Study Session #7
Learning Outcome Statements
(Last revised 12/14/04)

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Preliminary Reading Learning Outcomes
P1. A. “Measuring Business Income”
B. “Financial Reporting and Analysis”
a) define each asset and liability category on the balance sheet, and prepare a classified balance sheet;
b) define each component of a multi-step income statement, and prepare a multi-step income
statement.
C. “Short-Term Financial Assets”
a) describe how to choose the appropriate accounting method for investment securities, and explain
how fair (market) value gains and losses on such investments are reported;
b) describe how to account for transactions with credit customers, including accounting for bad
debts under the allowance method or the direct write-off method.
D. “Inventories”
a) identify the choices in inventory processing systems, costing methods, and valuation methods, and
describe how such choices affect external and internal evaluations as well as a company’s cash flow;
b) define inventory cost;
c) calculate the cost of an inventory based on 1) the specific identification method, 2) the averagecost
method, 3) first in, first out (FIFO), and 4) last in, first out (LIFO);
d) state the effects of inventory methods and misstatements of inventory on income determination,
income taxes, and cash flow;
e) calculate the lower-of-cost-or-market amount of an inventory using the item-by item and major
category methods.
E. “Current Liabilities and the Time Value of Money”
a) define liabilities, explain the difference between current and long-term liabilities, and describe the
uncertainties about the value of some liabilities;
b) describe how accountants record and report estimated liabilities (e.g., taxes, warranties, and
vacation pay liabilities) and contingent liabilities.
F. “Long-Term Assets”
a) describe the factors that distinguish long-term assets from other assets, and identify the common
types of long-term assets and their carrying values on the balance sheet;
b) calculate the cost, and record the purchase, of property, plant, and equipment;
c) explain depreciation accounting (including the reasons for depreciation), calculate depreciation
using the straight-line, production (also known as units-of production), and declining-balance
methods, and calculate depreciation after revising the estimated useful life of an asset;
d) describe how to account for the sale, exchange, or disposal of depreciable assets, and determine
whether a gain or loss is recorded;
e) identify assets that should be classified as natural resources, and prepare entries to account for
such assets, including entries to record depletion;
f) identify the types of intangible assets, and describe how the accounting treatment for goodwill
differs from the accounting treatment for other intangible assets.
G. “Long-Term Liabilities”
a) compare and contrast reporting for the issuance of long-term bonds when bonds are issued at face
value, at a discount, and at a premium;
b) describe the components of total interest cost and the amortization associated with long-term
bonds;

c) describe how to report the retirement of bonds and the conversion of bonds into common stock;
d) explain the basic features of, and the accounting for, long-term liabilities such as mortgages
payable, long-term leases, and pensions and other postretirement benefits.
H. “Contributed Capital”
a) identify the components that comprise the contributed capital part of stockholders’ equity;
b) describe how to account for cash dividends;
c) identify the characteristics of preferred stock;
d) describe how to account for stock issuance and the purchase, sale, and retirement of treasury
stock.
I. “The Corporate Income Statement and the Statement of Stockholders’ Equity”
a) explain how to report the income effects of discontinued operations, extraordinary items, and
accounting changes;
b) describe stock dividends and stock splits, and explain the effects of each on a company’s assets
and stockholders’ equity.
J. “The Statement of Cash Flows”
a) identify the types of important information for investment decision making presented in the
statement of cash flows;
b) compare and contrast the categories (i.e., cash provided or used by operating activities, investing
activities, and financing activities) in a statement of cash flows, and describe how noncash investing
and financing transactions are reported;
c) calculate, using the indirect method, the net cash provided or used by operating activities;
d) prepare the statement of cash flows for investing activities and financing activities.

P2. “Framework for Financial Statement Analysis”
a) explain the objectives of financial reporting according to the Financial Accounting Standards
Board (FASB) conceptual framework;
b) compare and contrast the Securities and Exchange Commission’s (SEC’s) and FASB’s role in
developing and enforcing U.S. GAAP;
c) identify the accounting pronouncements that are considered authoritative for U.S. GAAP
purposes (e.g., FASB pronouncements, Accounting Principles Board (APB) opinions, American
Institute of Certified Public Accountants (AICPA) accounting research bulletins) and the order of
hierarchy of such accounting principles;
d) identify the accounting qualities (e.g., relevance, reliability, predictive value, timeliness) set forth in
Statement of Financial Accounting Concepts (SFAC) 2, and discuss how these qualities provide
useful information to an analyst;
e) discuss the roles of the International Organization of Securities Commissions (IOSCO) and the
International Accounting Standards Board (IASB) in setting and enforcing global accounting
standards;
f) explain the components of and relationships among the income statement, balance sheet, and cash
flow statement;
g) discuss the additional sources of information accompanying the financial statements,
including the Management Discussion and Analysis section and financial footnotes;
h) discuss the role of the auditor and the meaning of the audit opinion.

1. A. “Accounting Income and Assets: The Accrual Concept”
a) describe the format of the income statement and describe the components of net income;
b) explain the importance of the matching principle for revenue and expense recognition;
c) identify the requirements for revenue recognition to occur;
d) identify and describe the appropriate revenue recognition, given the status of completion of the
earning process and the assurance of payment;
e) discuss different revenue recognition methods and their implications for financial analysis;
f) identify the appropriate income statement and balance sheet entries using the percentage-ofcompletion
method and the completed contract method;

g) describe and calculate the effects on cash flows and selected financial ratios that result from using
the percentage-of-completion method versus the completed contract method;
h) describe the types and analysis of unusual or infrequent items, extraordinary items, discontinued
operations, accounting changes, and prior period adjustments;
i) discuss managerial discretion in areas such as classification of good news/bad news, income
smoothing, big bath behavior, and accounting changes, and explain how this discretion can affect the
financial statements;
j) describe the format and the components of the balance sheet;
k) describe the format, classification, and use of each component of the statement of stockholders’
equity.
B. “Analysis of Cash Flows”
a) describe the elements of cash flow from 1) operations, 2) investing, and 3) financing;
b) classify a particular transaction or item as cash flow from 1) operations, 2) investing, or 3)
financing;
c) compute and interpret a statement of cash flows, using the direct method and the indirect method;
d) describe and compute free cash flow;
e) distinguish between the U.S. GAAP and IAS GAAP classifications of dividends paid or received
and interest paid or received for statement of cash flow purposes.

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