FAR F1

Question 1

Freight in vs Freight out

Answer 1

• Freight In: Cost of transporting goods to a business for purchase. It is added to the cost of inventory. it is included in the cost of goods sold as it is added to the cost of inventory.
• Freight Out: Cost of transporting goods from a business to its customers. It is considered a selling expense.it is not included in the cost of goods sold. It is considered a selling expense.

Question 2

The adjustment for the prior year understatement of amortization expense

Answer 2

is a prior period adjustment that will be reflected in beginning retained earnings, not on the income statement (Accounting error).

Question 3

quote the exchange rate using the direct method

Answer 3

Quoting the exchange rate using the direct method involves quoting the domestic price of one unit of another currency. SAR 3.75 is equal to 1 U.S. dollar.

Question 4

the effect of amortization of an actuarial pension loss on CI

Answer 4

the amortization of an actuarial loss will cause other comprehensive income to increase, while also increasing pension expense and causing net income to decrease. So there will be no net impact to comprehensive income.

Question 5

How should gains and losses from cash flow hedges be recognized?

Answer 5

Cash Flow Hedge: Gain/loss on the derivative is recognized in OCI and reclassified into earnings in the periods during which the hedged transactions impact earnings.

Question 6

Each of the following events is required to be reported to the United States Securities and Exchange Commission on Form 8-K

Answer 6

The form reports on major corporate events, including corporate asset acquisitions/disposals, accountant changes, financial statement changes, management changes, changes in securities, etc. Quarterly results of operations will be reported using Form 10-Q.

Question 7

How are stock dividends and splits treated?

Answer 7

Stock dividends and stock splits require restatement of the shares outstanding before the stock dividend or stock split. Thus, they would be treated as if it had occurred at the beginning of the fiscal year.

Question 8

How are Cumulative Preferred Stock when calculating basic EPS treated?

Answer 8

Because the preferred stock dividends are cumulative, when they are declared or paid is not relevant. Only the dividend accumulated during the period must be subtracted to calculate basic earnings per share (don’t include previous periods).

Question 9

When are stock options considered out of the money?

Answer 9

Out of the money stock options are antidilutive because the exercise price (strike price) exceeds the market price of the stock.

Question 10

Basic EPS =

Answer 10

(Net Income - Preferred Dividends) / Weighted average number of common shares

Question 11

What is the maximum number of days after the company’s fiscal year end that the company has to file Form 10-K with the SEC?

Answer 11

60 days for large accelerated filers;
75 days for accelerated filers; and
90 days for all other registrants.

Question 12

What is the maximum number of days after the company’s fiscal year end that the company has to file 10-Q should be filed with the U.S. SEC?

Answer 12

40 days for large accelerated filers and accelerated filers; and
45 days for all other registrants.

Question 13

Dividends in arrears

Answer 13

are dividends owed to cumulative preferred stockholders that must be paid out before any dividends can be paid to common stockholders.

Question 14

“Each of the following transactions will cause a decrease in stockholders’ equity, except:
A. The declaration of a cash dividend.
B. The sale of treasury stock at less than cost.
C. A loss on the sale of a discontinued segment.
D. A loss from a foreign currency translation adjustment.”

Answer 14

Choice “B” is correct. The sale of treasury stock at less than cost will result in a net increase in stockholders’ equity. The original cost of the treasury stock is credited; any additional paid-in-capital- treasury stock is debited; and any excess over the additional paid-in-capital would reduce retained earnings. However, the net impact to stockholders’ equity would still be positive as long as cash is received from the sale of the treasury stock.

Example: Assume that treasury stock initially purchased for $1,000 is sold for cash of $600 and a $200 balance exists in additional paid-in-capital—T/S. The net impact to stockholders’ equity is an increase of $600.

Question 15

At what value are property dividends dedcuted?

Answer 15

at market value (fair value) on the date of declaration

Question 16

On December 1, Nilo Corp. declared a property dividend of marketable securities to be distributed on December 31 to stockholders of record on December 15. On December 1, the marketable securities had a carrying amount of $60,000 and a fair value of $78,000. What is the effect of this property dividend on Nilo’s retained earnings, after all nominal accounts are closed?

