Advanced Accounting 4315 Exam II Handouts FCs

Potential Diluters

Securities whose assumed exercise or conversion result in a reduction of EPS or an increase in loss per share; examples are convertible preferred stock, convertible bonds, stock warrants, stock options, and contingent shares

Revenues

Should be recognized as earned during an interim period on the same basis as followed for recognition of income for the full year. Thus, _____ should be recorded in the period when it is earned. If a company's business is highly seasonal, it is not allowed to place the earnings in a different period to hide the seasonal trends.

Discontinued Operations, Extraordinary Items, and Unusual and Infrequent Items

Should be recorded in the interim period in which they occur.

Form S-1

Used by companies making their initial public offering (IPO)

Can EPS affect market prices of common stock?

Yes

Diluted EPS should be computed using the ___________ method when stock options, warrants, & rights are outstanding

treasury stock

The annual report form of the SEC is

Form 10-K

What is the price-earnings (PE) ratio?

PE ratio = Price of the stock / EPS

For interim financial reporting, an unusual or infrequent type of gain occurring in the second quarter should be

Recognized in the second quarter

When computing diluted earnings per share (DEPS), convertible securities that are potential common stock are

Recognized only if they are dilutive

The Federal Securities Act of 1933

Regulates initial securities issuances

What is the required financial statement presentation of EPS?

Restatement of EPS data of a prior period if the earnings of the prior period have been restated by a prior-period adjustment

Selected data for an operating segment of a public business enterprise are to be separately reported when the revenue of the segment exceeds 10% of the

Total revenue of ALL the enterprise's operating segments

Which of the following is permissible for interim reporting for inventories?

Use the gross profit method to estimate inventory

When the exercise price is greater than the average market price, EPS will _____ when the potential diluter is included. Since EPS will increase, the options are said to be ____-dilutive

increase, anti

The Board concluded that each interim period should be viewed as an _____ part of an annual period and not as a separate, independent period

integral

75% Rule

If the total of external revenue reported by operating segments is less than 75% of total consolidated revenue, additional operating segments must be identified as reportable segments until at least 75% of total consolidated revenue is included in reportable segments. In addition, to prevent the data from being too overwhelming, ten is the maximum number of segments that may be disclosed

How are discontinued operations and material unusual or infrequently occurring items that occur at midyear initially reported?

Included in net income and disclosed in the notes to interim financial statements

EPS data must be reported on the face of the income statement for

Income from Continuing Operations; Yes Cumulative Effect of a Change in Accounting Principle; No

Major Customers

Information about major customers. Enterprises must disclose the total amount of revenues from each single customer that amounts to 10% or more of the enterprise's revenues and identify the segment(s) reporting the revenues. The identity of the customer need not be disclosed.

In light of the movement towards a one set of international accounting standards, the SEC now accepts financial statements from foreign companies prepared using the _____

International Financial Reporting Standards (IFRS)

The Securities and Exchange Commission (SEC)

It is an agency of the US government created in 1934 to oversee the interstate issuances and trading of securities. Companies planning to issue securities interstate to the public generally must file a registration with the ___. In addition, companies whose securities are traded on national stock exchanges also must file a registration statement.

Segment sales reduced by segment traceable and allocated nontraceable expenses yields

Operating profit or loss

Characteristics of an Operating Segment

Operating segments have 3 characteristics: I. An operating segment is a component of an enterprise with revenue producing (even if no revenue is yet earned) and expense incurring activities. II. The operating results of an operating segment are regularly reviewed by the entity's chief operating decision maker. III. Discrete financial information is available for an operating segment.

The SEC's present position with respect to the inclusion of financial forecasts in fillings with the SEC is that financial forecasts are

Permissible

The nature of the adjustment for stock options in the calculation of diluted earnings per share can be described as

Pro forma because it indicates potential changes in the number of shares.

