Financial Accounting & Reporting Flashcards
R&D Costs Include
1.) New Knowledge or Technology
2.) Model or Prototype
3.) Application of New Research Findings
During the current year, ABC Co. purchased 10,000 shares of its own stock at $7 per share. The stock was originally issued at $6. The firm sold 5,000 of the treasury shares for $10 per share. The firm uses the cost method to account for treasury stock. What amount should ABC report in its income statement for these transactions?
Answer is $0.
Shares repurchased by the corporation but not retired are called the Treasury stock.
Under Cost method, the treasury stock is accounted at repurchase cost and reported separately on B/S as a deduction to stockholder’s equity (contra equity).
Gain/loss on the sale of treasury stock is reported in APIC (Plug).
ABC Co., would not report any gain from resale of the treasury stock in I/S.
Cash Flow is Linked to which Financial Statements
Cash Flow is Linked to the “Balance Sheet” & the “Statement of Income”
The three financial statements: (1) Statement of income, (2) Balance sheet, (3)Statement of cash flows are all linked and dependent on each other.
Net income from the bottom of the statement of income links to the balance sheet and cash flow statement.
On the balance sheet, it feeds into retained earnings and
On the cash flow statement it is the starting point for the cash from operations section (i.e. operating activity based on the indirect method). Depreciation is added back. Financing activities mostly affect the balance sheet. The sum of last period’s closing cash plus this period’s cash from operations, investing and financing is the closing cash balance on the balance sheet.
Interest paid to bondholders is reported in connection with a statement of cash flows as:
Answer: “An operating activity.”
Any interest paid or interest received in shown as an operating activity.
Borrowing or repaying the principal of a loan is classified as a financing activity but the interest paid on the same is an operating activity.
Earnings per share disclosure is required by:
Companies whose shares and potential shares are publicly traded should present EPS in accordance with the guidance in ASC 260.
Income tax expense formula with DTA & DTL
Income tax expense (current) + Deferred tax liability (for the year) - Deferred tax asset (for the year).
Expense + DTL - DTA
Income tax expense formula
Income tax expense (current) + Income tax expense (deferred)
When dealing with deferred taxes, which of the following should be disclosed in a company’s financial statements?
I. The types and amounts of existing temporary differences.
II. The types and amounts of existing permanent differences.
III. The nature and amount of each type of operating loss and tax credit carryforward.
Answer is I & III only
When dealing with deferred taxes, the types and amounts of existing temporary differences and the nature and amounts of each type of operating loss and tax carry forward need to be disclosed in the Co’s., financial statements.
Which of the following is correct regarding cash flows per share reported in a statement of cash flows?
(1) Only primary cash flows per share should be reported.
(2) Only fully diluted cash flows per share should be reported.
(3) Both primary and fully diluted cash flows per share should be reported.
(4) Cash flows per share should not be reported.
Answer is “Cash flows per share should not be reported.”
As disclosure of the cash flow per share may imply that it would be the amount to be paid in terms of dividends, cash flows per share are not disclosed irrespective of the method used (direct or indirect).
Cricket Corp. issued, without consideration, rights allowing stockholders to subscribe for additional shares at an amount greater than par value but less than both market and book values. When the rights are exercised, how are the following accounts affected?
(1) Retained Earnings
(2) APIC
Retained earning: Not affected.
Additional paid-in capital: Increased.
Stock rights were issued without consideration allowing stockholders to subscribe for additional shares at an amount greater than par value but less than market and book values. No entry will be made at the time of issuance. When the rights are exercised, cash will be debited for the exercise price of the rights exercised, common stock will be credited for the par value of the shares issued and additional paid-in capital (APIC) will be credited for the excess amount over par value. Retained earnings will not be affected.
Which of the following is not a right of a common stockholder?
(1) Right to share in the profits and losses of the corporation.
(2) Right to dividends each year.
(3) Right to a share in the company’s assets at the time of liquidation.
(4) Right to vote
Answer: (2) Right to dividends each year.
It is the discretion of the board of directors of a company to declare dividends. The common shareholders do not have a right to receive dividends every year.
A retained earnings appropriation can be used to
(1) Absorb a fire loss when a company is self-insured.
(2) Provide for a contingent loss that is probable and reasonable.
(3) Smooth periodic income.
(4) Restrict earnings available for dividends.
Answer: (4) Restrict earnings available for dividends.
Appropriation of retained earnings is basically when the a portion of retained earnings is set aside as a reserve to meet certain contingent liabilities that may require large payments in the future; this makes the appropriated portion of retained earnings unavailable for dividends; however, total retained earnings remains unchanged.
Thus, appropriation of retained earnings makes the appropriated or restricted portion of retained earnings unavailable for dividends.
One of the advantages of the return of equity ratio is:
It measures the operational efficiency, asset use efficiency and financial leverage.
Return on equity = Net profit / Equity. A variation of the return of equity formula is: (Net profit / Net sales) x (Net sales / Assets) x (Assets / Equity) which measures the operating efficiency, asset use efficiency and financial leverage respectively.
In a business combination, the non-controlling interest and the goodwill are
Directly related.
Goodwill is the excess of the sum of the acquisition-date fair values of (a) the consideration transferred, (b) any non-controlling interest NCI in the acquiree and (c) the acquirer’s previously held equity interest in the acquiree over the net of the acquisition-date fair values of the identifiable assets acquired and liabilities assumed. Thus, as NCI increases, the sum of acquisition date fair values increases, leading to a higher goodwill. NCI and goodwill are directly related, as NCI increases goodwill also increases. The vice-versa however, need not be applicable.
Return on Assets
Return on assets is equal to net income divided by average total assets.
Average assets = (Beginning assets + ending assets)
Which is the most appropriate financial statement to use to determine if a company obtained financing during a year by issuing debt or equity securities?
Statement of cash flows.
In statement of cash flow, financing activities will show if any debt or equity were issued during the year.
Hann School, a non-governmental not-for-profit organization, spent $1 million of cash with donor restriction to acquire land and a building. How should this be reported in the statement of activities?
Increase in revenue without donor restrictions.
When the restriction is removed, below J/E is passed:
Dr Revenue with donor restriction released.
Cr Revenue without donor restriction.
Thus, this will result in a decrease in revenue with donor restriction and an increase in revenue without donor restriction.
How should a non-governmental not-for-profit organization report investments in its financial statements?
Fair value with gains and losses reported in the statement of activities.
NPOs are required to use fair value accounting for most equity and debt investments and reports investment income (dividends/interest) as well as realized AND unrealized gains/losses on marketable securities directly in the statement of activities.
