F7: S.E, Cash Flows, and Ratio Analysis

Question 1

How do you caclulate the Book value per Common share?

Answer 1

Step 1. Total S.E - Preferred stock outstanding - cumulative preferred dividends in arrears = Common S.E

Step 2: Common S.E / Common Shares Outstanding = book value per common share.

Question 2

How has the right to convert? How about call?

Answer 2

The right to convert is on investor right,

The callable is the option of the entity that issued the preferred stock.

Question 3

How do you calculate ending retained earnings?

Answer 3

Current year NI/LOSS
- Dividends declared (Cash, property (@fmv), Stock (large or small)
-+ prior period adjustments
-+accounting changes 
\+ adjustments from quasi reorg
= Change in R.E

Question 4

When are the G/L calculated when it comes to C/S using the cost method and the Par value method?

Answer 4

1. Cost method - the gain or loss is calculated when the shares are reissued, Gain going in the APIC -T/S, and loss goes in the DR: APIC - T/S if the loss is greater than the APIC - T/S you will debit retained earnings.
2. Par value method the gain or loss is calculated when you buy back or repurchase the shares, and same rule apply to recognizing the gain and loss as cost method.

Question 5

When it is a stock dividend what will you reduce R.E by if its a large or small stock dividend? And how do you tell?

Answer 5

• If lower than 20% small if higher than 25% large.
• For small stock dividends you are going to reduce R.E by the FMV of the stock.
• For large stock dividends you will reduce by the par of the stock the R.E

Question 6

What is basic EPS formula?

Answer 6

(NI - Preferred dividends) / WACSO weighted average common stock outstanding.
The preferred dividend that you subtract depends on if its cumulative or non.
For non you only subtract out the declared.
For cumulative you subtract out the accumulated only.

Question 7

What is the Formula for WACSO or the weighted average common stock outstanding

Answer 7

Shares outstanding at BOY
+ shares issued or sold during period
- Shares required during period
+ Stock dividends and stock splits (Retro adjustment)
- Reverse Stock splits (retro adjustment)

Question 8

What is the formula for the diluted EPS?

Answer 8

This is done if you have a complex strucutre.

NI - Pref dividends + interest on dilutive securities) / (WACSO + additional outstanding shares

Question 9

How do you calculate the additional outstanding shares when computing diluted EPS?

Answer 9

This is what is added to WACSO.
Number of shares issued
- [ (number of shares x exercise price) / Average market price)] = additional shares outstanding.

It is basically the number of shares issued - the number of shares repurchased. Add this to the denominotr

Question 10

What are bank overdrafts classified as under IFRS and U.S GAAP?

Answer 10

They are classified as a finance charge under U.S GAAP, and IFRS they are cash equivalents.

Question 11

What is the starting point when you are in the operating section and are using the direct method?

Answer 11

You are going to start at cash received from customers.
Revenues
- increase in receive.
+ decrease in receive
- decrease in unearned revenue (liability)
+ increase in unearned revenue (liability
= cash received from customers.

+ Interest received (increases in cash)
+ Dividends received (increase in cash) Dividends paid financing outflow.
+Cash received from sales of TS securities
Other cash receipts increase the cash.

Question 12

How do you calculate the cash paid to vendors in the operating section under the Direct method?

Answer 12

Cost of goods sold the rules are reveresed of that of the reciepts. Assets = direct, Liablites = inverse. 
\+ increase in inventory
- decrease in inventory
- increase in A/P
\+ Decrease in A/P
= Cash paid to suppliers 

Interest paid (Decrease cash)
Income taxes paid (decrease cash)
Cash paid to acquire securities classified as trading (decrease)

Question 13

What is the formula for cash flows for operating activities when you are using the indirect method?

Answer 13

Start with:
NI per I/S "accrued for inflow or outflow for loss"
\+ Depreciation & amortization (discount)
\+ Losses
- Gains & amortization (premium)
- equity in earnings
\+ buy outflow in operating assets
- sell inflow in operating assets 
\+ borrow inflow in OL
- repay outflow in OL

Question 14

When is the only time that you are worried about gains and losses? How do you calculate them?

