Intermediate Accounting Test #3

What are examples of non cash transactions?

-Acquiring an asset by incurring a debt payable to the seller. -Acquiring use of an asset by entering a lease agreement -Converting debt into common stock or other equity securities -Exchanging non-cash assets or liabilities for other non-cash.

What is considered to be a change in accounting estimate?

-Change in depreciation -Change in estimate of useful life of appreciable asset -Change in estimate of residual value of depreciable asset -Change in estimate of periods benefited by intangible assets. -Change in actuarial estimates pertaining to a pension plan

What is considered a change in reporting entity?

-Consolidate a subsidiary not included -Report consolidated financial statement in place of individual statements

What reflects the changes in the way a company depreciates an asset?

-Estimate future benefits of the asset -Pattern of receiving those benefits -Company's knowledge about those benefits

What are examples of correction of error?

-Mathematical Mistakes -Inaccurate Physical count of Inventory -Change from cash base accounting to accrual basis -Failure to record an adjusting entry -Recording an asset as an expense -Fraud or gross negligence

What is considered to be a change in accounting principle?

-New accounting standards -Change in inventory methods (FIFO vs LIFO) -Change from cost method to equity

What are the terms of RSU?

-Recipient is giving cash equivalent of the number of shares used to value the RSUs. -The recipient or the company is allowed to choose whether to settle in stock or cash.

What are examples of errors that don't affect net income?

-Recording salaries payable as accounts payable -Recording a loss as an expense -Classifying cash flow as investing rather than financing. **No prior period adjustment necessary to net income

What are the goals of accounting for stock award plans, stock option plan, stock appreciation rights plan?

1. Determine the FV of the compensation 2. Expense the compensation over the periods in which participants perform services.

What should an option pricing model take into account?

1. Exercise price of the option 2. Expected term of the option 3. Current market price of the stock 4. Expected dividends 5. Expected risk free rate of return during the term of the option 6. Expected volatility of the stock

What might indicate that cash received from investment revenue differs from the amount reported in the income statement?

1. Investment money receivable 2. Long term investments

What are the steps to correct an error?

1. JE is made to correct any account balances that are incorrect as a result of the error. 2. Previous years financial statements that were incorrect are retrospectively restated to reflect correction. 3. If Retained earnings is one of the accounts incorrect the correction is reported as a prior period adjustment to the beginning balance in a statement of shareholder's equity. 4.A disclosure note should describe the nature of the error and impact of the correction on net income.

What is the opposition to the bill that require firms to report compensation expense based on the fair value of options?

1. Options with no intrinsic value at issue have zero fair value and should not give rise to expense recognition. 2. It's impossible to measure the fair value for the compensation on the grant date. 3. Proposed standard would have unacceptable economic consequences.

What makes accounting for employee share purchase plans straightforward (record the sale of new shares and don't record compensation expense)?

1. Substantially all employees can participant 2. Employees have no loner than one month after the price is fixed to decided whether to participate 3. Discount is not greater than 5%. **If any of this criteria are not met, then it is considered to be compensation and the amount is recorded as expense.

When does the calculation of EPS become more demanding?

1. When the number of shares has changed during the reporting period. 2. The earnings available to common shareholders are diminished by dividends to preferred shareholders 3. Attempt to take into account the impending effect of potential common shares.

How many years are reported in comparative financial statements?

2-3 years.

What happens if it's impracticable to adjust each year reported?

A change is applied retrospectively as of the earliest year practicable.

What is the difference between cash received in the sale of an asset and the book value of the asset?

A gain or loss -- not a cash flow!

What might an unexplained increase in a long term investment indicate?

A portion of the investment revenue has not yet been received in cash.

What does the survival and success of every business depend on?

Ability to create or attain cash.

What parallels with the accounting for stock options?

Accounting for restricted stock.

What makes correcting an error more complicated?

Affected net income in the reporting in which it occurred and it's not discovered until a later period.

