FAR M1 & M2

• The results of discontinued operations of a component are reported in the income statement in the period the component is either disposed of or is held-for-sale
• The cumulative effect of an accounting change in a RE stmt is based on adjusting the beginning balance of RE, net of tax.
• Days A/R is calculated as (average or ending?) ENDING net A/R divided by (net sales/365)
• Losses in excess of APIC-Treasury Stock are booked to retained earnings.
• Foreign currency translation gain is an OCI item and therefore affects comprehensive income, but not net income.
• Under the legal (par/stated value) method, the APIC account is debited for losses when the treasury stock is repurchased. However, when the APIC account doesn't have sufficient balance to absorb a loss, retained earnings is reduced.
• A dividend payout to company shareholders will have zero effect on comprehensive income because it does not impact net income.
• An unrealized loss on a trading security will be recorded as a loss on the income stmt which will reduce net income and thus comprehensive income.
• Return on assets = net (sales or income)? / average total assets

  
  

  Answer: net INCOME
• Gross profit margin = gross profit / revenue
• Net profit margin = net income / sales
• Working capital turnover = sales / avg. working capital (aka curr. assets - curr. liabilities)
• A change in accounting estimate affects the current and subsequent periods, but NOT prior periods and NOT retained earnings
• Comprehensive income includes all changes in stockholder's equity EXCEPT those resulting from owner investments AND distributions to owners
• BB RE

  Plus: Net Income

  Less: Dividends paid

  Equals: EB RE
• Corporations are not permitted to report income stmt gains + losses from treasury stock transactions. Instead, treasury stock gains + losses are reported as direct adjustments to SE.
• Earnings per Common Share = (Net Income less Preferred Dividends) / Weighted Shares O/S
• If a corporation holds shares of its own stock, they should be recorded as treasury stock and shown as a reduction in SE
• Gross profit = Net sales less Cost of Sales
• If a stock dividend or a stock split (or reverse split) changes C/S outstanding, the computation of EPS will give retroactive recognition for all periods presented using the new number of shares
• AOCI is reported in the B/S as a reduction of equity following RE
• The cumulative effect of a change in accounting estimate should NOT be shown separately on the B/S or the I/S because it is handled prospectively
• Gains from extinguishment of debt are a component of net income, NOT OCI.
• Gains on treasury stock transactions are NEVER recorded on the B/S or the I/S. They are recorded by increasing APIC - T/S.
• Losses on treasury stock transactions are NEVER recorded on the B/S or the I/S. They are recorded by first eliminating existing balances in APIC - T/S and then decreasing RE.
• APIC will only issue when stock is issued upon exercise of rights, not when the rights are first issued.
• The repurchase of common stock reduces total SE and the total capital available to a firm. This results in a higher debt-to-total-capital ratio as the total debt remains unchanged.
• A gain/loss included in OCI, which is not included in net income, would cause earnings to differ from comprehensive income
• EBIT (earnings before income and taxes) is shown in the single-statement I/S approach, not the two-statement I/S approach
• When collectibility is reasonably assured, the excess of the subscription price over the stated value of the no par C/S subscribed should be recorded as APIC when the subscription is recorded (aka when the subscription is received)
• P - Pension adjustments

  U - Unrealized gains & losses in AFS securities

  F - Foreign currency translation gains (transaction gains are part of continuing income!)
• If a corporation sells some of its treasury stock at a price that exceeds its cost, this excess should be credited to APIC (not credited to RE!)
• Fair value type foreign currency hedges are accounted for in current income, not OCI.
• Gains and losses from changes in fair value of foreign currency transaction hedges classified as fair value hedges are accounted for in earnings as are other fair value type hedges.

  
  

  Gains and losses from changes in the fair value of foreign currency transaction hedges used to hedge a net investment in a foreign operation are reported in OCI as part of the cumulative transaction adjustment.
• inventory turnover ratio = COGS / Avg. Inventory
• An unrealized loss on a trading security would be recorded as a loss on the income statement, which will reduce net income and therefore comprehensive income.
• In yr 2, Company A made a purchase using foreign currency. If the spot rate at the payment date in Yr 3 is LESS than the spot rate at the end of year 2, this is considered a gain because it cost less for Company A to buy the foreign currency.
• In the quick ratio, the current assets EXCLUDE inventory and prepaid expenses
• If comparative financial stmts are not presented, the cumulative effect of change in accounting principle is determined as the beginning of the year change
• When computing diluted EPS, preferred dividends are not subtracted because we assume that the preferred shares were converted to common shares at the beginning of the period; thus, no preferred dividends were paid.