CPA Exam FAR
Bond Issue price is calculated by...
Taking the sum of the present values of the maturity value and the interest payment annuity
Tangible Net Worth Calculation
Tangible Net Worth = Total Stockholder's Equity - Intangible Assets
Supplementary info on statement of cash flows.
These are non-cash investing and financing activities (issuing stock for assets, converting bonds to stock, issuing bonds for assets). Ex. If someone gave up 50K shares of common stock along with cash, then the shares would be calculated at the FV price (not par value) and cash is not considered in this.
accounts receivable turnover
net sales/average accounts receivable
Total Asset Turnover Formula
net sales/average total assets
When should significant estimates be disclosed?
When it is reasonably POSSIBLE (not probable) that the estimate will change in the near term and that the effect of the change will be immaterial. Immaterial items are not disclosed
NFPs report all expenses as with or without donor restrictions?
Without donor restrictions
Is OCI Net of tax?
YES
If a sub has a payable to its parent, should the sub report that on its balance sheet?
Yes. Payables and receivables to a subs parent will be reflected on its balance sheet, but not on its consolidated balance sheet.
Basic steps to find what a company should report as investment in bonds after a purchased bond that is classified as held to maturity.
**SEE MCQ-00501** Find Carrying amount Find sum of interest revenue and interest receivable to find the discount amortized. **Remember to look at the dates. If purchased in july, the two steps above will only be for 6/12 months. Add the discount amortized to the carrying amount.
Where do you record the excess over cost of treasury stock sold?
APIC
Governments use modified or accrual basis for its proprietary funds in measuring financial position and operating results?
Accrual
With a trade discount (example: the company allowed a trade discount of 30% and 20%)(this is literally all they give you... See MCQ 00307) Just take the first discount (30%) and then take the second discount (20%) and apply it to the result of the first trade discount. (cost of merchandise sold = $5000 - Trade discount 30% = $3500. Then 20% of $3500 = $700. 3500 - 700 = $2800.
After you do all of this then apply any other discounts like 2/15, n/40 and remember to subtract any loans like prepaid delivery cost
Do treasury stock transactions increase or decrease equity?
All treasury stock transactions decrease total equity.
How should the acquirer recognize a bargain purchase in a business acquisition?
As a gain in earnings at the acquisition date.
Current expected credit loss CECL model
Expected credit loss is equal to the difference between amortized cost and the present value of expected cash flows.
Legal fees defending a patent that aren't successful can be expensed or capitalized?
Expensed immediately. Successful = Capitalized
Return on Assets Formula
Net Income/Average total Assets
Net Profit Margin Formual
Net Income/Net Sales
Using the indirect method for reporting cash flows, The sale of land with a CA = 500K and Sale = 400K will have a increase or decrease on net income and how much will be shown as a cash inflow?
$100,000 addition to net income $400K cash inflow Its an addition to net income because of the indirect method.
Earnings Per Share (EPS)
Net Income - Preferred Dividends/ Weighted Shares Outstanding When Calculating the weighted shares outstanding, do not include nonconvertible stock. Stock Dividends/Stock Splits are treated as if they happened at the beginning of the year. REMEMBER - Dividends are cumulative. So when hey are declared or paid is not relevant.
When Valuing consolidated companies current assets.
Its not just the total of the parent. You add the parent and the subs current assets together and then adjust any inventory to FV or anything else that might affect current assets
NFP revenue related to charity care.
NOT recognized on the face of financial statements but is disclosed. When asked to compute the amount of revenues, gains, support etc. you must SUBTRACT charity care revenue
Quick Ratio
(Cash & Cash Equivalents + Net Accounts Receivable + Marketable Securities) / Current Liabilities
Finance lease Criteria
(OWNES) - If Yes to even one of these, then its a FINANCE LEASE (O) Ownership transfers to lessee at end of lease (W) Written purchase option lessee reasonably certain to exercise (N) Net Present value equals or exceeds FV of asset (90% or more) (E) Economic life ("major part" or 75% or more) of the underlying asset within lease term (S) Specialized asset such that it will not have an expected, alternative use to lessor
Return on Equity Calculation
(net income - preferred dividends) / average common equity
IN APPLICATION OF ACQUISITION METHOD, WHAT DOES MNEMONIC "CAR IN BIG" MEAN?
