Wiley CMAexcel Part 1 Virtual Classroom

Virtual Classroom No. 1:

• Section A:
Topic 1 Financial Statements
Topic 2 Recognition, Measurement, Valuation, and
Disclosure
Exercise 1: Investments

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Wiley CMAexcel Learning System
 Section A
Topic 1: Financial Statements
• Income Statement
• Statement of Changes in Shareholders’ Equity
• Balance Sheet
• Statement of Cash Flows
• Limitations of Financial Statements
• Users of Financial Statements
• Integrated Reporting

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Wiley CMAexcel Learning System
 LOS P1.A.1.c., f., and g.

Multiple-Step Income Statement

Sales Revenue
Sales $2,808,835
Less: Sales discounts $22,302
Less: Sales returns and allowances 51,913 74,215
Net Sales revenue 2,734,620
Cost of Goods sold
Merchandise inventory, Jan 1, Y1 424,321
Net purchases (including freight-in) 1,850,153
Total merchandise available for sale 2,274,474
Less: Merchandise inventory, Dec. 31, Y1 450,536
Cost of goods sold $1,823,938
Gross profit on sales 910,682

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 LOS P1.A.1.c., f., and g.

Multiple-Step Income Statement (cont.)

Operating Expenses
Selling expenses $416,786
Administrative expenses 322,709 739,495
Income from operations 171,187
Other Revenues and Gains
Dividend and rental revenue 157,697
328,884
Other Expenses and Losses
Interest on bonds and notes 115,975
Income before income tax 212,909
Income tax 61,579
To Statement of Changes $151,330
Net income for the year
in Shareholders’ Equity $1.89
Earnings per common share
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Wiley CMAexcel Learning System
 LOS 1.A.1.c.

Presentation of Discontinued Operations

Net Sales
– Cost of goods sold
Gross profit on sales
• Located below income – Operating expenses
from continuing Operating income
operations +/– Other gains and losses
• Shown net of tax Earnings before tax
– Tax expenses
Income from continuing
operations
+/– Discontinued operations
Net income

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Wiley CMAexcel Learning System
 LOS P1.A.1.c., e., and f.

Example: Statement of Changes in

Shareholders’ Equity
Common Additional
Retained
Stock, Paid-In Total
Earnings
$1Par Capital
Balance, Jan. 1, Y1 $24,680 $345,520 $90,251 $460,451
Net income From Income 151,330 151.330
Statement
Cash dividends
(33,330) (33,330)
paid
Common stock
1,000 14,800 15,800
issued
Balance, Dec. 31,
$25,680 $360,320 $208,251 $594,251
Y1
To Balance Sheet
CMA Part 1: Financial Planning, Performance, and Analytics 6
Wiley CMAexcel Learning System
 LOS P1.A.1.c., f., and g.

Format of Balance Sheet

Asset Liabilities & Equity
Current assets: Current liabilities:
Cash, cash equivalents $24,628 A/P $175,321
Receivables 552,249 Current portion of L/T debt 36,000
Other Receivables 18,941 Other current liabilities 147,500
Note Receivable 80,532 Total current liabilities 358,821
Inventory 252,567 L/T debt 117,343
Prepaid insurance 7,500 Total liabilities 476,164
Total current assets 936,417 Shareholders’ equity:
Fixed assets: Common stock, par 25,680
PP&E APIC 360,320
209,330
Less: Account, depreciation 75,332 Retained earnings 208,251
Net fixed assets 133,998 Total shareholders’ equity 594,251
Total assets $1,070,415 Total liabilities and equity $1,070,415
From Statement of Changes in Shareholders’ Equity
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Wiley CMAexcel Learning System
 LOS 1.A.1.b.

Statement of Cash Flows Overview

• Reports: cash inflows, cash outflows, and net change in cash
over a time period
• Usefulness:
• If entity generates enough cash to meet obligations and pay
dividends
• Financial statement users can assess if financing is needed
• Preparation:
• Income Statement for the time period
• Comparative balance sheets
• Additional information

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Wiley CMAexcel Learning System
 LOS 1.A.1.b.

Statement of Cash Flows Statement

Format
• Classifies cash receipts and cash payments into three major
categories:
1. Operating Activities
2. Investing Activities
3. Financing Activities
• Cash reconciliation:
Net cash inflow/(outflow)
+ Beginning Cash Balance
= Ending Cash Balance
• Disclosure:
• Noncash Investing and Financing Activities, listed separately

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 LOS 1.A.1.e.