Mission of the SEC

Protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation

Form 10-Q

Quarterly report

For interim financial reporting, a gain on disposal of property occurring in the second quarter should be

Recognized in the second quarter

Interim Financial Reports

Refers to the financial statements which cover a period of time of less than a year (e.g., a week, a month, a quarter of the year,, half the year, etc). In order to maintain comparability between interim and annual financial statements, the opinion states that the principles and practices used to prepare the latest annual financial statements should also be used to prepare the interim statements.

Which of the following is responsible for issuing pronouncements that establish the SEC's position on accounting and auditing matters?

The Office of the Chief Accountant

In calculating annual diluted earnings per share, which of the following should not be considered?

The amount of cash dividends declared on common shares.

How are partially paid stock subscriptions treated in the computation of EPS?

By use of the treasury stock method

Property Taxes

Expense should be allocated over all applicable interim periods and not recorded all as an expense in the period when it is paid

Major Repairs

Expense should be allocated over the periods that benefit and not recorded all as an expense in the period when it is paid

However, certain procedures applied to the annual statements may require ________ at the interim reporting dates so that the results for the interim period may better relate to the results of the operations for the annual period.

modification

International GAAP (iGAAP) is much more "_____-based" than US GAAP, which is considered "_____-based".

principles, rules

Segment information reporting applies to ____ business enterprises. It does not apply to nonpublic enterprises or not-for-profit organizations

public

An inventory loss from a permanent market decline of $360,000 occurred in May. Rich company appropriately recorded this loss in May after its March 31st quarterly report was issued. What amount of inventory loss should be reported in Rich's quarterly income statement for the 3 months ended in June 30?

$360,000

To prevent data from becoming too overwhelming, ____ is the maximum number of segments that may be disclosed

10

No more than ____ commissioners may be members of the same political party

3

The SEC is administered by ___ commissioners appointed for ___-year terms by the President and confirmed by the Senate

5, 5-year terms

A firm has BEPS of $1.29. If the tax rate is 30%, which of the following securities would be dilutive?

7% convertible bonds, issued at par, with each $1,000 bond convertible into 40 shares of common stock.

The total external revenue reported by operating segments must be at ____ of the total consolidated revenue. If not, then other segments must also be included until this ____ threshold is meet

75%

Simple capital structure

A capital structure that includes no potential diluters

Complex capital structure

A capital structure that includes potential diluters

Companies began voluntarily issuing quarterly reports in the late 1940's, but GAAP were not issued regarding interim reports until the early 1970s with the issuance of ____

APB 28

In considering interim financial reporting, how did the Accounting Principles Board conclude that such reporting should be viewed?

As reporting for an integral part of an annual period

In considering interim financial reporting, how should such reporting be viewed?

As reporting for the integral part of an annual period

Under the treasury stock method, the DEPS calculation is based on the assumption that call options and warrants issued by the reporting entity and outstanding for the entire year were exercised at the

Beginning of the period and that the funds obtained thereby were used to purchase common stock at the average market price during the period

Which EPS figure should be shown for a company with a simple capital structure?

BEPS

Which EPS figure should be shown for a company with a complex capital structure?

BEPS and DEPS

A company's convertible debt securities are both a potential common stock and dilutive in determining EPS. What would be the effect of these securities on the calculation of BEPS and DEPS?

BEPS has no effect DEPS decreases

Management Approach

Based on the way that management organizes the segments within the enterprise for making operating decisions and assessing performance. The components are called operating segments.

What is the basic (simple or base) EPS formula?

Basic EPS = (Net income - Preferred dividends) / Weight. Avg. shares of C/S outstanding

In a diluted earnings-per-share computation, the effect of outstanding call options and warrants issued by the reporting entity is reflected by applying the treasury stock method. If the exercise price of these options or warrants exceeds the average market price, the computation would

Be antidilutive

With respect to the computation of earnings per share, which of the following would be most indicative of a simple capital structure?

