Formulas Flashcards
Single-Step Income Statement
The single-statement approach will show totals for revenues and expenses, as well as net income, Earnings before income and taxes are only shown.
All Revenues & Gaines
- All Expenses and losses
————————————————————
Pretax Income
- Income Tax Expense
————————————————————
= Net Income
Multiple-Step Income Statement
The two-statement approach to displaying comprehensive income will begin with net income, and then will most likely show each component of other comprehensive income on an after-tax basis. So unrealized holding losses on available-for-sale debt securities will be shown net of tax. the two-statement approach only shows net income.
Sales
- Cost of goods sold
______________________________________________________________________________________________
Gross Profit
- Operating Expenses* (SG&A, depreciation, amortization, R&D, ETC.)*
______________________________________________________________________________________________
Operating Income* (Performance from the core business, sustainable) *
- Nonoperating (gains) & (losses) *(REGL from the sale of noninventory, write-downs, write-
offs, etc.) *
______________________________________________________________________________________________
Pretax income *(Income from continuing operations before tax) *
- Income tax expense
_______________________________________________________________________________________________
Net Income *(Income from continuing operations after tax) *
+/- Discontinued operations (net of tax)
________________________________________________________________________________________________
Net Income
The value comes from being able to see how well a company is doing in terms of its core business. Your bottom-line accounts for income from continuing & discontinued operations.
REGL
Items ON Income Statement
- Revenues
- Expenses
- Gains
- Losses
*Revenue & Expenses are either operating or non-operating
*Gains & Losses are non-operating items reported at net amounts (net gains or net losses)
PUFI
Items NOT on Income Statement
Net of Tax
Before related tax effects
Pension Adjustment in funded status:
G/L, prior service costs, net transition assets/liab
Unrealized G/L fr Available-for-Sale Debt Securities & hedges
* moving from “held-to-maturity” to “AFS” debt security.
* Not for “trading” securities -> I/S
* Not for avail-for-sale EQUITY securities
Foreign Currency Items
a. Translation method = CTA / Cumulative
Translation Adjustment
b. Remeasurement Method = g/l on I/S!! – excluded from Other Comp Income!
Instrument-Specific Credit Risk
Comprehensive Income
A. Net Income = REGL
B. OCI = PUFI (gains & losses that go directly to equity and are not included in net income)
______________________________________________________________________________________________________
A + B = Comprehensive Income
Note: CI is not the same as OCI
Ending Accumulated Other Comprehensive Income
Beginning of the year accumulated other comprehensive income
+/- PUFI Adjustments
+/- Reclassification adjustments (if any)
Common Shareholders’ Equity
Numerator for Book Value Per Share
Assets - Liabilities - Preferred equity - Dividends in arrears
Dividends in Arrears - only exisit if the company has cumulative preferred stock, such that if a dividend in a particular year to the preferred stockholders was not paid, it accumualtes. So the dividends in arrears, while it’s not a liability, it reduces the equity available to the common stockholders. We isolate in the numerator common stockholders equity.
Common Shares Outstanding
Denominator for Book value Per Share
Number of shares issued - Number of shares repurchased
Book Value per Share
Common Shareholders’ equity
___________________________________
Common Shares Outstanding
Additional Shares outstanding
Number of shares - ( Number of shares x Exercise price / Average market price)
Retained Earnings
Notice how any prior period adjustments and retrospective accounting changes go striaight to Retained Earnings
Net income/loss
- Dividends (cash, property, and stock) declared
+/- Prior period adjustments
+/- Accounting changes reported retrospectively
-accumulated earnings or losses during the lifetime of the corporation that have not been paid out as dividends
Ending Retained Earnings
Use Retained Earnings flashcard to figure out how to get begining retain
Current year change in retained earnings + Beginning retained earnings
Basic EPS
Income available to common shareholders
_________________________________________________
Weighted average number of common shares outstanding
EPS
Earnings Per Share
Net Income - Preferred dividends
________________________________________
Weighted Average common Shares Outstanding (WASCO)
Diluted EPS
Income available eto the common stock shareholders + Intereset on dilutive securites
______________________________________________________________________________________________
Weighted average number of common shares
(assuming all dilutive securities are converted to common stock)
WASCO
Weighted average number of common shares outstanding
Shares outstanding at the begninning of the period
+ Shares sold during the period (on a time-weighted basis)
- Shares reacquired during the period (on a time-weighted basis)
+ Stock dividends and stock splits (retroactively adjusted)
- Reverse stock splits (retroactively adjusted)
OCBOA
Other Comprehensive Basis of Accounting
Widely understood special purpose framework
Times Interest Earned
Times interest earned is also known as the interest coverage ratio.
