accounting auditing Flashcards

Question

How does a very material GAAP issue affect the Audit Report?

Answer 1

Modified-Adverse Opinion is issued. Emphasis-of-Matter paragraph is added after Opinion paragraph.

Answer 2

GAS is more strict than GAAS.

Answer 3

An audit performed under governmental auditing standards (GAS). A report on internal control is required. GAAS and GAS don't require the I/C report.

Answer 4

Taking part of a population- subjecting it to audit procedures- projecting results to a population

Answer 5

Based on formulas Helps find an appropriate audit sample Helps evaluate evidence obtained Helps evaluate results and quantify Sampling Risk

Answer 6

Based on human decision Equally acceptable as Statistical Sampling

Answer 7

Variables sampling Probability proportionate to size sampling

Answer 8

Attribute Sampling

Answer 9

Risk that your sample isn't representative of population Can happen even if audit is done properly

Answer 10

A risk of Control Testing - Auditor works to make Control Risk lower More substantive tests - Sample overstates Control Risk- Leads to an under-reliance on internal control- over-testing- and overall audit inefficiency Audit ends up being effective (correct result)- but you do more work

Answer 11

A risk of Control Testing - Complement to Confidence Level Inverse relationship to Sample Size Higher accepted risk of assessing Control Risk too low = Smaller Sample Lower accepted risk of assessing Control Risk too low = Larger Sample

Answer 12

Leads to higher Detection Risk - Fewer substantive tests Sample understates Control Risk This error leads to over-reliance on internal control- under-testing- and overall audit ineffectiveness. Does NOT necessarily mean that the Financial Statements are materially misstated - it does mean that if there is one- you are less likely to find it

Answer 13

A risk of Substantive Testing - Auditor accepts a balance as fairly stated- when in fact it is not fairly stated Hurts audit effectiveness Wrong conclusion reached Efficient- but not effective

Answer 14

A risk of Substantive Testing - Auditor rejects balance as fairly stated when in fact it is fairly stated Hurts audit efficiency Wrong recommendations given Effective- but not efficient

Answer 15

Risk of human (auditor) missing an error Also called exception- error or deviation.

Answer 16

Sampling Risk deals with the chance that your audit sample is flawed Non-Sampling risk deals with the chance that your human decisions/conclusions are flawed

Answer 17

Looking at Control Procedures - Were invoices approved when paid? Errors are stated in terms of %- not dollar amounts For example- 5 invoices out of 100 were not properly paid. Error rate is 5% Hint: If you see Error Rate on the Exam- they are referring to Attribute Sampling.

Answer 18

Control Procedures are either operating properly or they are not operating properly - based on Error Rate and the tolerance you have for errors

Answer 19

Error rate in population that you are willing to accept/tolerate Inverse relationship to Sample Size Higher Tolerable Rate = Smaller Sample Lower Tolerable Rate = Larger Sample If you're willing to accept a higher probability that errors exist- there is less pressure on the sample

Answer 20

What Error Rate are you expecting? - Judgment call- based on experience Direct relationship to Sample Size More errors = Larger Sample Less errors = Smaller Sample

Answer 21

Attribute in the sample gives information about the entire audit population Used to estimate Internal Control error rate

Answer 22

Used to determine initial level of Control Risk

Answer 23

Risk of Assessing Control Risk too low Gives you the Sampling Risk

Answer 24

Attribute sampling is only useful when there is documented evidence (an audit trail) to test Use when the existence of an error needs to be verified or debunked

Answer 25

Testing for a dollar amount Value in sample gives information about value in entire population.

Answer 26

Mean Per Unit = Sample Average x Number in Population Stratification - Decreases effect of variance in population and reduces sample size

Answer 27

A form of Variable Sampling Does NOT use Standard Deviation Auditor focuses on a dollar amount Larger or more valuable items get picked more often as part of the sample

Answer 28

Misstatement found in sample - have to project it to remainder of population

Answer 29

PPS: Easier to use- Results in a stratified (homogenous) sample- Results in a smaller sample size to audit- Easy to design Classic Variables Sampling: Easy to expand sample size- Selecting zero and negative balances easy

Answer 30

Tolerable rate for error - Inverse relationship with sample size Risk of assessing Control Risk too low - Inverse relationship with sample size Expected population error rate - Direct relationship with sample size Population size does NOT affect the sample size - as population is larger- sample size doesn't grow.

Answer 31

SER + ASR < TER SER = Sample Error Rate ASR = Allowance for Sampling Risk TER = Tolerable Error Rate

Answer 32

The amount that you add to the Sampling Error Rate to get some cushion for your sample. As high as you think the population error rate could go based on experience.

