Financial Statements and Income Flashcards

Question

RETAINED EARNINGS

Answer 1

Income from inception Net income or loss for the organization is ultimately recorded in retain earnings Dividends declared are a reduction to retain earnings

Answer 2

Other comprehensive income or loss for the organization is ultimately recorded in accumulated other comprehensive income Items accumulated here are not part of the calculation of net income

Answer 3

Ownership in subsidiary entities that is outside of the controlling entity When organization has a controlling interest in another entity Not complete ownership 100% of the assets and liabilities of the subsidiary are included in the balance sheet of the organization And the portion of the subsidiary that is owned by third parties is segregated as a separate component of equity

Answer 4

Sale of new shares Issuance of options Dividends Net Income/Loss Other Comprehensive Income items Repurchase of Treasury Stock Resale of Treasury Stock Stock split Stock dividends

Answer 5

Generally sold for an amount above par value. Cash received is recorded the common stock/preferred stock account is increased for the par value the additional paid in capital account is increased for the balance

Answer 6

Usually issued as a form of compensation recorded as part of additional paid-in capital as compensation expense is recognized 1) total compensation expense is valued at the fair value of the options on the date they are granted 2) compensation expense is recognized over the service period required for the employee to become vested in the options

Answer 7

Retain earnings is reduced with the cash dividend is declared. His payment of the dividend is delayed a payable is also recorded and then reduced when the payment is later made

Answer 8

Increases/Decreases retained earnings each year

Answer 9

Change in economic position of the company that’s not part of net income Increase/Decrease accumulated other comprehensive income each year

Answer 10

Treasury stock is increased (reduction to equity) for the cost of the treasury shares

Answer 11

1) when sold for an amount in excess of the repurchase price, the cost is taken out of the treasury stock and the excess is added to additional paid-in capital 2) when sold for an amount below the repurchase price, the cost is taken out of treasury stock and the difference is taken from additional paid-in capital to the extend it was previously increased for treasury stock transactions. If no additional paid-in capital from treasury stock transactions exists, the difference is taken from retained earnings

Answer 12

Generally has no impact on any of the equity accounts as long as the par value is also changed to reflect the new share size No journal entry is needed

Answer 13

A stock dividend occurs when an organization distributes additional shares of stock to existing shareholders as a dividend rather than paying them cash 1) Small stock dividend: <20-25% of the number of shares outstanding. Retained earnings is reduced for the fair value of the stock being issued, common stock is increased for the par value of the stock issued, and the difference is included in additional paid-in capital 2) Large stock dividend: >20-25% of the number of shares outstanding. Retained earnings is reduced for the par value of the stock being issued and common stock is increased for the same amount. No impact on additional paid-in capital, similar to stock split

Answer 14

Assets and claims to those assets

Answer 15

Resources available for the organization to carry out its purpose Presented in order of liquidity Current: expected to be realized within one year (or operating cycle, if longer) Non-current: expected to benefit the company for longer than one year (or the operating cycle if longer)

Answer 16

Represent third party claims to the assets of the organization Current liabilities: expected to be settled with cash or other current assets within one year Examples: A/P, accrued expenses, deferred revenue, principle portions of long-term debt due in the coming year Long-term liabilities: due after one year Examples: bonds or bank debt, deferred tax

Answer 17

Owner claims to the assets

Answer 18

1) significant accounting policies 2) significant estimates made within accounts 3) amounts with major classes of inventory 4) Gross amounts with major classes of PP&E 5) components of deferred tax assets and liabilities 6) expected annual principal payments on debt for the next five years and all amounts due thereafter 7) sinking fund provisions for bonds 8) Par values and contractual provisions for preferred and common stocks 9) details about employee stock compensation program 10) significant commitments or contingencies not recorded in the Balance Sheet 11) other information as may be needed for a full understanding of the items reported

Answer 19

Shows results of the operations 1) Revenues and expenses generally result from the primary operations of the organization 2) Gains and losses result from peripheral activities 3) Elements on the Income Statement are recorded on the accrual basis. Revenues are recorded when earned and realized and expenses are recorded when incurred 4) The Income Statement is often combined with a presentation of Other Comprehensive Income items. These items are not considered part of net income, but represent additional changes to the organization’s economic position during the period presented. When this information is included, the financial statement is called the Statement of Comprehensive Income.

Answer 20

1) Depreciation expense and amortization of intangible assets 2) amortization of deferred costs, such as bond issue cost 3) changes in deferred income taxes 4) amortization of a premium or discount on bonds payable 5) income from an equity method investee

Answer 21

Net Income + Noncash expenses (typically depreciation and amortization expenses) - Gains from investing and financing activities + Losses from investing and financing activities + Decreases in current assets - Increases in current assets + Increases in current liabilities - Decreases in current liabilities + Amortization of discounts on bonds - Amortization of premiums on bonds = Operating cash flow

Answer 22

Most items come from changes in long-term asset accounts. + Sales of PP&E + Sales of investments in another entity’s debt or equity securities + Collections of the principal on loans to another entity - Purchases of PP&E - Purchases of other company’s debt or equity securities - Granting of loans to other entities

Answer 23

Most items come from changes in long-term liability or equity accounts. + Sale of the entity’s equity securities + Issuance of debt, such as bonds or notes - Payments to stockholders for dividends - Payments to reacquire capital stock - Payments to redeem a company’s outstanding debt

Answer 24

Requires: - footnote disclosure of any significant noncash investing and financing activities (ex: issuing stock for fixed assets or the conversion of debt to equity) - if Indirect method for cash flow from operations is used, both interest paid and income taxes paid need to be disclosed

Answer 25

1) CONTINGENCIES 2) CONTRACTUAL SITUATIONS 3) ACCOUNTING POLICIES 4) SUBSEQUENT EVENTS

Answer 26

Are material events with an uncertain outcome dependent on the occurrence or non occurrence of one or more future events. - can be gain or loss contingencies - income recognition is not given to gain contingencies - loss contingencies must be recognized if it’s both 1) probable that the loss was incurred, and 2) the amount of the loss is reasonable estimable. Examples of loss contingencies: pending litigation, warranty and premium costs, environmental liabilities, and self-insurance risks Examples of gain contingencies: pending litigation, possible refunds of disputed tax amounts, and tax loss carryforwards.

Answer 27

Contractual agreements such as pension obligations, lease contracts, and stock option plans

Answer 28

Most companies prepare a separate note, “Summary of Significant Accounting Policies “, in which the report on the methods used to recognize revenue, calculate depreciation, value inventory, etc

Answer 29

Event that is occurring between the balance sheet date and the issuance date of the annual report. - if the event provides additional evidence about conditions that existed as of the balance sheet date and alters the estimates used in preparing the financial statements, then the financial statements should be adjusted. - subsequent events that provide evidence regarding conditions that didn’t exist on the balance sheet date should be disclosed in a note

Answer 30

-It assumes that the asset or liability is exchanged between market participants on the measurement date -When a principal market exists, fair value is defined as price in that market -If multiple markets, then highest price is used

Answer 31

1) Market approach use prices for transactions involving comparable assets 2) Income approach uses valuation techniques to convert future amounts to a single discounted present value 3) Cost approach based on the replacement value of the asset

Answer 32

Advantage: provides more current information about the valuation of assets Disadvantage: increased volatility in the reported value

Financial Statements and Income Flashcards

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