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CPA FAR Exam > CPA FAR 1-75 Ch 10 > Flashcards

CPA FAR 1-75 Ch 10 Flashcards

1
Q

What should a full set of financial statements include?

A

statement of financial position (B/S), statement of earnings (I/S) statement of comprehensive income, statement of cash flows, statement of owners’ equity

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2
Q

“Classified” balance sheet

A

distinguishes current and non-current liabilities and assets

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3
Q

Match unexpired cost to expense: Inventory, prepaid/unexpired cost of insurance, NBV fixed assets, unexpired cost of patents

A

Inventory= COGS, prepaid/unexpired cost of insurance= insurance expense, NBV fixed assets= depreciation expense, unexpired cost of patents= amortization

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4
Q

Gross or net: gains and losses on disposal of assets

A

Reported Net = proceeds less NBV

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5
Q

Gains/Losses from discontinued operations

A

consists of impairment loss, a gain or loss from actual operations, and a gain or loss on disposal

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6
Q

How do account for subsequent increases in fair value of a discontinued component?

A

a gain is recognized for subsequent increases in fair value less costs to sell **not in excess of previously recognized cumulative loss

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7
Q

What conditions must be present for a disposal to be reported in discontinued operations?

A

disposal of a component, group of components, business activity, or nonprofit activity is reported disc ops **if disposal represents a strategic shift that will have major effect on entity’s ops and financial results

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8
Q

2 types of foreign currency transactions

A

Operating transactions (importing, exporting, borrowing, lending, investing) and Foreign exchange contracts (agreements to exchange two different currencies at specific future date and specific rate

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9
Q

Where are foreign currency gains and losses recorded?

A

I/S = helps determine net income for the period

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10
Q

Recording process: operating transactions in a foreign currency

A

Record original transaction at spot rate on date of transaction, B/S date= compute gains/losses on transaction by recalculating using current exchange or spot rate, Payment date= compute gain/loss by using rate on payment date

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11
Q

Comprehensive income

A

a change in equity (net assets) that results from transactions and other events and circumstances from non-owner sources

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12
Q

Comprehensive income is made up of:

A

PUFI: Pension adjustments, unrealized gains/losses AFS securities and hedges, foreign currency translation adjustments (and gains/losses on certain foreign currency translations), Instrument-specific credit risk for liabilities (change FMV)

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13
Q

EPS (basic)

A

income available to common shareholders divided by weighted average number of common shares outstanding

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14
Q

dilutive securities/instruments

A

stock options, warrants and their equiv, convertible securities (bonds, pref stock), contracts to be settled in stock or cash, contingent issuable shares

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15
Q

Basic EPS

A

simple capital structure, only common shares outstanding

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16
Q

Diluted EPS

A

complex capital structure
income avail to common shareholders assuming conversion of all dilutive shares divided by weighted average common shares outstanding after conversion of all dilutive shares

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17
Q

Operating lease: who recognized the depreciation expense

A

Lessor using straight line for operating lease

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18
Q

straight line depreciation expense

A

cost of asset/useful life

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19
Q

short term lease

A

less than 12 months, it is expensed!!
no liability or asset on the balance sheet

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20
Q

Operating lease- lessee perspective: what expense is recognized?

A

lease expense only
it is the only expense for an operating lease = it is the amount of the lease payment
Interest is not separately recognized

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21
Q

Incremental borrowing rate

A

the rate the lessee could get borrowing that much additional money from a bank (same as if lessee went to the bank and borrowed the money)

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22
Q

Implicit rate

A

mathematical interest rate built into the payment by the lessor
**if known= use this rate
it is found in the amortization schedule given to lessee

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23
Q

finance lease criteria (must meet one to classify as a finance lease)

A
  1. ownership transfers
  2. bargain purchase option
  3. lease greater than 75% of economic life of the asset
  4. min lease pymt greater than 90% of FMV at lease inception
  5. no alternative use to lessor at lease term end
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24
Q

Expense for operating lease- lessee perspective

A

lease expense
no separate interest expense

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25
Q

Finance lease- lessee perspective

A

2 expenses recognized
1. amortization expense
2. interest expense

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26
Q

capitalization

A

recorded as an asset on the balance sheet (provides future economic benefit) such as PPE or intangibles
the asset is depreciated or amortized over its useful life with expense on I/S
Accum deprec or Accum amortization = contra-asset on B/S

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27
Q

Amortization

A

spread the cost of intangible asset across its useful life
reflects declining value of the asset over time
Amortization = expense on I/S and reduces net income

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28
Q

Guaranteed residual value

A

includes amount of money that lessee must pay to lessor at the end of the lease in the event that the asset has declined in value below the agreed upon amount Ex. mileage limitation on lease

