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CPA Exam FAR Review: Key Accounting Concepts & Ratios, Exams of Business Informatics

London Institute of Business and Technology (LIBT)Business Informatics

A concise overview of key concepts for the far cpa exam, focusing on financial accounting principles. It covers topics such as the net method of cash discounts, basic and diluted eps calculations, components of comprehensive income (pufie), sec filing thresholds, and accounting changes. Additionally, it includes information on investments in debt securities, stock dividends, subsequent events, and conversions between cash and accrual basis accounting. The document also outlines profitability, liquidity, and solvency ratios, along with foreign currency rules, fob shipping terms, consignment sales, repurchase prices, and lease criteria. It serves as a quick reference guide for exam preparation, summarizing essential formulas, definitions, and accounting treatments.

Typology: Exams

2024/2025

Available from 05/22/2025

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2024 - FAR CPA Exam
net method of cash discounts correct answer recorded at the time of the initial purchase/sale
Basic EPS vs. Diluted EPS correct answer simple cap structure --> only CS, basic EPS
complex cap structure --> CS, convertible PS, convertible bonds, options, warrants- present
basic and diluted (if dilution exists)
BEPS = (NI - Pref Div*) / WACSO
- noncumulative PS --> pref div declared on
- cumulative PS --> accumulated pref div (regardless if declared or paid)
WACSO = (sh outstanding x stock split) x period
- be careful of months & when multiplying by period take the total shares outstanding up until
that point rather than just the difference between the months
DEPS = [NI - Pref Div + Saved PD + Int on Conversion of Bonds (net of tax)] / WACSO + sh CS
issued on CPS + sh issued on CB
- add saved PD if you have convertible PS
- options and warrants only impact denom if avg price > strike (exercise) price
-- TS method (see below)
note: stock div and stock splits are treated as if they occurred at the beg of the earliest period
PRESENTED!!
- both add to WACSO
TS METHODavg mkt price > strike (exercise) price?? --> if so, dilutive and use the following
formula to add to WACSO
dilutive shares = options/warrants OS - [(options/warrants OS x ratio x strike price) / avg mkt
price]
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Download CPA Exam FAR Review: Key Accounting Concepts & Ratios and more Exams Business Informatics in PDF only on Docsity!

2024 - FAR CPA Exam

net method of cash discounts correct answer recorded at the time of the initial purchase/sale Basic EPS vs. Diluted EPS correct answer simple cap structure --> only CS, basic EPS complex cap structure --> CS, convertible PS, convertible bonds, options, warrants- present basic and diluted (if dilution exists) BEPS = (NI - Pref Div*) / WACSO

  • noncumulative PS --> pref div declared on
  • cumulative PS --> accumulated pref div (regardless if declared or paid) WACSO = (sh outstanding x stock split) x period
  • be careful of months & when multiplying by period take the total shares outstanding up until that point rather than just the difference between the months DEPS = [NI - Pref Div + Saved PD + Int on Conversion of Bonds (net of tax)] / WACSO + sh CS issued on CPS + sh issued on CB
  • add saved PD if you have convertible PS
  • options and warrants only impact denom if avg price > strike (exercise) price -- TS method (see below) note: stock div and stock splits are treated as if they occurred at the beg of the earliest period PRESENTED!!
  • both add to WACSO TS METHODavg mkt price > strike (exercise) price?? --> if so, dilutive and use the following formula to add to WACSO dilutive shares = options/warrants OS - [(options/warrants OS x ratio x strike price) / avg mkt price]

Comprehensive Income What are the components? What's included in PUFIE? correct answer CI = NI + OCI all changes in equity EXCEPT those resulting from investments and distrib to/by OWNERS Can be shown in a single FS that presents both net income and comprehensive income OCI (PUFIE)

  • pension adj
  • unreal G/L AFS debt securities
  • foreign currency translation G/L
  • instrument specific risk
  • effective portion of CF hedges SEC Filing What the $thresholds? What are the diff types of FS and when are they required to be filed? correct answer - large accel >
  • accel 75 < x < 700
  • all other < 10-K 60-75-
  • audited 10-Q 40-40-

