ICMA s Requirements for CMA Designation

Transcription

1 Part 1 Study Unit 1

2 ICMA s Requirements for CMA Designation Become a Member! Preferably of a local chapter (there are benefits). Pass both parts of the exam within 3 years (of starting the process). Satisfy the education requirements. Satisfy the experience requirements. Comply with IMA s Statement of Ethical Professional Practice. To remain a CMA you have to maintain active member, full-fill the requirements for CE, comply with IMA s Ethics statements and applicable state laws.

3 Gleim CMA Review System Gleim Suggested Study Steps see page 8 Alternative steps per Ron Multiple Choice Quizzes Audiovisual Presentation True/False Study Questions Knowledge Transfer Outline Essay CMA Test Prep Online Practice Exam vs. Study Session

4 Exam format 3 hrs multiple choice questions = approx. 1.5 minutes per question (on average). Find ways to bank time Look for short-cuts You will find that you most question do not seem easy, don t get discouraged You earn points for each question answered correctly Some questions are test questions that carry no point value. You will not know which ones they are Extra time can be carried forward to the Essay portion 1 hr - 2 Essay questions with up to 8 sub-parts You can t go back to multiple-choice part once you enter this portion of the exam Whatever you have typed on the screen will be saved as your answer, irrespective if the timer runs out on you

5 Exam format If you find you have weaknesses in any topic ref. Appendix A for ref. the appropriate sub units. The coverage percentage given for each major topic within each examination part represents the relative weight given to that topic in an examination part. The number of questions presented in each major topic area approximates this percentage. You will be expected to understand the impact of taxes when reporting and analyzing financial results. You are assumed to have knowledge of preparation of financial statements, business economics, time-value of money concepts, statistics and probability.

6 Most common reasons for missing questions 1. Misreading the requirement (stem) Read the question first 2. Not understanding what is required 3. Making a math error Try to not do calculations of paper first, with the idea of transferring to the exam later. If you know how to use your memory button(s) well on your calculator, use it (i.e. save sub-calculations in your calculator). 4. Applying the wrong rule or concept 5. Being distracted by one or more of the answers the most common wrong answers are the incorrect alternatives 6. Incorrectly eliminating answers from considerations read all answers first, some are more correct or complete then others 7. Not having any knowledge of the topic tested don t agonize over it. If possible try to make an educated guess by eliminating obvious wrong answers. If you guess, use the same letter each time. 8. Employing bad intuition when guessing

7 Required Cognitive Skills Knowledge: Ability to remember previously learned material such as specific facts, criteria, techniques, principles, and procedures (identify, define). Comprehension: Ability to grasp and interpret the menaing of material (classify, explain, distinguish). Application: Ability to break down material into its component parts so that its organizational structure can be understood (differentiate, estimate, order). Synthesis: Ability to put parts together to form a new whole or proposed set of operations; ability to relate ideas and formulate hypothesis (combine, formulate, revise). Evaluation: Ability to judge the value of material for a given purpose on the basis of consistency, logical accuracy, and comparison to standards (criticize, justify, conclude).

8 The essays Remember, 2 essay questions with up to 8 parts each! The ICMA grades on both subject matter and writing skills on the essay portion of the CMA exam. For writing skills to be graded, the response must be relevant to the question asked. The criteria for grading are as follows: Use of standard English includes proper grammar, punctuation, and spelling Organization response is arranged logically and coherently Clarity analysis is clearly communicated with well-constructed sentences and appropriate vocabulary. The CMA exam uses essays to reflect a more "real-world" environment in which candidates must apply the knowledge they have acquired. Essays are graded on both writing skills and subject matter. Partial credit IS available for essays that have some correct and some incorrect points. Finally, it is important to remember that essays are not intended to test typing ability, so the time you allocated for essay response is adequate to complete the questions even if you do not have the best typing skills. continued

9 The essays Answering multiple-choice questions is an effective method to study the material for both the multiple-choice and essay sections of the exam. They are an excellent diagnostic tool that will allow you to quickly identify your weak areas. Also, think about what your answer would be if the question were not multiple-choice. When reviewing the correct and incorrect answer explanations, your "essay answers" should be somewhat equivalent to the detailed answer explanations.