Income before interest expense/ Intereset Expense
or
Earnings before interest and taxes / Interest Expense
Profitability Ratios
Profitabilty Ratios are easures of success or failure of an enterprise for a given time period
- Gross (Profit) Margin
- Profit Margin
- Return on Sales
- Return on Assets (ROA)
- Dupont Return on Assets
- Return on Equity
- Operating Cash Flow Ratio
Gross (Profit) Margin
Profitability Ratio
Sales (Net) - Cost of goods sold / Sales (Net)
Profit Margin
Profitability Ratio
Net Income / Sales (Net)
Return on Sales
Profitability Ratio
Income before interest income, interest expense, and taxes / Sales (Net)
Return on Assets (ROA)
Profitability Ratio
Net Income / Average Total Assets
DuPont Return on Assets
Profitability Ratio
Profit Margin x Asset turnover
Note that this ratio uses both profit maring and the asset turnover. This ratio allows for increased analysis of the changes in the percentages. The profit margin indicates the percentage return on each sale, and the assets turnover indicates the effective use of assets in generating that sale
Return on Equity
Profitability Ratio
Net Income / Average total equity
Operating Cash Flow Ratio
Profitability Ratio
Cash flow from operations / Current Liabilites
Liquidity Ratios
Liquidity Ratios are measures of a firms short-term ability to pay maturing obligations
- Current Ratio
- Quick Ratio
- Accounts Receivable Turnover
- Days Sales in Accunts Receivable
- Days Turnover
- Days in Inventory
- Accounts Payable Turnover
- Days of payables outstanding
- Cash Conversion Cycle
Current Ratio
Liquidity Ratios
Current Assets / Current Liabilities
Quick Ratio
Liquidity Ratios
Cash and cash Equivalents
+Short-term marketable securities
+ Receivable (Net)
____________________________________
Current liabilities
Accounts Receivable Turnover
Liquidity Ratios
This ratio indicates the receivables quality and indicates the success of the firm in collecting outstanding receivables. Faster turnover gives credibility to the current and acid-test ratios
Sales (Net) / Average Accounts Receivable (net)
Turnover ratios generllay use average balance [i.e., (bneg balance + ending balance) / 2] for balance sheet components. However, on some recent CPA Exam questions, candidates have been instructed to use year-end balances instead. Please be sure to read the questions carefully to determine the appropriate method to use.
The ratios given in this module match th emost recent Ratio’s provided by the AICPA as an exhibit on task-based simulations requiring ratio calculation
Days sales in Accounts Receivable
Liquidity Ratios
Ending Accounts Receivable (Net)
____________________________
Sales (Net) / 365
This ratio indicates the average number of days required to collect Accounts Receivable
Inventory Turnover
Liquidity Ratios
Cost of goods sold / Average Inventory
This measure of how quick inventory is sold is an indicator of enterprise performance. The higher the turnover, in general, the better the performace.