What is the allocation process called if an intangible asset or depletion is a natural resource?

Amortization

What never requires an outflow of cash?

Amortization of a patent.

What is an example of a non cash transaction?

Amortization of patent.

How is compensation accrued for a restricted stock awards?

Amount is accrued over the service period for which participants receive the shares of, usually from the date of grants to when restrictions are listed.

What do you conclude if there was an increase or decrease in investment revenue receivable?

Amount of cash received during the year was less than (increase) or more than the amount of revenue reported (decrease).

How is deferred compensation reported?

As a reduction in shareholders' equity, resulting in a zero net effect on shareholder's equity 7 credit when compensation expense is debited over the service period. .

When are prospective changes usually accounted for?

As of the beginning of the year of change.

What refers to an addition to or reduction in the beginning retained earnings balance in a statement of shareholder's equity?

Assets Prior Period Adjustment

What happens when new shares are added?

Assets and shareholder's equity are increased by an additional investment in the firm by shareholders.

What happens if the convertible bonds have been issued during the reporting period?

Assume the conversion occurred on the date of issue.

How is the amount of compensation measured?

At the date of grant at the market price.

How is compensation measured?

At the fair value of the stock options at the rant date and then record that amount as compensation expense over the service period for which the employees received the options.

What ignores the dilutive effect of securities?

Basic EPS

What is the earnings available divided by the weighted average number of common shares outstanding?

Basic EPS

What reflects no dilution, only shares outstanding?

Basic EPS

What should analysts be aware of to increase managers' compensation?

Be aware of the possibility of earnings management.

What is not the same as the amount of cash paid to bondholders when bonds are issued at either a premium or discount?

Bond Interest Expense

What is the sum of the CGS and the cost of goods unsold (inventory)?

CGS Available for Sale.

What is paid to produce or purchase inventory for resale and pa fro the expense of selling goods?

Cash CREATES FINLOW

What are short term highly liquid investments that can be readily converted into cash with little risk of loss?

Cash Equivalents.

What are both inflows and outflows of cash that result from activities reported in the income statement?

Cash Flows from Operating Activities Includes elements of net income, but reported on cash basis

What are companies prohibited from reported in the statement of cash flows?

Cash flow per share.

What depends on the corporation generating cash flows to itself?

Cash flow to investors and creditors

What are cash inflows and outflows due to external financing of a business reported as?

Cash flows from financing activities

What provides insight to decision makers regarding the nature and magnitude of assets being acquired for future use and the company's ambitions for the future?

Cash from Investing Activities Outflows and inflows caused by the acquisition and disposition of assets.

What happens if bonds are issued at face amount?

Cash inflow at issuance is a financing activity as ins the cash outflow of maturity to repay the amount borrowed. Cash payments are operating activities

What happens if bonds are issued at discount?

Cash inflow at issuance is a financing activity, but the discounted price is less than the cash outflow for the face amount at maturing. -Amount paid at maturity (face amount - discount) = financing activity. -Total interest paid to borrow the cash received at issuance = operating activity.

What occurs when assets are sold?

Cash inflows

What happens if premium was reduced rather than discount?

Cash outflow would be greater than the expense.

What occurs when assets are acquired?

Cash outlows

What must be separately reported either on the face of the statement or a disclosure when using indirect method?

Cash payments for interest and taxes.

What happens when investing activities are liquidated?

Cash receipts are classified as investing activities as well.

What is the revision of an estimate because of new information or new experience?

Change in Accounting Estimate

What is the change from one generally accepted accounting principle to another?

Change in Accounting Principle

What is a change from reporting as one type of entity to another type of entity?

Change in Reporting Entity

What are some examples of changing circumstances that might make a new method more appropriate?

Change in economic conditions, wihtin a specific industry, and mandated by FASB (change in accounting principle

What is reflected in financial statements of the current and future periods?

Changes in Estimate

What is the exception of short term investments?