10 Prepping for the exam Decide if you will be using one of the approved financial calculators on the exam? Focus on what you don t know Realize that you will be more proficient in some topics more than others Read, quiz, evaluate (what you don t know), sit for lecture, re-quiz, identify anything you need help with one on one? Practice the Essay questions use the Gleim Essay Wizard Mid-way through the course, create a short mock multiple choice exams (say no more than 50 questions) to condition for the longer 100 question exam. Right after our cram session take the Gleim online CMA Practice Exam that came with your Gleim study material. It is a 4 hour exam. Contact instructor and review anything not quite clear.

11 Ethics tested on the Exams Ethics is tested from: Individual Perspective Part 1 Organizational Perspective Part 2 Questions could be either Multiple Choice or Essay Make sure you study the IMA Framework on Ethics, ref. the IMA website, or following URL: 20PRACTICE_ pdf Have it conceptually memorized. You will then be able to answer any question from there Stay within an objective view, and don t get side-tracked in emotional distractors

12 SU Concepts in Financial Accounting Objective of General-Purpose Reporting Usefulness in decision making Information relates to economic resources and claims (Statement of Financial Positions) & changes in those (Income Statement) Used for evaluating Liquidity Solvency Financial needs Obtaining financing

13 SU Concepts in Financial Accounting Users need to differentiate between changes from: Performance (Income Statement) Which helps evaluate determine Return on economic resources (not just investments) Management Future performance Others like debt and equity (Balance Sheet) Financial statements must be prepared in conformity to GAAP CMA also test IFRS knowledge

14 SU Concepts in Financial Accounting Financial Accounting vs. Managerial Accounting Management Accounting: Used primarily for internal users Helps management in decision making, planning and control Can be prospective Does not have to conform to GAAP Direct interest users invest or manage the business Indirect interest users advise, influence, or represent direct interests.

15 SU Concepts in Financial Accounting Objective of General-Purpose Reporting Usefulness in decision making Information relates to economic resources and claims (Statement of Financial Positions) & changes in those (Income Statement) Used for evaluating Liquidity Solvency Financial needs Obtaining financing

16 SU Concepts in Financial Accounting Financial Statements are the primary means of communicating financial information. Financial statement notes are there to enhance not make corrections or improper reporting, but rather amplify MD&A Other disclosures Full set of Financial Statements Statement of Financial Position (Balance sheet) Income Statement Statement of Comprehensive Income Statement of changes in equity Statement of Cash Flows

17 SU Concepts in Financial Accounting Financial Statement must be: Relevant Faithfully represented Comparable (past and others) Based on going-concern assumption (1 yr.)

18 SU Concepts in Financial Accounting Financial Statement complement each other: Different aspects of the same transaction Components of one statement relate to those of others Net income or loss shown in Retained Earnings Cash and Cash equivalents from BS reconciled in Statement of Cash Flows Ending inventory shown on BS and used in COGS of Income Statement Depreciation shown on BS and also as expense on Income Statement See appendix A

19 SU Concepts in Financial Accounting Accrual vs cash basis accounting Accrual accounting records the financial effects of transactions and other events and circumstances when they occur rather than when their associated cash is paid or received. For the CMA exam assume that all is on an accrual basis Revenues are recognized in the period in which they are earned Accrual Deferral Expenses are recognized in the period in which they were incurred Accrual Deferral

20 SU Concepts in Financial Accounting Practice question 1 Notes to financial statements are beneficial in meeting the disclosure requirements of financial reporting. The notes should not be used to A B Describe significant accounting policies. Describe depreciation methods employed by the company. C D Describe principles and methods peculiar to the industry in which the company operates, when these principles and methods are predominantly followed in that industry. Correct an improper presentation in the financial statements.

21 SU Concepts in Financial Accounting Practice question 1 answer Correct Answer: D Financial statement notes should not be used to correct improper presentations. The financial statements should be presented correctly on their own. Notes should be used to explain the methods used to prepare the financial statements and the amounts shown. The first footnote typically describes significant accounting policies.

22 SU Concepts in Financial Accounting Practice question 2 An entity that sprays chemicals in residences to eliminate or prevent infestation of insects requires that customers prepay for 3 months service at the beginning of each new quarter. Select the term that appropriately describes this situation from the viewpoint of the entity. A Deferred income. B C D Earned income. Accrued income. Prepaid expense.

