Reasonably possible is less than probable.)
82
Describe the entity's ability to exist as a going concern disclosure
Disclosures are required only when conditions give rise to substantial doubt about the entity's going concern. No disclosures are required if there is no going concern uncertainties. If the substantial doubt is alleviated because management developed a plan to mitigate the effects of the uncertainties, the disclosures are still needed and the disclosures would include a description of management's plans to alleviate the substantial doubt.
83
Define a subsequent event.
Events or transactions that have a material effect on the financial statements. Subsequent events occur after the date of the financial statements but before the statements are issued or are available to be issued.
84
Distinguish between subsequent events that require recognition or disclosure on the financial statements.
Subsequent events that existed at the balance sheet date must be recognized in the financial statements. Subsequent events that did not exist at the balance sheet date but arose after the date only need disclosed in footnotes.
85
Distinguish between subsequent events that require recognition or disclosure on the financial statements.
Subsequent events where conditions existed at the Balance Sheet Date—The financial statements should reflect all information regarding these events up to the balance sheet date.Conditions Did Not Exist at the Balance Sheet Date—This category of subsequent event requires only footnote disclosure of events that have material effects on the financial statements
86
Provide the key disclosure requirements for subsequent events.
The footnote disclosures include a description of the nature of the event and an estimate of the financial effect, or a statement that an estimate cannot be made. Recognition is inappropriate because the condition existed after the balance sheet date
87
Identify the key differences between IFRS and U.S. GAAP for subsequent events.
1. Under U.S. GAAP, the cut-off date for subsequent events is when the financial statements are issued or available to be issued. Under IFRS, the cut-off date for subsequent events is the date the financial statements are considered authorized for issuance.
2. IFRS does not require adjustment to the balance sheet for share splits or reverse splits occurring after the reporting date but before the financial statements are issued.
3. IFRS does not consider refinancing, amendments or waivers when determining the classification of debt as current or noncurrent. U.S. GAAP permits the entity to consider these items when determining the current or noncurrent classification of debt.
88
How do you calculate the gain or loss on the disposal or involuntary conversion of a plant asset.
First depreciated up to the date of the disposal
- When the cash received from the sale exceeds the assets net book value (asset cost – accumulated depreciation), then a gain is recognized.
- When the cash received is less than the assets net book value, then a loss is recognized.
89
What is the journal entry to record the disposal or involuntary conversion of a plant asset.
Accumulated depreciation $22,000
Plant Asset $20,000
Gain on sale of plant asset $ 2,000
90
What should be disclosed for discontinued operations?
- Facts and circumstances leading to the discontinued operation
- Expected manner and timing of the discontinuation
- Major line items of income (revenue, cost of sales, depreciation etc.(
- Major classes of assets and liabilities classified as held-for-sale
91
How to calculate the gain or loss on a discontinued operation.
The gain or loss is the net proceeds from sale of the component less book value of the component's net assets. Net proceeds are equal to the gross amount received on sale less the cost to dispose of the assets.
92
Define Financial Statement Ratio Analysis
The development of quantitative relationships between various elements of a firm's financial statements.
-enables comparisons across firms, especially within the same industry
93
Debt to Equity Ratio
Debt to Equity Ratio = Total Debt (Liabilities) / Owner's Equity
94
major purposes or types of measures being analyzed by using ratios
1. Liquidity/Solvency
2. Operational Activity
3. Profitability
4. Equity/Investment Leverage
95
Return on Assets (ROA)
measures operating performance independent of financing
96
Return on Equity (ROE)
measures operating performance including the amount and cost of financing
97
Define Liquidity Ratios (also known as Solvency Ratios):
Measure the ability of the firm to pay its obligations as they become due.
98
Define Working Capital
measures the extent to which current assets exceed current liabilities and, thus, are uncommitted in the short term.
Working Capital = Current Assets − Current Liability
99
Working Capital Ratio/Current Ratio
Working Capital Ratio = Current Assets / Current Liabilities
100
Working Capital Ratio/Current Ratio
Working Capital Ratio = Current Assets / Current Liabilities
Used to measure of the firm's ability to pay its current liabilities
An increase in current assets (alone) increases the WCR.
A decrease in current assets (alone) decreases the WCR.
An increase in current liabilities (alone) decreases the WCR.
A decrease in current liabilities (alone) increases the WCR.
101
Working Capital Ratio/Current Ratio
Working Capital Ratio = Current Assets / Current Liabilities
Used to measure of the firm's ability to pay its current liabilities
An increase in current assets (alone) increases the WCR.
A decrease in current assets (alone) decreases the WCR.
An increase in current liabilities (alone) decreases the WCR.
A decrease in current liabilities (alone) increases the WCR.
102
If the WCR exceeds 1.00: Equal increases in current assets and liabilities
decrease the WCR.
103
If the WCR exceeds 1.00: Equal decreases in current assets and liabilities
increase the WCR.
104
If the WCR is less than 1.00 equal increases in current assets and liabilities
increase the WCR.
105
If the WCR is less than 1.00 Equal decreases in current assets and liabilities
decreases the WCR.
106
Define acid-test ratio (quick Ratio)
measures the quantitative relationship between highly liquid assets and current liabilities in terms of the “number of times“ that cash and assets that can be converted quickly to cash cover current liabilities:
Acid-Test Ratio = (Cash + (Net) Receivables + Marketable Securities) / Current Liabilities
107
Securities defensive-interval ratio
measures the quantitative relationship between highly liquid assets and the average daily use of cash in terms of the number of days that cash and assets can be quickly converted to support operating costs
Securities Defensive-Interval Ratio = (Cash + (Net) Receivables + Marketable Securities) / Average Daily Cash Expenditures
108
Times interest earned ratio
measures the ability of current earnings to cover interest payments for a period.
