Chapter 1 of 6Area I, 30–40% of exam

Area I: For-Profit and Public Company Reporting

This part of Area I covers complete for-profit financial statements and consolidations, comprehensive income and the notes, SEC reporting and EPS, special purpose frameworks and ratio analysis. Most of the tested work is preparation, correction and reconciliation of statement amounts rather than recall of definitions.

For-profit statements and consolidation

A classified balance sheet separates current items from noncurrent ones, and the income statement separates continuing operations from discontinued operations. The statement of cash flows reconciles net income to operating cash under the indirect method and classifies each cash flow as operating, investing or financing. Consolidation combines parent and subsidiaries, measures goodwill and the noncontrolling interest at the acquisition date, and eliminates intra-entity balances and profit.

Short-term debt refinanced

A short-term obligation may be excluded from current liabilities if a long-term refinancing is completed, or a qualifying financing agreement is in place, before the statements are issued.

FASB ASC 470-10-45-14

Discontinued operations

A disposal of a component that represents a strategic shift with a major effect on operations is reported separately, net of tax, including the component's results and any disposal gain or loss.

FASB ASC 205-20-45-1B and 45-3

Cash flow classification

Interest paid and dividends received are operating; dividends paid are financing; purchases and sales of productive assets and investments are investing.

FASB ASC 230-10-45-12 to 45-17

Full goodwill

Goodwill equals consideration transferred plus the fair value of any noncontrolling interest, less the fair value of identifiable net assets acquired.

FASB ASC 805-30-30-1

Intra-entity eliminations

Intra-entity sales, balances and unrealized profit on assets still held in the group are eliminated in full.

FASB ASC 810-10-45-1

Comprehensive income, equity and notes

Other comprehensive income collects specific unrealized items, such as holding gains and losses on available-for-sale debt securities and foreign currency translation adjustments, that bypass net income. The statement of changes in equity links opening and closing balances, including prior-period adjustments. Notes must agree with the statements; the policy note describes methods, not balances already shown elsewhere.

Two presentation formats

Comprehensive income is shown in one continuous statement or in two separate but consecutive statements.

FASB ASC 220-10-45-1

What goes to OCI

Available-for-sale debt security holding gains and losses go to OCI; changes in fair value of equity securities with readily determinable fair values go to net income.

FASB ASC 320-10-35-1; ASC 321-10-35-1

Foreign currency transactions

Receivables and payables denominated in a foreign currency are remeasured at each balance sheet date, with transaction gains and losses in net income.

FASB ASC 830-20-35-1

Prior-period adjustments

Correction of an error in previously issued statements adjusts opening retained earnings, net of tax.

FASB ASC 250-10-45-23

Accounting policy note

Policies such as inventory pricing and depreciation methods are disclosed without repeating details, such as inventory composition or debt maturities, presented elsewhere.

FASB ASC 235-10-50-4 and 50-5

SEC reporting, EPS, special purpose frameworks and ratios

Registrants file annual (10-K), quarterly (10-Q) and current (8-K) reports under the Exchange Act. Public entities present basic and diluted EPS, using the treasury stock method for options and the if-converted method for convertible securities. Special purpose frameworks such as the cash, modified cash and income tax bases use titles that signal the basis. Ratio questions test choosing the right measure and computing it from statement data.

Form 10-K deadlines

Due 60, 75 or 90 days after fiscal year-end for large accelerated, accelerated and other filers respectively.

Form 10-K, General Instruction A.(2)

Form 10-Q Part I

Items 1 to 3 are financial statements, MD&A, and quantitative and qualitative disclosures about market risk.

Form 10-Q, Part I

Basic EPS numerator

Income available to common stockholders deducts current-year dividends on cumulative preferred stock whether or not declared.

FASB ASC 260-10-45-11

Dilution tests

Options use the treasury stock method; convertible debt and preferred stock use the if-converted method; antidilutive securities are excluded.

FASB ASC 260-10-45-23 and 45-40

Suitably titled statements

Special purpose statements must be suitably titled and describe how the basis differs from GAAP, for example a statement of revenue collected and expenses paid for the cash basis.

AU-C Section 800

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