| Question |
Answer |
| dilutive securities |
upon exercise they may reduce(dilute) eps |
| convertible bonds |
can be converted into other corp securities during some specified period of time after issuance |
| What do convertible bonds do? |
Combines the benefit of a bond with the privilege of exchanging it for stock at the holder's option |
| Corps issue convertibles for two main reasons |
1. to raise equity capital without giving up more ownership control than necessary
2. to obtain debt financing at cheaper rates |
| forward contract(ch 17) |
buy stock today, take delivery in future; if the price goes up the buyer profits |
| option contract(ch 17) |
2 week window to purchase stock ($3,000 charge) |
| Under the option contract, you receive the but not the to purchase |
receive the right but not the obligation to purchase |
| If the price goes down, under the option contract, the buyer does not exercise the right to buy, then |
the buyer will still owe the $3,000 |
| Because derivatives like forward contract and options are like assets and liabilities, they are reported on the Balance Sheet at |
Fair Value |
| Companies follow these guidelines in accounting for derivatives (there are 4) |
recognize derivatives in the FSs as assets and libs; report derivatives at fair value; recognize gains and losses resulting from speculation in derivatives immediately in income; report gain & losses resulting from hedge transactions on the type of hedge |
| call option |
give the holder the right but not the obligation to buy shares at a preset price |
| What are the basic characteristics of a derivative financial instrument? |
1. the instrument has 1+ underlyings and an identified payment provision; 2. the instrument requires little or no investment at the inception of the contract; 3. the instrument requires or permits net settlement |
| net settlement |
reduces the transaction cost associated with derivatives |
| hedging |
companies can use derivatives to offset the negative impacts or changes in interest rates or foreign currency exchange rates |
| Use interest rate swaps |
the hedge risk that changes in interest rates will impact the fair value of debt obligations |
| Use put option |
to hedge the risk that an equity investment will decline in value |
| Under the cash flow hedge, you would account for derivatives as |
Fair value on the balance sheet; and record gains(losses) in equity as part of comprehensive income |
| The gain on futures contract which is reported as part of other comprehensive income |
now reduces cost of goods sold |
| convertible bonds can be considered a h_____ i_________ |
hybrid instrument |
| bifurcation |
the process of separating the host security and the embedded derivative and then accounting for it using the accounting for derivatives |
| 3 criteria to ensure the use of hedge accounting in consistent manner across different hedge transactions |
documentation, risk mgm, and designation; effectiveness of the hedge relationship; effect of reported earnings of changes in fair values or cash flows. |
| Why is special accounting not needed for a fair value hedge trading security? |
Because a company accounts for both the investment and the derivative at fair vale on the balance sheet with gains and losses reported in earnings |
| What are the primary requirements for disclosures related to financial instruments? |
disclose the fv and cv of fin instruments in a note; distinguish btw fin instruments held or issued for purposes other than trading; do not combine or separate fin instruments; display separate classification of other cph income; provide info on mkt risks |
| What type of cost does the balance sheet use? |
historical cost |
| If a company is unable to estimate the fair value of a derivative, what must it do? |
The company must disclose info relevant to the estimate of fair value and the reason why it is unable to arrive at an estimate of fair value |
| When a company uses a put option to hedge prices changes in an A for S stock investment in a fair value hedge |
it records unrealized gains on the investment in earnings |
| How do companies account for derivatives used in qualifying cash flow hedges |
At fair value on the balance sheet |
| How do companies account for unrealized gains (losses) for derivatives in cash flow hedges? |
recorded in other comprehensive income until selling or settling the hedge item |
| Swap |
a transaction btw 2 parties in which the 1st party promises to make a payment to the 2nd party; the 2nd party promises to make a simultaneous payment to the 1st party |
| interest rate swap |
one party makes payments based on a fixed or floating rate, and the second party does just the opposite |
| In a swap, the settlement dates are the |
interest payment dates on the debt |
| on each interest payment date, the two parties meet to |
compute the difference btw current mkt interest rates and the fixed rate and determine the value of the swap |
| To account for fair value hedges, record the derivative at its___ ____ in the ____ ____ and record any gains and losses in ______. |
Record derivative at its fair value on the balance sheet and record any gains and losses in income |
| two models for consolidation |
voting interest model
risk and reward model |
| variable interest entity is an entity that has one of the following |
insufficient equity investment at risk;
stockholders lack decision-making rights;
stockholders do not absorb the losses or receive the benefits of a normal stockholder |
| revenue recognition |
occurs when
1. realized or realizable
2. earned |
| realizes revenue when |
exchanges of products for cash or claims to cash |
| realizable revenue when |
assets received or held are readily convertible into cash or claims to cash |
| earned revenue when |
company substantially accomplishes what it must do to be entitled to the benefits represented by revenues (sale) |
| During production, a company can |
-recognize rev before completion
-based on % of complete
-delay rev recognition if estimates not dependable |
| At the end of production, a company can |
-recognize rev after completion but before sale takes place if there are readily determinable prices without additional costs (minerals) |
| Upon receipt of cash, a company can |
-recognize rev when receive cash
-installment-sales method
(farm, home equipment, furnishings)
|
| installment-sales method of recognizing revenue |
periodic installments over a long period of time; based on high risk of not collection an a/r |
| Why would a company recognize revenue earlier |
if there is a nigh degree of uncertainty about the amount of revenue earned |
| Why would a company delay recognition of revenue |
if the degree of uncertainty concerning the amount of either revenue or costs is sufficiently high or it the sale does not represent substantial completion of the earnings process |
| Sales with Buyback Agreements |
When a repurchase agreement exists at a set price and this price covers all cost of the inventory plus related holding costs, the inventory and related libs remain on the seller's books (NO SALE) |
| channel stuffing |
'booking tomorrow's revenue today' |
Spanish 3
