F1 Financial Reporting

Question 1

Report filed annually with the SEC by U.S. registered companies

Answer 1

10-K

Question 2

EPS Disclosure

Answer 2

EPS disclosures are required for all companies with publicly traded common stock or potential common stock including:

Stock options
Stock warrants
Convertible securities
Contingent stock agreement

Question 3

When Dividend becomes liability

Answer 3

Dividend becomes liability on the books of the issuing company (along with a change to retained earnings) on the date the dividend is declared

Question 4

Dilutive stock options

Answer 4

Dilutive stock options would be used in the calculations of diluted EPS.

Question 5

U.S. companies file quarterly report that contains unaudited financial statements prepared using U.S. GAAP, interim period MD&A, and certain disclosures.

Answer 5

Form 10-Q

Question 6

Held for sale criteria

Answer 6

1.Management commits to a plan to sell the component.
2.The component is available for immediate sale in its present condition.
3.An active program to locate a buyer has been initiated.
4.The sale of the component is probable and the sale is expected to be completed within one year.
5.The sale of the component is being actively marketed.
6.It is unlikely that significant change to the plan to sell will be made or that the plan will be withdrawn.

Question 7

Treasury stock sold at a price that exceeds its costs

Answer 7

There is no gain Or loss on the purchase and/or sale of treasury stock. Any “difference” goes to “paid-in capital,” or if there is not enough paid-in capital to absorb a loss, the loss would be debited (subtracted) from “retained earnings.”

Question 8

Which form is used for major corporate events, such as ACQUISITIONS.

Answer 8

Form 8-K

Question 9

Compting diluted earnings per share

Answer 9

Convertible securiies are recognized only if they are dilutive

Question 10

Shares are acquired and reissued at a lower price

Answer 10

Under the COST METHOD, if shares are acquired and reissued at a lower price, the additional paid-in capital - treasury stock account will absorb the loss until reaching $0, with the remaining loss recognized as a reduction (debit) to the retained earnings account.

Question 11

Journal entry to record the reissue of treasury stock above cost using the COST METHOD

Answer 11

Debit: Cash
Credit: Treasury stock
Credit: Additional paid-in capital TS

Question 12

Earnings per share data

Answer 12

All public entities must present earnings per share on the face of the income statement. In a simple capital structure, basic EPS for income from continuing operations and net income are presented. In a complex capital structure, basic and diluted EPS must be presented for income from contninuing operations and net income.

Question 13

High Debt-to-Equit Ratio

Answer 13

A high Debt-to-Equity Ratio implies that a company has a greater risk due to high leverage. It indicates that the company is more heavily financed through debt than equity. It does not indicate strong liquidity (A) reliance on equity financing (B) ot operational efficiency

Question 14

Accounting standards update

Answer 14

When there are updates to the Codification, they are referred to as Accounting Standards Update (ASUs). Then the subsequent ASUs are numbered using the date they go into effect, such as ASU 2015-12.

Question 15

Level 2 and level 3 inputs

Answer 15

The primary distinction between level 2 and level 3 inputs is observability. Level 2 inputs are observable in the market, albeit not as directly as level 1 inputs. Level 3 inputs are not observable and require significant estimation and judgment.

Question 16

Basic Earning per share

Answer 16

(Net Income - Preferred Dividend) / Common Shares

Question 17

Overstatement in inventory valuation

Answer 17

Discovering an overstatement in inventory valuation after the balance sheet date but before the financial statements are issued is a Type I subsequent event. It provides evidence about conditions that existed at the balance sheet date and requires an adjustment to the financial statements. The inventory and possibly retained earnings should be adjusted to reflect the correct valuation.

Question 18

What is two-statement approach?

Answer 18

The income statement is presented separately from the statement of comprehensive income. The latter begins with net profit or loss from the income statement and displays the items of OCI.

Question 19

Comprehensive income

Answer 19

Comprehensive income is the change in equity of a business during a period from transactions and other events and circumstances from non-owner sources. It includes all changes in equity except those resulting from investments by owners and distributions to owners. SFAC 6 para 70.

Question 20

Interest expense while determining earnings per share

Answer 20

Interest expense (net of income tax) on debt considered would be added back to the numerator for diluted EPS if the effects are dilutive.

Question 21

10-Q report issue timeline to be received by shareholders

Answer 21

40 Days for large corporations.

45 Days for small corporations.

For the 10-Q report, both large accelerated and accelerated filers have 40 days to issue the report. For the quarter ending June 30, 40 days after June 30 is August 9 (31 days in July and 9 days in August).

Question 22

Capital or asset distribution

Answer 22

Capital or asset distribution includes liquidating dividends, property distribution, cash dividend.

Question 23

Stock splits (or reverse splits)

Answer 23

When a stock splits (or reverse splits), there is no change to equity as a result of the transaction. Prior to the split, 10,000 shares × $10 par value per share = $100,000. If the stock splits 5 for 1, 10,000 shares become 50,000 shares. In order to keep total equity at $100,000, the par value must be reduced from $10 to $2. 50,000 shares × $2 = $100,000.

Question 24

Purpose of reporting comprehensive income

Answer 24

Comprehensive income represents all changes in stockholders’ equity that come from nonowner sources. Therefore, comprehensive income includes all net income plus any and all components of other comprehensive income, the “PUFI” items. Comprehensive income would not include investments by stockholders (owners) nor would it include distributions or dividends to stockholders (owners).