23 SU Concepts in Financial Accounting Practice question 2 answer Correct Answer: A The future inflow of economic benefits is not sufficiently certain given that the entity has not done what is required to be entitled to those benefits. Thus, the receipt of cash in anticipation of goods to be delivered or services to be performed must be recognized as a liability, usually called deferred (or unearned) revenue or deferred (or unearned) income.

24 SU Concepts in Financial Accounting Practice question 3 The financial statements included in the annual report to the shareholders are least useful to which one of the following? A B C D Stockbrokers. Bankers preparing to lend money. Competing businesses. Managers in charge of operating activities.

25 SU Concepts in Financial Accounting Practice question 3 answer Correct Answer: D Accrual-basis amounts used in financial reporting are not useful to managers making day-to-day operating decisions. The practice of management accounting fulfills the needs of these users.

26 SU 1.2 Statement of Financial Position (Balance Sheet) Statement of Financial Position, AKA Balance Sheet Reports the amounts of assets, liabilities, and their relationships at a moment in time. Elements include: Assets resources controlled by the entity, and represent probably future economic benefits to the entity. Liabilities present obligations from past events. Equity residual interest in assets after liabilities are subtracted, also ref. to as net assets. continued

27 SU 1.2 Statement of Financial Position (Balance Sheet) Equity can be affected by operations but also by: Investment by owners Distribution to owners Ref. accounts on page 14

28 SU 1.2 Statement of Financial Position (Balance Sheet) Assets Classified as Current and Noncurrent based on whether they will be converted into cash or sold or consumed within the entities operating cycle or 1 year, whichever is longer. Major current asset categories incl.: Cash and Cash equivalents Trading, Available-for-sale, and Held-to-maturity securities Receivables Inventories Pre-paid expenses continued

29 SU 1.2 Statement of Financial Position (Balance Sheet) Assets Noncurrent can be classified as: Investments and funds nonoperating and held > 1 yr. Property, Plant & Equipment (PP&E) Incl. natural resources Intangible Assets i.e. patents, goodwill, customer lists

30 SU 1.2 Statement of Financial Position (Balance Sheet) Liabilities Classified as Current and Noncurrent based on whether they will be settled within the entities operating cycle or 1 year (usual), whichever is longer. Major current liabilities categories incl.: Trade payables Other payables Unearned revenues Other obligations continued

31 SU 1.2 Statement of Financial Position (Balance Sheet) Liabilities Current liabilities do not include short-term debt if: Intent to refinance on noncurrent basis Demonstrates the ability to do so by entering into refinancing agreement Noncurrent liabilities include: Noncurrent notes and bonds Liabilities under capital leases Most postretirement benefit obligations Deferred tax liabilities arising from interperiod tax allocations Product or service warranty agreements Advances Deferred revenues

32 SU 1.2 Statement of Financial Position (Balance Sheet) Equity Any transaction that does not have equal and offsetting effects on total assets and total liabilities. Major categories include: Capital contributions by owners Retained earnings Treasury stock Accumulated other comprehensive income

33 SU 1.2 Statement of Financial Position (Balance Sheet) Other Balance Sheet Accounts on BS are Permanent Accounts or Nominal BS accounts may vary significantly days before and after publication Based on historical cost Major Note Disclosures Describe significant accounting policies (estimates and revenue recognition basis) Include items re.: Investment securities Property, plant and equipment Pending litigation Capital Stock details

34 SU 1.2 Statement of Financial Position (Balance Sheet) Practice Question 1 A statement of financial position allows investors to assess all of the following except the A B C D Efficiency with which enterprise assets are used. Liquidity and financial flexibility of the enterprise. Capital structure of the enterprise. Net realizable value of enterprise assets.

35 SU 1.2 Statement of Financial Position (Balance Sheet) Practice Question 1 Answer Correct Answer: D Assets are usually measured at original historical cost in a statement of financial position, although some exceptions exist. For example, some short-term receivables are reported at their net realizable value. Thus, the statement of financial position cannot be relied upon to assess NRV.

