FAR SEC 1 Flashcards
1
Q
Is operating income subject to intraperiod tax allocation?
A
No.
2
Q
Which 4 types of income are subject to intraperiod tax allocation?
A
Items included in the determination of taxable income may be presented in different sections of the financial statements. Accordingly, intraperiod tax allocation is required. Income tax expense or benefit is allocated to (1) continuing operations, (2) discontinued operations, (3) other comprehensive income, and (4) items debited or credited directly to shareholders’ equity.
3
Q
Where should a gain or loss from a transaction that is unusual or infrequent in occurrence be reported?
A
A material event or transaction that is unusual in nature, infrequent in occurrence, or both must be reported as a separate component of income from continuing operations. Such items must not be reported net of income taxes.
The order of presentation in the income statement is
Income from continuing operations
Discontinued operations
4
Q
Which of the following statements would most likely be included among a set of financial statements prepared in conformity with a special purpose framework?
A
The statement of cash receipts and disbursements.
5
Q
What are special purpose frameworks?
A
Special purpose frameworks are comprehensive bases of accounting other than U.S. GAAP (i.e., accrual accounting).
6
Q
What are the 4 basic financial statements as per US GAAP?
A
Under U.S. GAAP, the set of basic financial statements is (1) the balance sheet (the statement of financial position), (2) the statement of income (the statement of operations), (3) the statement of comprehensive income, (4) the statement of changes in equity, and (5) the statement of cash flows.
7
Q
What is the statement of cash receipts and disbursements?
A
The statement of cash receipts and disbursements is for a special purpose framework not prepared under GAAP.
8
Q
A company pays more than the fair value to acquire treasury stock. The difference between the price paid to acquire the treasury stock and the fair value should be recorded as _________________.
A
Shareholders equity. Apart from cash paid or received, a firm cannot recognize assets, liabilities, gains, or losses from transactions in its own stock. Treasury stock is reported on the balance sheet as a subtraction from equity.
9
Q
What are real or permanent accounts?
A
The accounts presented on the balance sheet are real or permanent accounts. They report an entity’s resources and financing elements that exist from period to period.
10
Q
What are nominal or temporary accounts?
A
The accounts presented on the income statement are nominal or temporary accounts. They are reported for a period of time, closed at the end of the period, and reopened at the beginning of the next period with zero balances.
11
Q
To what permanent account are nominal/temporary accounts closed at the end of a period?
A
Retained Earnings.
12
Q
What is reported on the income statement? (2 elements)
A
1) RESULTS OF OPERATIONS ON ACRUAL BASIS. The results of operations are reported in the income statement (statement of earnings) on the accrual basis using an approach oriented to historical transactions.
2) REVENUES - EXPENSES + GAINS - LOSSES. The traditional income statement reports revenues from, and expenses of, the entity’s major activities and gains and losses from other activities.
13
Q
What is the net income equation?
A
Revenues – Expenses + Gains – Losses = Net income or loss
14
Q
Is it necessary to close each temporary account directly to equity at period-end?
A
No. The accountant need not close each transaction directly to equity. Net income or loss for the period is closed to retained earnings at the end of the period.
15
Q
What kind of accounts are income statement elements reported in?
A
Nominal/Temporary accounts
16
Q
What kind of accounts are balance sheet (statement of financial position) elements reported in?
A
Real/Permanent accounts
17
Q
When is the term “continuing operations” used on the income statement or elsewhere in the financial reporting?
A
The term “continuing operations” is used only when a discontinued operation is reported.
18
Q
When is the term “discontinued operations” used?
A
Any recognized amounts not included in continuing operations are reported in a separate section for discontinued operations.
19
Q
Which 5 types of transactions are not included in net income?
A
1) Transactions with owners,
2) Error corrections,
3) Items reported initially in other comprehensive income,
4) Transfers to and from appropriated retained earnings, and
5) Effects on prior periods of accounting changes.
20
Q
Which 3 formats are commonly used for the income statement?
A
1) Single-step
2) Multiple-step
3) Condensed
21
Q
What is the single-step income statement?
A
The single-step income statement provides one grouping for revenues and gains and one for expenses and losses. The single step is the one subtraction necessary to arrive at net income.
22
Q
What is the multiple-step income statement?
A
The multiple-step income statement reports operating revenues and expenses in a section separate from nonoperating items. It enhances disclosure by presenting subtotals.
