CMA Part 1 SU 1

Rules for Reconciling Cash flow from Operating Activities

-Increase in Current Operating Liabilities: Add to NI -Decrease in Current Operating Assets: Add to NI -Noncash Loss & Exp included in NI: Add to NI -Investing/Financing Loss & Exp cash effects: Add to NI -Increase in Current Operating Assets: Take from NI -Decrease in Current Operating Liabilities: Take from NI -Noncash Gains & Rev included in NI: Take from NI -Investing/Financing Gains & Rev cash effects: Take from NI

Current Liabilities include...

1. Accounts Payable 2. Wages Payable 3. Prepaid Rents received from tenants 4. Security deposits from tenants 5. Current portion of long-term debt

Suitable Approaches to price a good or service that is not directly observable

1. Adjusted Market Assessment: Entity evaluates the market to determine the selling price 2. Expected cost plus an appropriate margin: Forecasting the cost to satisfy a performance obligation + an appropriate margin 3. Residual: Estimated Standalone Selling Price by reference to the total transaction price minus the sum of the observable standalone selling prices of other goods or services promised in the contract.

When a standalone price is NOT DIRECTLY OBSERVABLE it must be estimated using the following approaches:

1. Adjusted Market Assessment: Evaluate the market in which the good or service is sold and estimate the price that a customer would be willing to pay. 2. Expected Cost plus An Appropriate Margin 3. Residual: Estimate the standalone selling price by reference to the total transaction price of other goods and services promised in the contract.

Limitations of the Statement of Changes in Equity

1. Because financial statements report accrual-basis results for the period, RE data is not sufficient to assess the amount actually available to be reinvested in the company or to pay debt because cash may not have actually been received or paid. 2. The Statement of RE represents a specific time period, and equity may vary significantly a few days before or after publication

Current Assets (types of)

1. Cash 2. Certain Investments 3. Accounts and notes receivable 4. Inventories 5. Prepaid expenses

The FASB encourages use of the direct method of reporting major classes of operating cash receipts and payments, but the indirect method may be used. The minimum disclosures of operating cash flows under the direct method are...

1. Cash collected from customers 2. Interest and dividends received 3. Other operating cash receipts 4. Cash paid to employees and other suppliers of goods or services 5. Interest paid 6. Income taxes paid 7. And other operating cash payments

Examples of cash inflows and outflows from investing activities

1. Cash payments to acquire (or cash receipts from the sale of) PPE; intangible assets; and other long-lived assets 2. Cash payments to acquire (or cash receipts from the sale and maturity of) equity and debt instruments of other entities for investing purposes 3. Cash advances and loans made to other parties (or cash receipts from repayment of advances and loans made to other parties)

Examples of cash inflows from financing activities

1. Cash proceeds from issuing shares and other equity instruments (obtaining resources from owners) 2. Cash proceeds from issuing loans, notes, bonds, and other short-term or long-term borrowings

Examples of cash outflows from financing activities

1. Cash repayments of amounts borrowed (i.e. notes payable) 2. Payments of cash dividends 3. Cash payments to acquire or redeem the entity's own shares 4. Cash payments by a lessee for a reduction of the outstanding liability relating to a capital lease

What two changes affecting financial statements are handled retroactively? (i.e. Cumulative-effect type accounting change)

1. Changes in Accounting Principle (e.g. Changing inventory valuation from LIFO to FIFO) 2. Corrections of prior-period financial statement errors

Major Income Statement Note Disclosures

1. Earnings per Share 2. Depreciation schedules 3. Components of income tax expense 4. Components of pension expense

Components to determining the transaction price of a contract

1. Exclude amounts collected on behalf of third parties 2. Considerations payable to the customer (i.e. coupons, credits, or vouchers) reduce the transaction price 3. Adjusted for the time value of money when a significant financing component is involved

What are the two methods used for estimating variable consideration on a contract?

1. Expected Value: The sum of probability-weighted amounts in the range of possible consideration amounts. 2. Most Likely Amount: The single most likely amount in a range of possible consideration amounts.

