Statement of Cash Flows and Stock holders Equity

Question 1

What items are included in operating activities on the Statement of Cash Flows?

Answer 1

Cash received from Customers- Interest & Dividends- Trading Securities

Cash paid to Vendors- Suppliers- Interest- Taxes- Trading Securities

Question 2

What items are included in investing activities on a Statement of Cash Flows?

Answer 2

Cash received: Sale of PP&E- Sale of Investments- Loan Principle

Cash paid: Loans- Acquisitions- AFS or HTM Securities- Taxes- Trading Securities

Question 3

What items are included in Financing Activities in a Statement of Cash Flows?

Answer 3

Cash received: Issuance of Stock- Issuance of Debt

Cash paid: Dividends

Question 4

What is the direct method for a Statement of Cash Flows?

Answer 4

Starts with Income from Continuing Operations

Adjusts for changes in accounts like A/R- A/P- Inventory and non-cash revenues- expenses- gains- losses

If used- the Indirect Method must also be shown

Question 5

What is the Indirect Method for a Statement of Cash Flows?

Answer 5

Starts with Net Income

Adjusts for changes in accounts like A/R- A/P- Inventory and non-cash revenues- expenses- gains- losses

Question 6

When common stock and preferred stock are issued in a lump sump purchase- how is APIC allocated?

Answer 6

APIC for each is allocated by its respective % of the total FMV of the shares x the proceeds.

Question 7

When is APIC recorded on a stock subscription?

Answer 7

APIC increases on date subscription is recorded - not on the date paid for or issued

Question 8

To what extent is retained earnings restricted if legally restricted due to Treasury Stock?

Answer 8

It will be restricted to the extent of the balance in the Treasury Stock account.

Question 9

When are dividends in arrear recorded for cumulative preferred stock?

Answer 9

They are not accrued until declared.

Question 10

When are dividends in arrears included as a disclosure and not an accrual in the financial statements?

Answer 10

If a year passes and no Cumulative Preferred Stock is declared- then the dividends in arrears are included as a disclosure - not an accrual in the Financial Statements.

Question 11

What is the gain or loss when a non-monetary asset is distributed to a shareholder?

Answer 11

The gain or loss is the difference between the FMV of the asset distributed at the date of distribution and its carry amount on the company’s books

Question 12

What is the effect on retained earnings when a non-monetary asset is distributed to a shareholder?

Answer 12

The effect on Retained Earnings is the Carrying Amount of the asset

RE will be debited when the dividend is declared for the FMV of the asset- which is more (or less) than the carrying amount

Gain/Loss recorded when the asset is distributed will offset the original effect of the debt to RE and will be a wash

The net effect of the entry is that RE will decrease by the CV of the asset

Question 13

When is Retained Earnings debited for FMV of Stock for a stock dividend?

Answer 13

When Stock Dividend is less than 25% of Common Stock outstanding

Question 14

When is Retained Earnings debited for Par Value for a stock dividend?

Answer 14

When Stock Dividend is greater than 25% of common stock outstanding

Question 15

What is the effect of a stock dividend or a stock split on total shareholder equity?

Answer 15

Stock dividends and stock splits both have no effect on Total Shareholder Equity

Question 16

What is the affect on APIC from a stock split?

Answer 16

Stock splits only affect par value - APIC remains the same.

Question 17

When is compensation expense recorded at the time of grant for a stock option?

Answer 17

Compensation expense is recorded at the time of grant if options are exercisable immediately

They are based on past service.

Expense recognized : FV Stock Option x # of Shares

Question 18

What interest rate is used to discount stock options?

Answer 18

The risk-free interest rate

Question 19

What date is used as the measurement date for share-based payments classified as liabilities?

Answer 19

The settlement date.

Question 20

How are compensation costs for share-based payments classified as liabilities measured?

Answer 20

Compensation costs for share-based payments classified as liabilities are measured by the change in the fair value of the instrument for each reporting period

Question 21

What is the net increase to shareholder equity in a reorganization where a company pays cash and issues stock to satisfy unsecured creditors?

Answer 21

Net increase to SHE : Gain on settlement of debt + Credit to SHE from stock issuance

Question 22

What is the primary purpose of a quasi-reorganization?

Answer 22

To eliminate a deficit balance in RE by restating its assets to Fair Value

It does not directly protect a company from its creditors

Question 23

How is return on Common Stockholder’s Equity calculated?

Answer 23

(Net Income - P/S Dividends) / Average Common Stockholders Equity

Note: Average CSE : Common Stock + RE

Question 24

How is book value per share of common stock calculated?

Answer 24

Total Common Stock
- Total Preferred Stock
- P/S Dividends in Arrears
- P/S Liquidation Premium
:Total Book Value

Book Value per Share : Total Book Value / Shares outstanding

Question 25

How is the dividend per share payout ratio calculated?

Answer 25

Dividends per share / earnings per share

Question 26

How is basic Earnings Per Share (EPS) calculated?

Answer 26

(Net Income - Preferred Dividends) / Average C/S Outstanding

Note - If cumulative- subtract the P/S dividend regardless of whether or not they’re declared.

Question 27

For EPS purposes- which date is used for calculation purposes when a stock split or stock dividend has occurred?

Answer 27

For EPS purposes- treat C/S stock splits or stock dividends as if they occurred at the beginning of the year- regardless of when actually issued during the year

Question 28

For which areas is EPS required to be shown?

Answer 28

EPS is only required to be shown for Income from Continuing Operations and Net Income.

All others (discontinued operations- extraordinary items) can be shown on the Financial Statements or in the notes

Question 29

When do stock options increase share outstanding?

Answer 29

Only if they are dilutive.

Their exercise price is LESS than the market value

If not- you ignore them in the calculation

Question 30

How is EPS calculated when convertible bonds are taken into consideration?

Answer 30

[Net Income + Bond Interest (Net of Tax)] / (Average Common Stock Shares + Convertible Equivalents)

Bond interest is added back because if converted- there would be no bond interest expense

Contingent Issue Agreements are included in Diluted EPS if contingency is met