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This collection of sources comprehensively covers various aspects of financial accounting and reporting. It begins with the income statement and balance sheet, before moving into other aspects of financial accounting. Topics include revenue recognition, accounting changes and error correction, stockholders' equity, earnings per share, and public company reporting requirements. The materials then progress into assets (e.g., receivables, inventory, property, plant, and equipment, and intangible assets), liabilities (both current and long-term), equity, leases, financial instruments, income taxes, partnerships, consolidations, and the statement of cash flows. The text concludes with special areas like not-for-profit accounting and governmental accounting.
Overview:
This document summarizes key concepts from the provided materials covering various accounting topics, including earnings per share (EPS), stockholders' equity, revenue recognition, ratio analysis, receivables, inventory, property, plant, and equipment (PP&E), long-term liabilities (notes and bonds payable), lease accounting, financial instruments, equity method, consolidated financial statements, cash flow statements, income taxes, not-for-profit accounting, and governmental accounting.
I. Earnings Per Share (EPS)
Weighted Average Shares Outstanding: Focuses on calculating the weighted average number of common shares outstanding (WACSO) for EPS calculations. Stock dividends and stock splits are treated as if they occurred at the beginning of the period, requiring retroactive adjustments. Example: A 2-for-1 stock split on March 31st requires shares outstanding before the split to be doubled for the January-March period.
Diluted EPS: Explains the formula and concepts related to diluted EPS, which considers the potential dilution from convertible securities, options, warrants, and other contracts that could be settled in cash or stock. Quote: "Diluted EPS = (Income available to the common stock shareholder + Interest on dilutive securities) / (Weighted average number of common shares (assuming all dilutive securities are converted to common stock))"
Treasury Stock Method: Used to determine the dilutive effect of options and warrants. Assumes proceeds from exercise are used to repurchase treasury shares. Dilution occurs when the average market price is greater than the exercise price ("in the money"). Quote: "The treasury stock method assumes that the proceeds from the exercise of stock options, warrants, and their equivalents will be used by the company to repurchase treasury shares at the prevailing market price."
If-Converted Method: Used for convertible securities (bonds, preferred stock). Assumes conversion at the beginning of the period (or time of issuance, if later).
II. Stockholders' Equity
Definition: Stockholders' equity represents the owners' claim to the net assets (assets minus liabilities) of a corporation. Quote: "Stockholders' equity...is the owners' claim to the net assets...of a corporation."
Common vs. Preferred Stock: Preferred stock has preferences (e.g., dividends, liquidation) not associated with common stock and usually lacks voting rights. Quote: "Preferred stock is an equity security with preferences and features not associated with common stock."
Treasury Stock: Shares held by the company are not considered outstanding. Two methods for accounting for treasury stock are the Cost Method (most common) and the Legal (Par/Stated Value) method. Gains/losses are adjusted directly to stockholders' equity, not net income. Quote: "Under both methods, the 'gains and losses' are recorded as a direct adjustment to stockholders' equity and are not included in the determination of net income."
Cost Method (Treasury Stock): Treasury shares are recorded at reacquisition cost.
Legal (Par/Stated Value) Method (Treasury Stock): Treasury shares are recorded by reducing par value and additional paid-in capital.
Stock Splits: Issuance of additional shares without charge, reducing par value proportionately. There is no change in total book value. Requires only a memo entry. Statement of Changes in Shareholders' Equity: *Provides info on changes in equity components including capital transactions and distributions to shareholders.
III. Revenue Recognition
Contract Modifications: A modification is treated as a new contract if the scope increases due to distinct goods/services and the price increase reflects stand-alone selling prices. Otherwise, it's treated as part of the existing contract.
Distinct Goods or Services: Quote: "In order to be distinct, both criteria below must be met: 1. The promise to transfer the good or service is separately identifiable from other goods or services in the contract; and 2. The customer can benefit either from the good or service independently or when combined with the customer's available resources."
Performance Obligations Satisfied Over Time vs. Point in Time: Determined based on whether the customer controls the asset as it is created, whether it is a service, or whether the entity has an enforceable right to payment for performance completed to date.
IV. Ratio Analysis
Solvency Ratios: Measure security for long-term creditors (e.g., Debt-to-Equity Ratio, Total Debt Ratio).
Profitability Ratios: Measure a company's ability to generate earnings (e.g., Profit Margin, Return on Assets).
Activity Ratios: Measure how efficiently a company is using its assets (e.g., Asset Turnover).
Limitations of Ratios: Ratios depend on the reliability of the underlying data (estimates, historical costs, fair value).
V. Receivables
Factoring Receivables: Involves selling receivables to a factor. Can be with or without recourse.
Without Recourse: The factor assumes the risk of uncollectible accounts.
With Recourse: The factor can resell uncollectible receivables back to the seller (can be treated as a sale or a borrowing).
Discounting Notes Receivable: Holder endorses the note to a third party for cash.
