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CMA-part 1A > Financial Statements and Income > Flashcards

Financial Statements and Income Flashcards

1
Q

FINANCIAL STATEMENTS LIMITATIONS

A

PERIODICITY
HISTORICAL INFORMATION
VALUATION
ACCOUNTING METHODS
OMISSIONS

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2
Q

PERIODICITY LIMITATION

A

FISCAL PERIODS ARE NOT GOOD INDICATORS OF NATURAL BUSINESS CYCLE

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3
Q

HISTORICAL INFORMATION LIMITATION

A

THE INFORMATION IS PURELY HISTORICAL AND MAY NOT BE DIRECTLY RELEVANT TO ONGOING OPERATIONS

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4
Q

VALUATION LIMITATION

A

1) HISTORICAL COST
some non-monetary accounts use historical cost because it’s objectively measured but becomes less relevant with time (inventory, Property ;Equipment)

2) ESTIMATES
some accounts are based on management estimates and judgments. This adds a level of uncertainty (Warranty reserves, allowance for doubtful accounts)

3) FAIR VALUE
accounts with objective market prices are often recorded at market value (marketable securities, bonds)

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5
Q

ACCOUNTING METHODS

A

CREATES DIFFICULTIES WHEN COMPARING RESULTS OF TWO DIFFERENT ORGANIZATIONS (depreciation method, inventory cost flow assumptions such as LIFO &FIFO)

Organizations must disclose significant accounting policy changes in the notes of financial statements

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6
Q

OMISSIONS

A

For Balance Sheet:

Value of workforce
Customer base
Reputation

Statement of Cash Flows:

Non-cash investing and financing transactions.

Ex: purchase of building through the issuance of stock (included in the notes)

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7
Q

STATEMENT OF CHANGES IN EQUITY

what’s included?

A

PREFERRED STOCK
COMMON STOCK
ADDITIONAL PAID-IN CAPITAL
TREASURY STOCK
RETAINED EARNINGS
ACCUMULATED OTHER COMPREHENSIVE INCOME

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8
Q

PREFERRED STOCK

A

CONTRIBUTED CAPITAL FOR NON-VOTING STOCK

IT GENERALLY CARRIES A STATED DIVIDEND RATE

IT’S PAID FIRST IN THE EVENT THE ORGANIZATION DECLARES A DIVIDEND

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9
Q

COMMON STOCK

A

CONTRIBUTED CAPITAL FOR VOTING STOCK

WITH NO SPECIFIED RETURN (growth or dividend)

AT PAR VALUE

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10
Q

ADDITIONAL PAID-IN CAPITAL

A

CONTRIBUTED CAPITAL IN EXCESS OF PAR VALUES

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11
Q

TREASURY STOCK

A

A CONTRA EQUITY ACCOUNT

RECORDS STOCK REPURCHASED BY THE ORGANIZATION

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12
Q

RETAINED EARNINGS

A

ACCUMULATED NET INCOME EARNED BY THE ORGANIZATION FROM INCEPTION LESS ANY DIVIDENDS DECLARED DURING THAT SAME TIME

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13
Q

ACCUMULATED OTHER COMPREHENSIVE INCOME

A

ITEMS NOT INCLUDED IN THE CALCULATION OF NET INCOME

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14
Q

OPERATING CASH FLOW

A

CASH FLOWS FROM YHE CENTRAL OPERATIONS OF THE ORGANIZATION.

