- I would like to record about the key points of the US CPA exam content.
- Form 10-K
- Form 8-K
- Form 10-Q
- Earnings Per Share (EPS) – preferred stock dividends
- Earnings Per Share (EPS) – Convertible preferred stock
- Earnings Per Share (EPS) – options and warrants
- Earnings Per Share (EPS) – convertible preferred stock vs options and warrants
- The weighted average number of shares outstanding-Stock split(and stock dividend)
I would like to record about the key points of the US CPA exam content.
<Create and note the points based on mainly Becker’s workbook>
Form 10-K
Form 10-K is an annual report filed with the U.S. Securities and Exchange Commission (SEC), providing a comprehensive overview of a company’s financial health, operations, and risks. It is a critical document used by investors and analysts to assess the overall health and future prospects of a publicly traded company. The Form 10-K includes several key sections:
- Business Overview (Part I, Item 1): Describes the company’s main operations, products or services, and its markets. It includes information about segments, major customers, and the competitive landscape.
- Risk Factors (Part I, Item 1A): Details the specific risks the company faces, which could materially affect its business. These can include market risks, regulatory risks, and other external factors.
- Selected Financial Data (Part II, Item 6): Provides a summary of selected financial data for the last five fiscal years. This section highlights key financial figures such as revenue, operating income, net income, and earnings per share.
- Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) (Part II, Item 7): Offers an in-depth analysis from management on the financial and operational results. This includes explanations of the financial statements, discussions of the company’s liquidity, capital resources, and results of operations.
- Financial Statements and Supplementary Data (Part II, Item 8): Includes complete audited financial statements, which typically consist of the income statement, balance sheet, statement of cash flows, and statement of stockholders’ equity. Notes to the financial statements provide additional details on accounting policies, contingencies, and risk management.
- Controls and Procedures (Part II, Item 9A): Reports on the effectiveness of internal control over financial reporting and any changes in internal controls that might affect the reporting.
- Executive Compensation (Part III, Item 11): Details the compensation of key executives, including salary, bonuses, stock options, and other compensation-related information.
- Principal Accountant Fees and Services (Part III, Item 14): Provides information about the fees paid to the principal independent accountants for both audit and non-audit services.
The deadlines for filing Form 10-K with the U.S. Securities and Exchange Commission (SEC) vary based on the company’s classification. Companies are broadly categorized into three groups: Here are the filing deadlines for each category:
- Large Accelerated Filers:
- These companies must file their annual reports (Form 10-K) within 60 days after the fiscal year-end. This category includes companies with a public float of $700 million or more.
- Accelerated Filers:
- These companies must file their annual reports within 75 days after the fiscal year-end. This category includes companies with a public float of $75 million or more but less than $700 million.
- Non-accelerated Filers:
- These companies must file their annual reports within 90 days after the fiscal year-end. This category includes companies with a public float of less than $75 million.
These deadlines are mandated by the SEC, and all public companies must adhere to them to ensure timely disclosure of financial information. Failure to meet these deadlines can result in penalties, making it crucial for companies to comply strictly with these requirements.
Form 8-K
Form 8-K provides immediate information to investors and the market when significant events occur. It must be filed within four business days of the triggering event and may include the following information:
- Appointment or dismissal of executives
- Changes in management
- Acquisitions or asset sales
- Changes in accounting principles
- Disagreements on accounting and financial disclosures
- Stock splits or reverse splits
- Entering into or terminating significant contracts
- Events that may impact the financial situation or operational results
- Other information considered important for investors
Form 10-Q
Form 10-Q is a quarterly report that provides more detailed information about a company’s financial status and operational performance. It typically includes:
- Financial statements – Balance sheet, income statement, and cash flow statement.
- Management’s discussion and analysis of financial condition and results of operations (MD&A)
- Disclosure of market risks
- Reports on the effectiveness of internal controls
- Recent changes in accounting policies
- Legal proceedings status
- Stock information (number of shares held, potential issuance of new shares, etc.)
- Disclosure of other significant events
Form 10-Q is a quarterly report filed with the SEC to report a company’s financial status and operational performance for each fiscal quarter. Here are the filing deadlines for each category:
- Large Accelerated Filers: These companies must file their quarterly reports within 40 days after the end of the quarter. This category includes companies with a public float of $700 million or more.
- Accelerated Filers: These companies must also file their quarterly reports within 40 days after the end of the quarter. This category includes companies with a public float of $75 million or more but less than $700 million.
- Non-accelerated Filers: These companies must file their quarterly reports within 45 days after the end of the quarter. This category includes companies with a public float of less than $75 million.
- Interim financial statements filed with the SEC would not include a statement of cash flows for the most recent fiscal quarter, but should include statements of cash flows for the period between the end of the preceding fiscal year and the end of the most recent fiscal quarter, and for the corresponding period for the preceding fiscal year. The financial statements may also present statements of cash flows for the cumulative 12 month period ended during the most recent fiscal quarter and for the corresponding preceding period.