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29
Q

Ordinary annuity

A

due at the end of the period

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30
Q

Annuity due

A

due at beginning of the period

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31
Q

Cost depletion

A

unrecovered cost less residual value/current estimated recoverable units

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32
Q

Composite depreciation

A

averages the service life of a number of assets and depreciates the group as if it were a single asset
Sum of annual straight line depreciation of individual assets/
total asset cost

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33
Q

Units of production

A

Cost less salvage value/
Estimated units

rate per unit or rate per hour
variable cost
depreciation method

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34
Q

Double declining balance

A

salvage value not subtracted first year =
depreciable base = cost

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35
Q

Change depreciation method

A

treatment as if it were a change in estimate
prospectively
starting point = NBV/ remaining useful life

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36
Q

Straight line deprecation

A

cost less salvage value/estimated useful life

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37
Q

Depreciable base

A

= cost less salvage value

it is the basis for depreciation

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38
Q

Intangible- Internally developed: R&D Expense vs Capitalized

A

Internally developed = most are expensed as R&D costs

Capitalize external costs like registration of a patent over the shorter of legal or economic life

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39
Q

Avoidable interest- Weighted average

A

Interest rate X weighted average accumulated expenditures for construction

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40
Q

Interest rate

A

incremental borrowing rate for an entity

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41
Q

Average accumulated expenditures for construction

A

payment that could have been avoided had there been no construction
Simple average for even pymt thru the year =
Beg balance + end balance/2

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42
Q

Avoidable interest

A

interest that could have been avoided had the entity not constructed the asset
Interest rate X average accumulated expenditures for construction

43
Q

Land improvements

A

can be depreciated
record as separate asset from land
Ex: fence, sewage system, sprinkler/water system, sidewalks, paving, landscaping

44
Q

Land costs

A

all costs prior to excavation
capitalized
land does not depreciate
Includes: draining a swamp, broker fees, legal fees, land to fill in (dirt in, leveling) pay back taxes, title/recording fees, title insurance, clearing brush, rai=ze old bldg less scrap

45
Q

Fixed asset - book value

A

Cost less accumulated depreciation less impairments = book value

46
Q

Capitalized fixed asset costs

A

insurance in transit, excise tax, sales tax, installation, testing the machine, freight in

47
Q

Not accounting changes

A

error corrections

48
Q

Fees paid in cloud computing arrangement that are an outright purchase of a software license should be…

A

capitalized as an intangible asset and amortized over the life of the asset
if service contract = expensed

49
Q

Not from normal operations

A

Interest expense (non-operating expense)

50
Q

Depreciation expense

A

not lumped with general and administrative expenses
separate line item above income from operations

51
Q

Selling expense

A

freight out
advertising
sales salaries
sales commissions

52
Q

general and administrative expense

A

utilities
officer’s salaries
property tax expense
insurance
legal and accounting expenses and fees

53
Q

Freight out

A

selling expense

SG&A/Operating expense

54
Q

Cost of goods available for sale

A

Beg Inventory + purchases + freight in

55
Q

COGS

A

Beg Inventory + Purchases + freight in =
Cost of goods avail for sale
less End inventory =
COGS

56
Q

Freight in is part of ..

A

COGS

57
Q

COGS

A

direct costs (labor and materials) related to the purchase of goods plus freight in

58
Q

Gross Profit

A

Revenue less COGS = Gross profit

important KPI

59
Q

Completed Contract method

A

only if you cannot us % completion
use if uncertain about customer ability to pay
use if this is a new type of job for the entity
if no profits recognized until work is substantially complete
recognize 100% of loss immediately (conservatism)

60
Q

% completion GAAP journal entries

A

Cost:
DR CIP
CR Cash
Billing:
DR AR
CR prog billing
Payment:
DR Cash
CR AR
Revenue recognition:
DR Construction expense
CR CIP-profit

61
Q

Progress billing

A

contra-asset to CIP
CIP > Prog billing = current asset
Prog billing > CIP = current liability

62
Q

CIP: Construction in progress

A

current asset
construction costs to date
profit recognized to date

63
Q

Direct incremental costs (to obtain a contract)

A

costs not otherwise incurred if the contract had not been obtained
recognized as asset if entity expects to recover costs
Capitalized and amortized over the life of the revenue -not expensed
Ex sales commissions, legal fees, engineering and accounting fees

64
Q

5 steps of revenue recognition

A
  1. ID contract with client
  2. ID performance obligations in contract
  3. determine contract price
  4. allocate transaction price to perf obligation in contract
  5. recognize revenue when/as the entity satisfies the perf obligation
65
Q

