Documente Academic
Documente Profesional
Documente Cultură
exam material. Each heading indicates the chapter and percentage of the exam dedicated to that
chapter. Equations are similarly introduced in bold, and there are additional formulas from assorted
other documents at the end.
Treasury stock are shares of a corporation’s stock that have been issued but are not currently
outstanding.
𝑡𝑠𝑒−𝑝𝑒
Book value per share: 𝑏𝑣𝑝𝑠 = 𝑡𝑜𝑠
, total shareholder equity minus preferred equity, over total
outstanding shares; is tied to net worth.
𝑑
Payout ratio 𝑝 = 𝑛𝑖, dividends over net income
Rate of return on common stock: Net income minus preferred dividends, divided by average common
𝑛𝑖−𝑝𝑑
stockholders’ equity. 𝑎𝑐𝑠𝑒
.
Stock vs capital: Capital stock is a company’s common and preferred shares, as issued in the corporate
charter. Capital stock pays dividends and confers voting rights. Treasure stock is total stock minus
shares outstanding, resulting from when “the company” buys back its stock from specific users.
Earned capital vs contributed capital: Earned capital comes from revenue, which goes into dividends and
retained earnings; contributed, or paid-in-capital, is paid into the company from investors, above the par
or stated value of their stock.
Classes of securities:
Debt securities- a bond. Also called “fixed income securities.” Pays interest.
Equity securities- shares of stocks.
Derivative securities- Rights and options contracts.
Value of warrants
𝑚𝑡
Total market (sold) value over total face value, times fair value of warrants, 𝑟𝑤 = × 𝑚𝑤
𝑓𝑡
Stock Appreciation Right compensation: Bonus to management if a company performs well. Similar to
stock options. Is a non-qualified stock option, and taxes are owed on the option’s value.
compensation value 𝑐 = 𝑠𝑝𝑓 for s= number of SARs, p= payout per option, and f= fraction of
plan’s life
Qualified, or Incentive Stock Options, are taxed at a capital gains rate instead of an income tax.
Fair value of share options- GAAP vs IFRS: GAAP permits the fair value option for equity; IFRS forbids it.
Both record increases in the fair value of share options.
Compensation plan disclosure: compensation expense is allocated to the periods benefitted by the
employee’s required service.
A non-compensatory plan offers no option feature, offers a discount no greater than would be
reasonable to the market, and is available to all full-time employees on an equitable basis.
Dilutive vs antidilutive securities: Dilutive securities have options with which to gain additional common
stock, increasing the total amount of outstanding shares. Convertible debt, warrants, and stock options
are dilutive.
Antidilutive securities include ownership of one company’s stock by another, where value is added to
the company through the transaction. An anti-dilution clause on convertible preferred stock makes it
antidilutive.
Retirement of debt: Cancellation of stocks or bonds because the issuer bought them back or maturity
has been reached. Excess may be charged to paid-in-capital under IFRS.
Carrying amount of stocks: Carrying value is book value, is asset value minus amortization. Fair value is
based on what the market would pay for an asset. Fair value tends to fluctuate because of this.
Equity investments
cash plus debit equity investments equals credit equity investments plus investment income,
𝑐 + 𝑑𝑒 = 𝑐𝑒 + 𝑖
Equity method vs fair value method & significant influence. Equity method changes the investment’s
value proportional to the company’s revenues or losses. Fair value method values the investment at
what the market would pay for it. If an investor has 20% or more of the stock in a company, he has
“significant influence” and should use the Equity Method.
Adjusting book value via fair value method: Fair value adjustment is balanced by Unrealized Holding
Gain or Loss
Other comprehensive income on bonds: Excluded from the Income Statement, but included on the
balance sheet under the equity section.
𝑖 𝑛
Effective interest rate: The amount actually earned, thanks to compounding. 𝑟 = (1 + 𝑛) − 1,
effective rate is one plus stated rate over number of compounding periods, raised to the number of
compounding periods, minus one.
Premium on Debt Investments: Difference between the market value and the face value.
Impairment vs unrecoverable loss: Capital is impaired when a company’s total capital is less than the par
value of its stock, or when retained earnings are negative. Impaired capital can be repaired by a
sufficient raise in equity. An unrecoverable loss is, effectively, a declaration of bad business debt, as
seen in bankruptcy.
17B: Derivatives- 7%
Futures contracts and unrealized holding gain or loss- equity. Unrealized gain or loss is on the “other
comprehensive income” part of the equity statement, so when a futures contract’s value changes, it
goes in the equity section, even though it isn’t a major holding in a company.