Answer 33

The amount of error rate that you can accept - If population error rate is less than TER- then accept the Control as effective If population error rate is more than TER- do more testing to get SER lower or conclude control isn't effective. Do more substantive testing

Answer 34

Determine Test Objective - for example- have sales shipments been billed? Define Population and Deviation - take a sample of shipping document- trace forward to see if billed Determine Sample Size based on tolerable rate for error- risk of assessing Control Risk too low- and expected population error rate. Select Sampling Technique

Answer 35

Perform the Sampling Plan Evaluate Results Document Results

Answer 36

Every certain # of a population is selected Population needs to be randomly ordered Primary advantage is that population doesn't require pre-numbering

Answer 37

Also called Stop or Go sampling Each audit step determines the next step

Answer 38

Audit is testing an area that is so crucial that zero population errors can be tolerated Any phony employees on payroll?

Answer 39

Easy to implement- but is the worst method of sampling.

Answer 40

To provide users of financial information with REASONABLE ASSURANCE that the financial statements are not materially misstated.

Answer 41

Auditors are *not* responsible for detecting theft or fraud. Instead- they are responsible for providing REASONABLE ASSURANCE that the financial statements are not materially misstated.

Answer 42

The earlier the auditor is hired- the better for audit planning and efficiency.

Answer 43

If Control Risk for the accounts and/or transactions is low- audit procedures can be performed at interim dates. The auditor then reviews changes in the balances at year-end.

Answer 44

The auditor can take the engagement if they are able to overcome the limitations of the engagement.

Answer 45

To plan the scope of the audit To plan the objectives of the audit

Answer 46

The auditor can compare actual versus forecasted numbers.

Answer 47

If issues relating to predecessor auditor's work on previous Financial Statements come up during the current audit- Auditor must have client's permission to discuss the issue.

Answer 48

Were they adequately performed? (Review the working papers) Are the results consistent with the audit report?

Answer 49

Auditor determines what the reporting objectives are. Auditor determines the scope of the audit.

Answer 50

Auditor must be independent in fact and appearance Honesty No direct financial interest No indirect material financial interest

Answer 51

Technical abilities mirror those held by peers in the profession Follow GAAS Standards Obtain a Reasonable Level of Assurance Maintain Reasonable Level of Skepticism Supervise Audit Staff Review judgment at every level

Answer 52

Review the previous financial statements Speak to third parties Contact predecessor auditor to evaluate whether engagement should be accepted (must have client permission)

Answer 53

Note: must have permission of client to contact predecessor auditor (no permission = no engagement) Why the Auditor Change? Any Serious Discussions with Audit Committee? How is Management Integrity? Disagreements? How was Internal Control? Understand Industry or Be Willing to Learn Consider Scope Limitation - Limited evidence available = no engagement

Answer 54

Note: must be written Objectives of Engagement Limitations of Engagement Responsibilities of Management - Provide written assertions Responsibilities of Auditor - Limited error/fraud responsibility Expectations of Access to Records Financial Statements (and Disclosures) are Management's Responsibility Compliance with Laws Internal Control

Answer 55

Management is responsible for financial statements and adequacy of disclosures. Presentation & Disclosure Existence (Tests Overstatements) Rights & Obligations Completeness (Tests Understatements) Valuation & Allocation

Answer 56

Responsible for Hiring Auditor Oversees Internal Control Must Agree with Auditor on: Responsibility of the Parties- Audit Fee- Timing of the Audit- Audit Plan Acts as Liaison Between Auditor and the Board Auditor Communicates Concerns about: Internal Control Deficiencies- Errors- Fraud- Illegal Activities

Answer 57

Inherent Risk x Control Risk x Detection Risk Risk that material mistakes- errors- omissions- or fraud will result in an inaccurate audit report Based on Auditor Judgment Measured in both Qualitative and Quantitative

Answer 58

Risk that internal control will not detect error or fraud Auditor cannot control this.

Answer 59

Which transactions have a higher level of risk? Auditor cannot control

Answer 60

Will the auditor fail to detect a material misstatement? Auditor CAN control Do testing at year-end Increase substantive testing Run more effective tests

Answer 61

Less Acceptable DR = Run More Substantive Tests More Acceptable DR = Run Less Substantive Tests More Substantive Tests (DR down) = Less Audit Risk; (AR = IR x CR x DR) Less Substantive Tests (DR up) = More Audit Risk; (AR = IR x CR x DR)

Answer 62

Quantitative Measurements - Inherent- Control- and Detection Risk can all be measured in terms of percentages Non-Quantitative Measurements - Inherent- Control- and Detection Risk can all be measured in terms of acceptable ranges

Answer 63

It is Management's responsibility.