23
Q
What is the condensed income statement?
A
The condensed income statement is the most common method of presentation. It includes only the section totals of the multiple-step format. The enhanced disclosure of each line item is presented in the notes to the financial statements.
24
Q
What is the most common format for the income statement?
A
The condensed income statement is the most common method of presentation.
25
What is the COGS Formula?
Beginning FG Inventory + Purchases or COGM - Ending FG Inventory = COGS
26
What is the Goods Available for Sale Formula?
Beginning FG Inventory + Purchases or COGM = Goods Available for Sale
27
What is the definition of COGS?
Cost of goods sold equals purchases for a retailer or cost of goods manufactured (COGM) for a manufacturer, adjusted for the change in finished goods (FG) in inventory.
28
What are the 2 COGM formulas?
1) WIP = work-in-process
Beginning WIP + Periodic Manufacturing Costs - Ending WIP COGM
2) FG = finished goods
Ending FG Inventory + COGS - Beginning FG Inventory = COGM
29
What is the definition of COGM?
Cost of goods manufactured equals the period’s manufacturing costs adjusted for the change in work-in-process. It also may be stated as cost of goods sold adjusted for the change in finished goods inventory.
30
How do selling expenses arise?
Selling expenses are incurred in selling or marketing.
31
What are examples of selling expenses? (4 examples)
1) SALES LABOR. Sales representatives’ salaries, commissions, and traveling expenses;
2) SALES DEPARTMENT OVERHEAD. Sales department rent, salaries, and depreciation; and
3) COMMUNICATIONS. Communications (e.g., Internet) costs.
4) SHIPPING COSTS. Shipping costs also may be classified as selling costs.
32
Are advertising costs selling expenses?
Yes.
33
When should advertising costs be expensed?
Advertising costs should be expensed either as incurred or when advertising first occurs.
34
What is cooperative advertising?
Sellers may agree to reimburse customers for the customers’ advertising costs (cooperative advertising). The revenues related to the transactions that created such obligations generally are recognized before reimbursement. Accordingly, the obligations must be accrued and the advertising costs expensed when the related revenues are recognized.
35
When is cooperative advertising expense recognized?
For cooperative advertising, the revenues related to the transactions that created such obligations generally are recognized before reimbursement. Accordingly, the obligations must be accrued and the advertising costs expensed when the related revenues are recognized.
36
What is the definition of general and administrative expenses?
General and administrative expenses are incurred for the direction of the entity as a whole and are not related entirely to a specific function, e.g., selling or manufacturing.
37
What are 6 examples of general and administrative expenses?
1) PROFESSIONAL EXPENSES. Accounting, legal, and other fees for professional services;
2) EXECUTIVE COMPENSATION. Officers’ salaries;
3) INSURANCE. Insurance;
4) ADMINISTRATIVE STAFF. Wages of office staff;
5) OFFICE SUPPLIES. Miscellaneous supplies; and
6) OFFICE RENT. Office occupancy costs.
38
How is interest expense recognized?
Interest expense is recognized based on the passage of time. In the case of bonds, notes, and finance leases, the effective interest method is used.
39
How are unusual or infrequently occurring items reported?
Material items that are unusual in nature, infrequent in occurrence, or both are reported as a separate component of income from continuing operations.
40
What are unusual or infrequently occurring items? (1 definition and 4 elements).
1). DEFINITION. Material items that are unusual in nature, infrequent in occurrence, or both are reported as a separate component of income from continuing operations.
2) These items must not be reported net of taxes.
3) Gains or losses of a similar nature that are not individually material must be aggregated.
4) The nature and financial effect of each item is disclosed in the notes to the financial statements or reported in the income statement.
5) The effects of such items on earnings per share must not be presented on the income statement.
41
Where are discontinued operations reported on the income statement?
This section is presented after the results of continuing operations.
42
Are discontinued operations reported without tax expense deducted?
No. The operating results of a discontinued operation are reported separately net of tax in the income statement.
43
Is it necessary for material gain or loss on disposal of a discontinued operation to be reported on the face of the income statement?
No. If a component of an entity (discontinued operation) is disposed of during the period, any gain or loss on disposal must be disclosed on the face of the income statement OR in the notes. This means that the gain/loss from discontinued operations would potentially not be shown on the income statement if it is disclosed on the notes instead.
44
How is a discontinued operation measured if it is classified as held for sale?
