FAR 1 Unit Outline

FAR 1
Unit Outline

Module 1—Balance Sheet, Income Statement, and Comprehensive Income

Balance Sheet
 Under U.S. GAAP, entities may present a classified balance sheet that distinguishes current and non-
current assets and liabilities. When appropriate, a balance sheet based on liquidity is also
permissible. Review the terminology and be able to recognize a classified balance sheet.

Uses of the Income Statement and Terminology

 The purpose of the income statement is to provide information about the uses of funds in the income
process (i.e., expenses), the uses of funds that will never be used to earn income (i.e., losses), the
sources of funds created by those expenses (i.e., revenues), and the sources of funds not associated
with the earnings process (i.e., gains).
 Know the difference between expired and unexpired costs and also the difference between the gross
concept and the net concept.

Income From Continuing Operations

 Know the difference between a multiple-step income statement and a single-step income statement.
The multiple-step income statement reports revenues and expenses separately from nonoperating
revenues and expenses and other gains and losses. In the single-step presentation of income from
continuing operations, total expenses (including income tax expenses) are subtracted from total
revenues; thus, the income statement has a single step.

Income From Discontinued Operations

 Accounting for discontinued operations can consist of gain/loss on current operations, gain/loss on
sale, and impairment loss. Discontinued operations are shown net of tax. Any of these must be
reported as part of discontinued operations in the year incurred.
 The results of operations of a component of an entity or a group of components of an entity, or a
business or nonprofit activity, will be reported in discontinued operations if it has been disposed of or
is classified as "held for sale."
 The disposal must represent a strategic shift that has or will have a major effect on an entity's
operations and financial results to be reported as a discontinued operation.

Foreign Currency Transactions

 Foreign currency transactions require adjusting the receivable or the payable at year-end for changes
in the dollar equivalent of the foreign currency-denominated transaction since the transaction date. An
additional gain or loss is reported when the transaction is settled in the foreign currency.

Comprehensive Income
 Comprehensive income includes all changes in owner's equity other than transactions with owners.
The formula shows that comprehensive income must include net income plus/minus other changes in
owner's equity not resulting from transactions with owners. These other changes are known as other
comprehensive income items.
 Other comprehensive income items are revenues, expenses, gains, or losses that are included in
comprehensive income but excluded from net income under U.S. GAAP.
 The mnemonic PUFI represents the five commonly tested sources of other comprehensive income.
• Pension adjustments
• Unrealized gains and losses on AFS debt securities and hedges

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 FAR 1 Unit Outline

• Foreign currency translation items

• Instrument-specific credit risk
 Accumulated other comprehensive income is the cumulative sum of all of the individual components
of other comprehensive income. Accumulated other comprehensive income is an owner's equity item.
 U.S. GAAP allows the statement of comprehensive income to be presented using the one-
statement approach (statement of income and comprehensive income) or the two-statement
approach (statement of income immediately followed by a separate statement of comprehensive
income).
 Components of other comprehensive income may be reported either net of tax or before related tax
effects, with one amount shown for the aggregate income tax expense or benefit related to the total of
other comprehensive income items.

Module 2—Earnings per Share and Public Company Reporting Topics

Earnings per Share Overview
 An entity's capital structure determines the manner in which earnings per share (EPS) are disclosed
on the income statement.

Simple Capital Structure (Report Basic EPS Only)

 An entity that issues only common stock (no other securities that can be converted to common stock)
has a simple capital structure.
 Basic EPS assumes no potentially dilutive securities. Basic EPS divides income available for
common shareholders by the weighted average number of common shares outstanding.

Complex Capital Structure (Report Basic and Diluted EPS)

 An entity has a complex capital structure when it has securities that can be potentially converted to
common stock and would therefore dilute or reduce EPS.
 Diluted EPS employs the "if converted" and/or “treasury stock” methods to recompute EPS as it
would be if any dilutive securities such as convertible bonds or preferred stock, rights, warrants, or
options were exercised. Antidilutive securities are not considered.
 Preferred stock, especially cumulative issues, causes calculation difficulties, as preferred claims are
not available for common shareholders and preferred dividends do not reduce net income.
 Contingent shares, if dilutive, are part of the basic EPS calculation if all conditions for issuance are met.

