FAR - MISC Flashcards
A property dividend should be recorded in retained earnings….
at the property’s market value at date of declaration.
NOT at book value and payment date (date of issuance). Because the book value is used to measure gain or loss on payment date (date of issuance)
For the last 10 years, a company has owned cumulative preferred stock.
During Y11, the company paid both Y11 dividend and Y10 dividends in arrears,
How do you report dividends in arrears in Y11?
by Including in Y11 income from continuing operations.
Note: NOT after income from continuing operations because it will be treated as a discontinued operation.
Dec 1 current year, a company declared and issued a 6% stock dividend on its 100,000 shares of outstanding common stock. What number of shares you should use to calculate BEPS for the current year?
First, 6% stock dividends on 100,000 share must be calculated.
100,000 x 0.06 = 6,000 shares issued due to stock dividend. Therefore,
Total = 100,000 + 6,000 = 106,000 shares should be used to determine BEPS.
NO weighted average calculation for a month because stock dividends treated for whole year.
You need to calculate to find out how many additional shares needed to be issued due to stock dividends and stock splits and ADD it to the given outstanding share numbers.
Stock dividends and stock splits are….
not considered income to the recipient (Rule).
Therefore, investors do not record stock dividends at fair market value. They simply reallocate the investment account balance (under either method cost or equity) over more shares so that value per share decreases.
How do you correct an error on the beginning balance of retained earnings in Year 2 for a $132,000 overstated depreciation expense in Year 1 where effective tax rate was 30% for both years:
$132,000 x (1 - 30%) = $92,400 is the correction error for the beginning balance of the R/Es in Y2.
Always deduct the tax amount!
(Overstated depreciation also means an understatement of net income for the year. Therefore, it effects to R/Es).
Rule: Foreign exchange transactions gains and losses are generally included in determining net income…..
for the period in which exchange rates change.
Unrealized gains and losses on debt securities classified……
as available-for-sale and they are recorded in OTHER comprehensive income.
How do you calculate the weighted average number of shares to be used for the EPS calculation if you have stock dividends?
Stock dividends are treated as if they occurred at the beginning of the period. For example,
Shares OS at 1/1 100,000
Stock dividend at 3/3 24,000
Stock issuance at 6/30 5,000
124,000 shares x 6/12= 62,000
129,000 shares x 6/12= 64,500
So, the total weighted average number shares are 126,500
A change in estimate is reported….
prospectively. (Do not go back)
The transaction costs are used to determine the most advantageous market, they are NOT used….
to determine the fair value of an asset.
When you calculate FV of an asset you need to add back the transaction cost to the selling price.
Define market participants?
Market participants are independent (not related parties) buyers are sellers who knowledgeable about an asset or liability. For example, a company purchases real estate zoned for recreational use.
The most appropriate and reliable fair value to use an equity investment traded in an active market is….
the quoted price for an identical investment.
What are Level 1, 2 & 3 inputs to determine the fair value?
- Level 1inputs are quoted prices in active markets for identical assets and liabilities on the measurement dates when no adjustments are required.
- Level 2 inputs are inputs other than quoted market prices that are directly or indirectly observable for the asset or liability. The value of a similar liability or Quoted market prices available from a business broker for a similar asset.
- Level 3 inputs are unobservable inputs for the asset or liability. Projected cash flows which are unobservable input based on entity assumptions.
Formula for from cash basis to accrual basis:
Cash basis revenue
Add: Ending A/R
Less: Beginning A/R
Less: Ending unearned revenue
Add: Beginning unearned revenue
Other comprehensive basis of accounting (OCBOA) financial statement titles should differentiate….
the financial statements from accrual basis financial statements because OCBOA FSs cannot use accrual basis financial statement titles.
Also, financial statements:
*disclosures should be similar to GAAP financial statement disclosures.
*report equity interests and should explain changes to equity accounts during the period.
*should include financial statements equivalent to the accrual basis balance sheet and income statement.
*A statement of cash flows is not required.
Accrual-based revenue will include….
all sales from current year regardless of when they are collected.