Earnings Per Share (EPS) – preferred stock dividends
When calculating Earnings Per Share (EPS), preferred stock dividends are not included in the EPS figure, but their treatment requires special consideration. Specifically, when calculating Basic Earnings Per Share (Basic EPS), the net income is adjusted by subtracting the dividends paid on preferred stock. This adjustment is made because dividends on preferred stock are paid out before any earnings are distributed to common shareholders.
- The impact of preferred stock dividends on common stock EPS depends on whether the preferred stock is cumulative. For cumulative preferred stock, dividends that have not been paid must still be subtracted from net income. For non-cumulative preferred stock, dividends are only subtracted when they are actually paid.
- When calculating Diluted EPS, if the preferred stock is convertible (i.e., can be converted into common stock), you need to assess whether the conversion would have a dilutive effect. If the conversion of preferred stock into new common stock would decrease EPS, this should be included in the calculation of Diluted EPS. Each potentially dilutive item must be tested via a comparison to Basic EPS
- In the case of cumulative dividends, it is necessary to keep track of the amount of unpaid dividends from the past. Additionally, the dividend amount for preferred shares each period is calculated by multiplying the dividend rate by the par value of the shares.
- The cumulative dividend obligation is deducted from net income in its entirety for the year, regardless of the payment status.
- Preferred dividends are not subtracted when computing the adjusted net income because we are making the assumption that the preferred shares were converted to common shares at the beginning of the period and, thus, that no preferred dividends were paid.
Earnings Per Share (EPS) – Convertible preferred stock
Convertible preferred stock requires special handling when calculating Diluted Earnings Per Share (Diluted EPS) because these securities may be converted into common stock. The potential dilutive effect must be considered in the calculation. Here are the specific steps involved:
- Determine the Conversion Ratio: Verify the conversion ratio of the convertible preferred stock, which indicates how many shares of common stock one share of preferred stock can be converted into.
- Calculate the Dilutive Effect: Calculate the total number of new common shares that would be issued if all convertible preferred stock were converted, adding the number of common shares that would be issued upon conversion of the convertible preferred shares to the current number of issued common shares.
- Assume that the dividends payable on the preferred stock would be foregone after conversion, which means that add the dividends of convertible preferred stock to the net income.
- Recalculate Diluted EPS: Consider the increase in the total number of common shares due to the conversion of preferred stock and recalculate the diluted EPS using the profit after deducting the dividends paid to preferred stock.
- Assess the Dilutive Effect: If the newly calculated diluted EPS is lower than the basic EPS, the convertible preferred stock is considered to have a dilutive effect and should be included in the diluted EPS calculation. Conversely, if the diluted EPS is higher than the basic EPS, it should be excluded following the anti-dilution rule.
Earnings Per Share (EPS) – options and warrants
In the calculation of Diluted Earnings Per Share (Diluted EPS), potentially dilutive securities such as warrants and options are calculated using the “treasury stock method.” This method does not assume that the warrants are exercised at the beginning of the period, but rather follows these steps:
Exercise Price: Consider the exercise price of each warrant or option, and calculate the funds the company would receive if these were exercised during the period.
Average Stock Price: Using the average stock price over the period, calculate how many common shares could be “re-purchased” with the funds received from the exercise.
Dilutive Effect: Add the number of shares that could be re-purchased to the current number of outstanding shares to determine the new total of diluted shares.
This calculation evaluates not the actual exercise of the warrants but the potential impact on EPS if they were to be converted into common stock. Therefore, the assumption is not that warrants are exercised at the beginning of the period, but rather, their impact is considered throughout the year.
This method allows for the assessment of how much the actual exercise of warrants and options and the issuance of new common stock could dilute EPS. This helps investors and analysts more accurately understand the potential decrease in earnings per share.
Earnings Per Share (EPS) – convertible preferred stock vs options and warrants
- The treatment of convertible preferred stock differs from options and warrants in that it is assumed that all such stock will be converted, based on the nature of preferred stock and the purpose of calculating Diluted Earnings Per Share (Diluted EPS). Here are the main reasons in detail:
- Conversion Incentive: The conversion rights of preferred stock are typically set under financially favorable conditions for the holders. If the market price exceeds the conversion price, holders of preferred stock have an incentive to convert to common stock to realize a profit. Unlike options and warrants, conversion under certain market conditions is almost certain to occur.
- Conservative Accounting Approach: In the calculation of EPS, the most conservative scenario (i.e., where the dilutive effect is maximized) is assumed when assessing dilutive effects. For convertible preferred stock, the impact of a full conversion is evaluated to explicitly show investors the maximum potential dilution risk.
- Difference in Conversion Periods: Warrants and options are set with specific exercise periods and conditions, and whether they are exercised can vary depending on market conditions. In contrast, convertible preferred stock has a more direct conversion mechanism and is more likely to be converted if market conditions favor such a conversion.
- Therefore, in the calculation of diluted EPS, it is common to include the impact under the assumption that all convertible preferred stock will be converted. This reflects the worst-case scenario the company might face, enabling investors to make more informed decisions based on this information
The weighted average number of shares outstanding-Stock split(and stock dividend)
- When a stock split occurs, the company must apply the effect of the stock split to the number of shares outstanding as of the beginning of the year, regardless of when during the year the stock split occurs.