If a component of an entity (discontinued operation) is classified as held for sale, it is measured at the lower of its carrying amount or fair value minus cost to sell (discussed in Study Unit 7, Subunit 8).
44
What items are detailed in the operating results of a discontinued operation shown on the income statement? (2 elements)
1) Income/expense or gain/loss from operations and/or disposal of discontinued operation.
2) Income tax benefit from discontinued operation.
44
Are basic and diluted EPS reported on the face of the income statement for discontinued operations?
Yes.
44
What is the timeframe for reporting discontinued operations?
The income/expense + profit/loss for a discontinued operation are reported both before and after the date within a given period that an operating unit is first classified as discontinued or held-for-sale.
44
What is the timeframe for reporting discontinued operations on comparative financial statements?
If an operation is classified as discontinued, results are reported separately on the single period income statement under "discontinued operations" adding up the income/gain or expense/loss within the single period before and after the date of the classification of the operation as discontinued. For comparative statements with multiple periods, there is separate reporting for discontinued operations in any prior periods before the operation was classified as discontinued.
44
What is included in general purpose financial reporting? (3 elements)
General purpose financial reporting includes
1)the full set of financial statements,
2) the notes to the financial statements,
3) and required supplemental information.
44
What are the 4 financial statements included in a full set of financial statements as per GAAP?
1) Statement of Financial Position (Balance Sheet)
2) Statement of Comprehensive Income (Income Statement)
3) Statement of Shareholders' Equity
4) Statement of Cash Flows
45
What are notes to the financial statements?
Notes to the financial statements supplement or further explain information on the face of the financial statements.
45
Give 2 examples of information included in notes to the financial statements.
1) descriptions of the accounting policies used
2) other disclosures required by generally accepted accounting principles (GAAP).
46
What 2 uses are prohibited for the notes to the financial statements?
(1) CORRECTION. to correct an improper presentation in the statements
(2) SUBSTITUTION. as a substitute for recognition in the statements
46
What 3 topics should be discussed in notes to the financial statements?
1) Financial statement line items
2) The reporting entity
3) Unrecognized past events and current circumstances that can affect cash flows
46
What is supplemental information?
Supplemental information, such as management’s discussion and analysis (MD&A), provides information in addition to that in the statements and notes.
47
Give one example of an item included in supplemental information.
management’s discussion and analysis (MD&A)
48
What is the statement of financial position?
The balance sheet (statement of financial position) reports assets, liabilities, equity, and their relationships at a moment in time. It helps users to assess liquidity, financial flexibility, and risk.
49
What is the purpose of the statement of financial position?
It helps users to assess liquidity, financial flexibility, and risk.
50
What is another name for statement of financial position?
Balance Sheet
51
What is the fundamental equation of accounting?
Assets = Liabilities + Equity
52
What does the left side of the fundamental equation of accounting represent?
The left side of this equation, assets, depicts the entity’s resource structure.
53
What does the right side of the fundamental equation of accounting represent?
The right side, liabilities + equity, depicts the entity's financing structure.
54
In what order are assets reported on the statement of financial position?
Assets are generally reported in order of liquidity.
55
What are current assets?
Current assets consist of “cash and other assets or resources commonly identified as reasonably expected to be realized in cash or sold or consumed during the normal operating cycle of the business.”
56
What is the operating cycle?
The operating cycle is the average time between the acquisition of resources and the final receipt of cash from their sale as the culmination of revenue generating activities. If the cycle is less than a year, 1 year is the period used for segregating current from noncurrent assets.
57
When is an asset classified as current?
An asset is classified as current on the statement of financial position if it is expected to be realized within the entity’s operating cycle or 1 year, whichever is longer.
58
What are 6 examples of current assets?
1) Cash and cash equivalents;
2) Certain individual investments in trading, available-for-sale, and held-to-maturity debt securities;
3) Receivables;
4) Inventories;
5) Prepaid expenses; and
6) Certain individual investments in equity securities.
59
What are noncurrent assets?
Noncurrent assets are those not qualifying as current.
60
What are the 5 main categories of noncurrent assets?
1) Investments and Funds
2) Property, Plant, & Equipment (PPE)
3) Intangible Assets
4) Other Noncurrent Assets
5) Deferred Charges (long-term prepayments)
61
What are the 4 types of Investments and Funds?
1) FOR CORPORATE EVENTS. Investments in equity securities made to control or influence another entity.