Earnings per Share Disclosures

 Basic and diluted EPS are disclosed by the income statement component for a proper presentation.

SEC Reporting Requirements

 Form 10-K must be filed annually by U.S. registered companies (issuers). The filing deadline for Form
10-K is 60 days after the end of the fiscal year for large accelerated filers; 75 days after the end of the
fiscal year for accelerated filers; and 90 days after the end of the fiscal year for all other registrants.
This form contains financial disclosures, including a summary of financial data, management's
discussion and analysis (MD&A), and audited financial statements prepared using U.S. GAAP.
 Form 10-Q must be filed quarterly by U.S. registered companies (issuers). The filing deadline for
Form 10-Q is 40 days after the end of the fiscal quarter for large accelerated filers and accelerated
filers, and 45 days after the end of the fiscal quarter for all other registrants. This form contains
unaudited financial statements prepared using U.S. GAAP, interim period MD&A, and certain
disclosures.
 Form 8-K is filed by U.S. registered companies to disclose changes whenever a material event occurs.

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 FAR 1 Unit Outline

Module 3—Stockholders' Equity: Part 1

Overview
 Stockholders' (owner's) equity includes five major components: 1) capital stock; 2) additional paid-in
capital; 3) retained earnings or deficit; 4) accumulated other comprehensive income; and 5) treasury
stock. When an entity presents consolidated financial statements, any noncontrolling interest must be
shown in equity.

Capital Stock (Legal Capital)

 Capital stock includes these terms: authorized, issued, and outstanding. Treasury stock is issued but
not outstanding.
 Common shareholders' equity equals total stockholders' equity reduced for the claims of preferred
shareholders.
 Book value per share is the common shareholders' equity divided by the number of common shares
outstanding at year-end.
 Preferred shares are "first in line" before common shareholders for dividends and payment in
liquidation. Preferred stock may also be cumulative, participating, or convertible. Mandatorily
redeemable preferred stock is reported as a liability because it has a maturity date, like other debt
instruments.

Additional Paid-in Capital

 Additional paid-in capital can come from several sources in addition to any amount received above
the par value of shares issued.

Retained Earnings
 Retained earnings can be increased or decreased by many events, including: income, losses, cash
dividends, property dividends, stock dividends, prior period adjustments, cumulative effects of
changes in accounting principles, and quasi-reorganizations.

Accumulated Other Comprehensive Income

 Accumulated other comprehensive income is an equity account into which the components of other
comprehensive income flow.

Treasury Stock
 Treasury stock may be accounted for by the cost method or the legal (par value) method. The
candidate should review journal entry examples in the text under the cost method and par value
method, including the retirement of treasury stock.
 Donated shares result in a credit to contributed capital.

Module 4—Stockholders' Equity: Part 2

Accounting for a Stock Issuance (to Nonemployees)
 Stock subscriptions are contracts to buy a stock at a future date.
 Stock rights provide existing shareholders with the opportunity to buy additional shares and do not
affect equity until exercised.

Distributions to Shareholders
 Dividends declared reduce retained earnings on the declaration date.
 Property dividends are recorded at their fair value at the declaration date. Gain or loss is recognized
on that date.

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 Stock dividends occur in two sizes: small and large. The "break point" is 20 to 25 percent of
outstanding common stock. Small stock dividends tend to be on the exam more often. Small stock
dividends are recorded at fair value on the declaration date. Large stock dividends are recorded at
par value.
 Stock splits do not require a journal entry and total book value of common stock is unchanged.
Statement of Changes in Shareholders' Equity
 The statement of changes in shareholders' equity provides specific information about changes in a
company's primary equity components for a stipulated period(s).

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