Common stock, preferred stock, and debt outstanding A simple capital structure has only common stock outstanding. A complex capital structure contains potential common stock. Potential common stock includes options, warrants, convertible securities, contingent stock requirements, and any other security or contract that may entitle the holder to obtain common stock.

Minimum Disclosures

Complete financial statements are not mandatory for interim reports, but certain minimum disclosures are required such as: - Sales and net income - Earnings per share - Discontinued operations - Seasonal information regarding revenues and expenses - Changes in accounting principles and estimates - Unusual items

For reportable industry segments of a diversified publicly owned business enterprise, all the following must be disclosed except

Cash Flows

Interim reporting disclosures should included all of the following except

Changes in investment policies

Which of the following is not a required disclosure when a publicly traded company elects to issue a financial summary of interim operations?

Changes in investment policy

The Office of the ________ Accountant is responsible for establishing and enforcing accounting and auditing policies.

Chief

The account Unearned Compensation is a ________

Contra-owners' equity account

Product Costs

Costs and expenses associated directly with product sold or services rendered for annual reporting purposes should be similarly treated for interim reporting purposes. Some exception are appropriate for valuing inventory at interim reporting dates. Some modification may be necessary.

Expenses

Costs and expenses other than product costs should be charged to income in interim periods as incurred, or be allocated among interim periods based on an estimate of time expired, benefit received, or activity associated with the periods. Most expenditures should be charged to expense when incurred. Some exceptions are: property taxes, advertising, and major repairs

Form 8-K

Current events report

The Hoity-Toity Country Club offers membership privileges for a 3-year period under the following arrangements: 1. The applicant pays the entire $200,000 membership fee in 8 quarterly installments during the first 2 years of the contract period 2. The applicant is entitled to unlimited use of the facilities during the 3-year contract period Based on experience, Hoity-Toity is able to reasonably estimate the uncollectible receivables. It prepares quarterly financial statements. In which accounting period should Hoity-Toity recognize the membership fee as revenue for financial statement reporting?

Evenly over the 12-quarter membership membership period

Diluted EPS (DEPS)

DEPS = (NI - Preferred Dividends + Adjustments) / (Weight Avg. + Potential Diluters)

Which of the following statements is true? A. Congress requires that publicly held companies follow FASB pronouncements B. Congress has given the SEC power to set GAAP for all publicly traded companies, but generally the SEC has not used its power directly and has relied on pronouncements by the private sector C. Congress wants the SEC to give assurance that all public traded companies are a safe investment for the citizens of the US D. A primary objective of the Securities Act is for companies to give full and fair disclosure. E. Both b and d are true

E. Both b and d are true B. Congress has given the SEC power to set GAAP for all publicly traded companies, but generally the SEC has not used its power directly and has relied on pronouncements by the private sector D. A primary objective of the Securities Act is for companies to give full and fair disclosure.

The Federal Securities Act of 1934

Established the SEC and requires all public companies to be audited and to periodically update their financial statements.

Are EPS figures required by GAAP for all corporations?

No, only public companies

In determining diluted earnings per share for a complex capital structure, which of the following is a potential common stock?

Noncovertible Preferred Stock; No Stock Option; Yes

For interim reporting purposes, an inventory loss from a temporary market decline in the first quarter, which may reasonably be expected to be restored in the fourth quarter is

Not recognized as a loss in the first quarter

Under US GAAP, interest paid is classified on the Statement of Cash Flows as an _______ activity.

Operating

Beginning in 2016, however, companies will no longer be able to show something as an ________

extraordinary items

With regard to stock dividends and stock splits, current authoritative literature contains what general guideline for the computation of EPS?

f changes in common stock resulting from stock dividends, stock splits, or reverse splits have been consummated after the close of the period but before completion of the financial report, the per-share computations should be based on the new number of shares.