Classifying a trading security as an operating activity rather than investing.

What is vesting on one single date known as?

Cliff Vesting

What does GAAP permit with graded vesting?

Companies can account for each vesting amount separately and give the companies the option to account for the entire award on a straight-line basis over the entire vesting period.

What is an enhancing characteristic of relevant accounting information?

Comparability

What is an enhancing qualitative characteristic of financial reporting?

Comparability

How is the amount of cash paid to suppliers calculated?

Compare the CGS with the change in inventory to determine the cost of goods purchased during the year AND the changes in inventory and AP accounts.

What is a firm called with potential common shares outstanding?

Complex Capital Structure

What can become common stock through their exercise or conversion?

Convertible Bonds

What does not affect the calculation of basic EPS?

Convertible Bonds

What can be exchanged for shares of stock at the option of the holder of the security and are considered potentially dilutive?

Convertible Securities

What are some examples of potential common shares?

Convertible preferred stock, stock options, and contingently issuable shares.

What is the practice of using unrealistic estimates and strategic choices of accounting methods to smooth out earnings?

Cookie Jar Accounting

How is the incorrect balance previously reported accounted for?

Corrected by the prior period adjustment.

Under GAAP, what is created for the cumulative amount of the fair value of the options the company has recorded for compensation expense?

Deferred Tax Asset

Under IFRS, what isn't created until the award is in the money (intrinsic value)

Deferred Tax Asset

What is increased by the additional common shares that would have been issued upon conversion?

Denominator of EPS

What is the allocation process called if an asset is a building, equipment, or other tangible asset?

Depreciation

What does not require a current cash expenditure?

Depreciation Expense -- NON CASH because it's merely an allocation in the current period of a prior cash expenditure.

What are not reported using direct method?

Depreciation expense, gains, and losses.

What happens when an RSU is considered a liability?

Determine the fair value at the grant date and recognize that amount as compensation expense over the requisite service period consistent with the way we account for restricted stock awards, RSUs, and other share based compensation.

What incorporates the dilutive effect of all potential common shares?

Diluted EPS

What is incremental shares that would have been issued prior to the actual exercise of the options (if they were exercised at the beginning of the period) included in?

Diluted EPS

What does FASB strongly encourage companies to report cash flow from operating activities as?

Direct Method

What method reflects the cash of effect of each operating activity that is reported directly on the statement of cash flows?

Direct Method

What explains why the change was needed as well as its effects on items not reported on the face of the primary statements?

Disclosure Notes

What are not considered non cash transactions and aren't considered investing or financing activities?

Distribution of stock dividends.

What expresses a firm's profitability on a per share basis?

EPS

What is affected if and when securities are converted and new shares of common stock are added?

EPS

What summarizes the performance of business enterprises into a single number?

EPS It allows for comparisons.

What's merely a firm's net income or less divided by the number of shares of common stock outstanding throughout the year?

EPS or Net Loss Per Share

What is a common practice that negatively influences earnings equality?

Earnings Management - it refers to companies' use of one or more several techniques designed to artificially increase or decrease earnings.

What is the single accounting number that is reported most frequently in media and receives by far the most attention by investors and creditors?

Earnings per Share (EPS)

What permits all employees to buy shares directly from their company as favorable terms and encourages employee ownership of the company's shares?

Employee Share Purchase Plans

What is another benefit of recording compensation expense when performance target is probable?

Employer doesn't need t asses at the grant date whether certain employees are retirement eligible or will become retirement eligible during the performance period in order to value the awards.

What happens to restricted stock shares or RSUs are forfeiting wen the employee leaves the company?

Entries previously made related to that specific employee resulting in a decrease in compensation expense in the year of forfeiture (this is the amount that is allocated over the remaining service period).

What is a correction of error caused by a transaction being recorded incorrectly or not at all?

Error Correction

How are RSUs accounted for in the settlement in stock?

Essentially the same as for restricted stock awards.