2) INVESTMENT DEBT SECURITIES. Certain individual investments in available-for-sale and held-to-maturity debt securities may be noncurrent.
3) SPECIAL PURPOSE FUNDS (NONCURRENT USE). Funds restricted as to withdrawal or use for other than current operations, for example, to
-Retire long-term debt,
-Satisfy pension obligations, or
-Pay for the acquisition or construction of noncurrent assets
4) UNUSED CAPITAL ASSETS. Capital assets not used in current operations, such as
-Idle facilities or
-Land held for a future plant site
62
What are Investments and Funds? (2 elements)
They are NONOPERATING & NONCURRENT.
Investments and funds include nonoperating items intended to be held beyond the longer of 1 year or the operating cycle.
63
What are three examples of restricted noncurrent use funds under Investments and Funds?
1) funds to retire long-term debt,
2) funds to satisfy pension obligations, or
3) funds to pay for the acquisition or construction of noncurrent assets
64
Under Investments and Funds, what are two examples of unused (nonoperating and noncurrent) capital assets?
1) Idle facilities or
2) Land held for a future plant site
65
What is property, plant, and equipment (PPE)?
Property, plant, and equipment (PPE) are tangible operating items recorded at cost and reported net of any accumulated depreciation.
They include
-Land and natural resources subject to depletion, e.g., oil and gas
-Buildings, equipment, furniture, fixtures, leasehold improvements, land improvements, noncurrent assets under construction, and other depreciable assets
66
How are property, plant, and equipment (PPE) reported?
PPE is reported net of any accumulated depreciation.
67
What are two examples of PPE?
1) LAND & NATURAL RESOURCES. Land and natural resources subject to depletion, e.g., oil and gas
2) BUILDINGS & CAPITAL EQUIPMENT.
Buildings, equipment, furniture, fixtures, leasehold improvements, land improvements, noncurrent assets under construction, and other depreciable assets
68
What are intangible assets?
Intangible assets are nonfinancial assets without physical substance. Examples are patents and goodwill.
69
What are other noncurrent assets? Give two examples.
Other noncurrent assets include noncurrent assets not readily classifiable elsewhere. Examples are
1) deferred tax assets and
2) long-term receivables.
70
What are deferred charges?
The category deferred charges (long-term prepayments) are noncurrent assets appearing on some balance sheets.
71
What are current liabilities?
Current liabilities are “obligations whose liquidation is reasonably expected to require the use of existing resources properly classifiable as current assets, or the creation of other current liabilities.”
-Current liabilities generally are expected to be settled or liquidated in the ordinary course of business during the longer of 1 year or the operating cycle.
72
What is the timeframe definition for noncurrent liabilities?
Current liabilities generally are expected to be settled or liquidated in the ordinary course of business during the longer of 1 year or the operating cycle.
73
Current liabilities include what 5 categories?
1) Trade payables.
2) Other payables.
3) Unearned revenues.
4) Short-term notes given to acquire capital assets.
5) Payments on the current portion of noncurrent debt.
74
What are trade payables?
Trade payables are current liabilities for items entering into the operating cycle, e.g., for materials and supplies used in producing goods or services for sale.
75
What are other payables?
Other payables are current liabilities arising from operations, such as accrued wages, salaries, rentals, royalties, and taxes.
76
What are unearned revenues?
Unearned revenues (contract liabilities) are current liabilities arising from collections in advance of delivering goods or performing services, e.g., ticket sales revenue.
77
When can noncurrent liabilities be reclassified as current?
Noncurrent obligations callable by the creditor because of the debtor’s violation of the debt agreement (e.g., covenant violation) at the balance sheet date are classified as current.
78
When can current liabilities be reclassified as noncurrent? (2 conditions)
1) Current obligations are reclassified as noncurrent liabilities if an entity (1) intends to refinance them on a noncurrent basis and (2) demonstrates an ability to do so.
-The ability to refinance may be demonstrated by
i) Entering into a financing agreement meeting all conditions before the balance sheet is issued.
ii) Issuing a noncurrent obligation or equity securities after the end of the reporting period but before issuance of the balance sheet.
-The amount excluded from current liabilities must not exceed the proceeds from the new obligation or equity securities issued.
2) Current liabilities to be paid from noncurrent asset funds will be reclassified as noncurrent liabilities. Debts to be paid from funds accumulated in noncurrent asset accounts. Thus, a liability for bonds payable in the next period will not be classified as current if payment is to be from a noncurrent fund.