36 SU 1.2 Statement of Financial Position (Balance Sheet) Practice Question 2 Abernathy Corporation uses a calendar year for financial and tax reporting purposes and has $100 million of mortgage bonds due on January 15, Year 2. By January 10, Year 2, Abernathy intends to refinance this debt with new long-term mortgage bonds and has entered into a financing agreement that clearly demonstrates its ability to consummate the refinancing. This debt is to be A Classified as a current liability on the statement of financial position at December 31, Year 1. B Classified as a long-term liability on the statement of financial position at December 31, Year 1. C Retired as of December 31, Year 1. D Considered off-balance-sheet debt.

37 SU 1.2 Statement of Financial Position (Balance Sheet) Practice Question 2 Answer Correct Answer: B Short-term obligations expected to be refinanced should be reported as current liabilities unless the firm both plans to refinance and has the ability to refinance the debt on a long-term basis. The ability to refinance on a long-term basis is evidenced by a post-balance-sheet date issuance of long-term debt or a financing arrangement that will clearly permit long-term refinancing.

38 SU 1.2 Statement of Financial Position (Balance Sheet) Practice Question 3 A company has outstanding accounts payable of $30,000 and a short-term construction loan in the amount of $100,000 at year end. The loan was refinanced through issuance of long-term bonds after year end but before issuance of financial statements. How should these liabilities be recorded in the balance sheet? A Noncurrent liabilities of $130,000. B Current liabilities of $130,000. C Current liabilities of $30,000, noncurrent liabilities of $100,000. D Current liabilities of $130,000, with required footnote disclosure of the refinancing of the loan.

39 SU 1.2 Statement of Financial Position (Balance Sheet) Practice Question 3 Answer Correct Answer: C Accounts payable are properly classified as current liabilities because they are for items entering into the operating cycle. Short-term debt that is refinanced by a post-balance-sheet-date issuance of long-term debt should be classified as noncurrent. (The ability to refinance on a long-term basis has been demonstrated.) Thus, the short-term construction loan is classified as noncurrent. Accordingly, the entity records current liabilities of $30,000 and noncurrent liabilities of $100,000.

40 SU 1.3 Income Statement and Statement of Comprehensive Income Income Statement Elements Income Statement reports results over a period of time Revenues Inflows or other enhancements of assets or settlements of liabilities (or both) from delivering goods and/or providing services from operations. Gains Increases in equity (or net assets) other than from revenues or investments by owners. Expenses Outflows or other usage of assets or incurrences of liabilities (or both) from delivering or producing goods and/or services from operations. Losses Decreases in equity (or net assets) other than from expenses or distributions to owners. continued

41 SU 1.3 Income Statement and Statement of Comprehensive Income Income Statement Elements Income = net change in equity except: Transactions with owners Prior-period adjustments Items reported in Other Comprehensive Income (OCI) Transfers to and from appropriated retained earnings Accounts are temporary or nominal

42 SU 1.3 Income Statement and Statement of Comprehensive Income Typical Items of Cost and Expense Accrual based accounting attempts to match income with the expenses that were incurred because of them, i.e. COGS is recognized in the same period as the revenue from the sale of the goods. SG & A Selling, General and Administrative are incurred for the benefit of the organization and therefore also recognized in the period incurred (Period Cost vs. Product Cost). They can be both variable and fixed. Some expenses are recognized because of the passage of time, i.e. interest, insurance.

43 SU 1.3 Income Statement and Statement of Comprehensive Income Income Statement Formats Single-step income statement Multi-step income statement Irregular Items Discontinued Operations Income/Loss from operations is classified as held for sale from the first day of the reporting period until the date of disposal Gain/Loss on the disposal of other assets, such PP&E, etc. continued

44 SU 1.3 Income Statement and Statement of Comprehensive Income Irregular Items Extraordinary items Unusual in nature and Infrequent in occurrence (in the environment in which the entity operates) Limitations Some items are shown on OCI and not on the Income Statement Accrual base Income Statement does not identify liquidity

45 SU 1.3 Income Statement and Statement of Comprehensive Income Statement of Comprehensive Income Includes all changes in equity except investments and distributions by/to owners Net Income Other Comprehensive Income

46 SU 1.3 Income Statement and Statement of Comprehensive Income Practice Question 1 When reporting extraordinary items, A B C D Each item (net of tax) is presented on the face of the income statement separately as a component of net income for the period. Each item is presented exclusive of any related income tax. Each item is presented as an unusual item within income from continuing operations. All extraordinary gains or losses that occur in a period are summarized as total gains and total losses, then offset to present the net extraordinary gain or loss.