Changes in Reporting Entity correct answer Retrospective Approach Error Correction correct answer Retrospective Approach: Adjust beg. RE, Assets, and liabilities for the earliest period presented only. A liquidating dividend means that correct answer dividends exceed retained earnings and APIC it is a return of capital (decrease of APIC) and not a distribution of earnings (decreases retained earnings) Recognizing Subsequent Events correct answer Record & disclose when event happens before BS date/settled after BS date (i.e. a lawsuit) Subsequent Event Evaluation Period correct answer Evaluate Subsequent Events:

  • SEC Filers: Date the financial statements are issued
  • All Filers: Date that the financial statements are available to be issued Disclose Date of Evaluation
  • Non-SEC filers: Date through which subsequent events have been evaluated) Converting Cash Basis Revenue to Accrual Basis Revenue correct answer Cash Basis Revenue
  • Ending Asset (i.e. A/R) '- Beginning Asset (i.e A/R) '- Ending unearned revenue (i.e. A/P)
  • Beginning unearned revenue Accrual Basis Revenue Converting Cash Paid for Purchases to COGS correct answer Cash Paid for Purchases
  • Ending AP '- Beginning AP '- Ending Inventory
  • Beginning Inventory COGS Converting Cash Paid for Operating Expenses to Accrual Basis Operating Expenses correct answer Cash paid for Operating Expenses
  • Ending Accrued Liabilities '- Beginning Accrued Liabilities '- Ending Prepaid Expenses
  • Beginning Prepaid Expenses Accrual Basis Operating Expenses Profitability Ratios correct answer 1. Gross Profit Margin: (Net Sales- COGS) / Net Sales
  1. Net Profit Margin: Net Income/ Net Sales
  2. Return on Sales: EBIT/ Net Sales
  3. Return on Assets: Net Income / Avg. Total Assets
  4. Return on Equity: Net Income / Avg. Total Equity
  5. Operating Cash Flow Ratio: Cash Flow from Ops / Current Liabilities Liquidity Ratios correct answer 1. Current Ratio: Current Assets / Current Liablities

Other Ratios correct answer 1. EBITDA (Top-Down): Sales - COGS - Operating Expense (exluding depreication and amortization)

  1. EBITDA (Bottom - Up): Net Income + Income tax expense + Interest expenses + Depreciation and amortization
  2. Price to Earnings Ratio: Price Per Share / Basic EPS
  3. Dividend Payout: Cash Dividends / Net Income Foreign Currency Rules correct answer If Euro Currency depreciates against the yen/$: European company books a loss before discontinued ops If Yen/$ appreciates against European company: Euro Company books a loss If Euro Currency appreciates against the yen/$: European company books a gain before discontinued ops FOB Shipping correct answer FOB Destination: Ownership (title) passes to buyer when buyer receives in-hand FOB Shipping Point: The buyer takes ownership once item is shipped out Consignment Sales correct answer Seller (consignor) delivers goods to an agent (consignee) to hold and sell Ownership (title) belongs to Consignor until goods are sold by consignee

Repurchase Price correct answer Financing agreement when => original sale price LIFO vs. FIFO Methods correct answer LIFO yields different results for perpetual and periodic accounting LIFO: Lower of NRV or middle value FIFO yields same results for perpetual and periodic accounting FIFO: Lower of NRV or Cost Bond Terminology correct answer Coupon/Stated Interest Rate : Rate the issuer uses to calculate the interest rate (Interest Payment = Coupon Rate x Rate Value) Market/Yield-To-Maturity/Effective Rate: Effective or real rate of interest the bondholder earns Issue $ of Bonds correct answer Stated Rate = Market Rate: Sold at Par Stated Rate < Market Rate: Sold at Discount Stated Rate > Market Rate: Sold at Premium Finance Lease Criteria correct answer O - Ownership is transferred from lessor to lessee W - Lessee has written option to purchase/ reasonably certain to exercise N - NPV of all lease payments + guaranteed residual value = or > 90% all of underlying assets FV E - Term of lease represents major part of Economic life remaining S - Asset is specialized

Income Tax: Temporary Differences correct answer Differences that reverse over time Balance Sheet Approach correct answer Asset and liability approach used in GAAP to determine income tax expense by squeezing out income tax expense after deferred tax assets and liabilities have been determined Mark-Up vs. Margin correct answer Mark-Up: Profit expressed as % of cost Margin: Profit expressed as % of Sales