Regardless of the type of share-based plan, the goals should be 1. to record the equity-based compensation at _____ _____ and 2. to record this fair value amount as an expense over the ____ period

fair value, service

Diluted EPS should be computed using the _______ method when convertible securities are outstanding

if-converted

The earnings per share (EPS) of a corporation is often regarded as the most ______ single number on the financial statements

important

The current events report form of the SEC is

Form 8-K

For IFRS, interest paid may be classified as an ____ activity or a ____ activity

Operating & Financing

The disclosure requirements for EPS do not apply to

Statements presented by wholly owned subsidiaries

Stock-based compensation is a popular method of compensation for employees, particularly at the top executives, because such plans

1. Tie employee compensation with a major objective of the firm - to maximize shareholder wealth 2. Do not use any of the company's assets 3. Minimizes the employee's after-tax cost, while trying to maximize the employee's after-tax benefit.

In determining EPS, interest expense, net of applicable income taxes, on dilutive convertible debt should be

Added back to net income for diluted EPS

In computing the loss per share of common stock, cumulative preferred dividends not earned should be

Added to the loss for the year

The Securities Act

Aka "Truth in Securities" Impose civil and criminal penalties on persons filing false or misleading information

Reporting Requirements

An enterprise is required to report a measure of operating segment profit or loss, segment assets and certain related items, but not segment cash flow or segment liabilities. Other reporting requirements include the following items; revenue from external customers and from transaction with other operating segments, interest expense, interest revenue, income tax expense or benefit, unusual items, and depreciation, depletion, and amortization expense.

In computing DEPS, the equivalent number of shares of convertible preferred stock is added as an adjustment to the denominator (number of shares outstanding). If the preferred stock is added as to dividends, which amount should be added as an adjustment to the numerator (earnings available to common shareholders)?

Annual preferred dividends

Form 10-k

Annual report

Foreign Operations and Exporting Sales

If revenue or assets from any one country is material, it should be disclosed.

Advertising

Expense should be allocated over the interim periods that benefit and not recorded all as an expense in the period when it is paid

The form that needs to be filed with the SEC for its initial public offering (IPO) is

Form S-1

Segment Information

GAAP requires that general-purpose financial statements include selected information reported on a single basis of segmentation using the management approach method. Consequently, the segments are evident from the structure of the enterprise's internal organization, and financial statement preparers should be able to provide the required information in a cost-effective and timely manner.

Accounting Standards Codification (ASC) 270 provides special treatment for interim periods' cost of goods sold for

Gross Margin method Temporary depletions of base layers of last-in, first-out inventories Temporary market declines of inventories

Purpose of Segment Information

The objective of reporting segment data is to provide information to help users of financial statements make more informed judgments about the enterprise as a whole. Segment info should help users to better: 1. understand the enterprise's performance, 2. assess its prospects for future net cash flows, and 3. evaluate risks that the company may encounter.

How should material seasonal variations in revenue be reflected in interim financial statements?

The seasonal nature should be disclosed. Revenue information for 12-month periods ended at the interim date may be disclosed.

Which of the following is not one of the three criteria used to define an operating segment?

The segment is primarily involved in business activities with unaffiliated enterprises

When a company reports amounts for basic and diluted earnings per share,

They should be presented with equal prominence on the face of the income statement.

Quantitive Measures

To be considered a significant segment, and thus reportable, it must meet one of the following: I. Revenue Test - Segment revenue is 10% or more of combined revenue (includes intercompany sales) II. Profit (Loss) Test - Absolute amount of segment profit or loss is 10% or more of the greater of combined operating profits of all profitable segments or the combined operating losses of non-profitable segments III. Asset Test - Identifiable segment assets are 10% or more of the combined identifiable assets of all operating segments.

In determining diluted earnings per share (DEPS), a potential common stock (PCS) was antidilutive in Year 2 and dilutive in Year 3. The potential common stock would be included in the computation for

Year 2; No Year 3; Yes