Conditions to qualify a financial investment for hedge accounting: Company documents the hedging
relationship, and evaluates it to be highly effective
Fair value disclosure & impaired assets: FASB requires disclosures about the reliability of fair value
measures, including how impairment of assets is measured.
18: Revenue Recognition- 8%
Recognize losses on unprofitable contract when the loss is estimated. Recognize revenues when the
amount of revenue is measurable and a “critical event” has occurred. Revenue and associated costs
must be reported in the same accounting period.
Repossession of goods: Deferred revenue is a liability representing payment received for good or
services not rendered, the opposite of prepaid expenses (asset). When goods are repossessed, the
corresponding receivables account is cancelled (credit the asset), and any payment received (deferred
profit) is debited (liability goes down), loss on repossession is debited (expense goes up), and the re-
acquired asset is debited (asset goes up).
credit accounts receivable = debit deferred revenue + repossessed merchandise + loss on
repossession
Revenue recognition under GAAP uses realizable revenue and earned revenue, but the probability of
economic benefit under IFRS
Consignment arrangement: Goods are left in the possession of an authorized third party to sell, similar
to retail space. The consigner retains ownership until a sale is completed.
Contract asset: A contract liability is the obligation to transfer goods when compensation’s been
received. A contract asset, then, is being owed goods. This debt can then be bought and sold as a
futures contract.
Transaction price of a contract is the amount of consideration that a company expects to receive from a
customer in exchange for transferring goods and services.
Incremental costs of a contract: If the costs don’t eliminate profit from the contract, under the
percentage of completion method, do a current period adjustment against the excess gross profit
recognized in prior periods.
Expected value method to estimate variable consideration: Identify a specific number of possible
outcomes and the likelihood that each will occur. Expected return equals the sum of each return times
the chance of that return, 𝑒 = ∑ 𝑟 × 𝑝
Principal-Agent relationship: Agent acts on behalf of the principal, and should not have a conflict of
interest against that principal. Any relationships should be disclosed.
Temporary difference between taxable income & financial income; deferred tax asset/liability.
Recognizing expenses when they happen can lead to “spending” tax money before the bill is collected.
It’s a liability if the tax is owed, but not paid; a deferred tax asset is when the money has already been
paid. Accelerated depreciation in particular can lead to valuing an asset less for tax assessors than for
investors.
Carry back tax loss: An operating loss can yield refunded money from excess taxes paid for the previous
two years, and forward for the next twenty years.
Deferred income tax liability: “There’s no tax on receivables.” So, report the income when you have the
receivable, but pay the tax when you get the cash.
Effects of a change in the tax rate on deferred liability: The effective tax rate for the applicable (future)
period is applied when calculating a deferred tax account.
A company will subtract an increase in a deferred tax asset from income taxes payable. Paid more now,
pay less later.
A loss carryback for income tax purposes applies to the last 2 years, and carryforward the next 20 years.
Valuation allowance is contra asset. When taxes are due, not all of a deferred tax asset are realized, and
the difference goes back to retained earnings.
A deferred tax asset is required for tax benefits in a loss year due to a loss carryforward.
A tax benefit is a reduction of a current loss, as it is a refund to compensate for a loss year.
Pension asset, liability, and expense. Contributory plans have assets or liabilities depending on the value
of the invested funds compared to the projected obligation. Contributions by the employer are an
expense.
Types of pension plans: Defined contribution, defined benefit, contributory, noncontributory, qualified,
Defined contribution: Employees contribute a fixed amount or percentage
Defined benefit: guaranteed benefits, calculated by a formula that takes into account years of
service and salary history. Uses a worksheet.
Contributory: The employer contributes to the employee’s benefits. Often with “employer
matching” retirement plans.
A qualified plan is eligible under IRS 401(a) to receive tax benefits. Employers get a tax break for
contributions made by employees, reducing employees’ tax liability by reducing taxable income.
Gain on pension assets: When an employer’s pension bill is less than expected, this is a gain.
GAAP amortizes pension liability and asset gains and losses over their remaining service lives using the
corridor approach.
Accumulated benefit obligation and other comprehensive income- A vested benefit is one owed to an
employee. When these are less than expected, the remnant funds are part of other comprehensive
income.