Users of Financial Statements with INDIRECT interest

1. Financial advisors and analysts 2. Stock markets and exchanges 3. Regulatory authorities

Facts about Preferred Stock

1. Has features of debt and equity 2. Classified as an equity instrument and presented in the equity section of the Balance Sheet 3. Has a fixed charge, but payment of dividends is not an obligation, which is at that firm's discretion 4. Tend not to have voting rights 5. Have the right to receive dividends at a specified fixed rate BEFORE common shareholders receive anything 6. Distributions before common shareholders, but after creditors, in the event of a bankruptcy (liquidation) 7. Cumulative Preferred Stock: Unpaid dividends (dividends in arrears) which must be paid before any common dividends can be paid 8. Convertible Preferred Stock: Holders of such stock have the right to convert the stock into shares of another class (usually common stock) at a predetermined ratio

Control of an asset is transferred when the customer...

1. Has the ability to direct use of the asset 2. Obtains substantially all of the remaining benefits (potential cash flows) from the asset

Lesser known noncash revenue and expenses are added back to net income to properly derive operating cash provided by (used in) operating activities...

1. Impairment Losses: Abrupt decrease in the fair market value of a company asset (decrease its value on the BS and record a loss on the income statement) 2. Undistributed earnings on an equity-method investments: The undistributed earnings give rise to a deferred tax liability (DTL) payable when the earnings are ultimately distributed or the investment is liquidated. 3. Amortization of discount and premium bonds: When bonds are purchased by investors at a rate that is higher than the market rate, the bond issuer must amortize the bond premium (the amount in excess) during each accounting period that the bonds are outstanding. So, Premium on Bonds Payable is credited for the full amount of the premium at the start and slowly debited based on the calculation method used: Straight-Line or effective interest rate 4. Increase or decrease of an equity based investment

Equity types (types of)

1. Investment by owners 2. Retained earnings 3. Accumulated other comprehensive income 4. Noncontrolling interest in a consolidated entity

Off-balance-sheet financing takes what four principal forms?

1. Investments in unconsolidated subsidiaries 2. Special purpose entities 3. Operating leases 4. Factoring receivables with recourse.

External Users of Financial Statements

1. Investors 2. Creditors 3. Financial advisors and analysts 4. Stock exchanges 5. Regulatory agencies

Users of Financial Statements with DIRECT interest

1. Investors or potential investors 2. Suppliers and Creditors 3. Employees 4. Management

Internal Users of Financial Statements

1. Management 2. Employees

A full set of financial statements include...

1. Statement of Financial Position (or Bal Sheet) 2. Income Statement 3. Statement of Other Comprehensive Income 4. Statement of Cash Flows 5. Statement of Changes in Equity

Basic Terminology Related to Stock

1. Stock authorized is the maximum amount of stock that a corporation is legally allowed to issue 2. Stock issued is the amount of stock that has actually been issued by the corporation 3. Stock outstanding is the amount of stock that is out in the hands of the shareholders

In determining the transaction price with a significant financing component, an entity should consider the effects of...

1. The Time Value of Money (i.e. discounted cash flows) 2. Variable consideration

What four criteria must be met when reclassifying a current liability to non-current?

1. The agreement with the lender does not expire within 1 year 2. It is noncancelable by the lender 3. No violation of the agreement exists at the balance sheet date 4. The lender is financially capable of honoring the agreement.

Revenue in the amount of nonrefundable consideration received from the customer is recognized if at least one of the following is met:

1. The contract has been terminated 2. Control over the goods or services was transferred to the customer and the entity has stopped transferring (and has no obligation to transfer) additional goods or services to the customer 3. The entity (1) has no obligation to transfer goods or services and (2) has received substantially all consideration from the customer

Revenue is recognized for a contract with a customer if ALL of the following criteria are met:

1. The contract was approved by the parties 2. The contract has commercial substance 3. Each party's rights regarding (a) goods or services to be transferred and (b) the payment terms can be identified 4. It is probably that the entity will collect substantially all of the consideration to which it is entitled according to the contract.

Promised Goods or Services are distinct if...

1. The customer can benefit from them either on their own or together with other resources that are readily available (capable of being distinct) and 2. The entity's promise to transfer them to the customer is separately identifiable from other promises in the contract (distinct within the context of the contract).