Answer 64

Assess the RISK that such things will lead to material misstatements Design the audit to provide reasonable assurance against fraud- illegal acts that directly and materially affect the financial statements Report ALL management fraud to the audit committee (minor fraud by low-level employees not reported to committee) Perform required inquiries and procedures (management inquiries- analytical procedures- discussions with audit personnel about fraud)

Answer 65

Fraud is born out of: Rationalization Incentive Opportunity (RIO)

Answer 66

Errors are unintentional- fraud is intentional.

Answer 67

Management compensation tied to stock Aggressive financial forecasting Former auditor disagreed with Management Records not available for audit Current audit procedures may need to be reconsidered if red flags exist.

Answer 68

Has been observed in similar situations Does NOT necessarily mean that there is a material weakness in internal control Leads to an auditor taking action

Answer 69

Internal control analysis can result in the conclusion that IC is weak- but probably won't identify illegal acts

Answer 70

Strives to make audit engagement procedures less patterned and predictable Re-evaluates management's application of accounting procedures Finds and assigns audit personnel with relevant skills in this area

Answer 71

Any fraud risks identified that could lead to material misstatement Audit procedures performed to assess risks Nature of communication made to audit committee and company management Disclosure to third parties regarding fraud not normally the auditor's responsibility Fraud by management should normally be reported to the audit committee- NOT the SEC.

Answer 72

Created PCAOB Designates Officer responsibility for internal control Must disclose significant internal control weaknesses to auditor and audit committee Must disclose any level of fraud discovered by employees with internal control responsibilities

Answer 73

1. Statements on Auditing Standards (SAS) 2. Auditing Interpretations- AICPA Guides & SOPs 3. Industry Articles (no authority)

Answer 74

Firm Leadership exhibits quality and leads by example and sets the tone for the organization Firm should Monitor and document that its policies and procedures are being followed Firm should have Relevant Ethical Requirements Acceptance and continuance of client engagements should continue to be evaluated for client integrity- auditor competency- and legality Firm should have competent and ethical personnel Firm engagements are performed- supervised- and reviewed in accordance with professional standards and regulations.

Answer 75

SSARS - Statements on Standards for Accounting and Review Services These govern reporting for non-public entities only

Answer 76

Independence NOT required for Compilations No Internal Control work allowed No assurance given

Answer 77

Compilations are not an assurance service. No assurance is provided.

Answer 78

Reviews provide NEGATIVE assurance.

Answer 79

Reviews require independence. No Internal Control work allowed Performs analytical procedures No material indirect financial interest allowed No immaterial direct financial interest allowed

Answer 80

Must have an understanding of the client industry.

Answer 81

CPA expresses a conclusion about an assertion - Compliance with laws NOT considered a Consulting engagement Independence Required

Answer 82

Independence is not required for consulting services.

Answer 83

Report is restricted to specified users. Agreed-upon procedures are implemented.

Answer 84

Develop Audit Strategy; Communicate with Component Auditors; Perform work on the Consolidation Process; Evaluate Audit Conclusions; Understand work of Component Auditors;

Answer 85

Firm Partners; Group Engagement Partner; Audit Staff

Answer 86

The Group Engagement Team; The Materiality threshold must be lower than the Group Materiality threshold

Answer 87

Group Audit Engagement Direction - Supervision - Performance and the Audit Report

Answer 88

Audit a component of the entity

Answer 89

Audit the Financial Information

Answer 90

Perform Audit Procedures

Answer 91

Analytical Procedures performed at Group Level

Answer 92

Contact Client external counsel through a Letter of Inquiry

Answer 93

Collection of evidence to support the opinion.

Answer 94

Evidence consists of client accounting data and supporting documentation from client or from third parties.

Answer 95

Evidence has an inverse relationship with Detection Risk The one aspect of Audit Risk an auditor can control through (N)ature (T)iming (E)xtent of audit procedures. Inherent Risk and Control risk are outside of auditor's control.

Answer 96

Detection Risk which is decreased by gathering evidence.

Answer 97

Inherent Risk and Control Risk are outside of an auditor's control.

Answer 98

Less Evidence collected. Opens door for incremental audit risk - Internal Control should be strong. Business and transactions should be relatively stable and predictable. (N) Less-competent Evidence collected (T) Interim testing acceptable (E) Fewer transactions are verified.

Answer 99

More Evidence collected (N) More-competent Evidence collected (T) End of year balance testing (E) More transactions are verified

Answer 100

Auditors are there to verify that Assets & Revenues are not overstated Expenses & Liabilities are not understated Exception - if the CPA Exam states that it is a tax-driven company flip them around

Answer 101

Cost vs. Benefit is a primary constraint.

