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FAR - Financial Accounting & Reporting
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Thanks for your explanation Rob. I understood it now.
@Madhavi - Stock dividends or splits are neither a change in accounting principle or reporting entity. They are adjustments to the prior year for the sake of comparability. For instance, if we had EPS of $5.00 in year 1 and we did a 2 for 1 stock split in year 2, even if we earned the same net income as year 1, we would show EPS of $2.50 because there are now twice as many shares outstanding. If we kept the $5.00 of EPS for year 1 and showed $2.50 of EPS in year 2 in the comparative income statement, it would like like results were worse, even though we earned the same net income. So, to make it comparable, we effectively restate the number of shares outstanding for year 1 to make it comparable, but it is not a change in accounting principle or change in reporting entity. It is just part of the EPS rules. My answer below was just in relation to what else impacts prior years aside from stock splits and dividends. I should have been more clear about that in the original explanation.
Is your second question related to deferred taxes? If we are just calculating depreciation expense, we do not factor in taxes. If the question is asking us what the impact of depreciation differences between book and tax are on income tax in the income statement, then we would have to factor in the tax rate. It would be helpful to see the entire question so I can be sure I am giving you the correct information.
I have one more question Rob regarding the depreciation; if the question mentions the tax rate and asks us to calculate the depreciation expenses that is reported as component of income statement, then do we have to consider the tax rate while answering this question or just ignore the tax savings and give the entire gross amount of depreciation?
Thanks for your explanation Rob. So issuance of stock dividends and stock splits are considered as what? changes in accounting principle or reporting entity?
@Madhavi - For comparative financial statements, items that would adjust prior years shown are changes in accounting principle, changes in reporting entity and initial implementation of IFRS.
On installment sales, we defer the gross profit. To make the deferral, we reverse out the sales and cost of sales. For instance, if we make an installment sale for $100,000 and we have COGS of $75,000, the company would book the following:
Dr. Accounts/Notes Receivable 100,000
Dr. COGS 75,000
Cr. Sales 100,000
Cr. Inventory 75,000
This way, we can set up the receivable and remove the inventory from our books. But, since this qualifies as an installment sale, we have to reverse the sale and COGS and record deferred gross profit. That entry is:
Dr. Sales 100,000
Cr. COGS 75,000
Cr. Deferred Gross Profit 25,000
What is the meaning of deferred revenue under installment sales? Is it the deferred sales amount or just the deferred gross profit?
I came across a MCQ which has stock dividend announced in year 2. The questions asks us how EPS is reported under comparative financial statements.
The answer to this says that though the stock dividends were issued in year 2 thus increasing the number of outstanding shares, for comparative financial statements purpose they must be included in the calculation of year 1 outstanding shares also. Thus in EPS calculation for year 1 and for year 2 under comparative financial statements stock dividends that were declared in year 2 are included.
Can any one please clarify me , how many elements are there in financial reporting like EPS for the purpose of comparative financial statements.
Thank you Rob, that explanation filled in the gaps. I was confused because I thought the encumbrance accounts were budgetary only. But with that cleared up I've written out your example in T account format and it makes sense! After closing the accts I end up with 2 fund balances, 1 General for $15k and 1 Assigned for $10K. Thanks a ton for clearing that up.
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