Factors used to assess whether a contract has a significant financing component

1. The difference between (1) the cash selling price of the promised goods or services and (2) the amount of consideration to be received 2. The combined effect of (1) the expected time between the payment and the delivery of the promised goods or services and (2) market interest rates

The indirect method of preparing the cash flow statement begins with net income and then adjusts for...

1. The effects of past deferrals of operating cash receipts and payments such as changes in inventory and deferred income. 2. Accruals of expected future operating cash receipts and payments such as changes in accounts receivable and accounts payable. 3. Net income items not affecting operating cash flows such as depreciation and amortization expenses, impairment losses, undistributed earnings of equity-method investments, and amortization of discount and premium bonds.

Indicators of the transfer of control of an asset

1. The entity has a present right to payment for the asset 2. The customer has legal title to the asset 3. The entity has transferred physical possession of the asset 4. The customer has significant risks and rewards of ownership of the asset 5. The customer has accepted the asset

A contract modification is accounted for as a separate contract if the following conditions are met:

1. The scope of the contract increases because of the addition of promised goods or services that are distinct, and 2. The price of the contract increases by an amount of consideration that reflects the entity's standalone selling prices of the additional promised goods or services

The transaction price should not be adjusted for the effect of the time value of money if

1. The time between the payment and the delivery of the promised goods or services to the customer is 1 year or less 2. The customer paid in advance and the transfer of goods or services is at the discretion of the customer (i.e. Bill-and-Hold contract in which the seller provides storage services for goods it sold to the buyer) 3. A substantial amount of the consideration promised is variable and its amount or timing varies with future circumstances that are not within the control of the entity or the customer

Facts about Common Shareholders

1. They have voting rights and they select the board of directors and vote on resolutions 2. They are not entitled to receive dividends unless so declared by the board of directors 3. They are entitle to receive liquidating distributions only after all other claims have been satisfied, including those of preferred shareholders 4. The ordinarily have preemptive rights. Meaning, the right to purchase additional stock issuances in proportion to their ownership percentages. In this way, preemptive rights safeguard a common shareholder's proportionate interest in the firm

All transactions affecting the net change in equity curing the period are included in income except...

1. Transactions with owners 2. Prior-period adjustments (such as error correction or a change in accounting principle) 3. Items reported initially in other comprehensive income 4. Transfers to and from appropriated retained earnings

What is the definition of a performance obligation?

A promise in a contract with a customer to transfer to the customer (1) a good or service that is distinct or (2) a series of distinct goods or services that are substantially the same and have the same pattern of transfer to the customer.

Statement of Cash Flows: Operating Activities

A. All activities that are not investing or financing and those activities primarily derived from the principal revenue-producing activities of the entity B. Examples of Cash INFLOWS (cash received) 1. Sales, including collections 2. Royalties, fees, commissions, and other revenue 3. INTEREST received or DIVIDENDS received C. Examples of Cash OUTFLOWS (cash used) 1. Payments to Suppliers for goods or services 2. Payments to employees 3. Taxes, duties, fines, and other fees or penalties 4. INTEREST ON DEBT Two methods of presenting in the statement: INDIRECT (also known as the reconciliation method) and DIRECT. The main difference being the presentation of net cash flow from operating activities

The information reported in the statement of cash flows should help investors, creditors, and others to assess all of the following except the...(Multiple Choice)

A. Amount, timing, and uncertainty of prospective net cash inflows of a firm. B. Company's ability to pay dividends and meet obligations. C. Company's ability to generate future cash flows. D. Management of the firm with respect to the efficient and profitable use of its resources. (Answer: D)

All of the following are limitations of the balance sheet except that... (multiple choice)

A. Assets and liabilities are usually recorded at historical cost, which might differ significantly from current market value. B. The balance sheet provides information on the liquidity and solvency of the company. C. The balance sheet is prepared using management judgments and estimates. D. The balance sheet omits many items that cannot be recorded objectively but which have financial value to the company. (Answer: B)

Items reported as prior-period adjustments (Multiple Choice)

A. Do not affect the presentation of prior-period comparative financial statements. B. Are reflected as adjustments of the opening balance of the retained earnings of the earliest period presented. C. Do not require further disclosure in the body of the financial statements. D. Do not include the effect of a mistake in the application of accounting principles, as this is accounted for as a change in accounting principle rather than as a prior-period adjustment. (Answer: B) Prior-period adjustments are made for the correction of errors. The effects of errors on prior-period financial statements are reported as adjustments to beginning retained earnings for the earliest period presented in the retained earnings statement. Such errors do not affect the income statement for the current period.