Statement of Cash Flows: Adjust for Non-

Cash Items in Operating Activities
• Net income includes non-cash items that impact current income, but do not affect
current period cash flows. Net income is adjusted for:
• Depreciation expense (PP&E); amortization expense (intangible assets)
• Amortization of deferred costs (e.g., bond issue costs)
• Amortization of premium or discount on bonds payable

• Gains/losses on investing and financing activities require income adjustments

because they are not a cash flow. But sales proceeds from these transactions are
reported in investing and/or financing activities as applicable.

• Net income includes accrual-related items that have no cash impact in the current
period; these require adjustments to net income in deriving operating
cash flows. Examples include:
• Accrued sales (uncollected)
• Accrued expenses (unpaid)

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Wiley CMAexcel Learning System
 LOS 1.A.1.c.

Operating Activity Section: Indirect Method

Start with Net Income
+ Non-cash expenses (e.g., depreciation, amortization)
– Gains from investing and financing activities
+ Losses from investing and financing activities
+ Decreases in current assets
– Increases in current assets
+ Increases in current liabilities
– Decreases in current liabilities
+ Amortization of discounts on bonds
– Amortization of premiums on bonds
Operating cash flow
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 LOS 1.A.1.e.

Question No. 1: SOCF—Operating Activities

At the end of the current fiscal year, XM Company reported net income of
$40,000. In addition, XM experienced the following changes in account
balances from the beginning to the end of the fiscal year:
• Increase in accounts receivable: $3,000
• Decrease in inventory: $4,500
• Increase in Prepaid expenses: $1,500
• Increase in accounts payable: $7,500
• Decrease in long-term debt: $12,000
What amount should be reported as cash flow from operating activities on
XM’s statement of cash flows for the current fiscal year?
a. $47,500
b. $49,500
c. $32,500
d. $34,500

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 LOS P1.A.1.c., e., f., and g.

Operating Activities
Net income $151,330
Adjustments to convert net income to a cash basis: 48,784
Net cash provided by operating activities 200,114
Investing Activities
Additions to PP&E (123,730)
Proceeds from sale of store 3,980
Net cash used in investing activities
Financing Activities (119,750)
Increase in notes payable From 1,100
Statement of
Increase in APIC Changes in 14,800
Shareholders'
Increase in common stock Equity 1,000
Decrease in L/T debt (50,500)
Cash dividends paid (33,330)
Net cash used in financing activities (66,930)
Net increase in cash and cash equivalents 13,434
Cash and cash equivalents at beginning of year To Balance 11,194
Cash and cash equivalents at end of year Sheet $24,628

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 Section A
Topic 2: Recognition, Measurement,
Valuation, and Disclosure

• Limitations of Financial Statements

• Users of Financial Statements
• Integrated Reporting
• Investments:
• Debt Securities
• Equity Securities

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Wiley CMAexcel Learning System
 LOS 1.A.1.d.

Limitations of Financial Statements

• Historical cost
• Different accounting methods
• Omit non-objective items of value
• Use of estimates and judgments
• Off-balance-sheet information
• Non-cash transactions

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Wiley CMAexcel Learning System
 LOS 1.A.1.a.

Users of Financial Statements and Their Needs

• Internal users
• Executives, managers, management accountants, employees who have
vested interests in company (i.e., through stock option plans, etc.)
• Internal decision-making

• External users
• Creditors—interested in entity’s ability to repay debt and comply with
debt covenants
• Investors—need to assess investment return and make decisions about
buying, holding, or selling an entity’s securities
• Others—stock exchanges, unions, analysts, regulatory agencies

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 LOS 1.A.2.j.

Investments: Debt Securities

• Examples: loans to other entities, federal and

municipal securities, commercial paper, corporate
notes and bonds, convertible debt.
• Three categories:
1. Held-to-maturity securities
2. Available-for-sale securities
3. Trading securities
• Recognition of unrealized gains and/or losses is
dependent upon security’s categorization

Part 1, Section A, Topic 2: Recognition, Measurement, Valuation, and Disclosure 17

Wiley CMAexcel Learning System, Part 1: Financial Planning, Performance, and Analytics.
Copyright © 2020, Institute of Management Accountants. Published by John Wiley & Sons, Inc.
 LOS 1.A.2.j.
Accounting for Unrealized Holding Gains and
Losses
Debt

Part 1, Section A, Topic 2: Recognition, Measurement, Valuation, and Disclosure 18

Wiley CMAexcel Learning System, Part 1: Financial Planning, Performance, and Analytics.
Copyright © 2020, Institute of Management Accountants. Published by John Wiley & Sons, Inc.
 LOS 1.A.2.k.