Answer 102

Sufficient (quantity) Appropriate: Relevant & Reliable (Quality)

Answer 103

Best evidence: Observation of activity by auditor. 2nd Best: Originates from External Parties and is sent directly to auditor (or failing that items are generated by third party and provided to auditor by the client such as a bank statement) Weakest: Oral evidence from management.

Answer 104

Third party documents are more persuasive and credible than internally-prepared docs Auditor Knowledge = Most Persuasive 3rd Party info given to auditor 3rd Party info given to client Internally-prepared doc

Answer 105

Test substance/amounts/values. They help to reduce the risk of material misstatements. They only test accuracy of financial statements and dollar amounts - they don't test internal controls.

Answer 106

``` Trace (or Vouch) Reconcile Analytical Procedures Confirmations Examine evidence that supports management assertions. ``` (T.R.A.C.E.)

Answer 107

Auditors focus first on Balance Sheet Accounts then associated Income Statement items

Answer 108

Assurance Level is High. Acceptable Detection Risk is Low.

Answer 109

If Acceptable DR is High - Negative Confirmation is used - Customer only responds if balance is materially wrong. If Acceptable DR is Low - Positive Confirmation is used - Customer asked to confirm by telling auditor the balance. Corresponding Income Statement Account - Revenue

Answer 110

Review purchase orders/invoices Confirm with Vendors Corresponding Income Statement Account - Various Expenses

Answer 111

Examine purchase agreements Look at Board Minutes Is Inventory held as collateral? Corresponding Income Statement Account - COGS

Answer 112

Should match last year's ending balance.

Answer 113

If Beginning Balance Additions Subtractions are OK then Ending Balances should also be OK.

Answer 114

Foot all balances - Check the Math Trace Cash Flow items to other Financial Statements Check classifications - Operating Activities Investing Activities Financing Activities

Answer 115

Interest Paid Income Taxes Paid Non-cash Transactions Cash and Cash Equivalents Definitions

Answer 116

Results as if you had used Indirect Method Non-cash Transactions Cash and Cash Equivalents Definition

Answer 117

Subsequent events occur after the Balance Sheet Date but before the audit report is issued. Auditor needs to make inquiries and assess if they affect the audit report.

Answer 118

If audit report has already been issued and auditor becomes aware of a situation that was present as of the BS date client should issue a disclosure to financial statement users and/or revise the financial statement. Regulatory agencies might need to get involved under some circumstances.

Answer 119

If auditor discovers that they forgot to perform a substantive procedure auditor should determine if other substantive procedures performed served as a substitute. Otherwise support for their audit opinion could be jeopardized.

Answer 120

REQUIRED When planning the audit (preliminary) REQUIRED When reviewing the audit (final) Analytical procedures may be also performed optionally along with the substantive testing. Use of Analytical Procedures in the audit must be documented.

Answer 121

Helps the Auditor: Determine if Management Assertions are reasonable Develop audit plan Develop some expectations about the financial statement and hopefully bring to light any glaring errors on financial statement

Answer 122

Analytical Procedure focus is on dollar amounts (not internal controls) Analyzes Financial Data: Do Financial Statements Make Sense? Comparison of data between years

Answer 123

Current Ratio = Current Assets / Current Liabilities

Answer 124

Quick Ratio = Liquid Assets / Current Liabilities

Answer 125

Asset Turnover = Net Sales / Average Assets

Answer 126

Inventory Turnover = COGS / Average Inventory

Answer 127

Gross Margin % = Gross Margin / Sales

Answer 128

Ratios are Analytical Procedures

Answer 129

Budget vs. Actual comparisons are Analytical Procedures.

Answer 130

Ratio analysis Budget vs. Actual comparison Comparison of data between years Use of non-financial data to predict expected values for financial data

Answer 131

Management assertions help the auditor to plan the audit and select substantive tests.

Answer 132

Presentation - Cutoff Classification - Is it in the right period and category? Existence/ Occurrence - Did it happen? Does it exist? Rights & Obligations - Does the company own them? Completeness - Was everything recorded? Valuation - Are they worth the amount at which they are recorded? (PERCV)

Answer 133

Occurrence Cutoff Classification Completeness Accuracy

Answer 134

Occurrence Completeness Classification Accuracy

Answer 135

No it is an extended procedure. For example you don't have to take a loan covenant document and go search out that it's a valid loan covenant. Instead you consider the source - if it's externally prepared it's more persuasive.

Answer 136

First and foremost you need to understand management's rationale and methods for developing estimates before you can judge reasonableness. Next Auditor should formulate their own opinion on what a good estimate should be and compare it. Finally determine if subsequent events affect the estimate.

Answer 137

Audit workpapers are the property of the auditor. They can be paper or electronic. They must include a WRITTEN audit program (either paper or electronic).

Answer 138