47 SU 1.3 Income Statement and Statement of Comprehensive Income Practice Question 1 Answer Correct Answer: A Extraordinary items are reported net of tax after discontinued operations. Incorrect Answers: B C D Extraordinary items are to be reported net of the related tax effect. Extraordinary items are not reported in the continuing operations section of the income statement. Each extraordinary item is to be reported separately.

48 SU 1.3 Income Statement and Statement of Comprehensive Income Practice Question 2 Which one of the following items is included in the determination of income from continuing operations? A B C D Discontinued operations. Extraordinary loss. Cumulative effect of a change in an accounting principle. Unusual loss from a write-down of inventory.

49 SU 1.3 Income Statement and Statement of Comprehensive Income Practice Question 2 Answer Correct Answer: D Certain items ordinarily are not to be treated as extraordinary gains and losses. Rather, they are included in the determination of income from continuing operations. These gains and losses include those from write-downs of receivables and inventories, translation of foreign currency amounts, disposal of a business segment, sale of productive assets, strikes, and accruals on long-term contracts. A write-down of inventory is therefore included in the computation of income from continuing operations. Incorrect Answers: A B C Discontinued operations are reported separately from income from continuing operations. Extraordinary loss is reported separately from income from continuing operations. A cumulative effect of a change in an accounting principle is not reported in the income statement.

50 SU 1.3 Income Statement and Statement of Comprehensive Income Practice Question 3 Which one of the following would be shown on a multiple-step income statement but not on a single-step income statement? A B C D Loss from discontinued operations. Gross profit. Extraordinary gain. Net income from continuing operations.

51 SU 1.3 Income Statement and Statement of Comprehensive Income Practice Question 2 Answer Correct Answer: B A single-step income statement combines all revenues and gains, combines all expenses and losses, and subtracts the latter from the former in a single step to arrive at net income. Gross profit, being the difference between sales revenue and cost of goods sold, does not appear on a single-step income statement. Incorrect Answers: A C D Loss from discontinued operations is shown on both a multiple-step and a single-step income statement. Extraordinary gain is shown on both a multiple-step and a single-step income statement. Net income from continuing operations is shown on both a multiple-step and a single-step income statement.

52 SU 1.4 Statement of Changes in Equity and Equity Transactions Statement of Changes in Equity Presents a reconciliation of changes in equity for the accounting period. Each change shown separately Net Income Distributions Increases of Common Stock (CS) Total change in Other Comprehensive Income (OCI) See example on page 21

53 SU 1.4 Statement of Changes in Equity and Equity Transactions Statement of Retained Earnings Reconciles Retained Earnings (RE) for the period See format on page 21 Prior period adjustments include Cumulative effects in accounting principles Corrections of prior financial statements Beginning balance of Retained Earnings is adjusted continued

54 SU 1.4 Statement of Changes in Equity and Equity Transactions Statement of Retained Earnings Appropriated for special purposes including: Compliance with bond indenture (bond contract) Retention of assets of internally financed expansion Anticipated losses Legal restrictions Only limits availability of dividends

55 SU 1.4 Statement of Changes in Equity and Equity Transactions Statement of Retained Earnings Common and Preferred Stock Authorized Issued Outstanding Common Stockholders Vote Select Board of Directors (BOD) Liquidating Distributions (last in line) Preemptive Rights Continued

56 SU 1.4 Statement of Changes in Equity and Equity Transactions Statement of Retained Earnings Preferred Stock Hybrid, but still considered an equity instrument Dividends are not considered an obligation No voting rights Features include: Cumulative Convertible Participating See transaction types on page 23

57 SU 1.4 Statement of Changes in Equity and Equity Transactions Practice Question 1 Items reported as prior-period adjustments A B C 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. Do not affect the presentation of prior-period comparative financial statements. Do not require further disclosure in the body of the financial statements. Are reflected as adjustments of the opening balance of the retained earnings of the earliest period presented.

