Financial Reporting Flashcards
Which financial report provides information on an entity’s financial position?
Balance sheet = financial position
Which financial report provides information on an entity’s financial performance?
Income statement = performance
Which financial report reconciles differences between net income and cash flow?
Statement of cash flows = reconciliation
What are the steps of revenue recognition?
1) Contract: identify the contract with the customer
2) Obligations: identify the performance obligations
3) Price: determine the transaction price
4) Allocate: allocate prices to performance obligations
5) Recognize: recognize revenue
What elements are required for operations to be classified as discontinued?
1) Mgmt must have a plan to sell the entity
2) Entity is immediately available for sale in the present condition
3) Active program to locate a buyer
4) Entity to be sold is actively being marketed
5) Sale of entity is probable within 1 year
6) Actions required to complete the plan indicate it is unlikely there will be significant changes to the plan
Calculation for Income from Discontinued Operations
Gain (loss) from operations
+ Impairment loss (NRV - CV)
+ Gain (loss) on disposal
= Income from discontinued ops, gross of tax
+/- tax effects
= Income from discontinued ops, net of tax
Earnings per share - disclosure requirements
EPS
Basic EPS and dilutive EPS must be disclosed on face of income statement for:
- income from continuing operations
- net income per share
Net income XXX
Income from continuing operations, per share XXX
Net income per share XXX
Basic EPS and dilutive EPS may be disclosed on face of IS or in the FNs for:
- income from discontinued operations per share
Do NOT disclose OCI/comprehensive income or cash flow per share
Basic EPS v. Dilutive EPS
EPS
Basic EPS is NI per shares outstanding. Dilutive EPS takes other capital instruments into account. E.g. bonds with convertible warrants outstanding. Disclose dilutive EPS due to prudence principle.
Basic EPS
Net income 10,000
Shares O/S 1,000
= EPS 10
Dilutive EPS Net income 10,000 Shares O/S 1,000 Convertible bonds 100 = dilutive EPS 9.09
Basic EPS - simple capital structure
Only common stock and no securities that convert to common stock.
Basic EPS =
income available to common shareholders / weighted average number of c-shs outstanding
OR
Basic EPS =
[net income - pstock dividends] / weighted average number of c-shs outstanding
Preferred stock dividends
basic EPS
P-stock divs are paid out of NI (percentage of NI)
Non-cumulative pstock dividends: payable/deductible in the year declared (do not carryforward to other years)
Cumulative pstock dividends: deduct every year irrespective of whether they were declared or not
Note: redeemable preferred shares are debt and those payments are deducted to arrive at NI. IRREDEEMABLE preferred shares (what we think of most often) are what is addressed above.
Stock issued or repurchased - wtd avg common shares outstanding
basic EPS
Number of shares outstanding during the period, pro-rata for time outstanding. Pro-rate stock issued or repurchased during the year.
E.g. BB 800 shs. 200 shs issued on 6/1. 200 * 6/12 = 100. total shs o/s for the year is 900.
BB 800 shs o/s. 100 shs repurchased on 3/1. 100 * 2/12 = 16.67. 800 - 16.67 = 783.33 shs for the year.
Stock splits & dividends - wtd avg common shares outstanding
Stock splits and stock dividends are adjusted retroactively for all the years presented. E.g. stmts presented for 2019 and 2020. stock split 3/1/20; adjust 2019 EPS too
E.g. BB 900 shs o/s. stock split on 7/1. 1800 shs considered o/s for entire year
E.g. BB 900 shs o/s. 10% stock dividend on 10/1. shs o/s for entire year = 990
Dilutive EPS - complex capital structure
Complex capital structure = convertible securities that convert in to common stock. Includes:
- convertible bonds
- convertible preference shares
- contracts that may be settled in stock
- options and warrants
Calculate basic EPS first, then calculate dilutive EPS for each dilutive security
anti-dilutive EPS:
if dilutive EPS > basic EPS, then it is not disclosed. e.g. 100 bonds convert to 4 shares (increase in shares < decrease in interest expense lost from bonds converted)
Dilutive EPS w/ convertible bonds
If bonds become c-shs, then the interest on the bonds would no longer be payable. Adjust NI for the interest impact.
NUMERATOR = [net income + interest exp - tax effect of interest] - p stock dividends
(remember to use the market rate of interest)
DENOMINATOR = increase for convertible shares either from the beginning of the period, or if issued during the year from the issue date
EPS w/ convertible preference shares
If p-stock converts to c-stock, then addback any p-stock dividends to the numerator (if already subtracted)