How can a company account for the options (similar to cliff vesting plans)?

Estimate a single far value for each of the options using a single weighted average expected life of the option. Then allocate that total compensation over the entire vesting period.

Who's plan is tied to performance in strategy that uses compensation to motivate its recipients?

Executive Compensation Plan

What lowers CGS?

FIFO

What usually lowers CGS and thus higher inventory?

FIFO

When costs are rising, what produces lower CGS and higher net income and retained earnings?

FIFO

What is estimated at the date of grant?

Fair Value

True or False. Recording the exercise of options is affected by the market price on the exercise date.

False. It is not.

True or False Accounting records of prior years usually are adequate to report a change retrospectively.

False. They aren't.

True or False. The interest, dividends, and cash return from investments is considered an investing activity.

False. They aren't.

True or False. IFRS has a requirement that the company must recognize at least the amount of the award has vested by each reporting date.

False. They do NOT nor do they allow the straight line choice.

True or False. Market price changes that occur after the date of grant affect total compensation.

False. They do NOT.

True or False. Plans that exercise price equals the market value of the underlying stock at the date of grant have intrinsic value and compensation.

False. They have NO intrinsic value and zero compensation.

What is the issuance of stock, bonds, and notes, payment of cash dividends, repurchase of stock, and repayment of debt classified as?

Financing Activities

What does greed on the part of some corporate executives contribute to?

Fraudulent and misleading financial reporting at the life time.

Who requires companies to record the value of options in their income statements eliminating the intrinsic value approach?

GAAP

When suing the direct method, what is not reported?

Gain or loss of PPE.

What is it called when recipients gradually become eligible to exercise their options rather than all at once?

Graded Vesting

Why is common stock entry included if it does not identify a cash flow or represent an activity?

Help explain changes in the three account balances.

Who is most susceptible to a reduction in reported earning when that compensation is included in the income statements?

High Tech Companies

Who was at the forefront of resistance of the intrinsic value approach?

High tech companies that extensively use stock options as a primary form of compensating employee.

How does IFRS classify cash flow from interest and dividends?

I = dividends & interest received O = Dividends & interest paid

What specifies that the performance target can be met after the requisite vesting period is completed?

IFRS Compensation should be measured and recorded all at once on the rant date.

What is the objective in preparing statement of cash flows?

Identify all transactions and events that represent operating, investing, or financing activities.

What assumes the conversion into common stock occurred at the beginning of the period or at the time the convertible security is issued?

If Converted Method

What is the exception to including purchase and sale of assets regarding reporting?

If the cash equivalents are sold at a gain or loss. The change inc ash would be reported as a cash flow from operating activities.

When does a company add shares to the denominator of the EPS fraction?

If the conversion has already occurred.

When should one adjust for preferred dividends?

If the preferred stock is cumulative.

When are sales or purchases affect a stock dividend or a stock split?

If they occur BEFORE the distribution.

When do tax treatment favor the employer?

In a non-qualified stock option plan.

What happens if options are exercised during the reporting period?

Include in the denominator of both basic and diluted EPS the actual shares issued on the exercise of the options, time weighted for the fraction of the year the new shares are outstanding.

Where is income tax effect reflected?

Income tax payable account because the inventory costing method must be used for tax purposes must be the same as that used for financial reporting.

What are the accounts intially affected by errors in net income?

Income taxes and retained earnings. -- recording as asset as an expense --failure to records sales revenue --inventory misstated

What method is used if one is not interested in identifying specific operating activities that cause increase and decreases in cash?

Indirect Method

When would the net cash increase or decrease from operating activities by starting with reported net income and working backwards to convert the amount to cash basis?

Indirect Method

What method does not require a separate reconciliation schedule because cash flow from operating activities section serves that purpose?

Indirect Metod

What do most companies use?

Indirect method.

What does compensation expense for performance based options depend on?

Initially on whether it's probable that the performance target will be met and ultimately on whether the performance target is met.