Information pertaining to the current year's audit.

Answer 139

Information used for this audit and future audits which is updated as needed.

Answer 140

Must be kept for 5 years after the audit release date or according to regulations whichever is longer. Must be kept for 7 years under PCAOB Audit PCAOB audits also require an Engagement Completion Document

Answer 141

Any experienced auditor should be able to look at your work and understand what you did.

Answer 142

If further documents are added to the work papers after the audit report is issued it must be documented as to who added them why they were added and any effects on the audit report.

Answer 143

After the audit report is released the firm has 60 days to subtract from the file. You can still add to the file if you document it but you cannot delete any information after 60 days. Note - for SEC auditors the PCAOB only allows deletions up to 45 days after issuance of the audit report.

Answer 144

Operators Programmers Librarians

Answer 145

Designs or purchases IT system Responsible for flowcharts Liaison between Users and Programmers Note: Think IT Manager

Answer 146

A Systems Administrator controls database access.

Answer 147

Writes- Updates- Maintains- & Tests software- systems- and compilers

Answer 148

In order to maximize internal control- a Systems Programmer should NOT have application programming duties/abilities or be an Operator on the system.

Answer 149

Schedules and Monitors Jobs Runs IT Help Desk

Answer 150

For internal control purposes- they should not be a Programmer on the system.

Answer 151

Include Computer Logs. Control Group should review the logs.

Answer 152

To assist with decision making.

Answer 153

A type of Management Information System (MIS) that processes accounting transactions.

Answer 154

Specialized for Company Executive needs Assists with Strategy Only No Decision-Making Capabilities

Answer 155

Computer uses reasoning Structured No human interpretation needed

Answer 156

Computer provides data Gives Interactive Support Human interpretation needed

Answer 157

User initiates the report. The report is created upon demand.

Answer 158

Exception reports are produced when Edit Tests- Check Digits- or Self-Checking Digits identify a problem

Answer 159

A type of Ad Hoc report- initiated by a user.

Answer 160

The User develops and executes their own application.

Answer 161

E-commerce makes business transactions easier.

Answer 162

Compromised data or theft. Less paper trail for auditors.

Answer 163

Uses globally-accepted standards Efficient

Answer 164

A file server stores shared programs and documents.

Answer 165

Located on a File Server- a Database allows users to share documents.

Answer 166

It connects computers in close proximity.

Answer 167

It connects computers that are far apart.

Answer 168

Privately-owned Network Serves as 3rd Party Between 2 Companies Routes EDI Transactions Accepts wide range of Protocols Very Costly

Answer 169

Prevents unauthorized access to a network.

Answer 170

Takes over a computer Needs a host program to run

Answer 171

Takes over multiple computers Doesn't need a host program to run

Answer 172

They prevent and detect hardware errors.

Answer 173

Random Access Memory. Internal memory in the computer used during immediate processing.

Answer 174

Computer Processing Unit It processes commands within a computer.

Answer 175

It schedules and allocates system resources.

Answer 176

Keyboard Mouse Scanner Magnetic Ink Reader Magnetic Tape Reader EDI Point of Sale Scanner

Answer 177

Speakers Monitors Printers

Answer 178

Sequential Access - Sorts data in order Slower data retrieval Header Label prevents Operator error by loading wrong tape External Labels prevent accidental destruction by operator

Answer 179

Random Access - Finds data in random spots Faster data retrieval Uses Boundary Protection for data

Answer 180

Connects one network to another Note: the Internet is connected by Gateways

Answer 181

A control that detects internal data errors. A bit is added to each character- it checks to see if a bit was lost.

Answer 182

Transmitted data is returned to the sender for verification (it echoes back to the sender)

Answer 183

It authorizes program changes and approves program test results.

Answer 184

Software that controls access to IT systems. Note: Don't confuse this with anti-virus software

Answer 185

It confirms a message has not been altered.

Answer 186

PDA/Smartphone/Tablet Microcomputer - PC- Laptop (cost-effective) Minicomputer - Like a Mainframe- but smaller Mainframe - Large computer with terminals attached Supercomputer - Very powerful and very big

Answer 187

Bit - 1 (on) and 0 (off) Byte - 8 bits to a byte/character Field - group of related characters/bytes (i.e. Name- Zip Code- Serial #) Record - Group of related fields (i.e. Member name- address- phone number) File - Group of related records (i.e. Membership directory)

Answer 188

Determine language used for a specific computer- on a computer-to-computer basis

Answer 189

Programs written in base computer language- not similar to English.

Answer 190

They are written in a language close to English.

Answer 191

Takes Source language (English) and converts to Object (Computer) Language

Answer 192

It uses a Data Warehouse to support management decision making.

Answer 193

Using artificial intelligence and pattern recognition to analyze data stores within a Data Warehouse.

