F1 - Financial Reporting

Question 1

What should a full set of financial statements include?

Answer 1

• Statement of Financial Position (the balance sheet)
• Statement of Earnings (the income statement)
• Statement of Comprehensive Income
• Statement of Cash Flows
• Statement of Changes in Owners’ Equity

Question 2

The gain (loss) from discountinued operations can consist of…

Answer 2

An impairment loss, a gain (loss) from actual operations, and a gain (loss on disposal.

Question 3

How do we account for subsequent increases in the fair value of a discontinued component?

Answer 3

A gain is recognized for the subsequent increase in fair value minus costs to sell (but not in excess of the previously recognized cumulative loss). The gain is reported in the period of increase.

Question 4

Define comprehensive income.

Answer 4

Change in equity (net assets) that results from transactions and other events and circumstances from nonowner sources.

Question 5

List some disclosure requirements for comprehensive income.

Answer 5

• Tax effects of each component included in current “other comprehensive income”
• Changes in the accumulated balances of components of “other comprehensive income”
• Total accumulated other comprehensive income
• Reclassification adjustments between other comprehensive income and net income

Question 6

State two types of foreign currency transactions.

Answer 6

• Operating transactions, such as importing, exporting, borrowing, lending, and investing transactions.
• Forward exchange contracts, which are agreements to exchange two different currencies at a specific future date and at a specific rate.

Question 7

Where are foreign currency transaction gains or losses reported in the financial statements?

Answer 7

Foreign currency transaction gains or losses are included in determining net income for the period.

Question 8

For operating transactions in foreign currency, detail the recording process.

Answer 8

• Record original transaction at exchange or spot rate on date of transaction.
• At balance sheet date, compute gain/loss on the transaction by recalculating using the current exchange or spot rate.
• On payment date, compute gain/loss on the transaction by using the exchange rate on payment date.

Question 9

What conditions must be present for a disposal to be reported in discontinued operations?

Answer 9

A disposal of a component, group of components, business activity, or nonprofit activity is reported in discontinued operations if the disposal represents a strategic shift that has or will have a major effect on an entity’s operations and financial results.

Question 10

Name the expense that each of the following unexpired costs turn as they expire:
1. Inventory
2. Unexpired (prepaid) cost of insurance
3. Net book value of fixed assets
4. Unexpired cost of patents

Answer 10

1. Cost of goods sold
2. Insurance expense
3. Depreciation expense
4. Amortization expense

Question 11

Are gains and losses on the disposal of assets shown on a “gross basis” (i.e., where both the sale proceeds and the net book value of the disposed asset are reported) or on the “net basis” (i.e., where only the difference between the sale price and the net book value of the disposed asset is reported)?

Answer 11

Gains and losses are reported at their net amounts (i.e., proceeds less net book value).

Question 12

How does a “multiple-step” income statement differ from a “single-step” income statement?

Answer 12

• A multiple-step income statement reports operating revenues and expenses separately from nonoperating revenues and expenses and other gains and losses.
• On a single-step income statement’s presentation of income from continuing operations, total expenses are subtracted from total revenues without separation between operating and nonoperating revenues and expenses.

Question 13

What is meant by a “classified” balance sheet?

Answer 13

A classified balance sheet distinguishes current and non-current assets and liabilities.

Question 14

List the two formats acceptable for reporting comprehensive income.

Answer 14

• Statement of comprehensive income (single-statement approach)
• Statement of income followed by separate statement of comprehensive income (two-statement approach)

Question 15

Identify four items included in other comprehensive income.
PUFI

Answer 15

Pension adjustments
Unrealized gains and losses on available-for-sale debt securities and hedges
Foreign currency translation adjustments and gains/losses on certain foregn currency transactions
Instrument-specific credit risk for liabilities (using FV) and their changes in FV

Question 16

Describe Form 10-K and Form 10-Q. What level of assurance must be provided with the financial statements submitted in these forms?

Answer 16

Form 10-K: Filed annually by U.S. registered companies. Includes a summary of financial data, MD&A, and audited financial statements prepared using U.S. GAAP.
Form 10-Q: Filed quarterly by U.S. registered companies. Includes aunaudited financial statements, interim MD&A, and certain disclosures.

Question 17

What is the basic formula used for calculating EPS?

Answer 17

Question 18

Compare basic and diluted EPS.

Answer 18

Question 19

Name the potentially dilutive securities or instruments.

Answer 19

• Stock options and warrants and their equivalents
• Convertible securities (bonds or preferred stock)
• Contracts that may be settled in stock or cash
• Contingent issuable shares

Question 20

What is the antidilution rule?