What happens if bonds are issued at premium?

Interest expense paid of the cash payment = operating Repayment portions = financing activities.

What is the determinant of net income and therefore an operating activity?

Interest not a dividend.

What is the simple difference between the market price of he shares and the option price at which they an be acquired?

Intrinsic Values

Why are inventories reported differently from PPE when classifying cash effects?

Inventory is purchased for the purpose of being sold as part of the firm's current operations while investments benefit the business over a relatively long period of time.

What accounts are all higher when switching to FIFO?

Inventory, pretax income, income taxes, net income, and retained earnings.

What is the sale or purchase of PPE, sale of investment securities, collections, of loans classified as?

Investing Activities

How is the sale of land classified?

Investing Activity

What is an example of a significant investing activity and financing the acquisition with long term debt making it a significant financing activity?

Investing in new equipment.

What has aligned to the rise of restricted stock?

It better aligns pay with performance.

What does it mean if a conversion is imminent?

It does not take into account the dilute effect of the share increase and can mislead investors and creditors.

What happens when an incentive plan provides no tax deduction?

It has no deferred tax consequences.

What is the adjustment for reacquired shares?

It's the same for new shares sold except the shares are deducted rather than added.

What must a company do when reflecting a change in depreciation method in the disclosure note?

Justify that the change is preferable and describe the effect of the change and per share amounts affects for all periods reported.

What usually produces higher CGS because more recently purchased goods (usually higher priced) are assumed sold first?

LIFO

How can managers manipulate numbers?

Low ball the data that go into the option pricing models; they are used to estimate fair value are built largely around subjective assumptions.

Why is weighing necessary?

Making the shares in the fraction's denominator consistent with the income in its numerator.

Who is more likely to choose accounting methods that maximize their bonuses?

Managers of companies with bonus plans

What is the compensations associated with a share of restricted stock?

Market price @ the grant date of an unrestricted share of stock.

What is a frequent objective of earnings management?

Meet analysts expectations regarding projections of income.

What are examples of cash equivalents?

Money market funds, T bills, and commercial paper.

What happens when an error affects net income and thus the balance sheet?

Must be retrospectively restated.

What happens to components that increase or decrease cash, but by an amount different from reported in income statement?

Must convert effects of those items to a cash basis/

What makes an investment a cash equivalent?

Must not have a maturity date longer than three months from date of purchase.

What reconciles the change in the company's beginning and ending cash balances?

Net amount of cash inflows and outflows.

What generally provides a better indication of current operating performance?

Net income.

What is the accrual concept of accounting in regards to net income or loss?

Netting together the revenues recognized using the reporting period and the expenses incurred in generating those revenues regardless of when cash is received of paid.

What happens if full retrospective application isn't possible?

New method is applied prospectively beginning in the earliest year practicable.

What is not a cash equivalent?

Newly issued corporate bonds.

Is there a differentiation between amounts held as cash and amounts held as cash equivalent investments?

No

What happens to remaining book value when a change is made prospectively?

No adjustments because the equity method is simply discontinued.

What are some benefits of employee share purchase plans?

No brokerage fees and perhaps at a slight discount; some companies even encourage participation by mating or partially matching employee purchases.

When would the employee NOT be able to delay paying income tax, but the employer is permitted to deduct the difference between the exercise price and the market price at the exercise date?

Non-Qualified Incentive Plan

How is amortization of patents reported in a statement of cash flows that is prepared using the direct method?

Not Reported because it explicitly shows cash.

What led to the collapse of Enron?

Not expensing the value of stock options.

What is increased by the interest after tax on bonds or other debt or the preferred dividends that would have been avoided if the convertible securities had no been outstanding due to having been converted?

Numerator of EPS

How does GAAP classify cash flow from interest and dividends?

O = dividends received, interest received / paid F = dividends paid

What is the effect on EPS if the shares change throughout the year?

