F1 Module 2

Question 1

form 10-K

Answer 1

-annual F/S report filed by U.S. registrants
-shows current and future investors risk factors of financial health of company
-large accelerated filers file in 60 days
-accelerated filers file in 75 days
-90 days for all other registrants

Question 2

form 10-K items

Answer 2

1) Part II, Item 7 MD&A (provides perspective of company in management’s words of financial condition, risks, estimates, assumptions etc.)
2) Part II, Item 8 F/S and supplementary data (comparative audited F/S, auditor report, certifications of CEO and CFO accuracy and completeness of 10-k

Question 3

form 10-Q

Answer 3

-quarterly report for each of three quarters of every year
-provides overview of business op, F/S, nonfinancial info and disclosures
-filing deadlines:
1) large and accelerated files = 40 days
2) 45 days for all other registrants

Question 4

form 10-Q items

Answer 4

Part 1 Item 1: F/S (unaudited F/S, but similar to 10-k with presentation of F/S)
Part 1 item 2: MD&A (similar to 10-k)
Part 1 Item 3: quantitative and qualitative disclosures on market risk (similar to 10-k)

Question 5

form 8-K

Answer 5

-discloses material changes in events and 4 days to file form
1) bankruptcy
2) acquisition/disposition of assets
3) changes in public accounting firm to audit company
4) securities and trademarks
5) election of directors and officers
6) bylaws/articles of incorporation
7) F/S
8) material definitive agreements
9) fiscal year

Question 6

EPS

Answer 6

-all public entities required to present EPS on face of I/S
-indicates company’s profitability for each stock of share
-the type of capital structure depends on how it should be disclosed (simple vs. complex)
-basic EPS based on continuing op. and net income
-if there is discontinued op., entity report both basic and diluted EPS on I/S or notes to the financials

Question 7

Basic EPS formula

Answer 7

net income - preferred dividends-dividends declared/weighted average common shares outstanding

-C/S also includes items that can be converted to C/S; ex. bonds, preferred stock, warrants etc.
-note if continuing operations is a loss, amount of loss should be increased by preferred dividends or claims to show income available to C/S

Question 8

weighted average number of common shares outstanding formula

Answer 8

shares outstanding in the beginning
+ shares sold during the period (weighted)
- shares reacquired (T/S) (weighted)
+stock dividends and stock splits (added to beginning)
- reverse stock splits (reduced from beginning)
= WAC/S

Question 9

how to count shares outstanding

Answer 9

-count shares outstanding from the initial date that it occurs to the end of the fiscal period
ex. shares reacquired as of April 1, and fiscal year end is December 31, XX, that’s 9 months/12 months weighted to reacquired shares and reduced from WAC/S balance

Question 10

simple structure vs. complex capital structure

Answer 10

-simple reports only basic EPS
-complex reports basic EPS and diluted EPS

Question 11

diluted EPS

Answer 11

-income available to common shareholders + interest in dilutive securities/WACSO (includes dilutive securities convertible to C/S)
-dilutive shares are those that reduce EPS
-any securities that increase EPS is considered antidilutive
-measures performance of an entity over reporting period with the dilutive effect

Question 12

potentially dilutive security examples

Answer 12

-warrants
-options
-convertible securities
-contracts settled in cash or stock
-contingent shares

Question 13

dilutive vs. antidilutive

Answer 13

-dilutive = avg market price of C/S > exercise price (in the money)
-antidilutive = avg market price of C/S < exercise price (out of the money)

Question 14

treasury stock method

Answer 14

1) if avg market price > exercise price, assume warrants, options exercised at beg. of period or at time of issue, if later
2) proceeds received from option/exercise price used to purchase C/S at avg market price during period
3) if option/warrant in money proceeds not enough to repurchase an equal number of shares = dilution
4) difference between number of shares issued to satisfy options/warrants and number of shares purchased with proceeds are included in denominator for diluted EPS
5) previously reported EPS not retroactively adjusted for changes in market price

Question 15

computing additional shares for options and similar instruments

Answer 15

number of shares - (number of shares * exercise price)/(avg. market price)

-amount will be added to denominator for WACSO

Question 16

if-converted method

Answer 16

-used to determine dilutive effects of convertible securities
-assumes securities were converted to common stock at beg. of period

Question 17

convertible bonds using if-converted method

Answer 17

1) add interest expense net of tax to numerator assuming bonds converted to C/S ($bond * bond rate * (1-tax rate)) + net income = total net income
2) add number of C/S associated with conversion to denominator ($ bonds/$1k bond * # shares convertible to C/S) + common stock outstanding = total common shares outstanding
3) if convertible bonds issued during period, assume stock was issued at date for weighted avg. calculation
4) total net income/total common shares outstanding = diluted EPS

-if diluted EPS > basic EPS = antidilutive; excluded from EPS
-if diluted EPS < basic EPS = dilutive; included in EPS

Question 18

antidilution

Answer 18

-only include each conversion if it reduces EPS, otherwise it is antidilutive because it increases EPS
-consider each issue separately from most to least dilutive, with options and warrants included first
-tests for dilutive and antidilutive effects are based on income from continuing operations

Question 19

convertible preferred stock using if-converted method

Answer 19

1) total common shares outstanding = common stock outstanding + (convertible shares * number of shares convertible to C/S)
2) total common shares outstanding/total net income = diluted EPS
3) compare to basic EPS = (net income - preferred dividends)/WACSO)

-if diluted EPS > basic EPS = antidilutive; excluded from EPS
-if diluted EPS < basic EPS = dilutive; included in EPS

*Note: do not reduce income available to C/S by preferred stock dividend because you pretend those were converted

Question 20

contingent shares

Answer 20

-do not require cash consideration like contracts that can be settled in cash or stock
-get used in basic EPS calc if issuance condition met:
1) included as of beginning of period by end of period
2) if not satisfied by end of period, shares based on number of shares issuable if reporting period were end of contingency period and included in beginning of period
3) if contingency due to attainment in future earnings or future prices of shares, both earnings to date and current market price are used

Question 21

EPS disclosures

Answer 21

-cash flow per share not reported
-for EPS and diluted EPS, provide recon of numerators and denominators of basic and diluted EPS computations for income from continuing operations
-effect given to preferred dividends in arriving at income available to common stockholders in computing basic EPS
-securities that could potentially dilute basic EPS in future not included in computation of diluted EPS because effect was antidilutive for periods presented
-description of any transaction occurred after period end that would have materially impacted number, actual, or potential C/S outstanding

Question 22

stock splits

Answer 22

stock splits impact the current and prior periods. So make sure to adjust prior periods C/S outstanding