Answer 20

Any conversion, exercise, or contingent issuance that has an antidilutive effect (increases EPS or decreases loss per share) is not included in the calculation unless the shares have actually been converted, exercised, or satisfaction of the contingency met.

Each potential common share is considered separately in sequence from most to least dilutive, with in-the-money options and warrants generally indluded first.

Question 21

List the reporting requirements for EPS.

Answer 21

Face of income statement, with equal prominence for basic and diluted per-share amounts, for both income from continuing operations and net income.

Per-share amounts for discontinued operations can be reported on the face of the income statement or in the notes to the financial statements.

Question 22

Define common stock and list the basic properties.

Answer 22

Common stock: Residual ownership interest

Basic rights include:
* Voting rights
* Dividend rights
* Rights to share in distribution of assets if corportation is liquidated, after satisfaction of creditor and preferred stockholders’ claims

Question 23

List some common properties of preferred stock.

Answer 23

• Convertible, callable
• Redeemable
• Dividends can be cumulative and/or participating

Question 24

What are the two alternative methods of accounting for treasury stock?

Answer 24

Cost method: Treasury stock is debited at cost of shares repurchased.

Legal (par value method/stated value method): Treasury stock is debited at par value of shares repurchased.

Remember, no gains/losses are recognized on the income statement; income and retained earnings may never increase by the transaction; Additional Pain-In Capital - Treasury Stock account used to record “gains” and absorb “losses”.

Treasury stock is not an asset; cash and property dividends are not paid on treasury stock; stock dividends may be paid on treasury stock.

Question 25

Summarize the cost method of accounting for treasury stock.

Answer 25

• Recorded, carried, and reissued at reacquisition cost
• Any “gain” is credited to Paid-in Capital - Treasury Stock
• Any “loss” is charged against previous “gains”, then retained earnings
• Reported as a deduction from total stockholders’ equity

Question 26

Summarize the par value method of accounting for treasury stock.

Answer 26

• Recorded at par value with cost of stock that is in excess of par value recorded as a deduction to Paid-in Capital - Treasury Stock and then from retained earnings after Paid-in Capital - Treasury Stock is depleted.
• Reported as a deduction from capital stock.

Question 27

List the significant dates with respect to cash dividends.

Answer 27

• Date of Declaration: Becomes a liability and reduces retained earnings
• Date of Record: No journal entry, memorandum entry only
• Date of Payment: Actually paid

Question 28

List five types of dividends.

Answer 28

Cash
Liquidating: Return of investment
Property: FMV of assets given up, the gain/loss recognized
Scrip: Promis to pay a dividend in future
Stock: Results in capitalizing part of retained earnings, increasing legal capital. Remember, if <20%-%25%, record at market value; if >20%-25%, record at par value.

Question 29

What is the threshold for treating stock dividends as large vs. small stock dividends?

Answer 29

• Small stock dividend: <20% - 25%
• Large Stock dividend: >20% - 25%

The treatment of stock dividends depends on the percentage of the dividend in proportion to the total shares outstanding prior to the declaration of the dividend.

Question 30

What is the accounting treatment of small stock dividends?

Answer 30

Fair value of additional shares issued at the date of declaration is transferred from retained earnings to capital stock and additional paid-in capital.

Question 31

What is the accounting treatment of large stock dividends?

Answer 31

Par value of additional shares issued is transferred from retained earnings to capital stock.

Question 32

What are the 10-K filing deadlines relative to fiscal year-end?

Answer 32

60 days for large accelerated filers; >$700 million revenue
75 days for accelerated filers; > 100 million revenue
90 days for other registrants; < 100 million revenue excluded

Question 33

What are the 10-Q filing deadlines for each of the first three quarters of every fiscal year?

Answer 33

40 days for large accelerated
40 days for accelerated
45 days for all other registrants

Question 34

What is the 8-K form used for?

Answer 34

To disclose changes whenever a material event occurs.
Example:
* Bankruptcy
* Acquisition or disposition of assets
* Changes in public accounting firm used to audit the company
* Changes in securities and trading markets
* Chagnes in or election of directors and officers
* Amendments to bylaws or articles of incorporation
* Changes in fiscal year
* Financial statement changes
* Material definitive agreements

COMPANIES GENERALLY HAVE 4 BUSINESS DAYS TO FILE THE FORM FOR ANY EVENT THAT TRIGGERS A FILING REQUIREMENT.

Question 35

How should stock dividends and stock splits be treated when calculating weighted average number of common shares outstanding?

Answer 35

As though they occurred at the beginning of the period.

Question 36

What is the equation for diluted EPS?

Answer 36

Question 37

What is legal capital?

Answer 37

The amount of capital that must be retained by the corporation for the protection of creditors.