58 SU 1.4 Statement of Changes in Equity and Equity Transactions Practice Question 1 Answer Correct Answer: D Prior-period adjustments are made for the correction of errors. According to SFAS 16, Prior Period Adjustments, 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. Incorrect Answers: A B C accounting errors of any type are corrected by a prior-period adjustment. a prior-period adjustment will affect the presentation of prior-period comparative financial statements. prior-period adjustments should be fully disclosed in the notes or elsewhere in the financial statements.

59 SU 1.4 Statement of Changes in Equity and Equity Transactions Practice Question 2 An appropriation of retained earnings by the board of directors of a corporation for bonded indebtedness will result in A B C D The establishment of a sinking fund to retire bonds when they mature. A decrease in cash on the balance sheet with an equal increase in the investment and funds section of the balance sheet. A decrease in the total amount of retained earnings presented on the balance sheet. The disclosure that management does not intend to distribute assets, in the form of dividends, equal to the amount of the appropriation.

60 SU 1.4 Statement of Changes in Equity and Equity Transactions Practice Question 2 Answer Correct Answer: D The appropriation of retained earnings is a transfer from one retained earnings account to another. The only practical effect is to decrease the amount of retained earnings available for dividends. An appropriation of retained earnings is purely for disclosure purposes. Incorrect Answers: A B C The establishment of a sinking fund is entirely independent of appropriating retained earnings. Cash is unaffected. The total retained earnings will not change; however, the total will appear as the sum of two retained earnings accounts instead of one.

61 SU 1.4 Statement of Changes in Equity and Equity Transactions Practice Question 3 When treasury stock is accounted for at cost, the cost is reported on the balance sheet as a(n) A B C D Asset. Reduction of retained earnings. Reduction of additional paid-in-capital. Unallocated reduction of equity.

62 SU 1.4 Statement of Changes in Equity and Equity Transactions Practice Question 3 Answer Correct Answer: D 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. Incorrect Answers: A B C Treasury stock is not an asset. A corporation cannot own itself. Treasury stock accounted for at cost is subtracted from the total of the other equity accounts. Treasury stock accounted for at cost is subtracted from the total of the other equity accounts.

63 SU 1.5 Statement of Cash Flows Purpose Provide relevant information about the cash receipts and cash payments of an entity during the period. It helps assess the entity s ability to generate positive future net cash flows (liquidity), meet obligations (solvency) and its financial flexibility. Three sections: Cash flow from Operations Cash flow from Investing Cash flow from Financing continued

64 SU 1.5 Statement of Cash Flows Cash flow from Operations everything that is not financing or investing activities. Usually changes to Balance Sheet current items, and adjusting for certain accruals and deferrals (non-cash, i.e. depreciation expense). There are two methods Direct and Indirect method, of which you need to know the indirect method for the exam. Under the indirect method of presenting the statement of cash flows, the presentation of this statement begins with net income or loss, with subsequent additions to or deductions from that amount for non-cash revenue and expense items, resulting in net income provided by operating activities. continued

65 SU 1.5 Statement of Cash Flows Cash flow from Investing Activities An item on the cash flow statement belongs in the investing activities section if it results from any gains (or losses) from investments in financial markets and operating subsidiaries. An investing activity refers to cash spent on investments in capital assets such as plant and equipment, which is collectively referred to as capital expenditure, or capex. continued

66 SU 1.5 Statement of Cash Flows Cash flow from Investing Activities Examples of Inflows: Proceeds from disposal of property, plant and equipment Cash receipts from disposal of debt instruments of other entities Receipts from sale of equity instruments of other entities Examples of Outflows: Payments for acquisition of property, plant and equipment Payments for purchase of debt instruments of other entities Payments for purchase of equity instruments of other entities Sales/maturities of investments Includes purchasing and selling long- term assets and other investments. continued

67 SU 1.5 Statement of Cash Flows Cash flow from Financing Activities - external activities that allow a firm to raise capital and repay investors, such as issuing cash dividends, adding or changing loans or issuing more stock. Cash flow from financing activities shows investors the company s financial strength. A company that frequently turns to new debt or equity for cash, for example, could have problems if the capital markets become less liquid. Items included: Sale of stock (positive cash flow) Repurchase of company stock (negative cash flow) Issuance of debt, such as bonds (positive cash flow) Repayment of debt (negative cash flow) Payment of dividends (negative cash flow) continued