Corridor approach: A smoothing effect on gains or losses on pension assets by amortizing these gains or
losses when they exceed ten percent of the pension benefit obligation
Expected return on plan assets: Asset value weighted over a reasonable period times expected rate of
return
Direct-financing lease vs sales type lease: In direct financing, income is recognized over time as lease
payments are made. The equipment asset is removed and transferred to a receivable account. A sales
type lease recognizes some income immediately, and then continues the rest of the payments as
normal.
Periodic lease payment- cost of equipment minus present guaranteed residual value, divided by the life
of the lease.
Guaranteed residual value- The remaining value of an asset after it’s been leased. Sometimes an
additional payment by the lessee is made before or after the lease, guaranteeing salvage.
Minor leaseback: Present value of minimum payments is less than 10% of the asset’s fair value.
Leasebacks are when a seller leases his item shortly after selling it, useful for finishing construction of a
major high-production-cost item or for tax benefits to the seller.
Effect of leasing on financial ratios: An operating lease is expensed, but a capital lease is treated as debt
Calculation of minimum lease payments, including present value: Use the present Value, PMT add-in on
a finance calculator.
Different rates: Incremental borrowing rate, discount rate, prime interest rate, implicit rate
The incremental rate is what a lessee would pay, if financing instead of leasing. GAAP requires
this unless the implicit rate is known by the lessee and is lower than the incremental rate. IFRS requires
the implicit rate.
The implicit rate is not stated explicitly stated, but is used by IFRS unless it is determined
impractical to find. Often tied to inflation as the cost of borrowing money, or it is generally known by
the lessor.
The discount rate is used by the lessee to compute minimum lease payments, and is the lesser
of implicit or incremental rates.
The prime rate is charged by banks to their customers or to each other.
Change in present value method: Used to measure the current liability of an ordinary annuity lease. A
leased asset that creates an income stream (an annuity) has a corresponding liability with a current
lump value, which decreases over time.
Initial direct costs of leasing: Costs of negotiating between lessee and lessor. Deferred and amortized
over the life of an operating lease. Expensed right away in a capital lease.
Interest from a lease/sale: Interest income is recognized over the lease period using the effective-
interest method (as a book value increases, so does the interest on it).
Capitalization and when to avoid it: Companies can avoid depreciation of capital assets by specifically
setting up operating leases instead.
Changing estimated life of depreciable assets: initial depreciation for years, plus new depreciation per
𝑝
𝑝 (𝑝−( ×𝑦))
𝑙
new years. Depreciation 𝑑 = (𝑙 × 𝑦) + 𝑙−𝑦
× (𝑙 − 𝑦 − 𝑚) for price p, life l, changed in year y,
assuming no salvage value, measured in year m.
Information disclosed when a company changes reporting entity: The effect of the change on earnings
per share for the year, retrospective.
Impracticability applies under GAAP to changes in principle, but only to corrections of errors under IFRS.
Indirect effects: only GAAP has detailed guidance on indirect effects of changes. IFRS has more general
guidelines.
Transactions under investing vs financing activities. Financial activities are generally more “paper.”
Calculate net cash from operating activities: net income plus depreciation, adjustments, and changes in
receivables, liabilities, and inventory
Cash and cash equivalents: Cash equivalents are highly-liquid, low risk investments, included with cash
in calculations. These include treasury bills, certificates of deposits, commercial paper, and money
market instruments.
Financing activities: Raising cash to grow or maintain the business, through loans from the bank, equity
stock, or issuing bonds.
Indirect method: Determining cash flow from net income and other transactions.
Depreciation and prepaid expenses: Depreciation is cash that wasn’t spent, and gets added back to cash
flow. Prepaid expenses and fixed assets are cash that was spent, so a change in them is subtracted from
cash flow.
Causes of adjustments via the indirect method: Interest, taxes, and other payables are income that is
still cash. Add them back, cash flow goes up.
Debt investments and trading investments: Financing activities. Changes in valuation are not cash flow;
however, gains or losses in these accounts would be in Other Comprehensive Income, not Net Income,
so Fair Value Adjustments do not need to be removed.
Gain on sale of equipment: Investing activity, plant property and equipment, so remove from Net
Income.
Comparative balance sheet: Side by side comparison of years’ assets, liabilities, and equity. Can be used
to prepare cash flow via the indirect method, i.e. manually finding the change in accounts due to
spending and receiving cash.
Cash flow worksheet: You need the comparative balance sheets, current income statement, and
selected transaction data. First, determine the change in cash. Next, determine net cash flow from
operating activities. Finally, determine investing and financing activities.