Answer 16

Two factors will affect retained earnings as a result of this transaction. Nilo will recognize a gain on disposition of marketable securities as well as a dividend

Question 17

Do stock splits affect treasury stocks?

Answer 17

The stock split applies to all shares of common stock, issued shares, unissued shares, and treasury stock. treasury stock is also affected by the stock split assuming it is held to satisfy stock option commitments.

Question 18

What is a liquidating dividend?

Answer 18

a liquidating dividend is an amount in excess of retained earnings balance.

Question 19

How would a 5% stock dividend affect assets, total stockholders’ equity, and retained earnings?

Answer 19

No effect on assets. No effect on equity. Decrease to retained earnings.

Question 20

what is the difference in recognition between stock dividends and cash dividends?

Answer 20

Receipt of a stock dividend is not revenue. It increases the number of shares held and decreases the cost basis per share. However, income from cash dividends is calculated as “Dividend Income = No. of shares × dividend per share”.

Question 21

How are gains and losses recognized under the cost method for treasury stock transactions?

Answer 21

• Gains (reissued above cost): Credited to APIC—Treasury Stock.
• Losses (reissued below cost):
  First debited to APIC—Treasury Stock.
  If APIC—Treasury Stock is insufficient, the remainder is debited to Retained Earnings.

These gains and losses do not affect the income statement and are recognized within equity accounts.

Question 22

How are gains and losses recognized under the par value method for treasury stock transactions?

Answer 22

Repurchase above issue price:
Treasury Stock is recorded at par value.
APIC—Common Stock is debited for any APIC from the original issuance.
Any loss beyond APIC is debited to Retained Earnings.

Repurchase below issue price:
Treasury Stock is recorded at par value.
APIC—Common Stock is debited for any APIC from the original issuance.
Any gain is credited to APIC—Treasury Stock.

Reissuance of treasury stock:
Treasury Stock is reduced at par value. If reissued above par, any excess is credited to APIC—Common Stock.

Treasury stock transactions do not affect the income statement and are recognized in equity accounts.

*Always focus on Par. everything is related to Par in this method.

Question 23

What is the difference between small and large stock dividends in terms of percentage and how they are issued?

Answer 23

Small Stock Dividend (<20–25% of shares):
Issued at Fair Market Value (FMV) at the date of declaration.
Retained Earnings are reduced by the FMV of the stock dividend, and this amount is transferred to Common Stock and Additional Paid-In Capital.

Large Stock Dividend (>20–25% of shares):
Issued at Par (Stated) Value.
Retained Earnings are reduced by the par value of the stock dividend, and this amount is transferred to Common Stock to meet legal requirements.

Question 24

How are basic and diluted EPS (Earnings Per Share) calculated for different securities?

Answer 24

Basic EPS:
Weighted Average of shares outstanding.

Diluted EPS:
Options and Warrants: if average market value > exercise price, use Treasury stock method (Repurchase common stock at the average price with the proceeds).

Convertible Bonds: Use If-converted method (adjust net income for interest expense not incurred, reduced by taxes).

Convertible Preferred Stock: Use If-converted method (do not reduce net income by preferred dividends).

Contingent Issues: Based on whether conditions have been fully satisfied.

Question 25

How are options and warrants treated in diluted EPS?

Answer 25

If the average market value is greater than the exercise price, use the Treasury Stock Method. The company repurchases common stock at the average market price with the proceeds from exercising the options. The net increase in shares (issued shares minus repurchased shares) is added to the diluted share count.

Question 26

How are convertible bonds treated in diluted EPS?

Answer 26

Use the If-converted method. Assume the bonds are converted into common shares. Add back to net income the interest expense (net of taxes) that would no longer be incurred if the bonds were converted. The additional shares from conversion are added to the diluted share count.

Question 27

How is convertible preferred stock treated in diluted EPS?

Answer 27

Use the If-converted method. Assume the preferred shares are converted into common shares. Do not reduce net income by the preferred dividends (since those dividends wouldn’t be paid if the stock were converted). The additional shares from conversion are added to the diluted share count.

Question 28

How are contingent issues treated in diluted EPS?

Answer 28

Contingent shares are included in diluted EPS only if conditions (such as performance milestones or earnings targets) have been fully satisfied as of the reporting date. If the conditions have been met, the contingent shares are added to the diluted share count.