CPA FAR 1-75 ch 1-3 concepts

Question 1

Balance sheet: current assets

Answer 1

cash
cash equivalent
investments in equity securities- marketable securities
accounts receivable (less allowance) = net AR
inventory
prepaids
current portion of LT receivables
supplies

Question 2

Balance sheet: noncurrent assets

Answer 2

Fixed assets: PPE- land, building, equipment, machinery
LT notes receivable
LT investments
Intangibles:
trademarks, patents, goodwill, coprights

Question 3

Balance sheet: current liabilities

Answer 3

accounts payable
interest payable
wages payable
taxes payable
current portion of notes payable
mortgage payable
deferred revenue

Question 4

Balance sheet: noncurrent liabilities

Answer 4

LT debt - LT notes payable
LT bonds payable
deferred tax liabilities
LT lease liabilities
pension benefit obligations

Question 5

Balance sheet: supplemental disclosures

Answer 5

1. contingencies
2. summary of accounting policies
3. contractual situations
   4 . fair market value= provide elaboration or qualifications for B/S items

Question 6

Contingency

Answer 6

could have a material effect on financial
uncertainty of possible gain or loss such as lawsuit outstanding, guarantee of debt of another entity, or environmental liabilities
rules of conservatism require recording of certain loss contingencies (probable, estimable, material)
do not record gain contingencies
disclose contingency losses and gains unless remote

Question 7

summary of accounting policies and procedures (overview)

Answer 7

methods used to value assets and allocate costs vary considerably among B/S accounts
Ex what inventory valuation method, what depreciation method used? how are investments valued?

Question 8

summary of accounting policies and procedures-disclosure

Answer 8

must disclose nature of operations, use of estimates in prep of financial statements, certain significant estimates and vulnerabilities due to certain concentrations
vulnerabilities= disclose risk
Ex how did we come up with bad debt or warranty estimates?

Question 9

summary of accounting policies and procedures- contractual situations

Answer 9

if significant= disclose (amounts, important provisions)
Ex essential provisions of lease contracts, pension obligations, stock compensation

Question 10

summary of accounting policies and procedures- disclose if material

Answer 10

for users and investors:
when in doubt = disclose
management must consider if omission is misleading
commitments to maintain working capital
limits on dividends
restricted use of assets
requirements to maintain financial ratios

Question 11

summary of accounting policies and procedures- fair value disclosure

Answer 11

very important
reporting at fair value
1. level 1- most reliable based on observable inputs, market price for identical assets
2. level 2- less reliable- based on market price for similar assets
3. level 3- least reliable- based on unobservable inputs like company’s own data **significant disclosure needed

Question 12

methods and techniques for disclosures

Answer 12

1. parenthetical explanations
2. notes
3. cross reference and contra items
4. supporting schedules

Question 13

statement of cash flows

Answer 13

explains changes in cash for the period
operating activities
investing activities
financing activities

Question 14

current cash debt coverage

Answer 14

net cash from operating activities/average current liabilities
ability to meet ST obligations and assess liquidity

Question 15

cash debt coverage

Answer 15

ability to pay all liabilities
net cash from operating activities/average total liabilities

Question 16

free cash flow

Answer 16

net cash from operating activities less CAPEX less cash dividends
assesses financial flexibility and evaluate discretionary cash flow

Question 17

liquidity ratios

Answer 17

acid test aka quick ratio
current ratio
D/E ratio

Question 18

annuity

Answer 18

periodic payment amount at same interval

Question 19

orinary annuity

Answer 19

due at end of period

Question 20

annuity due

Answer 20

due at beginning of period

Question 21

Cash

Answer 21

coin currency
cash
foreign currency
checking account
petty cash
savings account (demand deposit)

Question 22

negotiable instruments

Answer 22

money order
certified check
cashier’s check
personal check

Question 23

cash equivalents

Answer 23

ST highly liquid investment
maturity = 3 months or less
T-bills
commercial paper
money market account

Question 24

restricted cash

Answer 24

cash set aside for a certain purpose like collateral for a loan or minimum balance for an account= compensating balance
*disclose if restricted cash or compensating balance = material

Question 25

AR recognition

Answer 25

passed legal title of goods to customer
transferred physical possession to customer
no longer significant risk/reward to ownership
customer accepted goods

Question 26

AR initial valuation

Answer 26

consideration expected to receive (transaction price) from customer in exchange for goods/services

Question 27

AR variable consideration

Answer 27

1. trade discounts (record net)
2. sales/cash discounts
3. sales returns/allowances
4. time value of money

Question 28

Sales return

Answer 28

return the merchandise

Question 29

sales allowance

Answer 29

price reduction (discount) for customer to keep product

Question 30

end of period adjustment - sales return

Answer 30

DR sales return
CR return liability
DR inventory estimated return
CR COGS

Question 31

Goodwill

Answer 31

is calculated as excess of carrying value over fair value
only loss recognized
tested at individual reporting unit

Question 32

10-K

Answer 32

required for public companies
audited annual financial statement for public companies required by
and submitted to SEC
includes auditor’s report and opinion
comprehensive report for the company’s financial condition includes material events and MD&A
filed with EDGAR

Question 33

10-Q

Answer 33

required for public companies
quarterly condensed financial statements submitted to SEC
no opinion issued
no inquiries or analytical procedures
list of material events and MD&A
file with EDGAR

