Section A — External Financial
Reporting Decisions
All definitions, formulas, journal entries, key concepts, and exam tips from the HOCK CMA textbook — distilled into one clean, exam-ready reference guide.
📋 Contents — Section A
To provide financial information about a company that is useful for making decisions about providing resources to the company — primarily for existing and potential investors, lenders, and creditors.
- Balance Sheet (Statement of Financial Position) — assets, liabilities, equity at a point in time
- Income Statement (Comprehensive Income) — revenues, expenses, net income over a period
- Statement of Comprehensive Income — net income + other comprehensive income (OCI)
- Statement of Changes in Stockholders' Equity — movements in equity accounts
- Statement of Cash Flows — cash inflows/outflows: Operating, Investing, Financing
- Plus: Notes to Financial Statements — disclosures and supplementary information
- Change in Retained Earnings = Net Income − Dividends Declared
- Many balance sheet accounts are used to calculate income statement amounts (e.g., PP&E → Depreciation Expense)
- Change in Cash on Balance Sheet = Net Increase/Decrease in Cash on SCF
- Must meet the definition of an element
- Must be measurable
- Must be depicted with faithful representation
- Must be representationally faithful, verifiable, and neutral
- Historical cost — PP&E, most inventories
- Current replacement cost — some inventories
- Current market value (fair value) — marketable securities, impaired assets
- Net realizable value — receivables (net of allowance), some inventories
- Present value of future cash flows — long-term debt
- Liquidation values — only when company is no longer a going concern
The Balance Sheet (Statement of Financial Position) shows a company's assets, liabilities, and owners' equity at a point in time (usually end of a reporting period). It shows the resource structure (assets) and financing structure (liabilities + equity).
- Cash & cash equivalents — coins, deposits, demand accounts; equivalents = maturities ≤3 months from purchase date
- Marketable securities — classified as current if intended for short-term
- Receivables — trade accounts, notes receivable; collectible within one year/operating cycle
- Contract assets (ASC 606) — right to consideration contingent on future performance
- Inventories
- Prepaid expenses
- Long-term investments and advances
- Property, Plant & Equipment (PP&E)
- Right-of-use assets (from leases)
- Intangible assets (patents, goodwill)
- Net deferred tax assets
- Cash surrender value of life insurance on key employees
- Accounts payable and trade notes payable
- Cash dividends payable
- Contract liabilities (customer prepayments)
- Short-term notes (30/60/90-day)
- Current portions of long-term debt and lease liabilities
- Taxes payable, wages payable, and other accruals
- Assurance-type warranty liabilities (current portion)
- Long-term obligations callable due to covenant violation
- Long-term notes or bonds payable
- Long-term portions of lease liabilities
- Pension obligations
- Net deferred tax liabilities
- Non-current portion of assurance-type warranties
- Common Stock — par value × shares issued
- Additional Paid-in Capital (APIC) — proceeds above par value
- Retained Earnings — cumulative net income less dividends
- Accumulated OCI (AOCI) — unrealized gains/losses, pension adjustments, etc.
- Treasury Stock — contra-equity account (debit balance); reduces equity
- Noncontrolling Interest — equity of minority shareholders in consolidated subsidiaries
Bank Overdrafts: If no offsetting cash in the same bank, overdraft is a current liability added to accounts payable. If there is enough cash in another account in the same bank, the net positive balance is reported as cash (a current asset).
Comprehensive Income = change in equity from non-owner sources during a period. It includes net income PLUS other comprehensive income (OCI). Formula:
Gross Profit = Net Sales − Cost of Goods Sold
Operating Income = Gross Profit − SG&A Expenses
Net Income = Operating Income + Non-operating items − Income Taxes
- Revenues
- − Cost of Goods Sold = Gross Profit
- − Selling, General & Administrative = Operating Income
- + Interest/Dividend Income, − Interest Expense, ± Non-operating Gains/Losses
- = Income from Continuing Operations before Tax
- − Income Tax Provision = Income from Continuing Operations
- ± Discontinued Operations (net of tax)
- = Net Income
- + EPS must also be shown on the face of the income statement
Operating income = revenues and expenses from core business ONLY. Does NOT include financial income/expense, non-operating gains/losses, or taxes.
Income from continuing operations = Operating Income + financial income/expense + non-operating gains/losses + income taxes.
- Unrealized gains/losses on available-for-sale debt securities
- Pension liability adjustments
- Foreign currency translation adjustments
- Unrealized gains/losses on cash flow hedges
OCI items do NOT go through the income statement. They go directly to equity via AOCI. Total Comprehensive Income = Net Income + Change in AOCI for the period.