Items included in OCI (Other Comprehensive Income)

A. Gains and losses on derivatives designated, qualifying, and effective as cash flow hedges; B. Unrealized holding gains or losses due to changes in the fair value of an available-for-sale debt security (except those that are hedged items in a fair value hedge) C. Subsequent decreases/increases in FV of a previously impaired AFS security D. Translation gains or losses for financial statements of foreign operations E. Gains/Losses on Foreign currency hedge due to investment in Foreign company F. Certain amounts associated with recognition of the funded status of post retirement defined benefit plans (i.e. Pension plans). For example, differences in expected vs. actual return on plan assets that are not outside the corridor. G. Non-amortized portion of prior service (i.e. plan that is amended to grant additional years of credit to an employee which increases their pension) plan costs.

Preferred stock and common stock differ in that (multiple choice)

A. Preferred stock earnings are deductible for tax purposes while common stock earnings are not. B. Preferred stock has a higher priority than common stock with regard to earnings and assets in the event of bankruptcy. C. Preferred shareholders generally control the management of the company while common shareholders have limited voting rights. D. Failure to pay dividends on common stock will not force the company into bankruptcy while failure to pay dividends on preferred stock will force the company into bankruptcy. (Answer: B)

When treasury stock is accounted for at cost, the cost is reported on the balance sheet as...(multiple choice)

A. Reduction of additional paid-in-capital B. Reduction of retained earnings C. Asset D. Unallocated reduction of equity (Answer: D)

Statement of Cash Flows: Investing Activities

A. Represent the extent to which expenditures have been made for resources intended to generate future income and cash flows B. Examples of cash INFLOWS & OUTFLOWS. 1. Cash payments to ACQUIRE (cash receipts from SALE OF) PPE, intangible assets, other long-lived assets 2. Cash payments to ACQUIRE (cash receipts from SALE AND MATURITY OF) equity and debt instruments of other entities for investing purposes 3. Cash ADVANCES & LOANS made to other parties (cash receipts from REPAYMENT OF ADVANCES & LOANS made to other parties)

Comprehensive income is best defined as (multiple choice)

A. The change in net assets for the period excluding owner transactions. B. Net income excluding extraordinary gains and losses. C. The change in net assets for the period including contributions by owners and distributions to owners. D. Total revenues minus total expenses. (Answer: A)

To recognize revenue over time one of the following must be present

A. The customer simultaneously receives and consumes the benefits provided by the entity's performance as the entity performs B. The entity's performance creates or enhances an asset that the customer controls as the asset is created or enhanced C. The asset created has no alternative use to the entity and the entity has an enforceable right to payment for the performance completed to date (An entity does not have an alternative use for an asset of the entity is restricted contractually or limited practically from directing the asset for another use)

A holder of common stock with a preemptive right may share proportionately in all of the following except (Multiple Choice)

A. The vote for directors. B. New issues of stock of the same class. C. Corporate assets upon liquidation. D. Cumulative dividends. (Answer: D - this right is often attached to Preferred stock)

Statement of Cash Flows: Indirect Method

Adjustments are made for the following: 1. NONCASH Rev & Exp included in NI: Depreciation & Amortization expenses, impairment losses, undistributed earnings of equity-method investments, and amortization of discount and premium on bonds 2. Investing & Financing activities whose cash effects were included in NI: Gains or Losses on sales of PPE (investing) and Gains or Losses on extinguishment of debt (financing) 3. DEFERRALS - changes during the period in inventory and deferred income 4. ACCRUALS - changes during the period in AR or AP At a minimum, must report changes in AR, AP and Inventories

What is the definition of an available-for-sale security?

