Term
| what are the three main objectives of financial reporting? |
|
Definition
| 1. provide info that is useful in making investing/lending decisions; 2. help assess the amounts/timing/certainty of cash flows; 3. provide a picture of entity's economic resources and the claims on those resources |
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Term
| what are the three key areas that GAAP addresses (very general)? |
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Definition
| recognition, measurement, disclosure |
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Term
| what 3 organizations are responsible for GAAP? |
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Definition
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Term
| What is included in the highest level of GAAP? |
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Definition
| FASB SFASs, FASB Interpretations, CAP ARBs, APB Opinions |
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Term
|
Definition
| 7 FT members, not nec CPAs, renewable 5 year terms (1 renewal) |
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Term
| General process of setting GAAP? |
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Definition
| FASB places a topic on theagenda, does research --> Discussion Memo --> public hearings --> Exposure Draft = initial statement; more comment & mod --> fainal SFAS (majority vote) |
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Term
| Are Statements of Financial Accounting Concepts (SFACs) GAAP? |
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Definition
| NO!!! they provide the basis for developing GAAP but are not GAAP themselves |
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Term
|
Definition
| develop positions on new issues; 13 members; if they reach consensus this may be as far as things go |
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Term
|
Definition
| By difficulties in raising capital; SEC deficiency letters, SEC may stop trading, poss criminal sanctions vs mgrs |
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Term
| What is PCAOB concerned with? |
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Definition
| AUDITING of public companies |
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Term
| If ending A/R is larger than beginning A/R, which income is bigger: cash or accrual? |
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Definition
| if ending A/R is larger than beginning, then less cash has been paid in by customers than is owed due to new credit sales and accrual income > cash income |
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Term
| If ending A/P is larger than beginning A/P, which is bigger, cash or accrual income? |
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Definition
| If ending A/P is bigger than beginning A/P, then purchases are more than cash paid out to suppliers and accrual income will be less than cash income |
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Term
| Define operatig cycle of a firm/ |
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Definition
| cash-to-cash (purchase thru mf (if mf co) and sales and collection of receivables. |
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Term
| what is a "current" asset? |
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Definition
| one that will be converted to cash or consumed within one operating cycle or one year, whichever is LONGER |
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Term
| Which comes first, the econonic activity or the cash, for a. accruals and b. deferrals? |
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Definition
| Accruals = economic activity before cash; Deferrals = cash before the economic activity |
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Term
| Give an example of an accrued income item, an accrued expense, a deferrred income item, and a deferred expense |
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Definition
| Accrued income = receivables; accrued expense = payables; Deferred income = UNEARNED revenues such as subscription or rent income; deferred expense = prepaid expenses such as prepaid insurance or prepaid rent |
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Term
| what is the primary objective of financial statements |
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Definition
| to be useful to external decision makers |
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Term
| what do F/S provide information about |
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Definition
| cash flows, economic resources and claims on those recources, also financial performance and mgmt responsibility |
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Term
| **Two key characteristics of accounting info |
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Definition
| Relevance and Reliability |
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Term
| *Three components of relevant information |
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Definition
| Timely, predictive value, feedback value |
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Term
| *Three components of reliable information |
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Definition
| representationally faithful, verifiable, neutral |
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Term
| Two secondary qualitative characteristics of accting info? |
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Definition
| Comparabilitly across firms and Consistency within firms |
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Term
| *Basic accounting assumptions? SFAC 2 |
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Definition
| Entity assumption, going concern, unit-of-measure, time period |
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Term
| *basic accounting principles? SFAC 2 |
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Definition
| historical cost, revenue recognition, matching, full disclosure |
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Term
| When is revenue recognized? |
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Definition