68 SU 1.5 Statement of Cash Flows Noncash Investing and Financing Activities Anything that affect assets or liabilities but not cash flows must be disclosed in the notes. Include: Conversion of debt to equity Acquisition of assets via debt Exchange of a noncash or liability for another Any paper for paper transaction See example on page 28

69 SU 1.5 Statement of Cash Flows Practice question 1 When preparing the statement of cash flows, companies are required to report separately as operating cash flows all of the following except A B C D Interest received on investments in bonds. Interest paid on the company s bonds. Cash collected from customers. Cash dividends paid on the company s stock.

70 SU 1.5 Statement of Cash Flows Practice question 1 answer Correct Answer: D In general, the cash flows from transactions and other events that enter into the determination of income are to be classified as operating. Cash receipts from sales of goods and services, from interest on loans, and from dividends on equity securities are from operating activities. Cash payments to suppliers for inventory; to employees for wages; to other suppliers and employees for other goods and services; to governments for taxes, duties, fines, and fees; and to lenders for interest are also from operating activities. However, distributions to owners (cash dividends on a company s own stock) are cash flows from financing, not operating, activities. Incorrect Answers: A B C Interest received from investments is an operating cash flow. Interest paid on bonds is an operating cash flow. Customer collections is an operating cash flow.

71 SU 1.5 Statement of Cash Flows Practice question 2 A statement of cash flows is intended to help users of financial statements A B C D Evaluate a firm s liquidity, solvency, and financial flexibility. Evaluate a firm s economic resources and obligations. Determine a firm s components of income from operations. Determine whether insiders have sold or purchased the firm s stock.

72 SU 1.5 Statement of Cash Flows Practice question 2 answer Correct Answer: A The primary purpose of a statement of cash flows is to provide information about the cash receipts and payments of an entity during a period. If used with information in the other financial statements, the statement of cash flows should help users to assess the entity s ability to generate positive future net cash flows (liquidity), its ability to meet obligations (solvency) and pay dividends, the need for external financing, the reasons for differences between income and cash receipts and payments, and the cash and noncash aspects of the investing and financing activities. Incorrect Answers: B C D The statement of cash flows deals with only one resource: cash. The income statement shows the components of income from operations. The identity of stock buyers and sellers is not shown.

73 SU 1.5 Statement of Cash Flows Practice question 3 Depreciation expense is added to net income under the indirect method of preparing a statement of cash flows in order to A B C D Report all assets at gross carrying amount. Ensure depreciation has been properly reported. Reverse noncash charges deducted from net income. Calculate net carrying amount.

74 SU 1.5 Statement of Cash Flows Practice question 3 answer Correct Answer: C The indirect method begins with net income and then removes the effects of past deferrals of operating cash receipts and payments, accruals of expected future operating cash receipts and payments, and net income items not affecting operating cash flows (e.g., depreciation). Incorrect Answers: A B D Assets other than cash are not shown on the statement of cash flows. Depreciation is recorded on the income statement. On the statement of cash flows, depreciation is added back to net income because it was previously deducted on the income statement. Net carrying amount of assets is reported on the balance sheet, not the statement of cash flows.

75 SU 1.6 Revenue Recognition After Delivery Revenues and gains should be recognized when: Realized or realizable Goods and/or services have been exchanged for cash or claims to cash. They are realizable when exchanged for assets (other than cash) that are readily convertible to cash or claims to cash. And earned when earnings process has been substantially completed. Read IFRS difference on page 30

76 SU 1.6 Revenue Recognition After Delivery Installment Method only acceptable when: Receivables are collectible over an extended period, and No reasonable basis exists for estimating collectability Recognizes partial profit (gross profit) on each installment Cost-Recover Method Same as Installment Method, except: No profit recognized until collections exceed the cost of the item sold. Everything thereafter is recognized as revenues. continued

77 SU 1.6 Revenue Recognition After Delivery Deposit Method The deposit method is used when a company receives cash before transfer of ownership occurs. Revenue is not recognized when cash is received because the risks and rewards of ownership have not transferred to the buyer. The seller records the cash deposit as a deferred revenue, which is reported as a liability on the balance sheet until the revenue is earned.