*** SEE TBS-002364*** CAR IN BIG CAR are ELIMINATED - Common Stock, APIC (Additional Paid-in Cap.), Retained Earnings (from subs books) Investment in Subs is ELIMINATED (from parent's books) Non-Controlling Interest Balance Sheet of Subs is ADJUSTED to FAIR VALUE -100% of assets and liabilities Identifiable Intangible Assets of the Subs are RECORDED AT FAIR VALUE Goodwill (or Gain) is REQUIRED -create goodwill if there is excess of FV of the subs (acquisition + non controlling interest) over the fair value of the subs' net assets -Goodwill = Acquisition cost + any NCI - FV net assets
Non Governmental Not-For-Profit program services vs support services.
-Program services are expenses with activities related to the mission of the NFP (teacher salaries, dinner for a fund raiser banquet). Anything related to the "program" of the NFP is program services. -Support services include publicity costs (membership development), management and general expenses, and fundraising expenses. SEE F8 M1 MCQ's starting at 42 for practice on these
Periodic Inventory System Formula
Beginning Inventory + Purchases = Ending Inventory + COGS
Inventory Turnover
COGS/Average Inventory
When Correcting under or overstated Retained Earnings...
Calculate NET OF TAX for RE
Are trading securities a current or non-current asset?
Current Asset
Average Working Capital Formula
Current Assets - Current Liabilities = Working Capital. Take the average of the two years to find Average working capital.
A transaction in a foreign currency is recorded when and at what rate?
Date of sale, Spot rate
How to Calculate Composite Depreciation Straight-Line Method and find the "composite life" (Will be something like 6.2 or 7.5)
Divide the depreciable cost by the annual depreciation.
Dollar Value LIFO....
Do MCQ 00095 & MCQ 12643 1. Find the difference between beginning and ending inventory 2. Calculate LIFO layer factor (Beginning 100K ending 132K with a 20% increase in current year. 20% increase would be layer factor of 1.2. DIVIDE 132K/1.2 = 110K. Then times the increase (10K) by the factor (1.2)
A company is planning to construct an office that will be used as its new corporate headquarters. When/How can they capitalize interest?
During the construction period with borrowed funds to finance the weighted average accumulated expense.
2/15, net 30
2=2% discount and 15= days to pay or days in AR.
Total accumulated other comprehensive Goes on balance sheet as A. Equity B. Retained Earnings C. Asset
A. Equity
Where does a loss from permanent impairment get credited to?
Accumulated Depreciation.
Allowance Method that emphasizes asset valuation
Aging the receivables.
How are investments in bonds classified as held-to-maturity reported.
Amortized Cost.
What costs on plant assets (machinery) can be capitalized?
Any cost to acquire and make ready.
Computer software being developed can be capitalized once technological feasibility has been established.
Any costs before technological feasibility will be expensed. Any costs after software is available for release will be expensed.
How are trading securities reported?
At Fair Value on the Balance Sheet
When can revenue be recognized for ag products and precious metals?
At time of production, not at time of sale
If a check is deposited and its returned as NSF, when it be reflected on the checkbook balance?
If the check is counted into the checkbook balance, it will need to be taken out until the check is redeposited and cleared.
When a bank discounts a note receivable a 12% interest bearing note recievable at 15%, will the proceeds received from the bank equal matruity value less the discount of 15% or face value less the discount at 15%?
Maturity Value less the discount of 15%. This discount is always applied on the maturity value.
Different governmental accounting funds?
Modified Accrual Basis - Measurement Focus = Current Financial Resources Glamorous Smurfs Described Crisp Pies General Fund Special Revenue Fund Debt Service Fund Capital Projects fund Permanent Fund
Does a Liquidating Dividend count as dividend income?
NO, its a reduction of the investment account.
Free Cash Flow Equation
Free Cash Flow = Operating Cash Flow - Ttal Capital Expenditures
Gains and Losses on the purchase and resale of treasury stock are reflected where?
Gains increase paid-in capital, losses decrease paid-in capital to zero, then decrease retained earnings.
Double-Declining balance method. Do a calculation Example.
10K value with 5 yr life Yr1 = 10,000/5yrs x 2 = 4000 4000/10,000 = 40% - you will now use 40% as the depreciation for each year Yr2 = 10,000 (4,000) = 6000 x .4 = 2400 Yr3 = 10,000 (6400) = 3600 x .4 = 1400
Segment revenue is 10% or more of combined rev of all the company segments, a segment must be at least 10% of...
10% of... 1. Combined revenues (intersegment or affiliated customers) 2. Operating Profit (of all segments w/ NO OPERATING LOSS) 3. Identifiable assets
Sum-of-years-digits method of depreciation. Do a calculation example.
100K value with 5yr life 5+4+3+2+1=15 Yr1 = 100 x 5/15 Yr2 = 100 x 4/15 Yr3 = 100 x 3/15 And so on....