79
For reclassifying current liabilities as noncurrent, what are two ways to demonstrate the entity's ability to refinance on a noncurrent basis?
1) Entering into a financing agreement meeting all conditions before the balance sheet is issued.
2) Issuing a noncurrent obligation or equity securities after the end of the reporting period but before issuance of the balance sheet.
80
What is the limit on how much of a current liability can be reclassified as noncurrent?
Debts to be paid from funds accumulated in noncurrent asset accounts. Thus, a liability for bonds payable in the next period will not be classified as current if payment is to be from a noncurrent fund.
81
What is the definition of working capital?
The difference between current assets and current liabilities is working capital.
82
What is the working capital equation?
Working Capital = Current Assets – Current Liabilities
83
What are noncurrent liabilities?
Noncurrent liabilities are those not qualifying as current.
84
Give six major categories of noncurrent liabilities.
The noncurrent portions of the following items are reported in this section of the balance sheet:
1) Noncurrent notes and bonds
Lease liabilities
2) Most postretirement benefit obligations
3) Obligations under product or service warranty agreements
4) Advances for noncurrent commitments to provide goods or services
5) Deferred revenue
85
How does intraperiod tax allocation generate noncurrent liabilities?
Deferred tax liabilities arising from interperiod tax allocation are classified as noncurrent.
86
What is equity?
Equity is the residual after total liabilities are subtracted from total assets.
87
What are the 4 categories of equity?
1) Capital contributed by owners (par value of common and preferred stock issued and additional paid-in capital)
2) Retained earnings (income reinvested)
3) Accumulated other comprehensive income (all comprehensive income items not included in net income)
4) The noncontrolling interest in a consolidated entity
88
What is treasury stock?
Treasury stock is the entity’s own common stock that it has repurchased. Treasury stock is presented as a reduction of total equity (discussed in Study Unit 12).
89
Does treasury stock increase equity?
No. Treasury stock is presented as a reduction of total equity (discussed in Study Unit 12).
90
Are deferred tax assets and liabilities classified as current or noncurrent?
Deferred tax assets and liabilities are classified as noncurrent.
91
How is a revenue/gain reported net of tax? How is an expense/loss reported net of tax?
In both instances, multiply the amount by (1 - TAX RATE)
92
What is other comprehensive income? What two items is it the sum of?
Comprehensive income includes all changes in equity of a business during a period except those from investments by and distributions to owners. It includes all components of
1) Net income and
2) Other comprehensive income (OCI).
93
What is the Comprehensive Income equation?
Comprehensive Income = Net Income + Other Comprehensive Income
94
What is the single type of change in equity that is excluded from comprehensive income?
Investments by and distributions to owners, i.e., owner contributions and owner draws.
95
What is the definition of other comprehensive income? What are the four main categories of other comprehensive income?
DEFINITION. OCI includes all items of comprehensive income not included in net income. Under existing accounting standards, items of OCI include, among others,
1) AVAILABLE-FOR-SALE DEBT SECURITIES.
Unrealized holding gains and losses on available-for-sale debt securities (Study Unit 4).
2) DERIVATIVES FOR CASH FLOW HEDGING.
Gains and losses on derivatives designated and qualifying as cash flow hedges.
3) FOREIGN CURRENCY ADJUSTMENTS.
Foreign currency translation adjustments for a foreign operation (translation gains and losses).
4) ADJUSTMENT FOR CHANGE IN FAIR VALUE OF DEBT SECURITY WHEN FAIR VALUE OPTION ELECTED.
Changes in fair value attributable to instrument-specific credit risk of financial liabilities for which the fair value option is elected (Study Unit 4).
96
What are the four main categories of other comprehensive income? What common trait do they have?
COMMON TRAIT: Each of (1-4) involves gain loss on a financial instrument (none are revenue/expense items).
1) AVAILABLE-FOR-SALE DEBT SECURITIES.
Unrealized holding gains and losses on available-for-sale debt securities (Study Unit 4).
2) DERIVATIVES FOR CASH FLOW HEDGING.
Gains and losses on derivatives designated and qualifying as cash flow hedges.
3) FOREIGN CURRENCY ADJUSTMENTS.
Foreign currency translation adjustments for a foreign operation (translation gains and losses).