Days in Inventory
Liquidity Ratios
Ending Inventory
________________________
Cost of good sold / 365
This ratio incidcates the average number of days required to sell inventory
Accounts Payable Turnover
Liquidity Ratios
Cost of goods sold / Average Accounts payable
This ratio indicates the number of times trade payables turn over during the year. A low turnover may indicate a delay in paynent, such as from a shortage of cash
Days of Payables Outstanding
Liquidity Ratios
Ending Accounts Payable
_____________________________
Cost of goods sold / 365
This ratio indicates the average length of time trade payables are outstanding before they are paid
Cash Conversion Cycle
Liquidity Ratios
Days sales in accounts receivable
+ Days in inventory
- Days of payables outstanding
This ratio indicates the average length of time it takes from when the company pays cash for an invetory purcahse to when the company receives cash from a sale
Solvency Ratios
Solvency Ratios are measures of security or protection for long-term creditors/investors
- Debt-to-Equity
- Total Debt Ratio
- Equity Multiplier
- Times interest Earned
Debt-to Equity
Solvency Ratios
Total Liabilites / Total Equity
This ratio indicates the degree of protection to creditors in case of insolvency. The lower this ratio the better the company’s position
Total Debt Ratio
Solvency Ratios
Total liabilites / total Assets
This debt ratio indicates taht approximately half of the assets are financed by creditors
Equity Multiplier
Solvency Ratios
Total Assets / Total Equity
Times Interest Earned
Solvency Ratios
Income before interest expense and taxes / interest Expense
or
Earnings before interest and taxes / Interest Expense
This ratio reflects the ability of a company to cover interest charges. It uses income before interest and taxes to reflect the amount of income available to conver interest expense
Performance Metrics
Per formance meetrics are measures used to evaluate operating performace and elements of a company’s stock performance from the prespective of current and potential investors
- EBITA (Earnings Before Intereset, Tax, Depreciation, and Amortization)
- Earnings per share
- Price-to-Earnings Ratio
- Dividend Payout
- Asset Turnover
EBITA
(Earnings Before Intereset, Tax, Depreciation, and Amortization)
Performance Metrics
Useful when comparing performace, excluding impact of financial levearge and depreciation expense which is dependent on age of assets, methods, and estimates
- Top-down:
Sales
-Cost of goods sold
-Operating expenses (excluding depreciation and amortization) - Bottom-up:
Net Income
+ Income tax expense
+ Interest expense
+ Depreciation and amortization
EBITA can be calculated from the income statement using either a “top-down” or “bottom-up” approach.
Earnings Per share
Performance Metrics
Income available to common shareholders / Weighted average common shares outstanding
Price-to-Earnings Ratio
Performance Metrics
Price per share / Basic Earnings per share
The statistic indicates the investment potential of an enterprise; a rise in this ratio indicates taht investors are pleased with the firms opportunity for growth
Dividend Payout
Performance Metrics
Cash dividends / Net Income
This ratio indicates the portion of current earnings being paid out to dividends. (Alternatively, calculated dividend payout as Dividends per share / Earnings per share)
Asset Turnover
Performance Metrics
Sales (Net) / Average Total Assets
This ratio is an indicator of how GI makes effective use of its assets. A high ratio indicates effective assets used to generate sales.
Average total assets
Sales (Net) / Total Asset Turnover
Straight-Line Depreciation
Estimated useful life is usually stated in periods of time, such as year or months
Cost - Salvage Value / Estimated useful life
Sum-of-the-Year’s-Digits Depreciation
Rarely tsted for assets longer than 5 years
- N x (N + 1) / 2 = Sum-of-the-years digits
- Depreciation Expense = (Cost - Salvage value) x Remaining life of asset / Sum-of-the-years’ digits
Where: N = Estimated useful life
Figure out #1 to work out formula #2
Units-of-Production Depreciation
(Productive Output)
Converts depreciation from a fixed cost to variable costs
- Cost - Salvage Value (equals depreciable base)/ Estimated units or houirs = Rate per unit or hour
- Rate per unit (or hour) x Number of units produced (or hours worked/usage) = Depreciation Expnese
#2. (converts depreciation from a fixed cost to variable costs
Figure out #1 to work out formula #2
Double-Declining-Balance
(DDB)
The only method that ignore salvage value in the annual calculation of depreciation are the declining balance meethods. Salvage value is used as the limitation on total depreciation.
2 x 1/2 x (Cost - Accumulated Depreciation)
E.g., If useful life (N) = 150%; DDB = 1.5/N
If useful life (N) = 125%; DDB = 1.25 / N
If useful life (N)
Most common is DDB 125%, 150%, etc.
