F5 - INV, STMTS OF CF, & INCOME TAXES

Question 1

FAIR VALUE METHOD

Answer 1

Are measured at fair value BUT the treatment of changes in FV depends on the class of the instrument

Trading Securities ( under fair value method ) are recognized in income stmt

AFS: Changes in FV are recognized in OCI, not the IS
UNLESS
They are sold or impaired

Question 2

FAIR VALUE OPTION ELECTION

Answer 2

Allows a company to elect to measure any qualifying financial asset or liability at fair value
Recognized in IS

Election overrides the standard classification rules and can be applied to instruments normally carried at amortized costs ( HTM ) or those that would typically have changes recorded in OCI (AFS)

Once election the Fair Value OPtion is Irrevocable

Question 3

HTM Bonds are usually carried at Amortized costs
BUT
Once Fair Value Option is elected …..

Answer 3

Then the HTM bonds all changes in that FV are directly recognized on the INCOME STMT

Question 4

STATED RATE

Answer 4

Other names: COUPON RATE, Nominal Rate, Face Interest Rate

Is always the payment - bond issuer agrees to pay the bondholder

This rate does NOT change over the life of the bond

Question 5

MARKET RATE

Use this rate to discount future cash flows to their present value when determining the bond’s price

Answer 5

Other names: Effective Interest Rate or YIELD RATE

Rate of return that investors demand for a bond in the market

Reflects the current cost of borrowing

Question 6

Leases are NOT eligible for the fair value option

Answer 6

FV Option applies to financial assets
(Debt & Securities) and Liabilities (Notes Payable)

Excluded are:
Investments in subsidiaries
Pension benefit (assets/liabilities)
AND
Assets & Liabilities recognized under leases

Question 7

Fair Value Option may be chosen for eligible financial instruments that don’t usually get measured at FV

Answer 7

Picking this option is irrevocable
Applied to individual financial instruments (in their entirety)
NOT applied to specific risks

Question 8

A most likely reason for a decline in bond’s market value is that

Answer 8

Interest Rates have gone up

Which can make the bonds seem less appealing to new investors
AND
Leads to a decrease in the bond’s market value

Question 9

Bond Investments
That are HTM - Held-to-Maturity

Answer 9

Should be accounted at their
Amortized Costs - Question will always mention the Stated rate and Market Rate

Amortized costs deal with the differences between Stated Rate and Market Rate

Question 10

When a bond is classified as trading securities

Answer 10

Then they are classified as:

Trading Securities

Trading Securities are reported at Fair Value on BS

Question 11

CECL - CURRENT EXPECTED CREDIT LOSSES MODEL

Answer 11

When an AFS Debt Security has a FV that is below amortized cost

Then it has to be written down to the lower FV by recording a credit loss that is recognized in the IS

EVEN THOUGH the FV is above the Present Value of expected cash flows,

AFS can be sold at any time so that the Credit Loss is limited to the difference between Amortized and FV

Question 12

For Available For Sale

Answer 12

Credit Loss exists if the present value of expected future cash flows is less than the amortized cost.

Question 13

Determining Credit Loss for AFS Debt Securities

Answer 13

By Comparing the PV of the cash flows expected to be collected from the security to the security’s Amortized Costs

The Credit Loss is the excess of Amortized Cost over the Present Value of the expected Cash Flows

Question 14

AFS

Answer 14

Investing Outflow

Question 15

Equity Securities are generally reported at Fair Value Through Net Income ( FVTNI )

Answer 15

Unrealized holding gains and losses on Equity Securities are included in earnings as they occur.

Question 16

Credit Loss on AFS

Answer 16

Excess ( credit loss ) = Carrying Value - Amortized Costs

Question 17

The fair value method is used when an investor owns less than 20% of an investee’s common stock and does not exercise significant influence over the investee.

Answer 17

The investment is carried at fair value through net income (FVTNI). Earnings of the investee are not recorded by the investor and dividends received are considered to be income and do not affect the investment account.

Question 18

EQUITY SECURITIES

Answer 18

Can be Preferred Stock or Common Stock

Preferred Stock, No significant Influence

Common Stock, significant influence, If no significant influence, use the rules we are about to go over, known as “trading security rules” - you want significant influence (20% or more) get CS

Need to know if stock is publicly traded to mark to market at year end

All unrealized gains and losses on equity securities go on the income stmt, not OCI

Options & Warrants to purchase shares of Common Stock

Question 19

Equity Securities do NOT include

Answer 19

Redeemable preferred stock-USE Debt Securities

Treasury Stock is NOT an Equity Security

Treasury Stock is the company’s own stock repurchased and held

Convertible bonds are not Equity Securities

Question 20

Non-Public Companies for Equity Securities

Answer 20

If the investee company is non-public, we carry the investment on our books at Cost minus any impairment loss.

The Impairment loss is a realized loss on the Income Stmt, and the asset is written down.