An available for sale security is a debt or equity instrument where the intent is to sell them in the short term to earn a profit

Which of the following items is specifically included in the body of a statement of cash flows? A. Conversion of debt to equity. B. Purchasing a building by giving a mortgage to the seller. C. Acquiring an asset through a capital lease. D. Operating and nonoperating cash flow information.

Answer (D) Operating and nonoperating cash flow information. The body of a statement of cash flows provides information about cash flows from operating activities and nonoperating activities (i.e., investing activities and financing activities). All noncash transactions are excluded from the body of the statement of cash flows to avoid undue complexity and detraction from the objective of providing information about cash flows.

Equity

Any recognized transaction that does not have equal and offsetting effects on the total assets and total liabilities changes equity

Items reported as prior-period adjustments...

Are reflected as adjustments of the opening balance of the retained earnings of the earliest period presented. Prior-period adjustments are made for the correction of errors. The effects of errors on prior-period financial statements are reported as adjustments to beginning retained earnings for the earliest period presented in the retained earnings statement. Such errors do not affect the income statement for the current period.

Basic Accounting Equation

Assets = Liabilities + Owner's Equity

Basic definitions: Assets, Liabilities and Equity

Assets: Resources controlled by the entity as a result of past events Liabilities: Present obligations of the entity arising out of past events Equity: Residual interest in the assets of the entity after subtracting all its liabilities

COGS for a Retailer

Beginning Inventory + Net Purchases + Freight-In = Goods Available for Sale - Ending Inventory = Cost of Goods Sold

COGS for a Manufacturer

Beginning Raw Materials Inventory + Purchases during the period - Ending Raw Materials Inventory = Direct Materials Used in Production + Direct Labor Costs + Total Manufacturing O/H (Fixed+Variable) = Total Manufacturing Costs + Beginning Work In Process - Ending Work in Process = Cost of Goods Manufactured + Beginning Finished Goods Inventory - Ending Finished Goods Inventory = Cost of Goods Sole

Stock Splits and Stock Dividends alter Total Shareholder's Equity (TRUE or FALSE).

FALSE A stock split reduces the par value of the stock and increases the number of shares outstanding, making it more attractive to investors. As with a stock dividend, each shareholder's proportionate interest in the company and total book value remain unchanged.

The cumulative effect of changes in accounting principle and corrections of prior-period financial statement errors requires prospective treatment. (TRUE or FALSE)

FALSE Prior-period adjustments include the cumulative effect on the income statement of changes in accounting principle and corrections of prior-period financial statement errors. These items require retrospective application. However, changes in accounting estimates require prospective application.

Going-Concern Assumption

Financial Statements are prepared with the assumption that the entity is assumed to continue operating indefinitely.

In what section of the Statement of Cash Flows do you recognize cash receivable from the issue of common stock: Operating, Investing, or Financing?

Financing

Repayment of the principal portion of firm debt are cash out flows from Operating, Investing, or Financing activities?

Financing

Payment of Dividends are shown where on the cash flow statement?

Financing The payment of dividends is a cash outflow from a financing activity. The receipt of dividends, however, is generally considered a cash inflow from an operating activity.

Adjusted market assessment approach if the standalone selling price is not directly observable

Focuses on the amount that the seller believes that customers are willing to pay for the good or service by evaluating the market.

Why does a stock split have a zero effect on retained earnings?

In a stock split, no journal entry is recorded and no retained earnings are reclassified.

Using the input method based on costs incurred any estimated loss on the project...

Must be recognized in full! As soon as an estimated loss on any project becomes apparent, it must be recognized in full.

When using the statement of cash flows to evaluate a company's continuing solvency, the most important factor to consider is the cash provided by (used in) Operating, Investing, or Financing activities?

Operating Solvency is the ability of an entity to pay its noncurrent debts as they become due. A statement of cash flows provides information about, among other things, an entity's activities in generating cash through operations (operating activities) to (1) repay debt, (2) distribute dividends, or (3) reinvest to maintain or expand operating capacity. Thus, cash flows from operating activities (net operating cash inflows), which are generated by an entity's ongoing major or central activities, are the best indicator of its ability to remain solvent over the long term.