Sale of an Asset During its useful Life
4.1 Disposals
DR Cash Received from Sale XXX
DR Accumulated Depreciation of sold asset: XXX
CR Sold Asset at cost XXX
Cr/DR The difference is gain/losses XXX
Write-off Fully depreciated Assets
4.2 Disposals
DR Accumulated depreciation (100 percent) XXX
CR Old asset at full cost (100 percent) XXX
Impairment Loss
Fair Value - Carrying Value
Under U.S. GAAP, impairment analysis begins with a test for recoverability in which the net carrying value of the asset is compared to the undiscounted cash flows expected from the asset. If the net carrying value exceeds the undiscounted cash flows, then an impairment loss is recorded equal to the difference between the carrying value and fair value of the asset. In this problem, the carrying value of $250,000 is greater than the undiscounted future cash flows of $240,000, so an impairment loss must be recorded.
Total & Permanent Impairment
4.2 Disposals
DR Accumulated Depreciation per records XXX
DR Loss due to impairment (the difference) XXX
CR Asset at full costXXX
Total Depletion
6.3 Calculation of Depletion
Unit depletion rate x Number of units extracted
Unit depletion rate
6.3.1 Calculation of Depletion
Depletion base / Estimated recoverable units
Depletion Base
6.3.2 Calculation of Depletion
Cost to purchase property
+ development costs to prepare the land for extraction
+ any estimated restoration costs
- residual value of land after the resources (e.g., mineral ore, oil, etc.) are extracted
REAL
When computing depletion on land, remember it is REAL property
Residual Value (subtract)
Extraction/development cost
Anticipated restoration cost
Land purchase price
Franchise Fee Journal Entry
4.2 Franchisee Accounting
DR Franchises xxx
DR Discount on notes payable (contra-liability) xxx
CR Notes Payable xxx
CR Cash xxx
OWNES
3.3 Lessee Decision Tree
O - Ownership of the underlyng asset transfers from the lessor to the lessee by the end of the lease term.
W - The lessee has the written option to purchase the underying aset; the option is on ethat the lessee is “reasonably certain” to exercise.
N - The net present value of all lease payments and any guaranteed residual value equals or exceeds substantially all of the underlying asset’s fair value.
E - The term of the lease represents the major part of the economic life remaining for the underlying asset.
S - The asset is specialized such that it will not have an expected, alternative use to the lessor when the lease term ends.
Financial Lease: AT least one of the OWNES criteria is met.
Operating lease: None of the OWNES creiteria are met.
Reporting an Operating Lease
(Lessee’s Books)
5.1 Operating lease Journal Entry Lessee’s Books
1. Initial Entry:
DR ROU Asset XXX
CR Lease Liability XXX
2. Subsequent Entries
DR Lease Expense XXX
CR Cash/Lease liability XXX
DR Lease Liability XXX
CR Accumulated amortization – ROU Asset XXX
Reporting a Finance Lease
(Lessee’s Books)
5.2 Finance Lease Journal Entry
1. Initial Entry:
DR ROU Asset XXX
CR Lease liability XXX
2. Subsequent Entries:
DR Interest Expense XXX
DR Lease Liability XXX
CR Cash/lease payable XXX
DR Amortization Expense XXX
CR Accumulated Amortization-ROU Asset XXX
Unlike with operating (capital) leases, the amortization of the ROU asset for a finance lease will be expensed based on how the entity recognizes amortization expense on similar assets.
Three main journal entries are used to account for an equity method investment
2.1 Equity Method Accounting
- Journal Entry to record investment at cost (FV of consideration plus legal fees)
DR Investment in investee XXX
CR Cash XXX
- Journal Entry to rrecord interest in the investment by the investor’s share of the earnings of investee:
DR Investment in investee XXX CR Equity in earnings/investee income XXX (Equity in earnings is reported as income on the income statement) - Journal entry to record decrease int he investment by the invstor’s ahre of the cash dividends from the investee:
DR Cash XXX CR Investment in investee XXX
BASE
F5 M2
Begining balance
Add: Investor’s share of investee’s earnings (like bank interest; it is income when earned, not when taken out).
Subtract: Investor’s share of investee’s dividends (like bank withdrawls; and it is not income)
Ending balance.