FROM CUSTOMERS
TO EMPLOYEES
SUPPLIERS
INTEREST AND TAXES

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15
Q

INVESTING CASH FLOW

A

ASSOCIATED WITH LONGER TERM INVESTING ACTIVITIES

PURCHASE OF PROPERTY AND EQUIPMENT

SALE OF PROPERTY AND EQUIPMENT

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16
Q

FINANCING CASH FLOW

A

ASSOCIATED WITH FINANCING STRATEGY OF THE COMPANY

+ BORROWING (bank or bond)
+ SALE OF THE STOCK (common/preferred)

  • PRINCIPAL REPAYMENTS ON DEBT
  • REPURCHASE OF TREASURY STOCK
  • CASH PAYMENT OF DIVIDENDS TO OWNERS
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17
Q

PURPOSE OF MULTI-STEP INCOME STATEMENT

A

IT SPLITS REVENUES, EXPENSES, GAINS , AND LOSSES INTO OPERATING &;NON-OPERATING ACTIVITIES

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18
Q

DISCONTINUED OPERATIONS

A

SHOWN SEPARATELY AFTER THE RESULTS FROM CONTINUED OPERATIONS

1) disposal of a component of the business and those operations (cash flow must be clearly distinguishable)

2) Gains and losses are shown net of their tax impact

3) For public companies, Earnings per common share must be shown for:

Income from Continuing Operations
Discontinued Operations
Net income

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19
Q

OTHER COMPREHENSIVE INCOME (OCI)

A

1) UNREALIZED HOLDING GAINS AND LOSSES ON AVAILABLE-FOR-SALE (AFS) SECURITIES

2) GAINS AND LOSSES ON CASH FLOW HEDGES

3) +/- IN EQUITY DUE TO FOREIGN CURRENCY TRANSLATION ADJUSTMENTS ARISING FROM THE TRANSLATION OF FOREIGN SUBSIDIARIES INTO U.S. DOLLARS

4) CERTAIN GAINS AND LOSSES RELATED TO DEFINED BENEFIT PENSIONS

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20
Q

OCI CAN BE PRESENTED IN ONE OF TWO WAYS:

A

1) in a combined Statement of Income and Comprehensive Income

2) in a separate fifth financial statement titled Statement of Comprehensive Income

Net Income
Components of OCI
Total Comprehensive Income

OCI amounts are accumulated in equity through ‘Accumulated Other Comprehensive Income’

Similar to how revenues, expenses, gains, losses, and dividends are accumulated in equity through Retained Earnings

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21
Q

PREFERRED STOCK

A

Generally non-voting stock ownership

Generally carries specified dividend rate stated as a % of par value

Must be paid before any common shareholders

May be convertible into common stock at specified conversion rate (at option of the owner)

May be callable at a specified price (at the option of the organization)

Behind company creditors but ahead of common shareholders for preference in the case of bankruptcy or liquidation

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22
Q

COMMON STOCK

A

Usually carried at par value unless the stock is no par stock

Dividends are not pre-determined like preferred stock and only paid when declared after preferred shareholders

Last in line for preference in the case of bankruptcy or other liquidation

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23
Q

ADDITIONAL PAID IN CAPITAL

A

Amount received by the organization for stock over the par value of the shares

Can be affected by various equity transactions including stock dividends, resale of treasury stock and issuance of options and warrants

Only if the stock has par value

24
Q

TREASURY STOCK

A

Amount paid by the organization to re-purchase its own stock

Shown as contra equity or a reduction to the equity section

25
Q

RETAINED EARNINGS

A

Income from inception

Net income or loss for the organization is ultimately recorded in retain earnings

Dividends declared are a reduction to retain earnings

26
Q

ACCUMULATED OTHER COMPREHENSIVE INCOME

A

Other comprehensive income or loss for the organization is ultimately recorded in accumulated other comprehensive income

Items accumulated here are not part of the calculation of net income

27
Q

NON-CONTROLLING INTEREST

A

Ownership in subsidiary entities that is outside of the controlling entity

When organization has a controlling interest in another entity

Not complete ownership

100% of the assets and liabilities of the subsidiary are included in the balance sheet of the organization

And the portion of the subsidiary that is owned by third parties is segregated as a separate component of equity

28
Q

Common transactions that affect equity accounts

A

Sale of new shares
Issuance of options
Dividends
Net Income/Loss
Other Comprehensive Income items
Repurchase of Treasury Stock
Resale of Treasury Stock
Stock split
Stock dividends

29
Q

SALE OF NEW SHARES

A

Generally sold for an amount above par value.

