F1 Module 1

Question 1

trading debt securities

Answer 1

-purchased and retained to sell them in the near future
-demonstrate active buying and selling to generate profits on short-term changes in price
-reported as current assets

Question 2

available for sale debt securities

Answer 2

-do not meet held to maturity or trading debt security classifications
-reported as current or non-current asset based on intended use
-can be AFS if hold for indefinite period but not to maturity
-credit losses on AFS = amount of amortized costs in excess of fair value
-any other additional loss on it is reported on OCI

Question 3

held-to-maturity debt securities

Answer 3

-investments that the corp. has the intent to hold them to maturity
-if to hold for indefinite period but not to maturity, security classified as AFS
-credit losses on HTM = amount of amortized cost in excess of present value

Question 4

goodwill

Answer 4

-intangible resources that is related to the business (ex marketing, knowledge not identified or valued separately, technical skill etc.)
-capitalized in excess of earnings generation
-results from acquiring business combos and only recognized on consolidated F/S
-not amortized but tested for impairment annually at the reporting unit level

Question 5

impairment of loans

Answer 5

-considered impaired if likely that creditor is unable to collect all amounts under original contract when due
-Ex. troubled debt restructuring

Question 6

impairment of equity securities

Answer 6

-if securities do not have a determinable fair value, they are measured at cost less impairment
-if impairment exists, the cost basis will be written down to the fair value and the written-down amount is treated as a realized loss on the I/S

Question 7

impairment of debt securities

Answer 7

-AFS and HTM reported on B/S at net amount expected to be collected per current expected credit loss model (CECL)
-I/S will reflect increases or decreases in expected credit losses for the securities

Question 8

impairment of assets to be be held, used or disposed of

Answer 8

-occurs if book value of assets determined not be recoverable

Question 9

bond issuance costs

Answer 9

-transaction costs of selling a bond
-ex. legal fees, accounting fees, underwriting commissions and printing
-Under GAAP, these costs decrease the carrying value of the bond and amortized using effective interest method

Question 10

effective interest method

Answer 10

-a method of amortizing that results from a constant rate of interest each period
-interest expense = carrying amt of bond at beg. of period * effective interest rate
-amortization for period of discount or premium = interest expense - cash paid for interest
-EIR= (1 + i/n)^n -1

Question 11

effective interest rate

Answer 11

-market interest rate actually earned by bondholders and a rate of return for comparable bonds at date bonds were issued

Question 12

coupon (stated) interest rate

Answer 12

-the interest paid on a bond by the issuer for the term of the security
-usually the yield to maturity rate (market interest rate at date of issuance)

Question 13

bond discount

Answer 13

-bonds sold at discount if market interest rate > stated interest rate (coupon rate)
-sold at discount so investors can get higher interest rate on other investments

Question 14

bond premium

Answer 14

-bonds sold at premium if market interest rate < stated interest rate (coupon rate)
-sold at premium because investors cannot get a higher interest rate in other investments

Question 15

gains and losses treatment

Answer 15

-reported at net amounts (proceeds - net book value)
-gain is recognition of an asset not from operations
-loss is recognition of a cost not from operations
-items of gain or losses that are infrequent/unusual reported separately as part of income from continuing operations and disclosed on face of I/S or footnotes

Question 16

multiple step income statement layout (9 steps)

Answer 16

1) Sales - net sales, discounts
2) Less COGS
= gross margin
3) Less Selling Expenses (commission exp., advertising, freight out, sales dept.)
4) Less G&A (rent expense, office exp., office salaries)
5) Less depreciation expense
= Income (loss) from operations
6) Add other gains/revenues (interest income, realized gain on sale of AFS)
7) Less other expenses/losses (interest exp., loss on sale of PPE, restructuring exp.)
= Income before income tax
8) Less income tax expense
= Income from continuing operations
9) Less discontinued operations net of tax
= Net income

Question 17

single step income statement layout (4 steps)

Answer 17

1) All operating and non-operating revenues
2) Less all operating and non-operating expenses
3) Less Income tax expense
= Income from continuing operations
4) Less discontinued operations net of tax
= Net income

Question 18

equity method

Answer 18

-used to account for investment in securities if significant influence is exercised by investor over investee (business)
-investor exercises significant influence over operating and financial policies if owns 20 - 50% of investee voting stock

Question 19

cost method

Answer 19

-used to account for investments in securities if the investor does not exercise significant influence over the investee
-influence is less than 20%
-investment is generally carried at fair value through net income