Investments with not for profits should be reported at?
Fair Value. F8 M4 had a ton of questions on investments within a not for profit including bonds, stocks, etc and all of them were valued at fair value, usually at the end of the year. NFP investments are displayed at FV at year end. The only question that was different was asking how to report investments i debt securities and the answer was quoted market prices, which is the most reliable measure of fair value.
When finding how much interest to capitalize with PP&E the process is...
Find the average accumulated expenditures ($2000 in yr 1 would be $2000 / 2 = $1000) and times that by your interest rate. This is your "avoidable interest". Then, you will capitalize the interest that is lower between the interest incurred vs the avoidable interest.
When finding the amount of interest that should be capitalized for the year end.
Find weighted average accumulated expenditures. ($150K paid in sept = 4/12 or $50k) and apply the interest rate. The interest capitalized is the lesser of actual interest or capitalized interested from weighted average expenditures.
Non-Gov not-for-profit statement of activities is similar to a for profit entity
Income Statement
How to calculate basic earnings per share?
Income available to common shareholders/weighted average number of common shares outstanding Make sure to take out dividends accumulated from preferred stock regardless of whether or not the dividends have been paid. If company has 50K shares outstanding beginning of the year and then issues 8K shares on April 1, to find the weighted average number of common shares outstanding you'd need to take the 8K x 9/12 and then add that amount to the beginning outstanding shares.
What are the primary risks of Derivatives?
Market Risk, Credit Risk, Liquidity Risk
When using the allowance method for uncollectible accounts, how to write offs affect Net income and Total Assets?
No effect for either.
Is receipt of stock dividend income?
No, it just INCREASES the number of shares held and DECREASES the cost basis per share.
What are some expenses that can be included in the purchase of land?
Purchase price of the land, Real Estate Taxes in arrears, Attorney fee-title search on land. *NOTE - if the company issued debt to purchase the land, the debt issuance costs do not count towards the land. instead they are presented on the balance sheet as a direct reduction to the carrying amount of the bond.
On statement of Cash Flows, what are the 3 different types of cash flows?
Operating, Investing, Financing Remember to read the question carefully and determine what they are asking for. Generally they will ask to determine the cash flows in reference to one of these methods. DONT MIX THEM.
When a parent sells to a sub at the same markup on cost for all sales, that calculation will happen from INVENTORY.
Parent inventory - $60,000 Sub Inventory - $50,000 Total = $110,000 Inventory consolidated - $104,000 Interco profit Eliminated - $6000
How to calculate LIFO Method on Perpetual vs Periodic
Perpetual - Last in First Out as inventory comes in throughout the year. Periodic - Last In First Out starting at inventory at the end of the year. (SEE TBS 033003 @ 9Min for example)
FASB conceptual framework, quality of information that helps users forecast future outcomes is?
Predictive Value
Present value of 1 Vs. Present value of annuity of 1.
Present value of 1 is when there is a single payment in the future. Present value of annuity of 1 is when there are multiple payments throughout the years.
Non-Monitory exchange that has commercial substance.
Recognize all gains/losses
On bond questions, interest payments will be calculated at present value of ordinary annuity and the principal payments will be calculated at present value.
Remember to take the sum of the interest payments and liabilities with bonds
Accounts Receivable Turnover Ratio
Sales (net)/ Average A/R
On a Consolidated Financial Statement, what do you report plant assets at for the sub/parent?
Sub = fair value & Parent = book value
Questions with uncollectible accounts, do you subtract or add write offs of uncollectible accounts in BASE?
Subtract.
When trying to calculate if a company has an asset or liability when using the percentage of completion in construction activity, what are the key steps?
Sum of cumulative costs incurred plus cumulative gross profit recognized exceeds cumulative Billings, it will be an asset.
Cost of the trademark is amortized over its economic life
The cost/purchase price, not the book value.
How to find the profit on sale from a lease?
The excess of the PRESENT VALUE of the selling price over its cost.
Checks that are postdated should not be included into the checkbook balance until...
The postdated date arrives (for the date the check is written for)
On a lease question that states that someone wants to earn a specific interest rate on a lease, and the call of the question is "what is the total amount of interest revenue that will be earned over the life of the lease?" you need to...
Use the equation.. PV (FV) = Annual Rents x Annuity due PV factor Once you find the annual rents, you will then take the annual rents and multiply it by the amount of years of the lease, and then subtract that from the PV that you use at beginning of equation above to find the interest revenue
Current Ratio
current assets/current liabilities (liquidity)
Working Capital Turnover Formula
sales / average working capital
Total Debt Ratio
total liabilities/total assets
Debt to Equity Ratio
total liabilities/total equity
When changing from LIFO to another inventory cost flow assumption, do you adjust beginning retained earnings from current year or next year?