| When goods & services have been provided, collecibility of cash is assured, and the expense of providing the good/service can be determined |
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Term
| What are some ways of matching? |
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Definition
| immediate recognition (in period incurred); cause & effect (eg COGS); systematic & rational (eg depreciation) |
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Term
| What's the difference between an expenditure and an expense? |
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Definition
| An expenditure is an outlay of cash; an expense is matched with the revenue it produces (eg 3000 expenditure for a computer expense 50/month for its use to generate income) |
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Term
| *Constraints on Accounting SFAC 2? |
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Definition
| materiality; cost-benefit; conservatism; industry pecultiarities |
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Term
| What is included in a full set of F/S? SFAC 5 |
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Definition
| bal sheet, income statement, comprehensive income, cash flows, investments by & distrib to owners (SOE) |
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Term
|
Definition
| assets, liabilities, equity, investments by owners, distributions to owners, comprehensive income, revenues, expenses, gains, losses |
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Term
|
Definition
| probably future benefits, controlled by mgmt, resulting from past transaxns |
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Term
|
Definition
| probable future sacrifices, arising from present obligations that are a result of past transaxns |
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Term
| *different measurement principles in F/S |
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Definition
| historical cost (land), depreciated/amortized cost(PPE); NRV (A/R); LCM (inventory); fair value (marketable securities); expected cash flow (asset retirement obligations) |
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Term
| other name for balance sheet? |
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Definition
| statement of financial position |
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Term
| what distinguishes balance sheet from all other F/S |
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Definition
| only one that is measured at a POINT in time rather than a period of time |
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Term
| does a balance sheet represent all assets of a firm? |
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Definition
| surprisingly, no. only those assets acquired thru a transaxn; hence "off-balance sheet" assets |
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Term
| what key information might an investor glean from balance sheet? |
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Definition
| risk: liquidity of assets, debt to equity ratio |
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Term
|
Definition
| current ratio (CA/CL); quick (acid-test) ratio (cash, ST invest, AR/CL). want to be at least 1 |
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Term
| how are assets & liabilities ordered on a balance sheet? |
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Definition
| in order of liquidity. A classified balance sheet formally separates current from noncurrent assets but all BS use the same general ordering |
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Term
|
Definition
| cash & cash equiv; ST invest; A/R; inventory; prepaids |
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Term
| ordering of current liabilities on BS |
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Definition
| A/P, accrued liabilities, unearned revenue, tax payable notes payable, curr portion LT debt |
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Term
|
Definition
| contra goes in opp direction of assoc acct (subtract, eg accum deprec or allowance for doubtful accts); adjunct goes in same direction (bond premium) |
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Term
|
Definition
| used to bring an asset or liability to current value. All valuation accts are either contra or adjunct accts (but not vice versa) |
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Term
| key to know about related parties? |
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Definition
| FAS 57 requires specific disclosures about related party transaxns: nature of rel, descrip of transaxns; amts due and terms of settlement |
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Term
| what is a subsequent event? when is it recognized in the F/S and when is it merely disclosed? |
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Definition
| a subs event occurs after the balance sheet date. If conditions existed at B/S date (eg company on verge of bankruptcy), recognize (eg write off bad debt). If the condition did not exist at the B/S date, merely disclose (eg fire on Jan 2 destroys warehouse) |
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Term
| Must ALL related party transaxns be disclosed? |
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Definition
| No. if it's not material, it's not disclosed. (Q: if it's between related parties but its at FMV, must it be disclosed?) |
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Term
| subsequent event: if you have a signed contract in October but have not begun work, is the contract recognized in the F/S? |
|
Definition
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|
Term
| What kinds of subsequent event losses should be recognized in F/S |
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Definition
| probable and estimatable LOSSES--try ex's again |
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Term
| Define Revenue, Expense, Gain, & Loss. Diff between Revenue & Gain? Between Expense & Loss? |
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Definition