When you convert from cash-basis to accrual-basis:
- Add increases in current assets
- Subtract decreases in current assets
- Add decreases in current liabilities
- Subtract increase in current liabilities
I have to ADD an INCREASE in A/R (Asset) , I have to ADD a DECREASE in UNEARNED REVENUE (Liability)
Inventory turnover calculation:
Inventory turnover for Y2 = Year 2 COGS / Average inventory
COGS = Beg. Inventory + Purchases (: Goods available for sale) - Ending Inventory
Average inventory = (Inventory of Y1 + Y2) / 2
Debt-to-equity ratio calculation:
Debt-to-equity ratio = Total Liabilities / Equity
Equity = Capital stock + R/Es
Liabilities = Assets - Equity
Net profit margin calculation:
Net Profit Margin= Net Income / Net Sales
To calculate Net Income:
Sales
Deduct: COGS
Gross Profit (subtotal)
Deduct: Operating expenses
Deduct: Interest expense
Net income before taxes (subtotal)
Deduct: income taxes (%)
Net income after income taxes (Total)
Return on assets calculation:
Return on assets= (Net income / Average total assets) x 100
Average total assets = (Beg. of year total assets + End. of year total assets) / 2
DuPont return on assets calculation:
DuPont return on assets= (Net income / Net sales) x (Net sales / Average total assets)
Return on equity:
Return on Equity = (Net income - Preferred dividends) / Average common equity
If there is no preferred stock (and thus no preferred dividends), only net income will be divided by common stock
Current Ratio:
Current Ratio = Current Assets / Current liabilities
Do not include PPE in assets
Quick Ratio:
Quick Ratio = (Cash + Net A/R + Marketable securities) / Current Liabilities
Net A/R = A/R - Allowance for uncollectible accounts
A/R turnover:
A/R turnover= Net sales (Y2 only) / Average A/R
Net A/R = A/R - Allowance for uncollectible accounts (calculate for each year)
Average A/R = (Net A/R of Y1 + Y2) / 2
Days in inventory :
Financials given for Y1 & Y2 and asking for Y2. Do not confuse with Y1.
Days in inventory= Y2 Ending inventory / (Y2 COGS / 365 days)
Times interest earned:
Times interest earned = Income before interest expense and taxes/ interest expense
OR
Times interest earned = Earnings before interest and taxes / interest expense
Under U.S. GAAP, a material transaction that is “infrequent in occurrence” and/or “unusual in nature” should be presented…
separately as a component of “income from continuing operations” when the transaction results in a gain or loss.
If the additional paid-in capital account is not large enough to absorb a loss when the stock is reissued at a lower price,
then the retained earnings account must absorb the remaining loss.
A firm repurchases 10 percent of its outstanding common stock. What is the effect of this treasury stock transaction?
Repurchasing its common stock outstanding will lower total stockholders’ equity, as the treasury stock is recognized as a contra-equity account and resulting in a higher debt-to-total capital ratio as total debt remains unchanged
Its debt-to-total capital ratio will increase.
U.S. Securities and Exchange Commission (SEC) regulations for the financial statement presentation and disclosure requirements of SEC filings can be found in:
Regulation S-X sets forth the form and content of and requirements for interim and annual financial statements to be filed with the SEC.
If a change in accounting estimate cannot be distinguished from a change in accounting principle,
the change is considered a change in accounting estimate treated as a change in accounting estimate and is accounted for prospectively.
Prior service costs NOT previously recognized as a component of net periodic pension costs included in…
accumulated other comprehensive income or loss.
Under U.S. GAAP, the cumulative effect of an inventory pricing change on prior years earnings is reported on the financial statements for…
LIFO to weighted average. The cumulative effect is computed retrospectively (going back).
not Weighted average to LIFO because it is hard to identify the cumulative effect of change. Therefore, the change is accounted for prospectively (NOT going back).
What is the treasury stock method?
The treasury stock method presumes that option proceeds can be used to reacquire shares on the open market and that any option requirement will be satisfied by the issuance of new shares to be held in the treasury. Treasury shares themselves do not have an impact on the calculation.
Compute the dilutive effect of options using the following formula:
Number of shares - [(number of shares x exercise price) / Average market price] = Additional shares outstanding
Comprehensive Income =
Net income + OCI
Comprehensive income does not include…
changes in equity resulting from investments by owners or distribution to owners.
For example, treasury stock transactions are owner transactions and are not part of comprehensive income.
The services are all similar in nature provided in the same manner means
a single performance obligation
Purchasing a machinery Oct 1, Y1 and payment due on Apr 1, Y2, but Y1 operating income does NOT include a foreign exchange transaction gain or loss, then the transaction could have:
been dominated in U.S. dollars.
Rule: Foreign exchange transactions gains and losses are generally included in determining net income for the period in which exchange rates change.
Nonmonetary exchanges of common stock for productive assets represents
a transaction from owners and excluded from comprehensive income.
How purchase discounts and The recovery of accounts written off effects revenue on the single-step income statement?
Purchase discounts are not included in revenue (but instead reduce cost of goods sold) and The recovery of accounts written off does not hit the revenue account.
The single-step income statement will include in total revenues all sales of goods, services, and rentals.
Unrealized loss on investments in non-current marketable equity securities is…
included in comprehensive income because it is a change in stockholders’ equity not resulting from owner investments and distributions to owners.
An unrealized loss on a trading security will be recorded as a loss on the income statement, which will…
reduce net income and therefore comprehensive income.
