UNC MAC 710 Exam 1 Cheat Sheet — High-Yield Financial Accounting
UNC MAC 710 — Exam 1 Comprehensive Cheat Sheet
(High-yield, exam-oriented, organized for quick review)
1. Income Statement & Comprehensive Income
Core Definitions
Net income = revenues + gains 6 expenses 6 losses
OCI = items excluded from net income by standards (e.g., unrealized AFS, FX translation, hedges, pension adjustments)
Comprehensive Income
Net income + OCI
Why Net Income Matters
Evaluates past performance
Predicts future performance
Assesses risk and cash flow persistence
Limitations
Excludes some items (contingencies)
Accounting policies differ across entities
Management judgment may enable manipulation
Four Elements
Revenues 6 inflows from main operations
Gains 6 peripheral increases in equity
Expenses 6 outflows from main operations
Losses 6 peripheral decreases in equity
2. Income Statement Structure
Formats
Single-Step
All revenues and gains together; all expenses and losses together.
Simple presentation, no subtotals.
Multiple-Step
Preferred format
Subtotals: Gross profit 1 Operating income 1 Income before tax 1 Net income
Operating vs Non-operating
Operating: core operations
Non-operating: peripheral items such as dividends, interest, financing costs
Important Subtotals
Gross profit = Sales 6 COGS
Operating income = Gross profit 6 Operating expenses
Income before tax = Operating income + (Other revenues/gains 6 Other losses/expenses)
3. Discontinued Operations
General Rules
Must be:
Component of the entity
Strategic shift with major effect
Reported below the line and net of tax
US GAAP Definition
Component with:
Operations and cash flows
Clearly distinguishable
Disposal represents a major strategic shift
IFRS
A component that is:
Held for sale or disposed
Major line of business or geographic area
Subsidiary acquired for resale
Reportable Items (All Net of Tax)
Income/loss from discontinued operations
Gain/loss on remeasurement to fair value less costs to sell
Gain/loss on disposal
4. Other Comprehensive Income (OCI)
Characteristics
Low short-run cash realization
Highly transitory
Not part of normal operations
Reduces earnings volatility
Common OCI Items
Unrealized available-for-sale (AFS) gains/losses
Cash-flow hedge derivatives
Foreign currency translation adjustments
Pension adjustments
Long-lived asset revaluation (IFRS)
Presentation
Net of tax
Either item-by-item or gross with a net total
AOCI is reported in equity
5. Statement of Shareholders’ Equity
Shows changes in:
Contributed capital
Retained earnings
AOCI
Treasury stock
Noncontrolling interest
IFRS: Required
US GAAP: Optional (but commonly provided)
SEC: Required for public companies
6. Earnings Quality
Definition
Degree to which income helps predict future performance.
High Quality
Permanent, recurring items
Low Quality
Transitory or manipulated items
Manipulation Incentives
Meet or beat analyst forecasts
Avoid reporting losses
Smooth earnings
Compensation incentives
Common Manipulation Areas
Expenses (50%)
Revenue (25%)
M&A and “other” (25%)
Techniques
Big Bath 6 take large losses when a bad year is expected
Cookie Jar Reserves 6 understate income now, boost later
7. Balance Sheet (Financial Position)
Purpose
Reports assets, liabilities, and equity at a point in time
Supports cash flow predictions and risk assessment
Limitations
Historical cost measurement
Missing items (e.g., human capital)
Extensive use of estimates
Categories
Assets
Current: expected to convert or be used within 1 year or operating cycle
Long-term investments
PPE 6 tangible assets used in operations
Intangibles 6 nonphysical rights
Other assets
Liabilities
Current: AP, short-term NP, unearned revenue
Long-term: bonds, long-term notes payable
Equity
Contributed capital
Retained earnings
AOCI
Noncontrolling interests
Presentation
US GAAP
Current assets first (in order of liquidity)
Current liabilities first (order of maturity)
IFRS
Non-current assets first
Order not strictly prescribed
8. Statement of Cash Flows
Formula
Operating + Investing + Financing = Change in Cash
Operating Activities
Receipts from customers
Interest and dividends received
Payments for goods, employees, taxes, interest
Investing Activities
Buying and selling PPE
Loans (issuing and collecting)
Buying and selling debt/equity securities
Financing Activities
Issuing equity
Borrowing (notes, bonds)
Repurchasing equity
Dividends paid
IFRS Flexibility
Interest received/paid can be operating or financing
Dividends received can be operating or investing
Dividends paid can be operating or financing
9. Articulation Among Statements
Ending RE = Beginning RE + Net income 6 Dividends
Ending AOCI = Beginning AOCI OCI
A = L + Equity
Ending Cash = Beginning Cash + Net cash flows
10. Notes to Financial Statements
Key disclosures:
Significant accounting policies
Supplemental details
Subsequent events
Related-party transactions
Going concern issues
Subsequent Events
Condition existed at year-end 6 adjust
Condition arose after 6 disclose only
Going Concern
US GAAP: 1 year after issuance
IFRS: 61 year after reporting date
Must disclose conditions and management’s mitigation plans
11. Annual Report Contents
CEO letter
Financial summary (5-year data)
MD&A
Auditor’s report
Board of directors
Auditor Opinions
Unqualified (clean)
Unqualified with explanatory paragraph
Qualified
Adverse
Disclaimer
12. Financial Accounting Research (Big Test Area)
Codification Basics
ASC = Topic 6 Subtopic 6 Section 6 Paragraph
Example: ASC 450-20-30-1
Topic Groupings
1xx General Principles
2xx Presentation
3xx Assets
4xx Liabilities
5xx Equity
6xx Revenue
7xx Expenses
8xx Broad Transactions
9xx Industry
Key Sections
25 Recognition
30 Initial measurement
35 Subsequent measurement
50 Disclosure
S99 SEC guidance
US GAAP Hierarchy
Codification plus SEC guidance
Other authoritative GAAP
Non-authoritative sources (framework, industry practice)
IFRS Hierarchy
IFRS standards
Authoritative rules for similar issues
Conceptual framework
Other standards and practice
13. Research Process 6 Must Memorize
Establish facts
Identify the issue (write in 1 62 sentences)
Search literature
Evaluate results
Develop conclusions
Communicate findings
14. Example Research Question (from your deck)
Should PharmY allocate these costs to an asset account or expense immediately?
(This guides the type of Codification you search: ASC 730 R&D, PPE guidance, etc.)