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CPA REVIEW VOLUME 4



The CPA Exam

From CPA Review; Written by Steve Dowling on 2012-01-15
The CPA Exam

The Uniform Certified Public Accountant Examination (Uniform CPA Exam) is the examination administered to people who wish to become Certified Public Accountants in the United States. The Uniform CPA Exam is developed and maintained by the American Institute of Certified Public Accountants (AICPA), and is administered by the National Association of State Boards of Accountancy (NASBA).

The sections have been reorganized as follows:

Auditing and Attestation – This section covers knowledge of planning the engagement, internal controls, obtaining and documenting information, reviewing engagements and evaluating information, and preparing communications.
Financial Accounting and Reporting – This section covers knowledge of concepts and standards for financial statements, typical items in financial statements, specific types of transactions and events, accounting and reporting for governmental...(Read More)


Antidilutive Earnings Per Share

From CPA Review; Written by Steve Dowling on 2012-02-02

Are antidilutive securities included in EPS?

In computing EPS, all antidilutive securities should be ignored. A security is considered to be antidilutive if its inclusion does not cause EPS to go down. In computing EPS, the aggregate of all dilutive securities must be taken into account. However, in order to exclude the ones that should not be used in the computation, it is necessary to determine which securities are individually dilutive and which ones are antidilutive. As was previously noted, a stock option will be antidilutive if the underlying market price of the stock that can be bought is less than the exercise price of the option. A convertible security is antidilutive if the exercise of the convertible bond or preferred stock results in an increase in the EPS computation compared to that derived before the assumed conversion. In this case, the additive effect to the numerator...(Read More)


Diluted Earnings Per Share

From CPA Review; Written by Steve Dowling on 2012-02-01

Diluted Earnings Per Share

If potentially dilutive securities exist that are outstanding, such as convertible bonds, convertible preferred stock, stock options, or stock warrants, both basic and diluted EPS must be presented.

How does the "if-converted" method work?

In the case of convertible securities, the if-converted method must be used. Under this approach, it is assumed that the dilutive convertible security is converted into common stock at the beginning of the period or date of issue, if later. If conversion is assumed, the interest expense (net of tax) that would have been incurred on the convertible bonds must be added back to net income in the numerator. Any dividend on convertible preferred stock would also be added back (dividend savings) to net income in the numerator. The add-back of interest expense (net of tax) on convertible bonds and preferred dividends on convertible...(Read More)


Earnings per Share

From CPA Review; Written by Steve Dowling on 2012-02-01

Who must compute earnings per share?

FASB Statement No. 128 (Earnings Per Share) requires that publicly held companies must compute earnings per share. This is not required of nonpublic companies. In a simple capital structure, no potentially dilutive securities exist. Potentially dilutive means the security will be converted into common stock at a later date, reducing EPS. Thus, only one EPS figure is necessary. In a complex capital structure, dilutive securities exist, requiring dual presentation.

When shares are issued because of a stock dividend or stock split, the computation of weighted-average common stock shares outstanding mandates retroactive adjustment as if the shares were outstanding at the beginning of the year.

What does Basic Earnings Per Share and Diluted Earnings Per Share take into account?

Basic EPS takes into account only the actual number of outstanding...(Read More)


Research and Development Requirements

From CPA Review; Written by Steve Dowling on 2012-02-01

What are the requirements if another party funds R&D?

Per FASB 68, if a business enters into an arrangement with other parties to fund the R&D efforts, the nature of the obligation must be determined. In the case where the entity has an obligation to repay the funds regardless of the R&D results, a liability has to be recognized with the related R&D expense. The journal entries are:
Cash 100
Liability -100
Research and Development Expense 100
Cash -100

Footnote disclosure is made of the terms of the R&D agreement, the amount of compensation earned, and the costs incurred under the contract. A liability does not exist when the transfer of financial risk involved to the other party is substantive and genuine. If the financial risk applicable to R&D is transferred because repayment depends only on the R&D possessing future economic benefit, the company accounts for its obligation...(Read More)





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