Unrealized and realized gains and losses on trading securities go onto…
The income statement
Add: Deferred gain on a cash flow hedge
Add: Gain on Foreign currency translation
Less: Prior service cost not recognized in net periodic pension cost
reported to:
Other comprehensive income
Note: when prior service cost being recognized in net periodic pension cost, it would be added (+) to comprehensive income.
Unrealized gains or losses on available-for-sale debt securities go through….
Other comprehensive income
Increases OCI (CR) & Decreases OCI (DR)
Cash Flow Hedges and Pension adjustments go through..
OCI
How do you journalize a sale with a high historical rate of return:
Product sold for $15,000
High return rate 35%
However, the next day 15% returned.
6/29/Y1:
DR Cash $15,000
CR Sales Revenue $10,075
CR Refund Liability (35%) $5,425
6/30/Y1:
DR Refund Liability (15%) $2,325
CR Cash $2,325
Can you change the company’s inventory method from LIFO to FIFO because you want to improve shareholder return and stimulate the company’s stock price?
No, it is not an acceptable change in accounting because If the company expects COGS to decrease, improving net income, shareholder return, and stock price, then the change in accounting principle is not acceptable.
Identify treatment of accounting changes:
Change in estimate: Prospectively (warranty, litigation, and useful life)
Change in principle: Retrospectively (change from FIFO to LIFO is prospectively because hard to identify!)
A correction of error: Retrospectively
Software costs are capitalized
once technological feasibility is established and amortized using greater % of the straight line amortization OR the % of estimated sales. For example, 10% is expected (or projected) lifetime sales in each year and sales useful life straight line 25%. Use 25%.
JE for uncollectible A/R:
DR Bad debt expense
CR Allowance for doubtful accounts
JE for recognizing unearned revenue:
DR Unearned revenue
CR Revenue
JE for prepayment:
DR Prepaid Expense
CR Rent Expense
Bond are recorded at….
amortized costs not the fair value.
A property and land, whether it is an investment or used for operations…
you report it at historical cost. (GAAP rule)
In order for something to be cash equivalent,
the original maturity has to be less than 90 days and they are recorded at FV.
A bank account with a negative balance is..
a liability.
Note: All the balance totals for different banks must be accounted differently.
Cash in a bond sinking fund is
restricted cash.
Level 1 inputs are..
Quoted prices in active markets for IDENTICAL assets and liabilities on the measurement dates when no adjustments are required. Level 1 input, most reliable of all.
Level 2 inputs are..
*Principally derived from or corroborated by observable market data
*Quoted prices for similar assets or liabilities in active markets
Level 3 inputs are..
Inputs based on the reporting entity’s internal data. Level 3 input is an unobservable inputs, the least reliable of all.
A dividend is a liquidating dividend is
when the dividend exceeds retained earnings. For example:
Total cash dividend declared $400,000
Less retained earnings = $ 100,000 liquidating dividend
When stock rights are “issued” without consideration,
no entry (only disclosure) is made by either the “issuer” or the “recipient.”
Changes in other comprehensive income will impact…
only the balance in accumulated other comprehensive income (AOCI).
OCBOA financial statement titles should differentiate…
the financial statements from accrual basis financial statements.
and the cash flow statement is not required.
Deferred revenue is a liability…
until the service has been performed.
A stock dividend less than 20-25% NO effect on…
Assets & total stockholders’ equity (because all transfers take place within stockholders’ equity). Only decreases R/E.
Deferred income tax payable reported
as non-current liability
What are the subsequent event evaluation periods for a public company (SEC filer) and a private company ?
Public company: through the date that its financial statements are issued (it is the date date of financial statements distributed to the users)
Private company: through the date that the financial statements are AVAILABLE to be issued.
*both in a form and comply with GAAP.
Should the cumulative effect of a change in accounting estimate be shown separately on any financial statements?
A change in estimate is recorded prospectively (going forward).
No cumulative effect adjustment is made and no separate line item presentation is made on any financial statement. If a material change is being made, appropriate footnote disclosure is necessary.
How do you record a cash dividend on the declaration date?
DR R/E
CR Dividends Payable
Note: always deduct treasury stock shares from the calculations.
How do you calculate Allowance for Uncollectible Accounts based on BS approach based on ending A/R?
Ending Balance of Allowance for Uncollectible Accounts = Ending Gross A/R x %
Beg. Allow + BDE + Recovery - Write-off = Ending Allow
JE:
DR BDE
CR Allow for Uncollectible Accts.
What is factoring receivables WITH and WITHOUT a recourse?
WITH: It is a loan
WITHOUT : It is a sale and the risk of uncollectible transfers
When a specific uncollectible account is written off under the allowance method of recognizing bad expense,
the allowance for debt expense decreases.