Answer 194

To process a company's routine transactions.

Answer 195

Data held- updates multiple files all at once Leaves a better audit trail Uses Grandfather-Father-Son backup (3 levels of backup kept in 3 locations)

Answer 196

Checks to see if output data is valid- distributed and used in an authorized manner.

Answer 197

Checks if data processing produced proper output

Answer 198

An input control number- a meaningless sum of values included in the input. Example would be summing a list of SSNs to make sure the data is the same once entered as it was prior to input into the system.

Answer 199

Checks to see if data in existing tables or files belongs in the set For example- is there a # in an alpha-only field or a letter in a numeric-only field

Answer 200

Checks to see if numbers surpass a certain limit- i.e. in an age field is the number greater than 110.

Answer 201

An input control that adds an identification number to a set of digits - usually at the end

Answer 202

An input check that prevents invalid characters- i.e. checks for alphabetic letters in a SSN field

Answer 203

A disaster recovery system where if the main system goes down- a Hot Site is ready to take over immediately.

Answer 204

If a main system goes down- a Cold Site will take time to get set up and running.

Answer 205

SQL - Structured Query Language

Answer 206

Defines SQL Database Controls SQL Tables

Answer 207

Queries SQL Database tables

Answer 208

Controls Access to SQL Database

Answer 209

Logical structure Uses rows and columns similar to spreadsheet

Answer 210

Has various levels Uses trees to store data

Answer 211

Data is more accessible Reduced redundancy

Answer 212

Cost of installation Skilled personnel required to maintain

Answer 213

Desktop client Application Server Database Server Think: Your desktop computer runs applications and saves to a database

Answer 214

Control risk increases with poor Internal Controls and sloppy accounting practices.

Answer 215

Auditor will need to perform more testing and dig deeper into accounts in order to arrive at an opinion regarding the financial statements.

Answer 216

Internal control provides reasonable assurance that Material misstatements will be prevented Reliability/integrity of financial statements will be preserved Assets are protected against misuse

Answer 217

CEO/CFO must disclose Internal Control deficiencies Management must provide assessment of Internal Control Management must certify Financial Statements

Answer 218

Inverse Relationship Stronger Internal Controls - Less Testing Needed Weaker Internal Controls - More Testing Needed

Answer 219

Reliability of Financial Reporting Operational Efficiency/Effectiveness Compliance with Law and Regulations

Answer 220

Control Environment Risk Assessment Information and Communication Monitoring Control Activities

Answer 221

Sets tone for the entire company

Answer 222

Integrity/Ethics of Management Competence of Management Organizational Structure Human Resource Policies Assignment of Authority/Responsibility Management's Style (riskier with a dominant/aggressive individual) Board/Audit Committee involvement

Answer 223

Detection Risk determines nature- timing- and extent of audit procedures.

Answer 224

Risk of material misstatement determines acceptable level of Detection Risk

Answer 225

Rapid growth in the company. The methods management uses to identify risk- estimate its significance and assess the likelihood of occurrence Major changes to operations- personnel- systems- IT- products- corporate organization- and foreign operations.

Answer 226

No Internal Control testing is performed. All audit procedures are increased in intensity to compensate for increased risk.

Answer 227

Auditor tests Internal Controls. Auditor evaluates Control Risk based on tests Auditor adjusts substantive tests accordingly Weaker Internal Control - More substantive tests Stronger Internal Control - Less substantive tests

Answer 228

Performance Reviews Information Processing Physical Controls Segregation of Duties

Answer 229

Understand Client's Major transaction classes Transaction initiation Support records/documents Transaction processing Financial Statement internal reporting process Financial Statement external reporting process

Answer 230

Through written documentation such as Internal Control memos- flowcharts- and questionnaires

Answer 231

Were all transactions recorded? Were they timely? Measured appropriately? Recorded in correct period? Presented and disclosed properly? Did Management communicate their responsibilities?

Answer 232

Auditor needs reasonable assurance that controls are functioning as designed and effective Internal Control Testing should be strong as (IRON) so that nothing gets past them Inquiry - Interview company personnel Re-performance - Can it be replicated? Observation - Watch the control be applied INspection - Dig into the details/documents If results are as expected- substantive procedures do not need to be adjusted

Answer 233

Controls tested by auditor in a prior year can be used in the current year's audit assuming they are re-tested every third year Exception If the control has changed since the last audit

Answer 234

Control Risk increases Scope of substantive procedures increases Detection Risk decreases Material Weakness - Reasonable possibility that a material misstatement in Financial Statements would not be found- more than a remote chance of occurrence