One must find the weighted average of the shares outstanding during the period the earnings were generated.

What is cash received from revenues or cash paid for expenses classified as?

Operating Activites

How does a lessor classify its cash receipts from lease payments?

Operating activities after initially reporting its acquisition of a lease receivables and nonrecognition of the asset under lease as a non cash investing and financing activity.

What are the three categories of cash flow?

Operating, investing, and financing

What is based on the number of options expected to vest?

Option Compensation Expense

What are statistical models that use computers to incorporate information about a company's stock and the terms of the stock option to estimate the options' fair value?

Option Pricing Models

What is a topic explored in depth in finance courses and is subject to active empirical investigation and development?

Option Pricing Theory

What is the initial estimate of the total compensation formula?

Options Expected to Vest*Fair Value = Estimated total compensation

How is the value of an award expensed?

Over the service year for which the compensation is provided.

What are qualified as investing activities?

PPE, investment in securities, and non trade receivables.

What is the journal entry if options that have been vested expire without being exercised?

Paid in Capital - Stock Options..........xxx (credit) Paid in Capital - Expiration of Stock Options.....xxx

What happens when restrictions are lifted?

Paid in capital - restricted stock is replaced by common stock and Paid in Capital - excess of par.

What do the terms of performance options vary on?

Performance condition or a market condition that must be satisfied before employees are allowed the benefits of the award; provides employees with additional incentive for managerial achievement.

What are new shares replaced by the converted bond that might participate in future earnings?

Potential Common Shares

What happens when a firm dilutes EPS?

Potential Common Shares

What is reflected in EPS calculation in the same way as convertible debt?

Potentially Dilutive Effect of Convertible Preferred Stock

What is subtracted from net income so that earnings available to common shareholders is divided by the weighted average number of common shares?

Preferred Dividends

What reduces earnings available to common shareholders unless the preferred stock is noncumulative and no dividends were declared that year?

Preferred Dividends

What provides a source of internal financing?

Primary operations of the firm.

How are changes in accounting estimates recorded?

Propsectively

What approach is used if the change is simply implemented in the current financial statements and future years only?

Prospective Appraoch

What is not reported on the statement of cash flows in regards to investing?

Purchase and sale of assets classified as cash equivalents.

When would the employee pay no income tax until any shares acquired from exercise of stock options are subsequently sold?

Qualified Incentive Plan

What form of stock plan states that delaying the increase in outstanding shares is more acceptable to other shareholder?

RSU

What provides an incentive to remain with a company?

Recipients aren't normally allowed to exercise their options for a specified number of years.

What helps identify the operating, investing, and financing activities to be reported?

Reconstructing the events and transactions that occurred during the period.

How is total compensation recorded if there are revisions made when expectation of probability changes?

Record the effect of the change in the current period.

What helps determine the amount of cash received by customers?

Relating sales and the change in accounts receivable.

What is subject to forfeiture if the employee doesn't remain with the company?

Restricted Shares

From an executive's perspective, what is a more certain though potentially less lucrative form of compensation?

Restricted Stock

What type of shares are actually awarded in the name of the employee, although the company might retaining physical possession of the shares?

Restricted Stock Award

What type of stock plan gives the employee incentive to remain with the company until rights to the shares vest?

Restricted Stock Award *Employees aren't free to sell shares during the restriction period.

What are the primary types of restricted stock plans?

Restricted Stock Awards and Restricted Stock Units

What has the right to receive a specified number of shares of company stock?

Restricted Stock Units (RSU)

What is revised each year to reflect FIFO?

Retained Earnings

When using retrospective approach, what account requires an adjustment made to the beginning balance for the earliest period reported in the comparative statements of shareholder's equity?

Retained Earnings

Where are differences in CGS, income, and income tax effects of changes in income reflected?

Retained Earnings

What reflects the impact of the change whenever statements are presented for comparative purposes?

Retrospective Appraoch

What approach is used for the correction of errors?

