[Level 1] Revision Phase with SAPP

[FRA – Introduction & Income statement] – buổi 1

Note lý thuyết và bài tập điển hình Introduction & Income statement môn FRA

The role of financial statement analysis is to evaluate the financial reports

  • Balance Sheet: express financial position at poin of time
  • Income Statement : company’s profitability (financial results from business activities) for a period
  • Cash Flow Statement : cash flow for period
1. The MD&A section provides key information regarding how a company is performing financially (company’s performance in its previous fiscal year, its current financial standing, and projections by management for future performances) found in the SEC Form 10-K (proxy statement, and some aspects of management compensation are disclosed in the notes to the financial statements )

Example 1. Information about management and director compensation are least likely to be found in the:

A. auditor’s report.

B. proxy statement.

C. notes to the financial statements.

2. 4 Types of Audit Reports :

Unqualified Opinion : Clean opinion, provided by the small business is free of any misrepresentations is the best type of report 

Qualified Opinion : In situations when a company’s financial records have not been maintained in accordance with GAAP but no misrepresentations are identified

Adverse Opinion : The worst type of financial report, firm’s financial records do not conform to GAAP, the financial records provided by the business have been grossly misrepresented.

Disclaimer of Opinion : Some occasions, an auditor is unable to complete an accurate audit report. This may occur for a variety of reasons, such as an absence of appropriate financial records the auditor issues a disclaimer of opinion, an opinion of the firm’s financial status could not be determined.

Example 2. What type of audit opinion is preferred when analyzing financial statements?

A. Qualified.

B. Adverse.

C. Unqualified.

3.Two fundamental qualitative characteristics that make financial information useful : relevance and faithful representation.

Example 3 : According to the International Financial Reporting Standards framework, which of the following qualities of financial information is least likely cited as one of the two fundamental characteristics that make financial information useful?

A. Faithful representation

B. Accrual accounting

C. Relevance

4. EPS vs Diluted EPS

Basic EPS =                 (Net income – Preferred dividends)    
                             Weighted average number of shares outstanding

Diluted EPS <= EPS

Example 4 :
The following data pertains to the Sapphire Company:

Net income equals $15,000.

5,000 shares of common stock issued on January 1 .

10% stock dividend issued on June 1 .

1,000 shares of common stock were repurchased on July 1 .

1,000 shares of 10%, $100 par preferred stock each convertible into 8 shares of common were outstanding the whole year.

What is the company's diluted earnings per share (EPS)?

A. $1.15.

B. $1.00.

C. $2.50.

5. Comprehensive Income = Net Income + Other Comprehensive Income


Other Comprehensive Income = unrealized gains and losses on available for sale securities, foreign currency exchange rates, and changes to pension benefit obligations.

Example 5 : For the year ended December 31, 2007, Milan Company reported the following financial information:

Gross profit from sales                                                                          600,000

Operating expenses                                                                              100,000

Unrealized loss from foreign currency translation                                   30,000

Dividends received from available-for-sale securities                             15,000

Increase in minimum pension liability                                                      45,000

Interest expense                                                                                      25,000

Acquired treasury stock for $25,000 more than original book value       75,000

Unrealized gain from available-sale-securities                                       20,000

Ignoring taxes, calculate Milan's net income and comprehensive income for 2007.

          Net income     Comprehensive

A       490,000           2000

B       40,000             44000

C       490,000           43500

6. Completed-contract method vs Percentage-of-completion method

Under both IFRS and U.S. GAAP When the outcome of a long-term contract can be reliably estimated, the percentage-of-completion method is used.

Under U.S. GAAP, the completed-contract method is used when the outcome of the project cannot be reliably estimated.

Example 6 : An oil exploration company has been contracted to dig 100 exploratory holes for $200,000. The cost to complete this job is estimated to be $150,000, but the company doesn't recognize any of the $50,000 profit until the job is completed. Which revenue recognition method is being used?

A. Cost recovery method.

B. Completed contract method.

C. Percentage-of-completion method.

7. Marketable Security Classifications


fair value on balance sheet;      

dividends, interest, realized and unrealized G/L recognized on income statement.


fair value on balance sheet ;    

dividends, interest, realized G/L recognized on income statement;  

unrealized G/L is other comprehensive income.


amortized cost on balance sheet;

interest, realized G/L recognized on income statement.

Example 7: According to the Financial Accounting Standards Board, what is the appropriate balance sheet treatment for available-for-sale securities and where are the unrealized gains and losses reported?

          Balance sheet                                      Unrealized gains and losses        

 A       Fair value                                             Net income

 B       Amortized cost                                    Other comprehensive income

 C       Fair value                                            Other comprehensive income

Answer example:

1. A

2. C

3. B

4. B


Number of average common shares:

1/1 5,500 shares issued (includes 10% stock dividend on 1/6) × 12 = 66,000

1/7 1,000 shares repurchased × 6 months                                         = -6,000

                                                                                                           = 60,000

60,000 shares / 12 months = 5,000 average shares

Preferred dividends = ($10)(1,000) = $10,000

Number of shares from the conversion of the preferred shares = (1,000 preferred shares)(8 × 1.1 shares of common/share of preferred) = 8,800 common

Diluted EPS = [$15,000(NI) − $10,000(pfd) + $10,000(pfd)] / (5,000 common shares + 8,800 shares from the conv. pfd.) = $15,000 / 13,800 shares = $1.09/share

This number needs to be compared to basic EPS to see if the preferred shares are antidilutive.

Basic EPS = [$15,000(NI) − $10,000(preferred dividends)] / 5,000 shares = $5,000 / 5,000 shares = $1/share

Since the EPS after the conversion of the preferred shares is greater than before the conversion the preferred shares are antidilutive and they should not be treated as common in computing diluted EPS. Therefore diluted EPS is the same as basic EPS or $1/share. ration in combating violations of securities and derivative laws.

5. C


Net income is equal to $490,000 ($600,000 gross profit - $100,000 operating expenses + $15,000 dividends received - $25,000 interest expense).

Comprehensive income includes all transactions that affect stockholders' equity except transactions with shareholders. Thus, comprehensive income is equal to $435,000 ($490,000 net income - $30,000 unrealized loss from foreign currency translation - $45,000 increase in minimum pension liability + $20,000 unrealized gain on available-for-sale securities).

The treasury stock purchase is a transaction with shareholders and is not included in either comprehensive income or net income.

6. B
7. C