Module 9A: Basic Theory and Financial Reporting

Question 1

ISAB Framework: Income

Answer 1

Increases in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity, other than those relating to contributions from equity participants.

Question 2

ISAB Framework: Assets

Answer 2

An asset is a resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity.

Question 3

ISAB Framework: Liability

Answer 3

A liability is a present obligation of the entity arising from past events the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits.

Question 4

ISAB Framework: Equity

Answer 4

Equity is the residual interest in the assets of the entity after deducting all its liabilities.

Question 5

ISAB Framework: Expenses

Answer 5

Expenses are decreases in economic benefits during the accounting period in the form of outflows or depletion of assets or incurrence of liabilities that result in decreases of equity, other than those relating to distributions to equity participants.

Question 6

ISAB Framework for the Preparation and Presentation of Financial Statement, qualitative characteristics for Faithful Representation

Answer 6

Complete, neutral, and free from error

Question 7

Installment Sales

Answer 7

Revenue is recognized as cash is collected. Thus, revenue recognition takes place at the point of cash collection rather than the point of sale. Installment sales accounting can only be used where “collection of the sale price is not reasonably assured” (ASC Topic 605)

Question 8

Cost Recovery Method

Answer 8

Similar to installment sales method in that gross profit on the sale is deferred. The difference is that no profit is recognized until the cumulative receipts exceed the cost of the asset sold. The cost recovery method is used when the uncertainty of collection is so great that even use of the installment method is precluded.

Question 9

ISAB Framework for the Preparation and Presentation of Financial Statement, qualitative characteristics for Relevance

Answer 9

Predictive Value - requires that information be used to predict future outcomes
and
Confirmatory Value - requires that information either confirms or changes prior evaluations.

Question 10

Franchise Agreements

Answer 10

ASC Topic 952 provides that the initial franchise fee be recognized as revenue by the franchisor only upon substantial performance of their initial service obligation. The amount and timing or revenue recognized depends upon whether the contract contains bargain purchase agreements, tangible property, and whether the continuing franchise fees are reasonable in relation to future service obligations. Direct Franchise costs are deferred until the related revenue is recognized.

Question 11

Qualitative Characteristics: Relevance

Answer 11

Relevant information is capable of making a difference in a user’s decision. Financial information is relevant if it has predictive value, confirmatory value, or both. An item is material if omitting it or misstating it could influence a user’s decision. Therefore, the materiality threshold relates to the qualitative characteristic of relevance.

Question 12

Qualitative Characteristics: Relevance - Predictive Value

Answer 12

Requires that information be used to predict future outcomes

Question 13

Qualitative Characteristics: Relevance - Confirmatory Value

Answer 13

Requires that information either confirms or changes prior evaluations.

Question 14

Qualitative Characteristics: Faithful Representation

Answer 14

Information depicts what it purports to represent. A faithful representation should be complete, neutral, and free from error.

Question 15

Qualitative Characteristics: Faithful Representation - Completeness

Answer 15

Completeness requires that information is presented or depicted in a way that users can understand the item being depicted.

Question 16

Qualitative Characteristics: Faithful Representation - Neutrality

Answer 16

Neutrality requires that the item is depicted without bias either favorably or unfavorably to users.

Question 17

Qualitative Characteristics: Faithful Representation - Free From Error

Answer 17

Free from error means that there are no errors or omissions in the the information reported.

Question 18

Enhancing Qualitative Characterisitics

Answer 18

The enhancing qualitative characteristics of accounting information are comparability, verifiability, timeliness, and understandability.

Question 19

Economic Entity Assumption

Answer 19

Economic activity can be identified with a particular unit of accountability. Note: However, you can define the entity at a higher level (e.g. Parent) or lower level (e.g Subsidiary)

Question 20

Going Concern Assumption

Answer 20

The business enterprise will have a long life. The going concern assumption does not apply if liquidation of the business appears imminent. Note. The fair value of an asset irrelevant if we are going concern and we need this asset in our operations, this is another reason to use historical cost instead of fair value.

Question 21

Monetary Unit Assumption

Answer 21

Money (the U.S. dollar is the common denominator of economic activity and provides an appropriate basis for accounting measurement and analysis.

Question 22

Periodicity Assumption

Answer 22

The economic activities of an enterprise can be divided into artificial time periods. We report financial information periodically to apprise users of performance and economic status.

Question 23

Historical Cost Principle

Answer 23

GAAP requires that most assets and liabilities be accounted for and reported on the basis of acquisition price because it is the most reliable valuation.

Question 24

Matching Principle

Answer 24

Expenses are to be matched to the revenues whenever it is reasonable and practicable to do so.

Question 25

Revenue Recognition Principle

Answer 25

Revenue is generally recognized when (1) realized or realizable and (2) earned. Revenues are realizable when assets received or held are readily convertible into cash or claims to cash. Revenues are consider earned when the entity has substantially accomplished what it must do to be entitled to the benefits represented by the revenues.

Question 26

Exceptions to the Revenue Recognition Principle

Answer 26

(1) during production (e.g. percentage of completion accounting for construction) and (2) upon receipt of cash (installment sales method or cost-recovery of accounting); additional exceptions are (3) multiple-deliverable revenue arrangements and (4) milestone method of recognition on research and development contracts.

Question 27

Private Entity

Answer 27

A private company is, “an entity other than a public business entity, a not-for-profit entity, or an employee benefit plan within the scope of Topics 960 through 965 on plan accounting.”

Question 28

Current (replacement) Cost

Answer 28

Some inventories are reported at their current (replacement) cost, which is the amount of cash, or its equivalent that would have to be paid if the same or an equivalent asset were acquired currently.

Question 29

The following five items are to be used as a guide to determine if there should be differential guidance between public and private companies:

Answer 29

1) Recognition and measurement
2) Disclosures
3) Display
4) Effective Date
5) Transition method

Question 30

Change in Reporting Entities

Answer 30

When there is a change in reporting entity, the change is retrospectively applied to the financial statements of all prior periods presented. Previously issued interim statements are also presented on a retrospective basis.

Question 31

Three Criteria for a prior period adjustment:

Answer 31

1) the effect of the adjustment is material to income from continuing operation;.
2) the adjustment can be identified with a prior period; and
3) the amount of the adjustment could not be estimated in prior periods.

Question 32

Private Company Decision Making Framework: Guide to determine if there should be differential guidance between public and private companies

Answer 32

1) Recognition and measurement
2) Disclosures
3) Display
4) Effective date
5) Transition Method

Question 33

Deferred Cost

Answer 33

A cost which has been paid in advance of its use in the business and is, therefore, an asset which will provide future benefits such as the prepayment of insurance premiums.