An easy way to remember the GAAP accounting rules for the equity method is to think of it as a bank account and use your BASE account analysis:
MIC
* Let’s get on the “MIC”
FV Measurement: Valuation Techniques
M – Market Approach: uses prices and other relevant information from market transactions (exchanges) involving IDENTICAL or COMPARABLE assets/liabilities
I – Income Approach: Converts future amounts, including cash flows or earnings to a single discounted amount to measure FV
*Can be applied to assets or liabilities
*Discounted CF Approach PV of Future Cash Flows
C-Cost Approach: Uses current replacement cost to measure the FV of assets
Leases: Classification
Finance Lease–>Lessee and Sales-Type Lease –> Lessor
OWNES
O – Ownership
W – Written Option to Purchase
N – NPV of all Lease Pmts ≥ Asset’s Fair Value
* ≥ 90%
E – Economic Life of asset is represented in major part of lease term
* ≥ 75%
S – Specialized Asset
Operating Lease for lessee if meets 0 of those
Direct Financing ->Lessor
Meets none of “OWNES”
Meets Both of “PC”
* P - PV of lease pmts ≥ Assets Fair Value
* ≥ 90%
C – Collection is Probable
Operating lease –> Lessor
None of “OWNES”
0 – 1 of “PC”
Leases: Lease Payments for the Lessee
- Lessee will “REPORT N GO” for the lease payments Included in Lease Payment:
*R – Required contractual fixed payments
*E – Exercise Option (reasonably assured)
*P – Purchase Price at the end
*O – Only indexed or rate variable payments
*R – Residual guarantees likely to be owed
*T – Termination Penalties reasonably assured - Option to Include:
*N – Non-lease components - Excluded from Lease Payments:
*G – Guarantees of lessor debt by lessee
*O– Other Variable lease payments
CAR IN BIG
(The CAR I am IN is BIG!)
Completely Eliminated (Even if don’t own 100%)
Consolidations: Adjustments for External Reporting
Sub’s Stockholder’s Equity:
C - Common Stock
A - APIC
R – Retained Earnings
Parent’s Investment:
I – Investment in Sub
* Parent’s Investment is eliminated
N – Non-controlling Interest
* Created if 100% is not owned
Adjustments:
B – Balance sheet of sub
* Adj to FV at the acquisition date
* 100% of assets and liabilities
I – Identifiable Intangible Assets of the Sub
* Recorded at FV
G – Goodwill (Gain)
* Plug figure to make JE Balance
* Goodwill Debit
* Gain Credit
SOME
F6-M3 * Recognize “SOME” of the services at FV
Not-For-Profit: Donated Services
Contribution of service that do not enhance nonfinancial assets are recognized only SOME of the time
o S – Specialized skills are required and possessed by the donor
o O - Otherwise needed by the organization
o M – Measurable
o E – Easily (at FV)
JE:
DR Expense or asset
CR Contributions - without donor restrictions
Contributions without Donor Restrictions
F6-M3
Pledges without donor restriction (with impled time restriction and thus initially recognized as donor-restricted):
DR Pledge receivable-with donor restriction
CR Allowance for doubtful accounts
CR Contributions-with donor restriction
Later, when collected, assets with donor restrictions are adjusted:
DR Cash-with donor restriction
CR Pledge receivable-with donor restriction
DR Satisfaction of time restriction-with donor restriction
CR Cash-with donor restriction
Assets without donor restrictions:
DR Cash-without donor restriction
Cr Satisfaction of time restriction-without donor restriction
Collection of the pledge satisfies the time restriction and results in a reclasssification
Donor-Restricted Support (Contributions with Donor Restrictions)
F6-M3
Increases to net assets with donor restrictions:
DR Pledge receivable-with donor restrictions
CR Allowance for doubtful accounts
CR Donor-restricted support
Later, after receivable is collected and when money is spent on restricted purpose, net assets with donor restrictions will be reduced:
DR Reclassification-satisfaction of donor restriction
CR Cash-with donor restrictions
Net assets without donor restrictions are simultaneously increased and decreased:
DR Cash-without donor restrictions
CR Reclassification-satisfaction of donor restriction
DR Operating expnese
CR Cash-without donor restrictions
Contribution Revenue
Fundraising
Total Contribution received
< Fair value of premiums >
The general rule, for CPA exam questions, for amounts recognized as contributions received thruogh fundraising appeal is:
Gross revenue from tution and fees
Industry-Specific Revenue Recognition
F6-M3
Assessed student tuition and fees
< Canceled classes >
Scholarships, tuition waivers, and similar reductions are considered either expenditures or a separately displayed allowance reducing revenue.