Question 25

Foreign exchange transaction gains or losses

Answer 25

Foreign exchange transactions gains and losses are generally included in determining net income for the period in which exchange rates change.

Question 26

What is comprehensive income?

Answer 26

Comprehensive income is equal to current period net income plus current period other comprehensive income.

Question 27

Property dividend

Answer 27

A property dividend should be recorded in retained earnings at the property’s market value at date of declaration.

Question 28

Stock dividend Journal Entry

Answer 28

DR: Retained Earnings

CR: Common Stock
CR: Additional paid-in-Capital

Question 29

Treasury stock

Answer 29

• Net income is not affected by gains or losses from treasury stock transactions. It should be noted that although gains on treasury stock transactions also will not impact retained earnings, losses may affect the firm’s retained earnings account.
• The cost method is used approximately 95 percent of the time by firms accounting for treasury stock transactions.
• Treasury stock is a contra-equity account that reduces reported stockholders’ equity on a firm’s balance sheet.

Question 30

Purpose of reporting comprehensive income

Answer 30

To summarize all changes in equity from nonowner sources.
It includes net income plus any and all components of other comprehensive income, the PUFI items. Comprehensive income would not include investments by stockholders (owners) not would it include distributions or dividends to stockholders (owners).

Accumulated other comprehensive income is reported in the stockholder’s equity section of the balance sheet.

Question 31

Characteristics of Accounting Information

Answer 31

Two primary qualitative characteristics:

1) Relevance
2) Faithful Representation

Question 32

EBITDA Margin Formula

Answer 32

EDITDA / Revenue

Question 33

Basic Earning Per Share

Answer 33

= (Net Income - Preferred Dividend) / Common Shares

Question 34

Which organization creates GAAP

Answer 34

The Financial Accounting Standards Board

Question 35

What is not used in the calculation of comprehensive income?

Answer 35

Gain on reissuance of treasury stock under the cost method.

Question 36

Under U.S. GAAP, a material transaction that is “infrequent in occurrence” and/or “unusual in nature” should be presented separately as a component of “income from continuing operations” when the transaction results in a gain or loss.

Answer 36

Gain: Yes
Loss: Yes

Question 37

Which of the following items would not be found in comprehensive income?

Answer 37

Nonmonetary exchanges of common stock for productive assets.

Question 38

Excluded from the fair value option are

Answer 38

• investments in subsidiaries
• pension benefit assets/liabilities
• assets and liabilities recognized under leases.

Question 39

Intercompany billings

Answer 39

All intercompany billings are eliminated in consolidation.

Question 40

Large accelerated filer

Answer 40

A large accelerated filer is defined by the SEC as an issuer with a worldwide market value of outstanding common equity held by nonaffiliates of $700 million or more as of the last business day of the issuer’s most recently completed second fiscal quarter. Large accelerated filers are required to file Form 10-K (annual report) within 60 days after the end of the fiscal year.

Question 41

Small accelerated filer

Answer 41

a smaller reporting company has worldwide market value of outstanding common equity held by nonaffiliates of less than $75 million. Entities with annual revenues of less than $100 million are also considered smaller reporting companies and are excluded from the definition of large accelerated filers or accelerated filers.

Question 42

Stock dividend or stock split for weighted average stock calculation

Answer 42

A stock dividend or a stock split is treated as if it had happened at the beginning of the year.

Question 43

Gains and losses on treasury stock transactions

Answer 43

Gains and losses on treasury stock transactions are never recorded on the income statement. Gains are recorded by increasing Additional Paid-in Capital―Treasury Stock. Losses are recorded by first eliminating any balance in Additional Paid-in Capital―Treasury Stock and then decreasing retained earnings.

Question 44

Stock Warrants

Answer 44

A stock warrant is a financial instrument that gives the holder the right, but not the obligation, to buy or sell a specific number of shares of a company’s stock at a predetermined price within a certain time frame. The predetermined price is called the “strike price,” similar to a call option on a company’s stock.

Question 45

Retained earnings appropriation

Answer 45

A retained earnings appropriation can be used to restrict earnings available for dividends.

Rule: A retained earnings appropriation debits (reduces) “unappropriated retained earnings” and sets up (credits) “appropriated retained earnings.” It does not affect the income statement.

Question 46

Donation of stock by a shareholder to the company

Answer 46

The donation of stock by a shareholder to the company results in no change in total shareholders’ equity on the balance sheet. However, the number of common shares outstanding declines with a proportional increase in the book value per common share.

Question 47

Accelerated filer

Answer 47

In 2002, the SEC approved a deadline of 75 days for Form 10-K “accelerated filers.” An accelerated filer is an issuer:

• with a public float of greater than or equal to $75 million;
• subject to the Securities Exchange Act’s reporting requirements for greater than or equal to 12 months;
• that previously filed at least one report;
• which is not eligible to file quarterly and annual reports on Forms 10-QSB and 10-KSB.

Smaller reporting companies, which are entities with annual revenues of less than $100 million, are excluded from the definition of large accelerated filers or accelerated filers.

Question 48

Stock dividend affects on financial statements

Answer 48

Rule: A stock dividend (less than 20-25% of the stock outstanding) transfers the FMV of the stock dividend at declaration date from retained earnings to capital stock and paid-in capital. There is no effect on total stockholders’ equity because all transfers take place within stockholders’ equity.