78 SU 1.7 Revenue Recognition Before Delivery Completed Contract Method Used when Percentage-of-Completion is inappropriate. Defers contract cost until project is completed. Revenue and gross profit recognized when project completed.

79 SU 1.7 Revenue Recognition Before Delivery Percentage-of-Completion Method - work-in-progress evaluation (and billings) for recording long-term contracts, used wherein the revenues are determined based on the costs incurred so far. The percentage of completion method is used when: Collections are assured The accounting system can: Estimate profitability Measure progress toward completion. Losses are recognized in the year when they are discovered, the same way as for the completed contract method. The balance sheet presentation is the same as in the completed contract method.

80 SU 1.6 Revenue Recognition After Delivery Practice question 1 ABC operates a catering service that specializes in business luncheons for large corporations. ABC requires customers to place their orders 2 weeks in advance of the scheduled events. ABC bills its customers on the 10th day of the month following the date of service and requires that payment be made within 30 days of the billing date. Conceptually, ABC should recognize revenue from its catering services at the date when a A B Customer places an order. Luncheon is served. C Billing is mailed. D Customer s payment is received.

81 SU 1.6 Revenue Recognition After Delivery Practice question 1 Answer Correct Answer: B Revenues should be recognized when (1) realized or realizable and (2) earned. The most common time at which these two conditions are met is when goods are delivered or services are rendered. Incorrect Answers: A C D The certainty and measurability criteria are not met when the customer places an order. The date for billing is a matter of administrative procedure and convenience. The revenue should be recognized at the date the service was performed. The revenue should be recognized at the point of performance of the service. To wait until the receivable is collected is to ignore the accrual basis of accounting, which is identified in the Framework for the Preparation and Presentation of Financial Statements as an underlying assumption of financial accounting.

82 SU 1.7 Revenue Recognition Before Delivery Practice question 1 During Year 1, Tidal Co. began construction on a project scheduled for completion in Year 3. At December 31, Year 1, an overall loss was anticipated at contract completion. What would be the effect of the project on Year 1 operating income under the percentage-of-completion method and the completed-contract method? Percentage-of-Completion Completed Contract A No Effect No Effect B No Effect Decrease C Decrease No Effect D Decrease Decrease

83 SU 1.7 Revenue Recognition Before Delivery Practice question 2 Answer Correct Answer: D When the current estimate of total contract costs indicates a loss, an immediate provision for the entire loss should be made regardless of method. Thus, under either method, Year 1 operating income is decreased by the projected loss. Incorrect Answers: A B C Under either method, Year 1 operating income is decreased by the projected loss. Under the percentage-of-completion method, Year 1 operating income is decreased by the projected loss. Under the completed-contract method, Year 1 operating income is decreased by the projected loss.

84 SU 1.7 Revenue Recognition Before Delivery Practice question 2 A company began work on a long-term construction contract in Year 1. The contract price was $3,000,000. Year-end information related to the contract is as follows: Year 1 Year 2 Year 3 Estimated total cost 2,000,000 2,000,000 2,000,000 Cost incurred 700, , ,000 Billings 800,000 1,200,000 1,000,000 Collections 600,000 1,200,000 1,200,000 Under the percentage-of-completion method, the gross profit to be recognized in Year 1 is

85 SU 1.7 Revenue Recognition Before Delivery Practice question 2 continued Under the percentage-of-completion method, the gross profit to be recognized in Year 1 is A A $(100,000) B B $100,000 C C $200,000 D D $350,000

86 SU 1.7 Revenue Recognition Before Delivery Practice question 2 answer Correct Answer: D The percentage-of-completion method recognizes revenue based on the stage of completion of the contract. One typical method for estimating the stage of completion is the calculation of ratio of the contract costs incurred to date to the estimated total costs. The percentage-of-completion at year-end on the cost-to-cost basis is 35% ($700,000 $2,000,000). The gross profit for Year 1 is the anticipated gross profit on the contract times the completion percentage. Thus, profit for Year 1 is $350,000 [($3,000,000 $2,000,000) 35%]. Incorrect Answers: A The difference between costs incurred and collections is $(100,000). B The difference between billings and costs incurred is $100,000. C The difference between billings and collections is $200,000.