Deck 2

Question 1

What is the primary risk associated with an interest rate swap (which is a derivative)?

Answer 1

Credit Risk

The risk of a counterparty failing to perform under the terms of a contract is a primary risk associated with interest rate swaps. For example, credit risk is associated with a counterparty not making the settlement payment on the settlement date as defined in the swap contract.

Market risk is an inherent risk in all derivative instruments, but it is not the primary risk associated with interest rate swaps.

Question 2

Difference between derived tax revenues and imposed non-exchange revenues in the general fund (modified accrual basis):

Receivables associated with derived tax revenues are generally recorded upon receipt while receivables associated with imposed non-exchange revenues are recorded when billed.

Answer 2

Derived tax revenues, such as income taxes and sales taxes are accrued if measurable and available. Typically derived tax revenues are accrued at year end if received within 60 days of year end.

Imposed non-exchange revenues, such as a property taxes and fines, are recorded as a receivable when billed. Although revenue recognition is still subject to the availability criteria (received within 60 days of year end), the enforceable rights of the government allows for recording the receivable.

Question 3

What are the 3 characteristics of a derivative?

Answer 3

A derivative is a financial instrument that derives its value from the value of some other instrument and has three characteristics:

1. it has one or more underlyings, and one or more notional amounts or payment provisions, or both
2. it requires no initial net investment or one that is smaller than would be required for other types of similar contracts
3. its terms require or permit a net settlement, or it can readily be settled net outside the contract or by delivery of an asset that gives substantially the same results

Question 4

What are the characteristics of an Option Contract (derivative)?

Answer 4

Option contracts are a contract between two parties that gives one party the right, but not the obligation, to buy or sell something to the other party at a specified price (the strike price or exercise price).

The option buyer must pay a premium to the option seller to enter the option contract.

A call option gives the holder the right to buy from the option writer at a specified price during a specified period of time.

A put option gives the holder the right to sell to the option writer at a specified price during a specified period of time.

Question 5

What are the characteristics of an Future Contract (derivative)?

Answer 5

The Future contract is an agreement between two parties to exchange a commodity, currency, or other asset at a specified price on a specified future date.

One party takes a long position (agrees to buy the particular item) and the other takes a short position (agrees to sell particular item).

Both parties obligated to perform the terms of contract.

These contracts are made through a clearinghouse and have standardized notional amounts and settlement dates.

Question 6

What are the characteristics of an Forward Contract (derivative)?

Answer 6

Forward contracts are similar to a future contract except that they are privately negotiated between two parties with the assistance of an intermediary, to exchange future cash payments.

Question 7

What are the characteristics of an Swap Contract (derivative)?

Answer 7

A swap contract is a private agreement between two parties, generally assisted by an intermediary, to exchange future cash payments.

Common swaps include interest rate swaps, currency swaps, equity swaps, and commodity swaps.

A swap agreement is equivalent to a series of forward contracts.

Question 8

All Research and Development costs are expensed under GAAP except what two things?

Answer 8

1. Materials equipment, or facilities (i.e. tangible assets) that have alternative future uses. - Capitalize and depreciate these over their useful lives
2. Research and development costs of any nature undertaken on behalf of others under a contractual agreement.

Question 9

Under the acquisition method, where a company acquired 100% of the outstanding common stock of another company, how is inventory valued?

Answer 9

With acquisition accounting, the net assets are based on fair market value. The FV of finished goods and merchandise inventory are based upon selling price less disposal costs and a reasonable profit allowance.

Question 10

How is the difference between beginning and ending shareholder’s equity calculated?

Answer 10

Beginning Shareholders Equity - Dividends Paid + New Shares Issued - Shares Repurchased + Comprehensive Income = Ending Shareholders Equity

Question 11

A company recorded a decommissioning liability and recognized the amount recorded as part of the cost of the related property. After the property was fully depreciated, the decommissioning liability was reviewed and adjusted. How should this change in the decommissioning liability be recognized under IFRS and GAAP?

Answer 11

A decommissioning liability under IFRS is the same as an asset retirement obligation (ARO) under U.S. GAAP. Any change in the value of the liability after the property has been fully depreciated will be recognized in profit or loss.

Question 12

What is the carrying value of a bond?

Answer 12

The carrying value of a bond equals face plus the unamortized premium or face minus the balance of unamortized discount.

As bonds approach maturity, their carrying values approach face value, so that the carrying value of the bonds equals face value at maturity.