In what section of the Statement of Cash Flows do you recognize the gain or loss from the sale of available-for-sale securities: Operating, Investing, or Financing?

Operating (REMEMBER: AFS is an asset, current or long-term depending on how long the entity intends to hold it, and any gain or loss from the sale of an AFS is journalized to the asset account on the BS AND recognized in the Investing activities section of the Cash Flow Statement. So, when preparing the Operating activities for the Cash Flow Statement, any gain would need to be deducted from NI and any loss added back to NI so that we aren't double counting the gain when determining cash and cash equivalents balance for the period.)

Payout Ratio

Proportion of earnings paid out as dividends to shareholders, typically expressed as a percentage. The payout ratio can also be expressed as dividends paid out as a proportion of cash flow. = (Dividends per Share (DPS) / Earnings per Share (EPS)) x 100 or = (Total Dividends Paid / Net Income) x 100

Input Method for recognizing revenue over time

Recognizes revenue on the basis of (a) the entity's inputs to the satisfaction of the performance obligation relative to (b) the total expected inputs to the satisfaction of that performance obligation. For example, costs incurred, labor hours expended, resources consumed, time elapsed, or machine hours used.

When a property dividend is declared, the property is [BLANK] as of the declaration date. This amount is then [BLANK] from [BLANK] to [BLANK].

Remeasured at its fair value Reclassified Retained Earnings Property Dividends Payable

Common Retained Earnings Reconciliation

Retained Earnings beginning balance + Net Income (Loss) for the period - Dividends distributed during the period + Positive (negative) prior period adjustment = Retained Earnings ending balance

Basically, comprehensive income consists of all of the [BLANK], [BLANK], [BLANK], and [BLANK] that caused stockholders' equity to change during the accounting period

Revenues, Gains, Expenses, and Losses

5 Step Model for Recognizing Revenue

Step 1: Identify the contracts with a customer Step 2: Identify the performance obligations of the contract Step 3: Determine the transaction price Step 4: Allocate the transaction price to the performance obligations Step 5: Recognize revenue when (or as) the performance obligation is satisfied

Residual Approach if the standalone selling price is not directly observable

Subtract the sum of the known or estimated stand-alone selling prices of other goods and services in the contract from the total transaction price of the contract

Observable Price

The best evidence of a standalone selling price is the observable price of a good or service when it is (a) sold separately (b) in similar circumstance and (c) to similar customers (e.g. the list price of a good or service).

Observable Price

The best evidence of a standalone selling price of a good or service when it is (a) sold separately (b) in similar circumstances and (c) to similar customers (e.g. the list price of a good or service)

Changing inventory valuation is considered what type of change and should be presented on a prospective or retrospective basis?

The change in inventory valuation method is a change in accounting principle, which should be presented on a retrospective basis to maintain consistency and comparability.

Comprehensive Income is best defined as

The change in net assets for the period excluding owner transactions.

Amortization of a bond premium

The debtor (issuer) on a bond sold at a premium debits or reduces the bond premium for the excess of cash interest paid over interest expense recognized under the effective interest method. The lender (buyer) likewise reduces the bond premium (by a credit) for the excess of cash interest received over interest income recognized. Interest paid (received) is a cash outflow (inflow) from an operating activity. In a reconciliation of net income to net cash flow from operating activities, both the issuer of the bond and the purchaser must make an adjustment for the difference between the cash flow and the effect on net income. Because the issuer's cash outflow exceeded interest expense, it must deduct the difference (premium amortization) from net income in performing the reconciliation. The purchaser's cash inflow is greater than interest income, so it must add the difference (premium amortization) to net income to arrive at net cash flow from operating activities.

Standalone Selling Price

The price at which an entity would sell a promised good or service separately to a customer

Expected cost plus margin approach

The seller estimates its costs of satisfying a performance obligation and then adds an appropriate profit margin

Comprehensive Income includes all changes in equity (net assets) of a business during a period EXCEPT...