Question 21

FVNI Method

Answer 21

Use when Less than 20% ownership

When to reduce investment acct
- Shares of stock are sold
- Cumulative distributions exceed cumulative earnings (a return of capital)
- Investee incurs substantial losses that reduce net worth (impairment)

Question 22

Preferred Cash Dividends

Answer 22

Cash dividends received are considered income, regardless of stock ownership %’s

Question 23

Investee Income when both Commons & Preferred Stock are owned

Answer 23

Income to Be reported on Income Stmt:
- Preferred stock cash dividends
- Share of earnings available to common stockholders (MINUS) PREFERRED dividends
- Note that under the Equity Method, Common Dividends are NOT income to the Investor

Question 24

Available for sale debt securities will result in losses in OCI

Answer 24

FV is below PV of expected cash flows
AND
PV is below amortized costs

The loss recorded in OCI is PV- FV
The Credit loss that is recorded in IS is Amortized Cost - Present Value

Question 25

Marketable Debt Securities that the company has the intent and ability to Hold To Maturity ( long or short ) term

Answer 25

Are reported at carrying amount ( Amortized Cost ) Unless there's is a permanent decline in market value

Question 26

Equity Method

Answer 26

Treat Amortization as a decrease in the investment account Amortize Asset FV over BV , The Excess is amortized over the life of the asset The additional amortization causes the investor's share of the investee's net income to decrease Ex: DR Equity in Inv Inc (reducing the income from the investee) CR Investment in Investee (reduce Investment)

Question 27

FOR FVTNI Fair Value Through Net Income Method

Answer 27

A liquidating dividend is accounted for as a reduction of the investment account.

Question 28

HTM - Held - to - Maturity (Debt Security) HTM AT MATURITY JE DR CASH $100,000 CR INV TO MATURITY BOND $100,000

Answer 28

Non-Current asset - Unless it happens to mature within a year Amortized Cost is Cost + Unamortized Premium ( - MINUS UNAMORTIZED DISCOUNT ) NO FAIR VALUE ADJUSTMENT AT YE - YOU JUST CARRY IT AT AMORTIZED COST

Question 29

RULE: At date of acquisition, the consolidated equity will be equal to the parent company's

Answer 29

PLUS the FV of any Noncontrolling Interest The Subsidiary company's equity accounts are eliminated

Question 30

On the consolidated balance sheet, the parent and subsidiary assets and liabilities are combined into a single statement. Any payables or receivables between the parent and its subsidiary company must be eliminated in a consolidated presentation in order to avoid double-counting.

Answer 30

However, on the subsidiary's own balance sheet, any payables or receivables resulting from a transaction with the parent company should be reflected.

Question 31

RULE: 100% OF ALL INTERCOMPANY BALANCES AMONG MEMBERS OF THE CONSOLIDATED GROUP ARE ELIMINATED

Answer 31

When the FS are consolidated, the equity of SUB is eliminated

Question 32

The liabilities of any company which is greater than 50% owned by Parent Company should be included in liabilities

Answer 32

In the Consolidated Financial Stmts

Question 33

The Acquisition Method REQUIRES

Answer 33

That 100% of the FV of the Subsidiary's assets be recognized So Plant Assets reported on the Consolidated BS would be at FV of Subs Plant Assets PLUS BV of Parent Plant Assets

Question 34

When reconciling net income to net cash provided by operating activities,

Answer 34

Total Consolidated Net Income (including net income attributable to both the parent and the non controlling interest) should be used. Dividends paid by the subsidiary to noncontrolling shareholders are reported in the cash flows stmt. Dividends paid to the parent company are NOT reported

Question 35

INDIRECT METHOD Ends up being a reconciliation of NI to cash flows from Operations

Answer 35

Starts with NI All sources of REV, EXP, GAINS & LOSSES Discount on Bond - ADD BACK Premium on Bond - SUBTRACT Depreciation - ADD BACK All Losses - ADD BACK All Gains - SUBTRACT

Question 36

INDIRECT METHOD CHANGE IN OPERATING ASSETS

Answer 36

Operating Assets go up/ increase its an outflow - SUBTRACT Operating Assets go down/ decrease its an inflow - ADD ASSETS GO UP - SUB ASSETS GO DOWN - ADD

Question 37

INDIRECT METHOD CHANGE IN OPERATING LIABILITIES Subtract Equity Earnings/ ADD Losses of an affiliate

Answer 37

Operating Liab go up/ increase, cash inflow - ADD Operating Liab go down/ decrease, cash outflow - SUBTRACT LIABILITIES GO UP - ADD LIABILITIES GO DOWN SUB

Question 38

A supplemental disclosure of the reconciliation of NI to Net Cash provided by Operating Activities

Answer 38

Is ONLY REQUIRED when the direct method is used under US GAAP It is NOT REQUIRED when the Indirect Method is used as the operating activities section of the stmt of Cash Flows prepared under the Indirect Method shows this reconciliation