FAR 1 Flashcards
The general rule to convert from cash to accrual is to ADD decreases in liabilities and increases in assets, and SUBTRACT increases in liabilities and decreases in assets.
The general rule to convert from cash to accrual is to ADD decreases in liabilities and increases in assets, and SUBTRACT increases in liabilities and decreases in assets.
What are the three main ingredients of Relevance?
Predictive Value, Confirmatory Value and Materiality (acronym - PV, CV, M)
What are the three main ingredients of Faithful Representation?
Its three main ingredients are Completeness, Free from Material Error, and Neutrality (acronym - C, FFM, N)
Cost of Sales Formula (Note - different from Cost of Goods Manufactured Formula)
Beginning Finished Goods
+ Cost of Good Manufactured
- Ending Finished Goods
= Cost of Sales
Note: you subtract ending finished goods, but add in everything else
**Plug in values to solve for any one variable
Cost of Goods Manufactured Formula
Beginning WIP \+ Direct Materials \+ Direct Labor \+ Factory Overhead - Ending work in process = Cost of Goods Manufactured
Note: you subtract ending WIP, but add in everything else
**Plug in values to solve for any one variable
What types of transactions show up under Other Comprehensive Income?
- Foreign currency translation adjustments
- Unrealized holding gains and losses on DEBT securities available for sale
- Pension and other post-retirement benefit plan cost adjustments
- Certain deferred derivative gains and losses
Cash Flows from Financing Activities involves borrowing and equity (great way to differentiate from investing and operating activities)
Notes:
- Interest paid on a bond is an operating activity.
- Cash received from a sale of equipment is an investing activity.
- Principal payments on loans from financial institutions are financing because they are a return of a source of long-term financing.
Cash Flows from Financing Activities involves borrowing and equity (great way to differentiate from investing and operating activities)
Notes:
- Interest paid on a bond is an operating activity.
- Cash received from a sale of equipment is an investing activity.
- Principal payments on loans from financial institutions are financing because they are a return of a source of long-term financing.
The criteria for disclosing and accruing for a unique transaction
(1) a probable occurrence of a liability
(2) a reasonable estimate of an amount
When to use the Cost Method for an investment in another company?
You use the cost method when you make a passive but long-term investment in another company. You record the stock on a balance sheet account as a non-current asset at its historical purchase price. For example, if you purchase 10 percent of UVW Corp. for $10 million, that amount would be the balance sheet value of the shares. You normally do not update this amount unless you purchase additional shares or sell shares. You book any dividends you receive on the shares as income.
When to use the Equity Method for an investment in another company?
If you hold at least 20 percent of the investee’s shares, use the equity method unless you can prove you have no influence over the investee – for example, if the investee treats you hostilely or ignores your advice. Under the equity method, you book the stock purchase as you would under the cost method. However, you must adjust this balance to account for your share of the investee’s profits and losses. For example, suppose your company purchases 30 percent of XYZ Corp. for $10 million. You book the purchase as a non-current asset, “XYZ Corp. securities” valued at $10 million. In the next quarter, the investee posts net income of $500,000. Your 30 percent share is $150,000, which you add to the balance of XYZ Corp. securities and record as income on the income statement. You subtract losses in the same way. You treat dividends as a return of investment by posting to a contra-asset account linked to XYZ Corp. securities, thereby reducing the net carrying value of the investment. You do not book dividends as income.
Basic Earnings Per Share Calculations
- If you’re being asked to calculate Basic EPS for Net Income - be sure to include reductions in Income from cumulative preferred stock.
- If you’re being asked to calculate Basic EPS for discontinued operations - you don’t include reductions for cumulative preferred stock.
Stock Options and Diluted Earnings Per Share Calculations
- Stock Options should be measured net of proceeds. Ex/ Stock options, treasury stock method: (1) number of shares issued on assumed exercise of options = 40. Proceeds from assumed exercise = $120 (40 × $3 option price). (2) Shares assumed purchased for the treasury = 15 = $120/$8 ($8 was the average stock price for the year. (3) Incremental shares from assumed exercise = 25 which is derived from 40 −15.
Convertible Preferred Stock and Diluted Earnings Per Share Calculations
Given as part of the problem - Cumulative convertible preferred stock, 10 shares, 6%, $100 par, each share convertible into 20 shares of common stock
Effect of assumed conversion of preferred stock on EPS: numerator of EPS increases $60 because no dividend would be paid. Denominator increases by the number of common shares issued assuming conversion = 10(20) = 200. n/d ratio = $60/200 = $.30
Diluted EPS Formula
(Net income−preferred dividends)/Weighted Avg Shares Outstanding − Impact of Convertibles − Impact of Dilutive Securities
For Inventory - if a company uses LIFO for the Inventory method, you must use the Lower of Cost or Market.
FIFO and all other Inventory measurement methods uses the Lower of Cost or Net Realizable Value (NRV)
For Inventory - if a company uses LIFO for the Inventory method, you must use the Lower of Cost or Market.
FIFO and all other Inventory measurement methods uses the Lower of Cost or Net Realizable Value (NRV)
Under IFRS for Inventory its the Lower of Cost or NRV
Under IFRS for Inventory its the Lower of Cost or NRV
Allowance for Credit Sales Method does NOT adjust the allowance balance to a required ending amount, but rather simply places the appropriate percent of sales into uncollectible accounts expense and the allowance account.
Ex/ end the year with a negative allowance amount of $3K. You wouldn’t take the negative amount into account, just the percentage of credit sales would be considered
Allowance for Credit Sales Method does NOT adjust the allowance balance to a required ending amount, but rather simply places the appropriate percent of sales into uncollectible accounts expense and the allowance account.
Ex/ end the year with a negative allowance amount of $3K. You wouldn’t take the negative amount into account, just the percentage of credit sales would be considered
Lower of cost or net realizable value applies to inventories that are carried at FIFO or Average cost. Net realizable value is selling price less cost of disposal.
Lower of cost or net realizable value applies to inventories that are carried at FIFO or Average cost. Net realizable value is selling price less cost of disposal.