Those from investments by and distributions to owners

Comparability

To enhance the usefulness, financial statement information should be comparable with similar information for (1) other entities and (2) the same entity for another period or date.

When treasury stock is accounted for at cost, the cost is reported on the balance sheet as a(n)

Unallocated reduction of equity. Treasury stock is a corporation's own stock that has been reacquired but not retired. In the balance sheet, treasury stock recorded at cost is subtracted from the total of the capital stock balances, additional paid-in capital, retained earnings, and accumulated other comprehensive income.

A performance obligation can be satisfied over time or at a point in time?

Either or!

TRUE or FALSE: Stock Dividends are classified as a liability.

FALSE! Stock dividends are accounted for as a reclassification of different equity accounts, not as liabilities

A contract modification exists when the parties approve a change in the scope or price of a contract. A contract modification is accounted for as a separate contract if...

(1) it results in the addition to the contract of promised goods or services that are distinct and (2) the price for these additional goods or services is their standalone selling price.

Book Value

(BV) = (Total Assets - Total Liabilities) - Preferred Equity

Noncurrent Asset (types of)

1. Certain investments and funds 2. Property, plant, and equipment (PPE) 3. Intangible Assets 4. Other noncurrent assets

A change in the estimate for bad debt requires retroactive (i.e. affecting prior periods) or prospective application (i.e. affecting the period of the change and any future periods)?

A change in estimate for bad debts requires prospective application (i.e., the effect of the change should be treated as affecting the period of the change and any future periods). Changes in estimates are viewed as normal recurring corrections, and retrospective treatment is prohibited.

Contract Liability vs Contract Asset

A contract liability is recognized when an entity receives consideration from a customer and is obligated to transfer goods or services. A contract asset is recognized for an entity's unconditional right to consideration (where the passage of time is the only outstanding factor) in exchange for goods or services that the entity has transferred to a customer.

Statement of Cash Flows: Financing Activities

A. Cash effects of transactions & other events that relate to the issuance, settlement, or reacquisition of the entity's debt & equity instruments B. Examples of cash INFLOWS 1. Cash proceeds from issuing shares and other equity instruments (obtaining resources from owners) 2. Cash proceeds from issuing loans, notes, bonds and other short-term or long-term borrowings C. Examples of cash OUTFLOWS 1. Cash repayments of amounts borrowed 2. Payments of cash dividends 3. Cash payments to acquire or redeem the entity's own shares 4. Cash payments by a lessee for a reduction of the outstanding liability relating to a capital lease

Which section of the Statement of Cash Flows would include paying dividends and which section would include disposing of an equity instrument?

Cash provided by (used in) Financing activities would include paying dividends and treasury stock transactions. Cash provided by (used in) Investing activities would include acquiring and disposing of debt and equity instruments.

In what method of revenue recognition does COGS in a given period equal the costs incurred during that same period?

Cost-to-Cost

Cost-to-Cost Method for recognizing revenue over time

Costs incurred relative to total estimated costs are used to measure the progress toward completion. (Often used in long-term construction contracts.)

Noncash investing and financing activities

Definition: Investing and financing activities that affect recognized assets or liabilities but NOT cash flows Examples: 1. Conversion of debt to equity 2. Acquisition of assets either by assuming directly related liabilities or by means of a capital lease 3. Exchange of a noncash asset or liability for another

Statement of Cash Flows: Direct Method

Entity major classes of actual gross operating cash receipts and payments and their sum (net cash flow from operating activities). At a minimum, the following must be presented: 1. Cash collected from customers 2. Interest and dividends received 3. Other operating cash receipts, if any 4. Cash paid to employees or suppliers for goods and services 5. Interest paid 6. Income taxes paid 7. Other operating cash payments, if any If the Direct Method is used, the reconciliation of net income to net cash flow from operating activities (the operating section of the indirect method format) must be provided in a separate schedule

Proprietary Theory

Equity is what remains after the economic obligations of the enterprise are deducted from its economic resources

TRUE or FALSE: The distribution of a stock dividend affects Total Stockholder's Equity.

FALSE: The distribution of a stock dividend never affects the amount of equity since it merely represents a repackaging of the company's equity accounts.