| Rev & Expenses are changes in net assets/liabilities related to provision of goods & services. Gains & losses are changes in net assets or equity and are not related to the main business purpose. Expenses provide bus benefit; loss do not. |
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Term
| What Rev/Exp/G/L do NOT appear on Inc St? |
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Definition
| PRIOR PERIOD ADJUSTMENTS appear on St of Retained Earnings. Foreign currency adjustments, unrealized holding G/L, and pension cost adj appear only on st of comprehensive income. |
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Term
| Overall Income Statement Flow |
|
Definition
Net Sales
Less COGS
Gross Margin
Less Operating Expenses
= Operating Income
+ Misc Rev/Gains
- Misc Exp/Losses
+/- unusual/infreq items
= Income from continuing ops pre-tax
less income tax expense
= Inc f cont ops
+/- discontinued ops net of tax
+/- extraordinary items net of tax
= NET INCOME |
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Term
| what is included in income tax item in income statement? |
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Definition
| Income tax on continuing operations. Non-continuing items are reported net of tax. |
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Term
| What is included in continuing ops other than Rev/Exp/Gains/Losses f/bus? |
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Definition
| Items that are unusual OR infrequent, eg restructuring. These go in continuing ops. Items that are BOTh are extraordinary and go after cont ops and are reported net of tax |
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Term
| Framework for single step income st? |
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Definition
| REvnues & Gains; Expenses & Losses; Unusal or Infreq items; Sum; Tax; Inc f/Cont ops; discont items/ extraord items; net income |
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Term
| Overall Multi-step Income Statement? |
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Definition
| Sales Rev Less COGS = gross margin less op exp = op margin plus other rev/gains less other exp/loss; plus/minus unsual OR infreq items = inc f/cont ops; discont ops, extraord items; net income |
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Term
| What is the value of separating income from continuing operations from net income? |
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Definition
| INcome from continuing operations is more predictive of future income |
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Term
| Income statement: What's part of G&A expense? what should be broken out separately |
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Definition
| officer's salaries, rent for non-mf and non-sales, prof'l fees...but NOT advertising, NOT interest |
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Term
| How handle discontinued operations, sale of segment planned for next year, for antic Gain and for antic Loss |
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Definition
| Discont ops always is broken out separately. Have loss from operations for this year, then est loss on sale, if one is estimated. (FMV - CV)(1-tax rate). If the loss is less than expected, the next year you report a gain in the amt of the difference between the loss est (eg -1200) and the actual (-1000 --> gain of 200). If you anticipate a gain on sale you do NOT report it until it actually occurs |
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Term
| Discontinued operations-if you plan a sale next year what do you report this year? |
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Definition
| both the actual OPERATING loss and a loss on sale, if one is anticipated. If a gain on sale is anticipated, it is NOT reported |
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Term
| Does a sudden unexpected currency devaluation from a foreign govt qualify as an extraordinary item? How about a foreign govt takeover of a business? |
|
Definition
|
|
Term
| Are strike losses unusual? antitrust case losses unusual? |
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Definition
| no, yes if they tell you it's the first for the co |
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Term
| treatment of early retirement of bonds? |
|
Definition
| goes in IFCO (inc f cont ops) as a separate item |
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Term
| Is abandonment of equipment extraordinary? |
|
Definition
| apparently not according to example questions |
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|
Term
Casey Corp. entered into a troubled debt restructuring agreement with First State Bank.Prior to this agreement, Casey has never had troubled debt and does not expect to have troubled debt in the future.
Under the agreement, First State agreed to accept land with a carrying amount of $85,000 and a fair value of $120,000 in exchange for a note with a carrying amount of $185,000.
Disregarding income taxes, what amount should Casey report as extraordinary gain in its income statement? |
|
Definition
| 65 extraord (and 35 ord fv-cv)--total gain 100 (get 185 debt forgiv, give up 85 cv, but divide into ord and extraord) |
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Term
| 3 ways to present st of comprehensive income? which is most popular? |
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Definition
| as a separate statement; in with income statement; in with st of owner's equity; lastter is most popular |
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Term
| 4 components of OCI (other comprehensive income)? |
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Definition
| unrealized gains & losses on AFS (avail for sale) securities; unrealized pension G/L; foreign currency translation adj; unrealized G/L from derivative transaxns |
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Term
|
Definition
| Begin with Net Income; then present the OCI items in order net of tax; total OCI, total OCI and Net Income to get COMPREHENSIVE Income |
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|
Term
| Comprehensive income = __ + ___ |
|
Definition
| Net Income + Other Comprehensive Income |
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Term