Equity Securities

Valuation
Ownership Interest or Influence
method
Less than
Passive Fair Value
20%

20%–50% Significant Equity method

Greater than Consolidated

Controlling
50% financial statements

For < 20% ownership, all unrealized gains (losses) are

reported in net income.

Part 1, Section A, Topic 2: Recognition, Measurement, Valuation, and Disclosure 19

Wiley CMAexcel Learning System, Part 1: Financial Planning, Performance, and Analytics.
Copyright © 2020, Institute of Management Accountants. Published by John Wiley & Sons, Inc.
 LOS 1.A.2.k.

Between 20% and 50% Ownership

• “Significant influence”
• Equity method
• Carrying value is adjusted based on the proportionate share of
ownership
Increase carrying value—net income
Decrease carrying value—net loss, dividends, and
amortization/depreciation of excess investment over book
value of net assets acquired that relates to
amortizable/depreciable assets
• Intercompany transactions are eliminated to the extent of investor
ownership

Part 1, Section A, Topic 2 20

Wiley CMAexcel Learning System, Part 1: Financial Planning, Performance, and Analytics.
Copyright © 2020, Institute of Management Accountants. Published by John Wiley & Sons, Inc.
 LOS 1.A.2.k.
Between 20% and 50% Ownership
Calculation of Investment Carrying Amount
Invested $20,000,000 for a 30% ownership of XYZ.
XYZ’s Book Value = $50,000,000

Acquisition cost 1/1/Year 1 $20,000,000

Plus: 30% Share of Income before dividends 1,380,000 $21,380,000

& amortization of assets
30% of Y1 Dividends (630,000)
Depreciation of undervalued assets (100,000)
($1 million/10 years)
Amortization of unrecorded intangible (300,000) (1,030,000)
assets
($1.5 million/5 years)
Carrying Amount 12/31/Year 1 $20,350,000

Part 1, Section A, Topic 2 21

Wiley CMAexcel Learning System, Part 1: Financial Planning, Performance, and Analytics.
Copyright © 2020, Institute of Management Accountants. Published by John Wiley & Sons, Inc.
 LOS 1.A.2.k.

Greater than 50% Ownership

• Controlling interest; parent and subsidiary relationship
• Consolidated financial statements—“single entity”
• Purchase accounting is required:
Record acquired firm at fair value (FV) of consideration given
Goodwill computation:
Fair Value of consideration given up to acquire Subsidiary
+ Fair value of any non-controlling interest
+ Fair value of any previously held equity interest in Subsidiary
– Fair value of net assets acquired
No amortization of goodwill allowed

Part 1, Section A, Topic 2 22

Wiley CMAexcel Learning System, Part 1: Financial Planning, Performance, and Analytics.
Copyright © 2020, Institute of Management Accountants. Published by John Wiley & Sons, Inc.
 LOS 1.A.1.i

<IR> — Primary Purpose

Provide information to external users

who provide financial capital to a firm.

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 LOS 1.A.1.j

<IR> — Value Creation

• Over the short, medium, and long term
• For all internal and external stakeholders of the
company
• Achieved through six capitals

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 LOS 1.A.1.j

<IR> — Six Capitals

Capitals: Description:

1. Financial Funds available to produce goods or provide

services
2. Manufactured Physical objects available to produce goods or
provide services
3. Intellectual – Knowledge-based intangibles
– Organizational
4. Human Competencies, capabilities, experiences,
motivations for innovation from the people
5. Social and relationship – Relationships within and between groups
– Ability to share information
6. Natural – Environmental resources
– Company processes

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 LOS 1.A.1.k

<IR> — Value Creation Process

Mission and Vision:

Six Capitals – Governance Six Capitals
– Business Model

External Environment

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Wiley CMAexcel Learning System

• Benefits and Challenges of Adopting <IR>
by a Company
Benefits
Improves quality of information
available to external users
Promotes cohesive and efficient
approach to corporate reporting
based on ability to create value
Enhances accountability and
stewardship of six capitals
CMA Part 1: Financial Planning, Performance, and Analytics
Wiley CMAexcel Learning System
LOS 1.A.1.l
Challenges
No defined reporting standards
Is complex if operations are diverse
Added reporting burden creates
additional cost
Added risk of litigation due to use
of qualitative and forecasted info
27
Virtual Classroom No. 1 continues with:

Exercise 1: Investments

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Wiley CMAexcel Learning System