Allowance method to estimate credit loss expense

A

consistent with GAAP and accrual accounting

66
Q

Direct write off method for credit loss expense

A

only used for income tax returns

67
Q

Net realizable value

A

AR less recovery (no effect on total assets and net income)
Increase allowance = decrease NRV
NRV decreased with recovery
After allowance method nets certain AR to zero,
customer pays all or part of the AR
DR AR
CR Allowance
DR Cash
CR AR

68
Q

Allowance for doubtful accounts

A

contra asset to AR

69
Q

Write off

A

no effect on total assets or net income

DR allowance for uncollectible/doubtful acct
CR AR

70
Q

Trade discounts

A

quantity discounts
sales revenue and AR should be recorded NET of discount

71
Q

Sales discounts not taken

A

Net method = returns sales to full amount when customer does not pay within discount period
Revenue account = normal credit balance

72
Q

Sales discounts

A

contra-revenue account
normal debit balance

73
Q

unearned revenue

A

nonfinancial liability
normal credit balance

74
Q

PPE

A

nonfinancial assets

75
Q

When determining fair market value and do not know principal market:

A

transaction costs used to determine the most advantageous market

76
Q

One you know principal market:

A

ignore transaction costs in determining FMV

77
Q

Stock split in subsequent period but before issuance of financial statement

A

GAAP states must restate financial statements to address # of shares outstanding impacted by stock split

78
Q

Type I subsequent event

A

restatement required
existed at B/S date
may use footnote to supplement

79
Q

Type II subsequent event

A

no restatement
did not exist at B/S date
more common
disclose only

80
Q

Matching principle - accrual accounting US GAAP

A

matches expenses against revenues in the period incurred and earned
all expenses incurred to generate a particular revenue should be recorded in the same period in which revenue is recorded

81
Q

expense

A

no future economic benefit, period costs

82
Q

accrual accounting treats expired costs as

A

an expense

83
Q

assets

A

provide future economic benefits

84
Q

Gift certificate

A

deferred revenue account = liability
account will decrease with redemption of GC or lapse/expire GC
future income collected in advance
DR Cash
CR deferred GC revenue
Used/Expired:
DR deferred GC revenue
CR revenue

85
Q

Cash and deferrals

A

cash now, I/S later

86
Q

Cash and accruals

A

I/S now, cash later

87
Q

Deferred expense

A

prepaid expense

88
Q

deferred revenue

A

unearned revenue = prepaid = liability

89
Q

Working capital

A

current assets less current liabilities

90
Q

Order of financial statements

A

I/S -> Capital/RE -> B/S then closing entries

91
Q

Closing entries

A

Income summary temp account –
DR Rev
CR Income summary
DR Income summary
CR Expense
DR Income summary
CR Equity capital
DR Equity capital
CR Dividends

92
Q

Balance sheet

A

A = L+E
**must always balance
A-L =E
Equity = net assets

93
Q

Public and private companies must use US GAAP for reporting

A

private- once a year at tax time IRS
Public- SEC quarterly 10-Q and annually 10-K plus IRS

94
Q

FASB codification

A

FASB codification -> US GAAP
responsible for accounting rules and principles
offer consensus and comparability

95
Q

Primary financial statement users

A

potential and existing investors
creditors
lenders

96
Q

Secondary financial statement users

A

regulators and general public

97
Q

Net realizable value NRV

A

report accounts receivable at NRV
required US GAAP
uses allowance method

98
Q

Allowance for doubtful accounts

A

contra-asset to AR
Income approach (I/S one step)
Rec’v approach (B/S two steps - % of rec’v or aging process)
more involved vs direct write off
uses matching principle = adjust end of every period (estimate)

99
Q

SEC form S-1

A

the initial registration form for a new issuer of securities required by SEC

100
Q

Regulation S-X

A

contains info re: financial statement that must be submitted to the SEC
describes the form and content of the financial statement
all financial statements presented in annual reports to SEC must conform to the accounting and disclosure rules presented in regulation S-X

101
Q

Form S-K

A

contains instructions for filing nonfinancial statement forms required by the SEC

102
Q

Form 8-K

A

current events - SEC
companies report current events to everyone at the same time such as product being removed from market for safety reasons, CEO stepping down, change in auditors, merger announcements, creation of an obligation under off B/S arrangement
avoids inside info leaking out first to some parties then to others
4 biz days from event to file

103
Q

Form 3

A

statement of beneficial ownership for corporate insiders, officers, directors, owners with > 10% SE
must file reports any month buying and selling

104
Q
A

CPA FAR Exam (25 decks)

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