Under the revenue recognition principle governing contracts with customers, adjustment of the transaction price to reflect the time value of money results in

Interest income or expense that is presented in the income statement separately from revenue. The transaction price should be adjusted for the effect of the time value of money when the contract includes a significant financing component. The interest income or expense is recognized using the effective interest method. Interest income or expense must be presented in the income statement separately from revenue from contracts with customers.

In what section of the Statement of Cash Flows do you recognize cash received from the sale of available-for-sale securities: Operating, Investing, or Financing?

Investing

Statement of Cash Flows: Note Disclosures

Investing & Financing activities that affect recognized assets or liabilities BUT NOT CASH FLOWS must be disclosed in the notes Examples: 1. Conversion of debt to equity 2. Acquisition of assets either by assuming directly related liabilities or by means of a capital lease 3. Exchange of a noncash asset or liability for another

The best reason for opting for the stock split is that...

It does not impair a company's ability to pay dividends in the future. A 2-for-1 stock split doubles the number of shares outstanding; retained earnings is not affected. Under a stock dividend, however, a portion of retained earnings is reclassified as common stock. Since dividends are restricted by the amount of available retained earnings, a stock dividend, but not a stock split, will impair the firm's ability to pay dividends in the future.

The major segments of the statement of retained earnings for a period are...

Net income or loss, prior-period adjustments, and dividends paid or declared.

In what section of the Statement of Cash Flows do you include unrealized gains or losses of available-for-sale securities?

No where! Changes in the FMV of an AFS is part of OCI and though it changes the asset account it will not be used to prepare the Statement of Cash Flows until the gain or loss is actually realized (i.e. the AFS is actually sold).

Amounts due in future years under operating leases is considered...

Off-Balance-Sheet Financing Off-balance-sheet debt includes any type of liability for which the company is responsible but that does not appear on the balance sheet. The most common example is the amount due in future years on operating leases. Under U.S. GAAP, operating leases are not capitalized; instead, only the periodic payments of rent are reported when actually paid. Capital leases (those similar to a purchase) must be capitalized and reported as liabilities.

Interest payments on firm debt are cash out flows from Operating, Investing, or Financing activities?

Operating

Preferred Stock preference right

Preferred stockholders will receive dividends before the common stockholders do. If no dividends are paid to common stockholders, there is no requirement to pay them to preferred stockholders.

Preferred Stock and Common Stock differ in that...

Preferred stocks have a higher priority than common stock with regard to earnings and assets in the event of a bankruptcy (i.e. liquidation).

Stock Dividends greater than 20% to 25% of outstanding common shares

Recognized as a stock split in the form of a dividend

Output Method for recognizing revenue over time

Recognizes revenue based on direct measurement of (a) the value of goods or services transferred to the customer to date relative to (b) the remaining goods or services promised under the contract. Examples include, appraisals of results achieved, milestones reached, units produced and units delivered.

What must an entity do if it estimates a loss on a contractual project with a customer?

The estimated loss must be recognized on the income statement IN FULL!

Stock Dividends less than 20% to 25% of outstanding common shares.

The fair value of the dividend is reclassified from retained earnings to common stock.

Treasury Stock (basic definition)

The firm's own stock that has been repurchased

Net of Income Tax

The income that remains after deducting income taxes (e.g. (EBT x (1 - Tax Rate)))

Cash Selling Price

The price a customer would have paid for a promised good or service if the cash payment had been made when they were transferred to the customer

Standalone Selling Price

The price at which an entity would sell a good or service separately to a customer

Treasury Stock is an asset, can participate in dividends, has all the rights of outstanding shares, and is a contra-equity account. Which one of these statements is TRUE?

Treasury Stock is a contra-equity acount Treasury stock recorded at cost is a reduction of total equity. Treasury stock recorded at par is a direct reduction of the pertinent contributed capital balance, e.g., common stock or preferred stock. T-Stock cannot be treated as an asset, does not participate in dividends (either cash, stock, or property), and does not carry the rights, such as voting, of outstanding stock.

Prepaid Expenses

Valued on the balance sheet at cost less the expired or used portion