Student tution and fees are reported at the gross amount. Many prior CPA exam questios have required students to compute gross revnue from tution and fee’s.
Government: Three Funds
MAC-GRaSPP - Governmental Funds
SE - Proprietary Funds
CIPPOE - Fiduciary Funds
GRaSPP
Government Funds
F6-M6
General
Special Revenue
and
Debt Service
Capital Projects
Permanent
MAC-GRaSPP
Governmenttal Funds
To remember the differences in focus and Accouting
Modified
Accrual accounting
Current financial resources measurement focus
GRaSPP
SE-CIPPOE
Service (internal)
Enterprise
Custodial
Investment trust
Private purpose trust
Pension ( and Other Employee benefit) trust
The economic resources measurement focus and full accrual basis of accounting is used for both government-wide financial statements as well as the fund presentations of the figuciary and proprietary funds
SCARE
Proprietary and fiduciary funds
To remember the differences in focus and Accouting
o S – SE
o C – CIPPOE
o A – Accrual Accounting
o R – Record non-current assets and liabilities
o E – Economic resources measurement focus
FED
Not-For-Profit: Underwater Endowment Funds
F6-M4
- Must disclose how hard it will be for their intended beneficiaries to be “FED”
o F – FV of fund
o E – Endowment gifts original amount
o D – Deficiency amount
Underwater endowmenets must disclose how hard it will be for their intended beneficiaries to be FED
U R MICE
* Characteristics in Financial Reporting
Government: Financial Reports
U - Understandability
R – Reliability
M – Makes a difference – Relevance
I – In Timeliness
C – Consistency year over year
E – Entity to entity comparability
Two Rules concerning Capital Interest
F3.M4
Rule 1: Only capitalize interest on money actually spent, not on the total amount borrowed
Rule 2: The amount of capitalized interest is the lowe of :
1. Actual interest cost incurred, or
2. computed capitalized interest (avoidable interest)
Interest Expnese
F4.M5
Effiective Interest method
Carrying value at the beg of the period x Effective (market) interest rate
Amortization of the discount
F4.M5
Effiective Interest method
eInterest Expenese - Interest Payment
Amortization of the premium
F4.M5
Effiective Interest method
Interest Payment - Interest Expense
Effiective Interest method
F4.M5
Income Satement -> Net carrying value x Effective interest rate = Interest Expense
Balance sheet-> Bond Face x Coupon Rate = (Interest Payment)
Difference -> Amortization
Price Index
F3-M4
Ending Invetory at current year cost / ending inventory at base year cost
LIFO to FIFO
Change in Principle, use retrospective approach
FIFO to LIFO
Change in estimate, use prospective approach
Cost of goods Sold
(Periodic System)
F3 M3
Periodic Inventory
Beg inventory
+ Purchases
= COG available for sale
- Ending Inventory (physical count)
Cost of Goods Purchased
(Periodic System)
F3 M3
Periodic Inventory
Gross Purchases
- Purchase returns and/or Purchase discounts
+ Freight in
Periodic Inventory
- Must do
- Periodically
- Buyer pays the freight
JE when buying Inventory:
DR Purchases
CR Cash or AP
JE when selling inventory:
DR Cash or AR
CR Sales
Perpetual Inventory
- Can do
- Random or cyclically
JE when buying Inventory:
DR Inventory
CR Cash or AP
JE when selling inventory:
DR Cash or AR
CR Revenue
DR COGS
CR Inventory
Capitalized Interest “Key Rules”
F3 M4
Rule #1 Only capitalize interest on money spent not on total amount borrowed
Rule #2 The amount capitalized interest is the lower of:
*Actual interest cost incurred, or
* Computed capitalized interest (avoidable interest)