| Difference OCI & comprehensive income? |
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Definition
| watch this on qs--tricky! sometimes they ask for one, sometimes for the other. CI=NI+OCI |
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Term
| can comprehensive income be less than net income? |
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Definition
| Yes, if the OCI items total to be a loss |
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Term
| Comprehensive income is reported net of tax for what? |
|
Definition
| EITHER for the total of the OCI items OR for each item individually--but the net of tax doesn't appear twice (tricky item) |
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|
Term
| True of False: CI should appear in a F/S that has equal prominence with other F/S |
|
Definition
|
|
Term
|
Definition
|
|
Term
|
Definition
| net income - preferred stock dividends / wtd avg common shares outstanding |
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|
Term
| can CS dividends affect EPS? |
|
Definition
|
|
Term
| what is included in diluted EPS? |
|
Definition
| stock options and convertible securities, calc as the number of common shares these would convert to plus existing CS |
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|
Term
|
Definition
| net income -preferred stock div + adjustments to income for assumed conversion of potential cs / wtd avg cs shares outstanding + shares from assumed conversion of pcs |
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|
Term
|
Definition
| basic and diluted; for IFCO and net income, and for discont ops and extraord items |
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|
Term
| key issues to watch out for in calc of EPS |
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Definition
| subtracting preferred stock div from numerator (remember cum whether pd or not; declared noncum as long as declared); calc wtd avg # CS when there are treasury stock buybacks or stock splits |
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Term
| how handle a stock dividend or split that occurs in the middle of the year, for calc EPS? |
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Definition
| treat it as tho it occured at the beg of the year. If you have a comparative st, need to adj prev yrs too to be comparable |
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|
Term
| If you have 2 yrs dividends in arrears on PS and .5 year for the curr year, how much do you subtract for calculating EPS for the current year? |
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Definition
| one full year--the rest would have been calc in a previous year so don't repeat |
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|
Term
| if a firm has issued 1000 shares and has 200 in treasury, how many shrea to include in calc EPC |
|
Definition
|
|
Term
| If a firm has no shares of PS, what does EPS represent? |
|
Definition
| The amount of dividends that could be paid w/o reducing retained earnings below what it was at the beginning of the year |
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Term
| if 7000 shares have been issued and 2000 are in treasury stock, what # shares use for wtd avg shares outstanding in calc EPS |
|
Definition
|
|
Term
| If a stock split or a stock dividend occur early in the year before the annual F/S have been issued, should the new number of shares be used to calculate EPS even tho that number of shares was irrelevant to the year to which the FS pertain? |
|
Definition
| yes, b/c the goal of EPS is to give investors info about the future, so take the stock div or split into consideration! |
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|
Term
| If you expect a gain on disposal of a discontinued operation that will occur the next year, is it reported in this years' FS? what about an estimated loss? |
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Definition
| Do NOT report an est gain but DO report an est loss! |
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|
Term
| what is the benchmark for antidilution? |
|
Definition
|
|
Term
| how handle convertible bonds and convertible preferred stock for diluted EPS? |
|
Definition
| assume they have been converted |
|
|
Term
| how handle stock options and warrants for diluted EPS? |
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Definition
| "treasury stock method"-assume they have been exercised |
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|
Term
| Numerator effect of convertible bonds. How calc? What does it represent? |
|
Definition
| # bonds x par/face amt x %int rate x (1-tax rate). **ADD** this to net income b/c it is the additional income you'd have from not having to pay interest on the bond! |
|
|
Term
| denominator effect of convertible bonds? What do you do once you've calc num & denom effects? |
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Definition
| Denom effect is simple conversion, eg if each bond converts to 20 CS and you have 100 bonds, add 2000 shares to CS. Once you have the numerator and the denom effects JUST BY THEMSELVES (ignoring the orig net income), divide the num effect by the denom effect. If this is less than basic EPS there is a dilution effect and calc DEPS |
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|
Term
| What's a big difference between calculating the effects of convertible preferred stock vs convertible bonds on EPS? |
|
Definition
| with bonds, the interest expense is tax deductible, so you multiply the interest rate by 1-tax rate. With PS, the dividend is NOT tax deductible so you don't do this. |
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|
Term
| do you always report both basic and diluted EPS when there is a potential conversion of bonds or stock? |
|
Definition
| NO. Only report the potential effect if it is dilutive due to conservatism |
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|
Term
| 3 steps for treasury stock method for calc effects of stock options on diluted EPS |
|
Definition
1. If option price < market price assume the option is exercised and calculate how much more income and how many more shares the company has as a result.