Question 20

discontinued operations

Answer 20

-reported net of tax
-includes component, entity, nonprofit/business activity, or major equity investment method (if disposed of or classified as held for sale in period it occurred)
-can consist of impairment loss, gain or loss from operations or disposal
-must present as major strategic shift and impact operations
-once asset disposed of, no longer depreciable/amortizable

Question 21

impairment loss for discontinued operations

Answer 21

-loss recognized is fair value less costs to sell - carrying amount and will be reported net of tax
-a gain is recognized if a subsequent increase in fair value minus costs to sell, but cannot exceed previously recognized cumulative loss

Question 22

measurement for held for sale item

Answer 22

-component classified as held for sale is the amount item was sold for less fair value less costs to sell and reported net of tax
-costs to sell are the extra costs to make the sale happen

Question 23

presentation and disclosure of discontinued operations

Answer 23

-results are reported as separate component of income, below income from continuing operations
-gain or loss recognized on disposal is disclosed on either the face of I/S or notes to the F/S

Question 24

exchange rate

Answer 24

-difference in price of a currency between the domestic and foreign country

Question 25

direct method of foreign exchange

Answer 25

-the price of the domestic currency in relation to the foreign currency

Question 26

indirect method of foreign exchange

Answer 26

-the price of the foreign currency in relation to the domestic currency

Question 27

when foreign transaction not settled as of B/S date

Answer 27

-is an unrealized gain or loss on foreign currency transaction
-booked to OCI
-the amount of gain or loss unrealized is the difference between the initial transaction amount and the rate at the balance sheet date

Question 28

items in OCI

Answer 28

-pension adjustments (included until pension expense recognized, ex. amort on actuarial loss)
-unrealized gains/losses on AFS, HTM, derivative instruments designated as cash flow hedges and differences in initial amount and fair value for derivatives as hedges (debt securities, NOT equity securities)
-foreign currency translation adjustments on OCI until sale
-changes in fair value of instrument-specific credit risk

Question 29

reclassification adjustments

Answer 29

-move OCI items in AOCI to the income statement

Question 30

two types of financial statement reporting for OCI (does not apply to NFP entities)

Answer 30

1) single statement approach
2) two statement approach

Question 31

single statement approach

Answer 31

-displays OCI items individually and in total below NI amount, and totals them for comprehensive income
-the OCI items are recorded net of tax or before tax, even if they are losses, and the total is receives income tax expense or benefit of total OCI
-shows income statement and OCI together for the CI statement

Question 32

two statement approach

Answer 32

-immediately follows the income statement
-only shows net income at top, and then OCI items
-OCI items reported net of tax or before tax and total of OCI reduced or added by income tax expense or benefit

Question 33

income tax expense or benefit disclosures

Answer 33

-allocated to each OCI item disclosed either on the face of the statement in which components displayed OR in notes to F/S

Question 34

required disclosures

Answer 34

1) tax effects of each item of OCI as statement presentation or notes to F/S
2) changes in accumulated balances by item of OCI (pension adjustments, gains/losses of foreign currency etc.)
3) total AOCI as item of equity
4) reclassification adjustments to avoid double counting

Question 35

reclassification adjustment disclosures

Answer 35

1) changes in AOCI by item of OCI, must disclose the reclass adjustment and current period OCI
2) significant items reclassified out of AOCI disclosed on face of F/S where NI presented or separate disclosure in notes to F/S
3) amounts of OCI item presented net of tax or before tax, as long as tax effect shown in F/S or notes

Question 36

accumulated other comprehensive income

Answer 36

-item of equity that includes total OCI for current and prior periods
-current OCI is closed to AOCI similar to NI closed to RE

Question 37

denominated in currency

Answer 37

the transaction is being either settled in the foreign or domestic currency? If it’s denominated in euros, payment or receivable will be transacted in euros

Question 38

if the domestic currency depreciates against foreign currency:

Answer 38

domestic payables: cost more to pay back foreign supplier, requiring more units (loss)

domestic receivable: receive less money for sale of goods because it requires less units for foreign customer to pay (loss)

Question 39

if the domestic currency appreciated against foreign currency:

Answer 39

domestic payables: it will cost less to pay back foreign supplier, requiring fewer units to pay back (gain)

domestic receivable: receive more money from sale because it will require more units for foreign customer to pay (gain)