Answer 235

Reasonable possibility exists that a material misstatement in Financial Statements would not be found- and has more than a remote chance of occurrence.

Answer 236

Tests Completeness Starts with source document and traces forward to the journal entry.

Answer 237

Tests Existence. Starts with a journal entry and searches for a voucher or source document to support the entry.

Answer 238

Non-compatible duties performed by separate individuals- such as Authorization of asset disbursement vs. Recording of Assets vs. Custody of assets If supporting audit evidence doesn't exit - use Observation and Inquiry Accounting should be segregated from Production

Answer 239

Employees who prepare vouchers/invoices should not also have the authority to SIGN CHECKS Tip - Remember this as an underlying theme with Segregation of Duties. The authority to make a payment should not also lie in the hands of those creating invoices/vouchers. Why? People commit fraud by setting up fake companies and basically paying themselves

Answer 240

Employees who have custody of assets should not also RECORD those assets Someone in charge of petty cash should not also control the petty cash records Treasury Department (custodians) should NOT have record keeping duties They control assets and should not be able to adjust any recording of those assets

Answer 241

Controls can't stop collusion or bad judgment Management can override controls Cost vs. Benefit relationship of Internal Control

Answer 242

A written report to management is required. Report declaring that no material weaknesses were found is allowed Previous weaknesses reported that still exist should be reported again Should be reported no later than 60 days after audit report release date If one or more material weaknesses is uncorrected at year-end- an Adverse Opinion on Internal Control must be given

Answer 243

A significant deficiency adversely affects a company's ability to report in the financial statements according to GAAP. A significant deficiency is a more than a remote likelihood of material misstatement by more than an inconsequential amount

Answer 244

If a Significant Deficiency is identified- a written report to management required Report declaring that no significant deficiencies exist is not allowed Previous deficiencies reported that still exist should be reported again Should be reported no later than 60 days after the audit report release date

Answer 245

A control is not operating as intended.

Answer 246

Are they competent? Are they objective?

Answer 247

Auditor needs to understand the role of Internal Auditors within the organization because their work affects the audit plan Responsibility for judgments about materiality or appropriateness of entries or estimates cannot be shared with third parties like Internal Auditors Internal Auditors should be asked to do some of the legwork like preparing schedules or running reports They should not be asked to make any decisions or judgments

Answer 248

CEO/CFO must disclose deficiencies Management must provide assessment of Internal Controls Management must certify Financial Statements

Answer 249

Has inverse relationship Stronger Internal Control results in LESS substantive testing Weaker Internal Control leads to MORE substantive testing

Answer 250

Reliability of Financial Reporting Operational Efficiency/Effectiveness Compliance with Law and Regulations

Answer 251

Control Activities Risk Assessment Information and Communications Monitoring Control Environment

Answer 252

Integrity/Ethics of Management Competence of Management Organizational Structure Human Resources Policies Assignment of Authority/Responsibility Management's Style (riskier with a dominant/aggressive individual) Board/Audit Committee involvement

Answer 253

Auditor tests Internal Controls. Auditor evaluates Control Risk based on tests Auditor adjusts substantive tests accordingly Weaker Internal Control - More substantive tests Stronger Internal Control - Less substantive tests

Answer 254

Understand Client's Major transaction classes Transaction initiation Support records/documents Transaction processing Financial Statement internal reporting process Financial Statement external communication process

Answer 255

Auditor must document understanding of Internal Control via Memos - Flowcharts - Questionnaires

Answer 256

Auditor needs reasonable assurance that controls are functioning as designed and effective Internal Control Testing should be strong as (IRON) so that nothing gets past them Inquiry - Interview company personnel Re-performance - Can it be replicated? Observation - Watch the control be applied INspection - Dig into the details/documents If results are as expected - substantive procedures do not need to be adjusted

Answer 257

The International Auditing and Assurance Standards Board (IAASB) Member of the International Federation of Accountants (IFAC)

Answer 258

IAASB standards are for countries that don't have their own standards and help set the tone for the rest of the members who do have their own standards (AICPA) IAASB doesn't override member standards

Answer 259

IAASB standards are based on a risk assessment approach

Answer 260

IAASB - No Internal Control audits IAASB - No Referencing another Audit Firm IAASB - Less detailed documentation IAASB - Required: obtain written fraud assessment IAASB - Required: location of auditor's home office