Cash received is recorded

the common stock/preferred stock account is increased for the par value

the additional paid in capital account is increased for the balance

30
Q

ISSUANCE OF OPTIONS

A

Usually issued as a form of compensation

recorded as part of additional paid-in capital as compensation expense is recognized

1) total compensation expense is valued at the fair value of the options on the date they are granted

2) compensation expense is recognized over the service period required for the employee to become vested in the options

31
Q

DIVIDENDS

A

Retain earnings is reduced with the cash dividend is declared.

His payment of the dividend is delayed

a payable is also recorded and then reduced when the payment is later made

32
Q

NET INCOME/LOSS

A

Increases/Decreases retained earnings each year

33
Q

OTHER COMPREHENSIVE INCOME ITEMS

A

Change in economic position of the company that’s not part of net income

Increase/Decrease accumulated other comprehensive income each year

34
Q

REPURCHASE OF TREASURY STOCK

A

Treasury stock is increased (reduction to equity) for the cost of the treasury shares

35
Q

RESALE OF TREASURY STOCK

A

1) when sold for an amount in excess of the repurchase price, the cost is taken out of the treasury stock and the excess is added to additional paid-in capital

2) when sold for an amount below the repurchase price, the cost is taken out of treasury stock and the difference is taken from additional paid-in capital to the extend it was previously increased for treasury stock transactions.
If no additional paid-in capital from treasury stock transactions exists, the difference is taken from retained earnings

36
Q

STOCK SPLIT

A

Generally has no impact on any of the equity accounts as long as the par value is also changed to reflect the new share size

No journal entry is needed

37
Q

STOCK DIVIDENDS

A

A stock dividend occurs when an organization distributes additional shares of stock to existing shareholders as a dividend rather than paying them cash

1) Small stock dividend: <20-25% of the number of shares outstanding. Retained earnings is reduced for the fair value of the stock being issued, common stock is increased for the par value of the stock issued, and the difference is included in additional paid-in capital

2) Large stock dividend: >20-25% of the number of shares outstanding. Retained earnings is reduced for the par value of the stock being issued and common stock is increased for the same amount. No impact on additional paid-in capital, similar to stock split

38
Q

BALANCE SHEET

A

Assets and claims to those assets

39
Q

ASSETS

A

Resources available for the organization to carry out its purpose

Presented in order of liquidity

Current: expected to be realized within one year (or operating cycle, if longer)

Non-current: expected to benefit the company for longer than one year (or the operating cycle if longer)

40
Q

LIABILITIES

A

Represent third party claims to the assets of the organization

Current liabilities: expected to be settled with cash or other current assets within one year

Examples: A/P, accrued expenses, deferred revenue, principle portions of long-term debt due in the coming year

Long-term liabilities: due after one year

Examples: bonds or bank debt, deferred tax

41
Q

EQUITY

A

Owner claims to the assets

42
Q

BALANCE SHEET KEY DISCLOSURES

A

1) significant accounting policies
2) significant estimates made within accounts
3) amounts with major classes of inventory
4) Gross amounts with major classes of PP&E
5) components of deferred tax assets and liabilities
6) expected annual principal payments on debt for the next five years and all amounts due thereafter
7) sinking fund provisions for bonds
8) Par values and contractual provisions for preferred and common stocks
9) details about employee stock compensation program
10) significant commitments or contingencies not recorded in the Balance Sheet
11) other information as may be needed for a full understanding of the items reported

43
Q

THE INCOME STATEMENT

A

Shows results of the operations

1) Revenues and expenses generally result from the primary operations of the organization
2) Gains and losses result from peripheral activities
3) Elements on the Income Statement are recorded on the accrual basis. Revenues are recorded when earned and realized and expenses are recorded when incurred
4) The Income Statement is often combined with a presentation of Other Comprehensive Income items. These items are not considered part of net income, but represent additional changes to the organization’s economic position during the period presented. When this information is included, the financial statement is called the Statement of Comprehensive Income.