Question 34

FOB shipping

Answer 34

revenue recognized when shipped to buyer

Question 35

FOB destination

Answer 35

revenue recognized when received by buyer

Question 36

Working capital

Answer 36

current assets less current liabilities

Question 37

unearned revenue or prepaid expenses

Answer 37

cash now and income statement later

Question 38

deferral of revenue

Answer 38

produces a current liability
expense is not recognized until incurred

Question 39

deferral of expense

Answer 39

produces current asset

Question 40

accrued revenue and expense

Answer 40

income statement now and cash later
accrual match the revenue and expense to the correct period

Question 41

service contract

Answer 41

deferred revenue

Question 42

MD&A

Answer 42

required disclosure not footnote that supplements the financial statements = not optional, need for GAAP compliance
narrative written by management for the annual report
precedes 10-K for annual report public company
narrative includes operations, liquidity, capital resources of the firm, future market conditions prediction, estimate of sales for coming year, analysis of major comps

Question 43

summary of significant accounting policies

Answer 43

usually first footnote
important for financial statement users
annually required to disclose sign acctg policies
helps for comparability
Ex inventory valuation methods, depreciation method, basis for consolidation, rev rec policies
not required for interim unless significant change

Question 44

Which of the following is ID’d and described in the footnotes known as summary of significant accounting policies?
1. measurement basis used in prep of financial statements
2. accounting principles and methods
3. revenue recognition policies

Answer 44

All!!

Question 45

Which of the following is ID’d and described in the footnotes known as summary of significant accounting policies?
1. criteria for recording the transaction
2. policies for measuring the transaction
3. pricing of inventory

Answer 45

All of the above

Question 46

Which of the following is Not ID’d and described in the footnotes known as summary of significant accounting policies?
1. dates of maturity and amounts of LT debt
2. yearly computation of depreciation, depletion, amortization
3. carrying value and gross unrealized gains/losses marketable securities
4. company pension plan and funded status
5. certain FV estimates, contingency losses, restrictions on assets

Answer 46

all are disclosed elsewhere!!

schedules may be added to the financials

method of depreciation = policy
computation of depreciation = not a policy

Question 47

change in accounting principle

Answer 47

not part of summary of significant accounting policies
but is disclosed in another note

Question 48

profit recognition on LT construction projects

Answer 48

should be disclosed- summary of significant accounting policies

Question 49

sources of risk and uncertainties requiring disclosure

Answer 49

1. nature of entity’s operations
2. use of estimates in financial statements
3. certain significant estimates
4. vulnerabilities due to certain concentrations
5. going concern assessment

Question 50

nature of operations (disclosure)

Answer 50

Required with description of:
major products and services
geographic locations
principle markets
different businesses have different risk
qualified basis: major, minor and intermediate
if more than one type of biz - disclose relative importance of each
give basis of the determination
Ex ID comps and vulnerability to tech changes

Question 51

Use of estimate (disclosure)

Answer 51

GAAP= firm must communicate that the use of estimates is inescapable in prep of financial statements that conform with GAAP
use of estimates = approx amount and not certainty
estimates involve assumptions about future events
Is the biz or economic environment stable or unstable?
tell users do not place an unwarranted degree of reliance on reported amount “actual results could differ from those estimates”
If uncertain that estimate will not change in near term= must disclose if it would be material and effect of change
include: nature of uncertainty that may cause estimate to change, reas possible that it may change in near term
Ex impairment of a segment

Question 52

Certain significant estimates (disclosure)

Answer 52

not just assets and liabilities, certain revenue, expenses, gains and losses are estimated and may be sensitive to change
if estimate concerns a loss contingency, disclosure mut include an estimate of poss loss/range of loss or state an estimate cannot be made

Question 53

Risk due to concentrations (disclosure)

Answer 53

concentrations: single vendor, single customer, single product = heavily concentrated in one area
not properly diversified = highly susceptible
excessive reliance on one customer, one vendor, one product/service for most of the revenue
reliance on small # of vendors
risk exposure to loss would have been mitigated through diversification

Question 54

Vulnerability disclosures: concentration

Answer 54

1. concentration exists at B/S date
2. entity is vulnerable due to concentration and risk of severe impact that could cause significant financial disruption to firm in near term
3. reasonably possible less than probable that events causing severe impact will occur in near term
   severe = greater than material but less than catastrophic

Question 55

4 defined concentrations

Answer 55

1. volume of biz with one supplier, one customer, one lendor/grantor but impact may not be severe (loss of relationship could be severe)
2. concentration in revenue from specific products, services or fundraising sources (price or demand change could have severe impact)
3. concentration in available resources (material, labor, services) loss of key supplier could have severe impact
4. concentration in market or geographic area (is it reas poss to have disruption in near term?)

Question 56

Concentration: disclose when company is vulnerable

Answer 56

condition existed at B/S date and its reasonably possible to have severe impact (meaning it is likely)

Question 57

Risk and uncertainty: disclose change in management or personnel?

Answer 57

not required for this

Question 58

subsequent events

Answer 58

transactions or events that occur after financial statement date but before issuance and are material per US GAAP

Question 59

Type I recognized subsequent event

Answer 59

requires restatement of financials
existed at B/S date
such as settlement of lawsuit that was pending

Question 60

Type II recognized subsequent event

Answer 60

did not exist at B/S date but occurs before financial statement issuance
disclosure not restatement even if material
more common
Ex earthquake, fire, flood

Question 61

Current asset: Inventory

Answer 61

not as liquid as cash
should be turned over at least once a year

Question 62

operating cycle

Answer 62

usually a year or less
sometimes over year such as LT construction contracts

Question 63

Liabilities - FASB framework

Answer 63

present obligation to transfer assets or provide services
unavoidable
result of past transaction and or event
outsider claim’s to firm’s assets or enforceable claims for services to be rendered
not necessary to know ID of creditor, exact amount to be paid or even due date