Forecasts vs projections: A forecast is an expected result, whereas a projection only shows various
possibilities
Account receivable turnover: Net credit sales over average accounts receivable
Horizontal vs Vertical analysis: Horizontal approach compares the same category over different periods
of time, whereas vertical analysis compares categories within the same year.
Interim reports: Cover a period less than one year. Estimate unknown costs and allocate them to their
relevant period. These should be every three months for GAAP, and every six for IFRS.
Integral approach, direct approach: The integral approach says that interim reports should consider
events for the entire year, including deferrals and accruals. The direct approach recognizes expenses
when they happen, as if every interim report is a separate period.
MD&A: Management discussion and analysis. Portion of the annual report that discusses company
performance. Required by the SEC, outlined by the FASB. Covers liquidity, capital resources, and results
of operations.
Safe harbor rule- an SEC rule that protects erroneous forecasts as long as they’re made on a reasonable
basis and in good faith. Has not worked well in practice, and does not cover fraud.
Which information is disclosed in notes: Accounting methods for recording and reporting transactions,
pension plan and stock option compensation details, why any irregularities or one-time changes
occurred, and pretty much anything else that would be relevant to an investor but would clutter the
primary financial data. GAAP allows information to be presented in the Statement of Cash Flows, but
IFRS requires non-cash or financing activities to be contained to the notes.
Interim reports and uncertain costs: Costs go in the best estimate of the most applicable period.
Big GAAP vs Little GAAP: Small companies shouldn’t have to follow complex requirements for leases and
pensions.
Errors vs Irregularities: Irregularities are intentional distortions and fraud, but errors are unintentional
mistakes.
Significant segments via quantitative tests: To be disclosed, a segment’s revenue must be 10% or more
of the combined revenue of all of an enterprise’s industry segments. A segment’s results should equal
or exceed 75% of combined sales for the business. The FASB requires these rules to prevent companies
from reporting too many segments and overwhelming users with details.
Additional Formulas:
𝑛𝑖−𝑝𝑑
Rate of Return on Common Stock Equity 𝑟 = 𝑎𝑐𝑠𝑒
, net income minus preferred dividends over average
common stockholders’ equity
𝑐𝑑
Payout ratio 𝑝𝑟 = 𝑛𝑖−𝑝𝑑, cash dividends over net income minus preferred dividends
𝑐𝑠𝑒
Book Value per Share 𝑏𝑣𝑝𝑠 = 𝑜𝑠
, common stockholders’ equity over outstanding shares
Income taxes payable or refundable ± changes in deferred income taxes = total tax expense or benefits
𝑖𝑡𝑝 + 𝛿𝑖𝑡 = 𝑖𝑡𝑥; 𝑖𝑡𝑟 − 𝛿𝑖𝑡 = 𝑖𝑡𝑏
Or, Income Tax Expense = Tax Payable + Deferred Tax Liability – Deferred Tax Asset
𝑖𝑡𝑒 = 𝑡𝑝 + 𝑑𝑡𝑙 − 𝑑𝑡𝑎
Earnings per share = net income minus preferred dividends over weighted average shares outstanding.
𝑛𝑖−𝑝𝑑
𝑒𝑝𝑠 = 𝑤𝑎𝑠𝑜
𝑣𝑤
Allocated value (bonds, warrants) = value without ÷ value of both × purchase price, 𝑎 = 𝑣𝑏
×𝑝
𝑛𝑖−𝑝𝑑
Rate of Return on Common Stock Equity 𝑟 = 𝑎𝑐𝑠𝑒
, net income minus preferred dividends over average
common stockholders’ equity
𝑐𝑑
Payout ratio 𝑝𝑟 = 𝑛𝑖−𝑝𝑑, cash dividends over net income minus preferred dividends
𝑐𝑠𝑒
Book Value per Share 𝑏𝑣𝑝𝑠 = 𝑜𝑠
, common stockholders’ equity over outstanding shares
Price Earnings Ratio = market price of stock ÷ (net income ÷ shares outstanding),
𝑚𝑝
𝑝𝑒𝑟 = 𝑛𝑖
𝑠𝑜
𝑛𝑖
Return on assets = net income ÷ average total assets, 𝑟𝑜𝑎 =
𝑎𝑡𝑎
𝑐𝑜𝑔𝑠
Inventory turnover = cost of goods sold ÷ average inventory, 𝑖𝑡 =
𝑎𝑖
The acid-test ratio is cash, marketable securities and net receivables divided by current liabilities
𝑐+𝑚𝑠+𝑛𝑟
𝑎𝑡𝑟 = 𝑐𝑙
𝑐𝑎
Current ratio = current assets over current liabilities, 𝑐𝑟 = 𝑐𝑙
Total stockholder’s equity: sum of par values + sum of excess of par + retained earnings – treasury stock
at cost, 𝑞 = 𝑝 + 𝑒 + 𝑟 − 𝑡
Proceeds allocated to common stock: common shares × common price per share ÷ sum of common
𝑐𝑠
and preferred stocks, times lump sum. 𝑎 = 𝑐𝑠+𝑝𝑠 × 𝑙.