Retrospective Approach

What approach makes statements appear as if the newly adopted accounting method had been applied all along or that the error had never occurred?

Retrospective Approach

What approach offers consistency and comparability?

Retrospective Approach

How are most voluntary changes in accounting principles accounted for?

Retrospectively

How does a company record a change to LIFO?

Retrospectively

What happens if compensation expense later becomes probable that a performance target will NOT be met?

Reverse any compensation expense already recorded.

What is the balance sheet account affected by salaries expense?

Salaries payable.

What helps explain the remaining increase in the stock account and the remaining increase in PIC excess of par?

Sale of Common Stock -- reported as a financing activity.

What are classified as financing activities?

Sale or repurchase of shares, issuance or repayment of debt securities, buyback of stock to retire the stock or as treasury stock, and the payment of cash dividends.

What form of payment's value is dependent on the value of the company's stock?

Share-Based Rewards

What does it mean to have no outstanding securities/no potential common shares that could potentially dilute earnings per share?

Simple Capital Structure **Dilute meaning reduce EPS

How is an accounting error corrected if it's made in the same reporting period it occurred?

Simply reverse the entry and record the appropriate entry.

What does it mean to manipulate the earnings by choosing accounting methods is not always in the direction or higher income?

Smooth Earnings

What duplicates the actual journal entries used to record the transaction as they occurred during the year?

Spreadsheet entries. They help explain account balance changes simultaneously identifies and classifies the activities to be reported.

What provides information about cash flows that is lost when reported indirectly by the balance sheet and income statement?

Statement of Cash FLows

What is a distribution of additional shares to existing shareholders?

Stock Dividends and Stock Splits

What gives the employees the option to purchase a specified number of shares of the firm's stock, at a specified price, during a specified period of time?

Stock Option Plans

What are presumed to have been exercised at the beginning of the reporting period or when the options were issued later when calculating diluted EPS?

Stock Options

What has become an internal part of the total compensation package for key officers in most medium and large companies?

Stock Options

What gives holders the right to exercise their option to purchase common stock at a specified exercise price?

Stock options, stock rights, and stock warrants.

What serves the same purpose as a spreadsheet in assisting in the preparation of cash flows?

T Accounts

What serves as the new balance when the equity method is discontinued?

The balance in the investment account.

What happens if a distinction is not possible OR a change in principle and a change in estimate occur simultaneously?

The change should be treated as a change in estimate.

What happens when the recipient of RSUs satisfied the vesting requirement?

The company distributes the shares; the recipient benefits by the value of the shares at the end of the vesting period.

What happens when forfeiture estimates change?

The cumulative effect on compensation is reflected in current earnings.

What happens if the eventual tax savings exceeds the DTA?

The difference is recognized as equity.

What happens when new shares are issued?

The new shares are time weighted by the fraction of the period they were outstanding and then added to the number of shares outstanding for the entire period.

What is the reason for time-weighting the shares issued?

The resources of the stock sale provides the company are available for generating income only after the date the shares are sold.

What happens if an award contains a market condition?

There's no special accounting required because the fair value already implicitly reflects the market conditions due to the nature of share option pricing models.

What happens to the shares outstanding prior to the stock dividend?

They are retroactively restated to reflect the 10% increase in shares - that is, treated as if the distribution occurred.

What is the affect of a stock dividend and stock split?

They increase the number of shares without affect the firm's assets and results in a larger number of less valuable shares.

What happens to the amounts that were subtracted from net income, but did not reduce cash?

They're added back such as depreciation expense, gains and losses.

What is the primary objective of financial reporting?

To help investors and creditors and other asses the amounts, timing, and uncertainty of prospective net cash inflows to the related enterprise thus creating statement of cash flows.

How is the period period adjustment applied?

To the beginner of retained earnings for the year following the error or for the earliest year being reported in the comparative financial statements when the error occurs prior to the earliest year presented.