Question 13

What is the basic earnings per share calculation and the dilutive earnings per share calculation?

Answer 13

Basic EPS:
(Net Income - Preferred Dividends)/Weighted average # of Outstanding Common Stock

Dilutive EPS:
(Net Income + Interest on dilutive Securities)/ Weighted average number of common shares (assuming all dilutive securities are converted to common stock)

Question 14

What are the required financial statements for a defined benefit pension plan and a defined contribution plan?

Answer 14

Both require the:

1. Statement of Net Assets for Benefits
2. Statement of Changes in Net Assets Available for Benefits

The Defined benefit pension plan also requires:

3. Statement of Accumulated Plan Benefits
4. Statement of Changes in Accumulated Plan Benefits

Question 15

When a bond is issued to pay off a previous bond, the long-term liabilities will increase by the difference in what?

Answer 15

The long-term liabilities will increase by the difference between the carrying amount of the old bond and the face amount (issuing price) of the new bond.

Rule: Bond liability is shown on the balance sheet net of unamortized discount.

Question 16

How would you calculate dividends to share holders for Preferred and Common Stock?

Answer 16

1. Preferred in arrears = Full amount
2. Preferred = # shares * Par * %
3. Common = # shares * Par * Preferred %
4. The rest is split based on the ration of 2 and 3 above. If $100 dividends remained after 3 above and preferred had received $5 in #2 and Common had received $10 in #3, you would pay preferred $33 (5/(10+5) and you would pay common $67 (10/(10+5)

Question 17

For held to maturity securities, if the problem mentions a specific accrued interest amount, subtract that from the investment’s carrying amount (face-discount or + premium)

Answer 17

b

Question 18

When calculating compensation expense, use the FV determined on the date the stock options are granted, not the FV at a later date.

Answer 18

b

Question 19

A company reports the net periodic pension cost on its own income statement and the funded status of the plan (the plan’s assets relative to the plan’s obligations) on its own balance sheet.

Answer 19

b

Question 20

If a problem asks how many shares of Common stock were outstanding at year end you would add all common stock and subtract out treasury stock.

Answer 20

b

Question 21

Loans to other entities and the consequent collection of the loans are reflected in the investing activity section of the cash flow statement.

Answer 21

Example would be a Note receivable from a related party

Question 22

Is R&D included in Net Assets when calculating Goodwill?

Answer 22

Yes, for both GAAP and IFRS

Question 23

How do you determine if shares are dilutive or anti dilutive?

Answer 23

If the $ per share is higher than the average market price of the common stock then the shares are anti-dilutive. If the $ per share is lower than the average market price of the common stock then the shares are dilutive.

So if i have stock options at $50 and stock warrants at $35 and the average market value of the CS is $40 then the stock options are antidilutive and the stock warrants are dilutive.

Anti dilutive is not included in the calculation of dilutive EPS.

Question 24

If in the purchase of a subsidiary there is contingent consideration, that contingent consideration is included in the price paid for the acquisition.

Answer 24

b

Question 25

For governmental accounting, is intergovernmental revenues included as estimated revenues for the period?

Answer 25

Yes, Intergovernmental revenues are included as estimated revenues for the period.

Transfers in from other funds are not though

Question 26

What costs can be capitalized related to a patent?

Answer 26

Legal costs of applying for a patent license
Costs spent to successfully defend the rights of a patent against a competitor

R&D is NOT capitalized

Question 27

For component depreciation, what amounts are capitalized and depreciated?

Answer 27

Separate significant components of a fixed asset with different lives should be recorded and depreciated separately. The carrying amount of parts or components that are replaced should be derecognized (EX: Minor parts).

Question 28

Under GAAP, the cash effects of transactions involving making and collecting loans are included in investing activities, not financing.

Answer 28

b

Question 29

Do all identified concentrations need to be disclosed?

Answer 29

Identified concentrations only need to be disclosed if all of the following criteria are met:

1. The concentration exists at the financial statement date.
2. The concentration makes the entity vulnerable to the risk of a near-term severe impact.
3. Its at least reasonably possible that the events that could cause the severe impact will occur in the near-term.

Question 30

When calculating book value per share of common stock, you would take all of stockholders equity and then subtract out any dividends in arrears for Preferred stock and if there’s a liquidating value of stock, remove that as well. Then divide that by the number of common stock shares

Answer 30

b