Sell stock: Credit the excess. Price times shares. Fair value. Proportions when necessary.
𝑛𝑖−𝑝𝑑
Rate of return on common stock 𝑟 = 𝑎𝑐𝑒
, net income minus preferred dividends, divided by average
common stockholder’s equity.
𝑐𝑒
Book value per share 𝑏 = , common stockholder’s equity divided by common shares outstanding
𝑐𝑜
12−𝑚+1 4
Weighted average shares: First of the month 𝑛 = 12
. So, September (9) becomes 12. January (1) is
12
12
. Issue stock: Add weighted avg shares. Purchase stock: Subtract weighted shares.
Date: “Add shares”- just add a negative for repurchased shares.
Gross profit- cost to complete method- Contract minus estimated costs and billings to date
𝑠−𝑐 𝑜
Installment method, deferred gross profit: 𝑠 − 𝑐 − 𝑜 × 𝑠
= (𝑠 − 𝑐) × (1 − 𝑠 ) for s = installment sales,
c = cost of installment sales, and o = collections on installment sales.
Benefit obligation: Sum of projected obligation, service cost, settlement rate times projected obligation,
minus benefits paid. 𝑝 + 𝑐 + 𝑠𝑝 − 𝑏.
Gain on benefit plan assets: Actual return minus prior year’s market asset value times current year’s
expected rate of return. 𝑎 − 𝑚𝑟.
TMV Solver: “unguaranteed residual value” is a negative future value. Effectively, you’re paying enough
to have that much worth leftover.
(Cash Flow) Investing activities: buy/sell stock in another company, buy/sell land
Financing activities: proceeds from issuing or selling stock, minus paying dividends, minus paying down
bond principal
Ratios:
Acid test = (Cash + short term investments + accounts receivable) ÷ current liabilities
𝑐+𝑚+𝑟
same as quick ratio, 𝑞 =
𝑙
asset turnover = Net sales ÷ average total assets
Book value per share BVPS = Common Stockholders’ Equity / Outstanding Shares
Current ratio = current assets ÷ current liabilities
Debt to equity ratio = Total debt ÷ total assets
Dividend yield = dividends per share ÷ share price
𝑛𝑖−𝑑
earnings per share 𝑒𝑝𝑠 = 𝑤𝑎𝑠
for earnings per share, net income, dividends, and
weighted-average shares outstanding. Shares issued later in the year are only worth a fraction of the
year
Equity per share: book value
𝑠−𝑐𝑜𝑔𝑠
Gross profit margin = 𝑠 for s = sales
Inventory turnover = Cost of goods sold ÷ average inventory
Payout Ratio = Cash Dividends / ( Net income - Preferred Dividends )
Payout Ratio = dividends per share ÷ earnings per share
profit margin on sales = Net income ÷ Net sales
Receivables turnover = annual credit sales ÷ accounts receivable
Return on assets = Net income ÷ total assets
ROE = ( Net Income - Preferred Dividends ) / Average Common Stockholder’ Equity
times interest earned = Income before income taxes and interest expense ÷interest expense
1
(1−[(1+𝑖)𝑛 ]) 1
Gain on sale of bonds 𝑏 = [𝑚 × 𝑐] × 𝑖
+ 𝑚 × (1+𝑖)𝑛 for b= bond price, m= par/ maturity value,
c= coupon rate, i= interest rate, n= number of periods
Stock-appreciation right SAR compensation: 𝑐 = 𝑠𝑝𝑓 for s= SARs, p= payout, and f= fraction of plan’s
life.
𝑝−𝑠
Straight line depreciation 𝑑 = 𝑙
, price minus salvage over time
cash from operating activities 𝑐𝑜𝑎 = 𝑛𝑖 + 𝑎𝑝 + 𝛿𝑑 − 𝑝𝑒 − 𝛿𝑓𝑎 for net income, accounts payable,
change in depreciation, and change in fixed assets.