Without Recourse (Discounting Notes): Note is sold outright and removed from the balance sheet.
VI. Inventory
Types of Inventory: Retail, Raw Materials, Work-in-Process (WIP), Finished Goods.
Sales with Mandatory Buyback: The seller should include the goods in inventory even if title has passed to the buyer.
Installment Sales: If the seller retains legal title, include goods in inventory if uncollectible debts cannot be estimated.
Lower of Cost or Market: Market generally means current replacement cost, but cannot exceed Net Realizable Value (NRV) or fall below NRV less normal profit margin. Quote: "the term market in the phrase lower of cost or market generally means current replacement cost...provided the current replacement cost does not exceed net realizable value...or fall below net realizable value reduced by normal profit margin." Hybrid Inventory Systems: *Quantities only: record of units maintained on a perpetual basis; often referred to as the modified perpetual system.
Dollar-Value LIFO: Inventory is measured in dollars and adjusted for changing price levels. Quote: "Under the dollar-value LIFO method, inventory is measured in dollars and is adjusted for changing price levels."
VII. PP&E: Depreciation, Depletion, and Impairment
Capitalization of Interest Costs: Interest costs are capitalized during the construction period if: (1) expenditures have been made, (2) activities are in progress, and (3) interest cost is being incurred.
Depreciation Methods: Straight-line, Sum-of-the-Years' Digits.
Sum-of-the-Years' Digits: Uses the formula (Cost - Salvage Value) * (Remaining Life / Sum of the Years Digits)
Depletion: Applies to natural resources. Unit depletion rate = (Depletion Base) / (Estimated Recoverable Units).
VIII. Long-Term Liabilities
Current vs. Non-Current: Principal payments due within the next year are classified as current liabilities. Short-term obligations expected to be refinanced may be classified as non-current if certain conditions are met.
Liabilities vs. Equity: Mandatorily redeemable preferred stock, obligations to repurchase the issuer's equity shares, and obligations to issue a variable number of shares are classified as liabilities.
Notes Payable: Recorded at present value at the date of issuance. Non-interest bearing notes are imputed with a market interest rate.
Debt Covenants: Used by creditors to protect their interest. Violation can lead to technical default.
Bonds Payable:Denominations: Usually issued in $1,000 increments.
Quoting: Prices are quoted as a percentage of par value.
Coupon Rate: Stated interest rate on the bond.
IX. Lessee Accounting
Lease Definition: A contractual agreement conveying the right to use an asset for a period of time in exchange for consideration. Lease Criteria: *The contract includes an identified asset and must convey the right to control this asset.
Lease vs. Non-Lease Components: Leases must be separated from non-lease components.
Finance Lease vs. Operating Lease: Classified based on whether the lessee effectively assumes control of the underlying asset. Criteria include transfer of ownership, bargain purchase option, lease term representing a major part of the asset's economic life, present value of lease payments exceeding substantially all of the asset's fair value, and specialized nature of the asset. Operating Lease Balance Sheet: Reflects a right-of-use (ROU) asset and lease liability.
X. Financial Instruments
Financial Assets: Cash, ownership interests, and contracts conveying the right to receive cash or exchange financial instruments on favorable terms.
Financial Liabilities: Contracts obligating an entity to deliver cash or another financial instrument.
Debt Securities Classification: Trading, Available-for-Sale, and Held-to-Maturity. Trading and available-for-sale are reported at fair value.
Equity Securities: Generally carried at fair value through net income (FVTNI).
XI. Equity Method
Significant Influence: Generally presumed with 20%-50% ownership.
Accounting: Investment is initially recorded at cost, then adjusted for the investee's income, dividends, and amortization of any fair value adjustments above the book value.
XII. Consolidated Financial Statements
Controlling Interest: Requires consolidation.
Noncontrolling Interest (NCI): Portion of the subsidiary's equity not attributable to the parent.
XIII. Statement of Cash Flows
Operating Activities (CFO): Cash flows from the company's primary revenue-generating activities.
Investing Activities (CFI): Cash flows related to the purchase and sale of long-term assets and investments.
Financing Activities (CFF): Cash flows related to debt, equity, and dividends.
XIV. Income Taxes
Intraperiod and Interperiod Allocation: Intraperiod allocates the tax provision to different components of net income; interperiod deals with temporary differences.
XV. Not-for-Profit Accounting
Net Assets: Classified as with donor restrictions or without donor restrictions.
Accounting for Assets Received from Resource Provider: Measured at Fair Value.
XVI. Governmental Accounting
Fund Accounting: Governmental entities use separate funds, classified as Governmental, Proprietary, and Fiduciary.
Governmental Funds: Use the modified accrual basis and current financial resources measurement focus.
Modified Accrual: Revenues are recognized when measurable and available (collectible within the current period or soon enough thereafter to be used to pay liabilities in the current period). Expenditures are generally recorded when the related fund liability is incurred.
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