Answer 14

This is when you are doing the indirect method only. In the direct method you ignore them.
Selling price (investing inflow)
- NBV (cost - accumulated deprecation)
= gain (-)/ Loss (+)

Question 15

What are the required supplemental disclosures that are required if using the indirect method? Direct method?

Answer 15

Indirect method

1. Cash paid for interest and taxes
2. Accounting policy
3. Non cash investing and financing.
4. Reconciliation to CFO (indirect method)

Direct method is only 2,3,4

1. is specific to the indirect method.
2. specific to direct

Question 16

What are the 4 types fo financial analysis ratios?

Answer 16

1. Liquidity ratios - short term ability to pay liabilities.
2. Activity ratio - how effectively the entity is using assets.
3. Profitability Ratios - success or failure of an enterprise for a given time.
4. Long term debt paying ability ratio- security for long term creditors and investors.

Question 17

What is mandatorily redeemable preferred stock?

Answer 17

This will be stock that has a maturity date so it will be treated as a liability.
It will not be classified as a liability if it is required to occur only upon termination or there is termination of the reporting entity.

Question 18

What is the difference between a reverse stock split and a regular stock split and what is the accounting for them?

Answer 18

Stock splits increase the number of shares outstanding and decrease the par value.
The reverse stock split has the opposite affect, it increases par, and reduces the number of shares outstanding.

Question 19

What happens when you receive a donation of your own stock?

Answer 19

This would cause an increase in the stockholders equity since there is no cost to the company.
DR: Donated treasury stock
CR: APIC @FMV.

Question 20

How do you get the intrinsic value of the stock?

Answer 20

number of share options x (mkt. price on the stock date of the grant - exercise price of the option)

Question 21

Whats the difference between a simple capital structure and a complex structure?

Answer 21

• The simple structure only includes common stock nothing can be converted into common stock. You only have to include the basic EPS in the face of the I/S for this.
• A complex structure you have to include both a diluted EPS and a basic EPS and include them on the face of the I/S.
• it is complex if can be converted into securities, warrants and other options, contracts that may be settled in cash or stock, and contingent shares.

Question 22

What is the dilution effect of the options, warrants?

Answer 22

They will only affect the denominator of the diluted eps, not the numerator.
It uses the treasury stock method.

Question 23

When are options considered in the money? And what does that mean in terms of dilutive or anti-dilutive

Answer 23

This is true when the average price is greater than the strike price.
They are considered to be dilutive if they are in the money.

Question 24

What is the effect of convertible securities when it comes to Dilutive EPS?

Answer 24

• They affect both the numerator and the denominator.
• For bonds add to the numerator the interest expense net of tax,
• Add to the denominator the number of common shares issued with assumed conversion.

Question 25

What is the difference between dilutive vs anti-dilutive eps? In terms of reporting?

Answer 25

• if the shares are anti-dilutive, meaning they increase the basic EPS do not include it, do not disclose.
• if the shares are dilutive then include it! Reduces basic EPS.

Question 26

When calculating the numerator for EPS what do you subtract when it comes to preferred dividends?

Answer 26

• If the preferred dividends are non cumulative you will subtract out the amount that is declared, not paid.
• If the preferred dividends are cumulative you will subtract out the amount that will accumulate. Whether they were paid or declared does not matter.

Question 27

What are operating assets and liabilities made up of?

Answer 27

All current assets except cash and cash equivalents.

Operating liabilities that are not interest bearing.

Question 28

1. What is interest received?
2. Interest Paid?
3. Dividends received?
4. Dividends paid?
5. Taxes paid?
   Under U.S GAAP and IFRS?

Answer 28

1. CFO, U.S GAAP; CFO or CFI, IFRS
2. CFO, U.S GAAP; CFO or CFF, IFRS.
3. CFO, U.S GAAO; CFO or CFI
4. CFF, U.S GAAP; CFF or CFO.
5. CFO, U.S GAAP; CFO CFI, CFF.

Question 29

What are some investing activities?

Answer 29

• Giving out cash loans (outflow).
• purchasing or disposing of trading securities that are classified as non current.
• Acquiring or disposing of PPE.