44
Q

Examples of noncash expense and revenue items that must be added back to net income

A

1) Depreciation expense and amortization of intangible assets
2) amortization of deferred costs, such as bond issue cost
3) changes in deferred income taxes
4) amortization of a premium or discount on bonds payable
5) income from an equity method investee

45
Q

Cash Flows from Operating Activities- Indirect Method

A

Net Income
+ Noncash expenses (typically depreciation and amortization expenses)
- Gains from investing and financing activities
+ Losses from investing and financing activities
+ Decreases in current assets
- Increases in current assets
+ Increases in current liabilities
- Decreases in current liabilities
+ Amortization of discounts on bonds
- Amortization of premiums on bonds
= Operating cash flow

46
Q

Items from Investing Activities

A

Most items come from changes in long-term asset accounts.

+ Sales of PP&E
+ Sales of investments in another entity’s debt or equity securities
+ Collections of the principal on loans to another entity
- Purchases of PP&E
- Purchases of other company’s debt or equity securities
- Granting of loans to other entities

47
Q

Items for Financing Activities

A

Most items come from changes in long-term liability or equity accounts.

+ Sale of the entity’s equity securities
+ Issuance of debt, such as bonds or notes
- Payments to stockholders for dividends
- Payments to reacquire capital stock
- Payments to redeem a company’s outstanding debt

48
Q

Footnotes for the Statement of Cash Flows

A

Requires:
- footnote disclosure of any significant noncash investing and financing activities (ex: issuing stock for fixed assets or the conversion of debt to equity)
- if Indirect method for cash flow from operations is used, both interest paid and income taxes paid need to be disclosed

49
Q

Footnotes and Disclosures to financial statements

A

1) CONTINGENCIES
2) CONTRACTUAL SITUATIONS
3) ACCOUNTING POLICIES
4) SUBSEQUENT EVENTS

50
Q

CONTINGENCIES

A

Are material events with an uncertain outcome dependent on the occurrence or non occurrence of one or more future events.
- can be gain or loss contingencies
- income recognition is not given to gain contingencies
- loss contingencies must be recognized if it’s both 1) probable that the loss was incurred, and 2) the amount of the loss is reasonable estimable.
Examples of loss contingencies: pending litigation, warranty and premium costs, environmental liabilities, and self-insurance risks
Examples of gain contingencies: pending litigation, possible refunds of disputed tax amounts, and tax loss carryforwards.

51
Q

CONTRACTUAL SITUATIONS

A

Contractual agreements such as pension obligations, lease contracts, and stock option plans

52
Q

ACCOUNTING POLICIES

A

Most companies prepare a separate note, “Summary of Significant Accounting Policies “, in which the report on the methods used to recognize revenue, calculate depreciation, value inventory, etc

53
Q

SUBSEQUENT EVENTS

A

Event that is occurring between the balance sheet date and the issuance date of the annual report.

  • if the event provides additional evidence about conditions that existed as of the balance sheet date and alters the estimates used in preparing the financial statements, then the financial statements should be adjusted.
  • subsequent events that provide evidence regarding conditions that didn’t exist on the balance sheet date should be disclosed in a note
54
Q

FAIR VALUE STANDARDS

A

-It assumes that the asset or liability is exchanged between market participants on the measurement date
-When a principal market exists, fair value is defined as price in that market
-If multiple markets, then highest price is used

55
Q

Three approaches to determining fair value

A

1) Market approach
use prices for transactions involving comparable assets
2) Income approach
uses valuation techniques to convert future amounts to a single discounted present value
3) Cost approach
based on the replacement value of the asset

56
Q

Advantage and disadvantage of using fair value

A

Advantage: provides more current information about the valuation of assets
Disadvantage: increased volatility in the reported value

CMA-part 1A (3 decks)

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