What should not be reported on the statement of cash flows?

Transaction that involve transfers from cash to cash equivalents from cash equivalent to cash -- sale or purchase of a 3 month T bill

What must be reported in disclosures?

Transactions that don't increase or decrease cash, but result in significant financing and investing activities. **non cash investing and financing activites

What is the way a firm takes into account the dilutive effect of stock options?

Treasury Stock since treasury shares are purchased with the cash proceeds f the exercise of the options.

True or False. Changes in the market price of underlying shares do no influence the previously measured fair value of options.

True

True or False. Even errors that eventually correct themselves cause financial statements to be misstated in the meantime.

True

True or False. The objective is to create a degree or uniformity in the way firms determine EPS so the results can be compared.

True

True or False. An unprofitable company with good cash flow can survive.

True.

True or False. Debiting net income and crediting retained earnings does not affect amounts reported on the SCF.

True.

True or False. Direct and indirect methods are alternative approaches that derive net cash flows from operating activities only.

True.

True or False. Direct or Indirect Method used for operating activities does not cause a difference to investing and financing activities.

True.

True or False. It is necessary to periodically adjust the liability of an RSU based on the change in the stock's fair value until the liability is paid.

True.

True or False. No compensation can be recognized for options that don't vest due to performance targets are not being met.

True.

True or False. Purchase and sale of investments and the purchase and sale of assets are not considered investing activities.

True.

True or False. Since diluted EPS is calculated as if the preferred shares had been converted, there are no dividends.

True.

True or False. Tax code allows a retrospective change in inventory, but requires that taxed saved previously from having used another inventory method must now be repaid.

True.

True or False. The FASB consented to encourage, rather than require, that the fair value of potions be recognized as expense.

True.

True or False. The correction of an error is another adjustment sometimes made to financial statements that is not actually an accounting change, but is accounted similarly.

True.

True or False. The cumulative income effect increases each year by the annual after tax difference in COGS?

True.

True or False. The number of reacquired shares is time-weighted for the fraction of the year they were not outstanding prior to being subtracted from the number of shares outstanding during the period.

True.

True or False. The policy about cash equivalents must be consistent with the company's customary motivation for acquiring carious investments and should be disclosed in the notes to the statement.

True.

True or False. The resulting increase in common shares could dilute/decrease.

True.

True or False. There can be no cash inflow or outflow without a corresponding change in a non-cash account.

True.

True or False. When using indirect method, the amount reported as an operating activity is discount amortization added back to net income each period.

True.

True or False. Increases are subtracted from net income - operating activities while assets added are decreased.

True. Changes in liabilities are reverse -- increases in liabilities are added.

When would compensation expense be recorded?

Until meeting the performance target is probable even it this isn't until after the requisite vesting period is completed.

What is the common approach to preparing a SCF?

Use a manual or electronic spreadsheet to organize and analyze transactions.

What happens if accounting standards are updated?

Use prospective application

What happens with the cash proceeds from selling the new shares in regards to securities?

Use the money to buy back as many shares as possible at the shares' average market price during the year.

What does GAAP state for accounting employee stock options?

Using models that permit greater flexibility in modeling the ways employees are expected to exercises options and their expected employment termination patterns after option vest.

What happens if the employee will receive cash or can elect to receive cash?

We consider the award to be a liability rather than equity as in the case.

What is increased by the difference between the shares assumed issued and those assumed reacquired?

Weighted Average Number of Shares

What happens if shares were reacquired during the period as retired or treasury stock?

Weighted Average Number of shares is reduced.

When will the net change in cash be entered as a debit to the cash account?

When all cash inflows and outflows have been identified.

Why does the effect of most errors differ?

When the error is discovered differs.

When is a deferred tax asset recognized for the future tax savings from the tax deduction?

When the non-qualified stock options are exercised.

What does the way a company accounts for stock option have an effect on?

Whether the value of stock options is included among employees NOT cash flows.