Section 1 Flashcards
Convert from Cash to Accrual Basis
ADD INC in ASSETS and DEC in LIAB
SUBTRACT DEC in ASSETS and INC in LIAB
**This is a Prior Period Adj to a Correction of an Error
Comprehensive Income
Net Income + Other Comprehensive Income (Unrealized gain/loss on AFS debt securities, foreign currency translation adjustments, unrecognized gain/loss on pension benefits, and deferred gain/loss on hedging)
Book Value per share of C/S
Total Stockholders Equity / # of COMMON shares OUTSTANDING (or Shares Issued - Reacquired)
COGS
Amt paid = COGS - Inv Decrease - AP Increase
Equity Method for Investments
Parent recognizes its share of subsidiary income and dividends declared by subsidiary.
Return on equity
Net income - Preferred Dividends (also called dividends paid to preferred stock)
/
AVG common shareholder’s equity (this is C/S + Retained Earnings)
WASO
If Treasury shares are in the beginning of the calculation, SUBTRACT them to get your starting total.
If you’re asked for Basic EPS from DISCONTINUED Ops, DO NOT include P/S DIVIDENDS
Diluted EPS
Diluted EPS: NI- P/S dividends + P/S dividends
/
WASO + Dil Sec Options (Or Incremental Shares) + PS Con
T/S Method: Option to purchase 40 shares at $3 per share. Avg market price is $8.
Calculation is : ((Option Shares (40) x Price (3)) / Avg Mkt price = Shares I can buyback (15)
Option shares (40) - Shares I can buyback (15) = Incremental Shares (25)
Conversion Rate: # of P/S shares (10) x Convertible shares (20) = Dil Sec Conv P/S (200)
EPS P/S dividends
If not given, it’s Dollar amt of p/s divided by the ‘convertible’ percentage
Non-controlling interest
F.V. of unpurchased shares +
Non-controlling % of N.I. -
Non-controlling % of Dividends paid
Warranty Liabilities
*Remember, if asked to calculate warranty liability at the end of a given year, you must include estimated warranty expense even AFTER the end of the period.
Diluted EPS cont’d
If P/S is convertible, we add back P/S div in Diluted EPS calc
Interest on bonds is added back to N.I., net of tax
ONLY Common Shares are used in the denominator
First figure out basic EPS to determine if it’s dilutive vs antidilutive
You do consider time value when accounting for diluted shares in denominator
Underlying principles
Conservatism - Recognizing gains/losses
Relevance - Quality of info that is useful for decision making
Faithful Representation - Unbiased
Segment Reporting
10% of Sales, Op Income, or Assets
Discontinued Ops
Income from Continuing Ops is restated in prior years to reflect the change from discontinuing ops for comparability.
Basic EPS
Net Income - Preferred Dividends (if not given, it’s total $$ value of preferred stock x’s %cumulative. / WASO
Cash Flow Statement
Trading securities are reported in OPERATING ACTIVITIES
Remember to account for depreciation (by looking at change in A.D. compared to any sale of fixed assets)
Primary Qualitative Characteristics
Relevance - capable of impacting a decision.
Predictive Value-used as input to predict future outcomes
Confirmatory Value-provides feedback about previous evals
Materiality-can influence decision making.
Faithful Representation - reliable.
Complete-Includes all necessary info.
Neutral-without bias in the selection or presentation of fin. info.
Free from error-No errors or omissions
Enhancing Qualitative Characteristics
Comparability-enables users to identify and understand similarities
Verifiability-different knowledge and independent observers reach consensus
Timeliness-Having info available in time to make decisions
Understandability-presenting info clearly
Diluted T/S Method
Stock Options and Warrants
Calculation: ((Mkt Price - Exercise Price) / Mkt Price)) x’s # of options
Example:
10,000 options to acquire C/S at $20 par and the market value is $25
- (25-20)/ 25 x’s 10,000 = 2,000
The 2,000 is added to the denominator.
Diluted ‘If Converted’ Method
of shares converted is added to denominator.
Int Exp (net of tax) is added back to numerator.
**Remember, both account for time value.
If P/S is CONVERTIBLE, we add back to Net Income in calc.
Accounting estimates
Change in estimate - Current and prospective change
Change in principal - Retrospective application