Beginning RE in current year. Whatever your beginning inventory for the year is, you'll take beginning inventory net of tax to find the adjusted RE. Example: $400 beginning inventory.... 400 x (1 - .30) = 280 which is the cumulative effect of accounting change in RE ***Remember that you will adjust beginning retained earnings to the earliest of years presented when switching any inventory method with one exception.... If switching from any method TO LIFO, there are no retroactive adjustments, not even to the current year retained earnings. you simply begin to use LIFO in the current period moving forward.
Assets = $760 Capital Stock = $150 RE = $215 What is the debt to equity ratio? (REMEMBER THE ACCOUNTING EQUATION)
Equity = capital stock + retained earnings (150 + 215 = 365) Liabilities = Assets - equity 760 - 365 = 395 Total liabilities/Equity=debt to equity 395/365=1.08
Non-Monitory Exchange that LACKS commercial substance
Calculate gain/loss, if you have a loss then loss is recognized, if gain and if no boot received then no gain recognized. If boot is paid, no gain recognized. If cash is received & less than 25% you recognize a portion of the gain. If cash received and is more than 25% of total FV then both sides recognize gain/loss.
When a Question asks for the "Stated interest" amount on bond, do you calculate the interest expense or cash credited?
Cash Credited. GAAP interest would be the actual interest expense. READ THE QUESTION CAREFULLY
Book Value per common share equation
Common stockholders equity/common shares outstanding.
Lenders do not recognize loan origination fees, but rather...
Defer and recognize over the life of the loan as an adjustment to interest income.
Times Interest Earned Formula
EBIT/interest expense *EBIT = Earnings before interest and taxes
Days sales in A/R formula
Ending A/R / (Net Sales/365)
Days in Inventory Formula
Ending Inventory / (COGS/365)
Remeasurement method is used to convert the financial statements of a sub from the foreign currency to the functional currency. (US Corp with a sub in Switzerland, switching the franc to US dollar on the financial statements) in these type of questions, what is the difference between REMEASUREMENT and TRANSLATION.
Remeasurement of the financial statements is recorded on the income statement. Translation method goes to OCI. ***Both are a conversion of the financial statements. here is the difference... Remeasurement method = foreign local currency to functional currency (INCOME STATEMENT) Translation method = functional currency to the reporting currency (OCI)***
Lets say you purchase equipment in the current year. If equipment can only be used for a single project, and it is depreciated over 10 years, but the project is only expected to take 5 years, how much of the product would you depreciate in the current year
The total cost of the equipment is expensed immediately, even tho the project is expected to take 5 years. It would be capitalized over its useful life, only if the equipment had an alternative use.
If a change in accounting estimate is made at some point during the year (FIFO to weighted average) Then you must adjust the beginning retained earnings at the earliest year presented.
This means if you change in year 2 and you have year one as a comparative financial statement then you need to adjust for both 1 & 2. If just year 2 and lets say you started the change in august that means you just need to change the beginning retained earnings to year 2 beginning of the year.
With Monitory Exchanges (25% of cash received or more) you record the entire loss/Gain based on the FV of the asset
With Monitory Exchanges (25% of cash received or more) you record the entire loss/Gain based on the FV of the asset
When a non-monetary exchange HAS commercial substance, do you recognize gains or losses? How do you value the asset received?
YES you recognize all gains and losses based on the difference between the FMV of the asset given up and its NBV. You value the asset received equal to the FV of the asset surrendered (plus any cash paid)
does transportation to consignees count towards COGS?
YES.
Present value of an ordinary annuity vs. present value of annuity due
Present value of an annuity starts payments at the end of the period, where present value of annuity due starts payments at the beginning of the period.
When finding non-controlling interest, take the acquisition price divided by acquired percentage and that will give you the FV of the company invested in. (Example: P acquired 80% of T's 200 shares of common stock for $5M. $5m/80% = FV of T - $6.25M). Then to find the non-controlling interest you take the FV of T and times that by the % P does not own. ($6.25M x 20% = $1.25M or Noncontrolling interest).
THEN if the question also presents any net income or dividends paid, you would take the % not owned, (in this situation it would be 20%) and you would apply that to the net income and dividends paid. (Example: T Net income = 100K and paid dividends of 20K. 20% of 100K = 20K and 20% Div paid 20K = $4K.) This would give you a total noncontrolling interest of $1.25M + $20K - $4K = $1.266M