2. Assume that the company will use the proceeds to buy back treasury shares at the market price.
3. Add together the incr # shares f/exercise of the option less the treasury shares to find the total difference in number of shares |
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|
Term
| Is there a numerator effect when stock options are exercised? |
|
Definition
|
|
Term
| why does the treasury stock method assume that the proceeds from the stock options will be used to buy back shares of treasury stock? |
|
Definition
| because this minimizes the dilutive effect of exercising the options |
|
|
Term
| when you have multiple dilutive entries in a problem, which do you start with--the biggest ratio or the smallest |
|
Definition
| start with the smallest ratio and go until the effect is antidilutive |
|
|
Term
| the control number for antidilution =? |
|
Definition
| income from continuing operations |
|
|
Term
| How do you handle a series of potential entries into diluted EPS |
|
Definition
| calculate the N/D ratio for each. Start with the lowest and calc DEPS. go step by step. Stop when the N/D ratio for the next entry is larger than the DEPS from the last calculation! |
|
|
Term
| if there are shares issued and outstanding, what do you use for denom in EPS |
|
Definition
| use shares outstanding. if they say there are shares in treasury stock, subtract this from number of shares issued! |
|
|
Term
| purpose of statement of cash flows? |
|
Definition
| assess bus ability to generate cash flows, likelihood of being able to pay off debt and of future borrowing |
|
|
Term
| 3 key sections of statment of cash flows |
|
Definition
| operating (this is the only one where you can use either direct or indirect method), investing, financing |
|
|
Term
| other items on SCF besides 3 main sections |
|
Definition
| foreign currency adjustments, noncash investing & financing, reconcil beg to end of year cash to cash |
|
|
Term
|
Definition
| Op; Inv; Fin; foreign currency adj; change in cash; beg cash; end cash |
|
|
Term
| use of supplemental schedule to SCF |
|
Definition
| present significant *non-cash* investing and financing activities |
|
|
Term
| does the choice of direct vs indirect method for SCF affect required disclosures? |
|
Definition
| yes--direct method requires a separate reconciliation of net income with cash from operating activiites |
|
|
Term
| in the indirect method for the SCF, what is the starting point? what is the goal |
|
Definition
| Net Income is start, reconcile this to net cash from operating activities |
|
|
Term
| focus of investing section of the SCF |
|
Definition
| acquisition & disposal of non-cash assets |
|
|
Term
| Direct method SCF: sources of cash? |
|
Definition
| customers, interest or dividends, sale of investments |
|
|
Term
| Direct method SCF: uses of cash? |
|
Definition
| pay vendors/suppliers, pay employees, pay taxes, *pay interest expense* |
|
|
Term
| Investing activities: sources of cash? |
|
Definition
| sale of assets or investments, collection of loan principle |
|
|
Term
| investing activities: uses of cash? |
|
Definition
| purchase assets, purchase investments |
|
|
Term
| financing activies: sources of cash? |
|
Definition
|
|
Term
| financing activities: uses of cash? |
|
Definition
| *pay dividends*, pay off bonds/LT debt |
|
|
Term
| if you make a loan to another, is that an investing activity or a financing activity? |
|
Definition
|
|
Term
| tax effects show up in which section of the SCF |
|
Definition
|
|
Term
| classification of dividends paid, dividends received, interest paid, interest received on SCF? |
|
Definition
| dividends PAID is financing (direct reduction of retained earnings); all the others are operating |
|
|
Term
| classification of TRADING securities in SCF? |
|
Definition
| depends on purpose--if intent is very short term turnover, OPERATING; else investing |
|
|
Term
| what do you do with foreign currency adjustments in the SCF? |
|
Definition
| separate section entitled "Net Effect (on Cash) of Foreign Currency Translation" provides an adjustment |
|
|
Term
|
Definition
| change in cash (sum of OIFF) + beg = end |
|
|
Term
| what do with noncash transactions on SCF? what if a transaxn is part cash part noncash? |
|
Definition
| separate schedule or footnote. If transaxn is split, the reporting is also split between the face and the schedule |
|
|
Term
| change in cash (indirect method) = ? |
|
Definition
| change in liabilites + change in equity - change in noncash assets |
|
|
Term
| Where does bad debt expense/allowance go when figuring St of Cash Flows |
|
Definition
| Count it as a selling expense!!! do not use when calc cash collected f/customers |
|
|
Term
| What do you do with discount/premium on Bonds payable when calc St of Cash Flows |
|
Definition
| Discount amortiz adds to interest expense so add it back (like deprec); premium subtracts from interest expense |
|
|
Term
| Helpful equation for remembering directions of add/subtract to Net Income when calc St of CF using indirect method |
|
Definition
change in cash = ch in L + ch in E - ch in other assets
derived from A = L + E |
|
|
Term
| What belongs in investing activities? |
|
Definition
| LIP: loans, investments in other companies (EXCEPT trading investments), PPE |
|
|
Term
| Roger's easy way to remember which are operating, investing, financing activities? |
|
Definition
| draw up a balance sheet with curr sept from noncurr A & L; Curr A&L are gen operating; noncurr assets are gen investing, noncurr liabilities and SE are gen financing |
|
|
Term
| on the statement of cash flows, how do you classify: a note receivable? a note payable? |
|
Definition
N/R is noncurr asset, investing
N/P is noncurr liability, financing |
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|