4) ADJUSTMENT FOR CHANGE IN FAIR VALUE OF DEBT SECURITY WHEN FAIR VALUE OPTION ELECTED.
Changes in fair value attributable to instrument-specific credit risk of financial liabilities for which the fair value option is elected (Study Unit 4).
97
How are other comprehensive income items presented with respect to taxation?
Each component of OCI must be presented net of tax, or one amount must be presented for the aggregate tax effect on the total of OCI. In either case, the tax effect on each component must be disclosed.
98
What are the two options for reporting OCI items with respect to taxation?
1) Each component of OCI is presented separately net of tax.
2) One amount can be given for the aggregate tax effect of the total OCI amount.
99
When does an entity not have to present OCI or Comprehensive Income?
An entity that presents a full set of financial statements but has no items of OCI need not report OCI or comprehensive income.
100
When is an entity required to report OCI and Comprehensive Income?
If an entity has any OCI items at all, it must report OCI and Comprehensive Income; otherwise, there is no need to report these amounts (only net income is reported).
101
What are the two options for reporting OCI and Comprehensive Income?
1) In one continuous financial statement or
2) In two separate but consecutive statements.
102
If one continuous statement is used to report OCI and Comprehensive income, which two sections must it have? Which three items must be reported across the twos sections with this option?
One continuous statement must have two sections: net income and OCI. It must include
1) A total of net income with its components,
2) A total of OCI with its components, and
3) A total of comprehensive income.
103
If two separate but consecutive statements are used to report OCI and Comprehensive Income, what are the two statements and how does the second statement begin? (3 elements)
1) The first statement (the income statement) presents the components of net income and total net income.
2) The second statement (the statement of OCI) is presented immediately after the first. It presents
-The components of OCI,
-The total of OCI, and
-A total of comprehensive income.
3) The entity must begin the second statement with net income.
104
What are the two statements used when OCI and Comprehensive Income are reported on two consecutive statements?
1) The first statement (the income statement) presents the components of net income and total net income.
2) The second statement (the statement of OCI) is presented immediately after the first. It presents
-The components of OCI,
-The total of OCI, and
-A total of comprehensive income.
105
For the two consecutive statements option for reporting OCI and Comprehensive Income, describe the first statement.
The first statement (the income statement) presents the components of net income and total net income.
106
For the two consecutive statements option for reporting OCI and Comprehensive Income, give the definition for the second statement. Give the three items reported on the second statement. (4 elements)
1) DEFINITION. The second statement (the statement of OCI) is presented immediately after the first. It presents
2) The components of OCI,
3) The total of OCI, and
4) A total of comprehensive income.
107
For the two consecutive statements option for reporting OCI and Comprehensive Income, what item appears at the beginning of the second statement?
The entity must begin the second statement with net income.
108
When can a statement of Comprehensive Income replace the Statement of Income?
If there is OCI and the single statement option for reporting OCI is elected, a Comprehensive Income statement replaces the Income Statement. If the two statement approach is used or there is no OCI, there would be no way to substitute a Comprehensive Income Statement for the Income Statement.
109
In the single statement approach for reporting OCI/CI, what is the name of the single statement? In the two-statement approach for reporting OCI/CI, what are the names of the two statements? (3 elements)
If one statement, the title is:
1) Statement of Comprehensive Income
If two statements, the titles are"
2) Statement of Net Income
3) Statement of Other Comprehensive Income
110
What is the final component of the statement of net income and also the first component of the statement of other comprehensive income? What is the final component of the statement of other comprehensive income? (2 elements)
1) Net Income
2) Comprehensive Income
111
How is the Other Comprehensive Income account closed in each period?
The components of OCI are recorded initially in a temporary (nominal) account. At the end of each reporting period, the total OCI for a period is closed to accumulated OCI, a permanent account that is reported in the equity section of the balance sheet.
-Other comprehensive income for the period increases accumulated OCI.
-Other comprehensive loss for the period decreases accumulated OCI.
112
What is the Statement of Changes in Equity?
A statement of changes in equity is presented as part of a full set of financial statements. This statement provides disclosure of changes during the accounting period in the separate equity accounts. These are retained earnings, accumulated OCI, common stock, preferred stock, additional paid-in capital, and noncontrolling interest.
113
What are the 6 columns shown on the Statement of Changes in Equity? What are the 5 changes in equity reported?