Times Interest Earned Ratios = (Net Income + Interest Expense + Income Tax) / Interest Expense
109
Times preferred dividend earned ratio
measures the ability of current earnings to cover preferred dividends for a period.
Times Preferred Dividend Earned Ratio = Net Income / Annual Preferred Dividend Obligation
110
Accounts receivable turnover
measures the number of times that accounts receivable turnover (are incurred and collected) during a period. Indicates the quality of credit policies (and the resulting receivables) and the efficiency of collection procedures.
Accounts Receivable Turnover = (Net) Credit Sales / Average (Net) Accounts Receivable (e.g., Beginning + Ending/2)
111
Number of days' sales in average receivables
measures the average number of days required to collect receivables; it is a measure of the average age or receivables.
Number of Days' Sales in Average Receivables = (300 or 360 or 365 (or other measure of business days in a year)) / Accounts Receivable Turnover (computed above)
112
Inventory turnover
measures the number of times that inventory turnover (is acquired and sold or used) during a period. Indicates over or under stocking of inventory or obsolete inventory.
Inventory Turnover = Cost of Goods Sold / Average Inventory (e.g., Beginning + Ending/2)
113
Number of days' supply in inventory
measures the number of days inventory is held before it is sold or used. Indicates the efficiency of general inventory management.
Number of Days' Supply in Inventory = (300 or 360 or 365 (or other measure of business days in a year)) / Inventory Turnover (computed above)
114
Operating number of cycle
measures the average length of time to invest cash in inventory, convert the inventory to receivables, and collect the receivables; it measures the time to go from cash back to cash.
Operating Number of Cycle = Days in Operating = Number of Days' Sale in A/R + Length Cycle Number of Days' Supply in Inventory
115
Define Financial Statement Ratio Analysis
The development of quantitative relationships between various elements of a firm's financial statements.
116
Debt to Equity ratio
Debt to Equity ratio = Total Debt (Liabilities) / Owner's Equity
117
What are Profitability Ratios
These measure aspects of a firm's operating (income/loss) results on a relative basis.
118
Profit margin
Profit margin (on sales) measures the net profitability on sales (revenue).
Profit Margin (on Sales) = Net Income / (Net) Sales
119
Return on total assets
Return on total assets measures the rate of return on total assets and indicates the efficiency with which invested resources (assets) are used.
Return on Total Assets = (Net Income + (add back) Interest Expense (net of tax effect)) / Average Total Assets
120
Return on common stockholders' equity
Return on common stockholders' equity measures the rate of return (earnings) on common stockholders' investment.
Return on Common Stockholders' Equity = (Net Income—Preferred Dividend (obligation for the period only)) / Average Common Stockholders' Equity (e.g., (Beginning + Ending)/2)
121
Return on owners' (all stockholders') equity
Return on owners' (all stockholders') equity measures the rate of return (earnings) on all stockholders' investment.
Return on Owners' (all Stockholders') Equity = Net Income / Average Stockholders' Equity (e.g., (Beginning + Ending)/2)
122
Earnings per share
Earnings per share (EPS—basic formula) measures the income earned per (average) share of common stock. Indicates ability to pay dividends to common shareholders.
Earnings Per Share (EPS—Basic Formula) = (Net Income—Preferred Dividends (obligation for the period only)) / Weighted Average Number of Shares Outstanding
123
The price-earnings (P/E) ratio
The price-earnings (P/E) ratio measures the price of a share of common stock relative to its latest earnings per share. Indicates a measure of how the market values the stock, especially when compared with other stocks.
Price-Earnings Ratio (P/E Ratio) = Market Price for a Common Share / Earnings per (Common) Share (EPS)
124
Common Stock Dividends Pay Out Ratio
Total Basis = Cash Dividends to Common Shareholders / Net Income to Common Shareholder
125
Per share basis
Per share basis measures the extent (percentage) of earnings distributed to common shareholders.
Per Share Basis = Cash Dividends per Common Share / Earnings per Common Share
126
Common stock yield
Common stock yield measures the rate of return (yield) per share of common stock.
Common Stock Yield = Dividend per Common Share / Market Price per Common Share
127
What are Equity/Investment Leverage Ratios
These provide measures of relative sources of equity and equity value.
128
The debt to equity ratio
The debt to equity ratio measures relative amounts of assets provided by creditors and shareholders.
Debt to Equity Ratio = Total Liabilities / Total Shareholders' Equity
129
The owners' equity ratio
The owners' equity ratio measures the proportion of assets provided by shareholders.
Owners' Equity Ratio = Shareholders' Equity / Total Assets
130
The debt ratio
The debt ratio measures the proportion of assets provided by creditors. Indicates the extent of leverage in funding the entity.
Debt Ratio = Total Liabilities / Total Assets
131
Book value per common stock
Book value per common stock measures the per share amount of common shareholders' claim to assets. (See the section on this ratio in the "Book Value per Share" lesson for more details.)
Book Value per Common Stock = Common Shareholders' Equity / Number of Outstanding Common Shares
132
Book value per preferred share
Book value per preferred share measures the per share amount of preferred shareholders' claim to assets.
Book Value per Preferred Share = Preferred Shareholders' Equity (including dividends in arrears) / Number of Outstanding Preferred Stocks
133
Dividends per share payout ratio
Dividends per share payout ratio = Dividends per share/ Earnings per share
134
Calculate Total Asset Turnover
Sales/Average Total Assets