Columns
1) Total Equity
2) Retained Earnings
3) Accumulated OCI
4) Common Stock
5) Additional Paid-in Capital
6) Treasury Stock
Changes in Equity
1) Net Income for the period
2) OCI for the period
3) Common Stock issued in the period
4) Dividends declared
5) Repurchase of common stock
114
What are the 6 columns shown on the Statement of Changes in Equity?
1) Total Equity
2) Retained Earnings
3) Accumulated OCI
4) Common Stock
5) Additional Paid-in Capital
6) Treasury Stock
115
What are the 5 changes in equity reported on the Statement of Changes in Equity?
1) Net Income for the period
2) OCI for the period
3) Common Stock issued in the period
4) Dividends declared
5) Repurchase of common stock
116
What is additional paid-in capital?
Additional paid-in capital (APIC) is the difference between the par value of a stock and the price that investors actually pay for it.
To be the "additional" part of paid-in capital, an investor must buy the stock directly from the company during its IPO.
117
What happened to the Statement of Retained Earnings?
A statement of retained earnings reconciles the beginning and ending balances of the account. This statement is not separately reported. Instead, it is reported as part of the statement of changes in equity in a separate column.
118
Do appropriated retained earnings count equally as unappropriated retained earnings towards the total equity total.
Yes. The distinction between appropriated/unappropriated retained earnings doesn't mean that appropriated retained earnings don't count towards total equity - they do.
119
What are specials purpose frameworks?
Special purpose frameworks are the accounting practices for bases of accounting other than accrual, that is, for firms that don't follow GAAP. Special purpose frameworks are comprehensive bases of accounting other than GAAP.
120
Is it possible to prepare financial statements using a comprehensive basis of accounting that is not in accordance with GAAP?
Yes. Financial statements may be prepared using a comprehensive basis of accounting that is not in accordance with GAAP.
121
What are three examples of special purpose frameworks, i.e., comprehensive bases of accounting other than GAAP?
1) The cash basis or modified cash basis
2) A basis used for tax purposes
3) A basis used to comply with the requirements of a regulator
122
What additional material should be included with financial statements prepared using bases of accounting other than GAAP?
Statements using a basis other than GAAP should include a summary of significant accounting policies that discusses the basis used and how it differs from GAAP.
123
Cash Collected from Customers = ?
Cash Collected from Customers = Beginning Accounts Receivable + Sales (Accrual Basis) – Ending Accounts Receivable
124
Cash Paid to Suppliers = ?
Cash Paid to Suppliers = Beginning Accounts Payable + Purchases (Accrual Basis) – Ending Accounts Payable
125
Interest Paid During the Period = ?
Interest Paid During the Period = Beginning Interest Payable + Interest Expense (Accrual Basis) – Ending Interest Payable
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Expenses Paid During the Period = ?
Expenses Paid During the Period = Ending Prepaid Expenses + Current-period Expenses (Accrual Basis) – Beginning Prepaid Expenses
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What is the cash basis of accounting?
Under the strict cash basis of accounting, revenues and expenses are recognized when cash is received or paid, respectively, regardless of when goods are delivered or received or when services are rendered.
-The cash basis ignores the revenue and expense recognition principles that are fundamental to the accrual basis.
-This method may be appropriate for small businesses operated as sole proprietorships.
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What does the cash basis of accounting ignore?
The cash basis ignores the revenue and expense recognition principles that are fundamental to the accrual basis.
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When is the cash basis of accounting appropriate?
This method may be appropriate for small businesses operated as sole proprietorships.
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What is the modified cash basis of accounting? Who is it appropriate for? (2 elements)
1) The modified cash basis uses the cash basis for typical operating activities with modifications to the accrual basis for activities having substantial support, for example, reporting inventory, accruing income taxes, and capitalizing and depreciating fixed assets.
2) This method often is used by professional services firms, such as physicians, realtors, and architects.
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What are three examples of items that would be under the accrual basis in the modified cash basis of accounting?
1) reporting inventory,
2) accruing income taxes,
3) capitalizing and depreciating fixed assets.
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What is the tax basis of accounting? When is it appropriate and mandatory to use the tax basis of accounting?
1) Certain doctrines underlying the federal tax code differ significantly from those in the conceptual framework. For example, the code requires use of the modified accelerated cost recovery system (MACRS), a depreciation method not recognized under GAAP.
2) This basis must be applied to calculate income tax liability.
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