Answer 261

Standards set by International Ethics Standards Board for Accountants (IESBA) Code of Ethics for Professional Accountants - Similar to AICPA Code of Professional Conduct

Answer 262

A) Covers all accountants B) Covers Public accountants C) Covers accountants in a business environment

Answer 263

Accountants should have Integrity Accountants should be Objective Accountants should have Competence Accountants should exercise Due Care Accountants should maintain Confidentiality Accountants should act Professionally

Answer 264

What are the threats/safeguards? Does this new client threaten our ethics? What are the conflicts of interest? What are the threats/safeguards for offering a second opinion? What are the threats/safeguards for receiving commissions or contingent fees? Is our marketing truthful? What are the threats/safeguards for receiving client gifts? What are the threats/safeguards to objectivity?

Answer 265

This engagement helps the client be more efficient with personnel and resources in order to accomplish their goals.

Answer 266

Competence; Due Professional Care; Planning; Supervision; Obtain Sufficient Data; Serve Client Interest; Agreement: Written or Oral; Communicate w/ Client; Objectivity NOT REQUIRED: Independence

Answer 267

Express: Contract specifies what accountant will do Implied: Accountant performs without negligence

Answer 268

DUTY - DAMAGES - RESULT Duty - Accountant must have had duty to perform with due care exercised by an average accountant. Damages - The client experienced actual damages. Result/Causation - The damages were as a result of the negligence.

Answer 269

It is not the accountant's job to find fraud and they are not normally liable for not detecting it

Answer 270

When a normal audit following GAAS would have detected the fraud. When an accountant agrees to take on more responsibility than what is required under a normal audit. When accountant words the audit report to indicate this greater responsibility.

Answer 271

Misrepresentation - Accountant misrepresents MATERIAL fact(s) Scienter - Accountant commits scienter Damages - Client has actual damages. Reasonable Reliance - Client reasonably relied on the misinformation.

Answer 272

To report something knowing it is false. Characterized by reckless disregard for truth Intentionally conceal facts

Answer 273

Lack of privity defends against contract breach and negligence. NOT a defense against fraud.

Answer 274

Accountants are not liable to third parties unless the third party was an intended beneficiary of the engagement AND the accountant knew they would be relying on the financial statements.

Answer 275

Regular fraud Misrepresentation of Material Fact Scienter Damages Reasonable Reliance

Answer 276

Gross Negligence - reckless disregard for truth CPAs usually not liable for simple negligence; but Gross Negligence (aka Constructive Fraud) opens the CPA up to be liable to third parties.

Answer 277

Accountant must report discovered illegal activity to Audit Committee or Board of Directors If material in public company; BOD has *1 DAY* to notify SEC.

Answer 278

NO Federal Accountant-Client privilege for non-disclosure of private conversations to a court unless a particular state recognizes such a privilege. If your client tells you Yeah; I cheated on my taxes; a court could force an accountant to testify about that conversation.

Answer 279

1. Can be subpoenaed 2. Can be looked at by another CPA doing peer review 3. Property of the accountant who created them Note: Source documents supplied by client must be returned to client if they request them back; even if there is a billing dispute.

Answer 280

Accountants have no way of auditing individual's personal finances and are not required to do so when preparing a return

Answer 281

If a past error is found; accountant should inform client of this error. Contacting the IRS is NOT required. If client won't fix it; then the accountant should reconsider whether they want to do business with the client

Answer 282

Accountant must prepare the return in good faith and ask for more information if something is missing When recommending a tax position; the accountant should realistically believe that it would stand up under the scrutiny of a court

Answer 283

Managerial Accounting technique used to evaluate different investment options Helps management make decisions Uses both accounting and non-accounting information Internal focus GAAP is not mandatory

Answer 284

Capital Budgeting ONLY uses Present Value tables. Capital Budgeting NEVER uses Fair Value.

Answer 285

For ONE payment- ONE time.

Answer 286

Multiple payments made over time- where the payments are made at the START of the period.

Answer 287

Multiple payments over time- where payments are made at the END of the period. Think A for Arrears.

Answer 288

1 / (( 1+i )^n) i : interest rate n : number of periods

Answer 289

A preferred method of evaluating profitability. One of two methods that use the Time Value of Money : PV of Future Cash Flows - Investment

Answer 290

NPV : PV Future Cash Flows - Investment If NPV is Negative- Cost is greater than benefits (bad investment) If NPV is Positive- Cost is less than benefit (good investment) If NPV : 0- Cost : Benefit (Management is indifferent)

Answer 291

The Discount Rate.

Answer 292

The rate of return on an investment used. It represents the minimum rate of return required.

Answer 293

Uses the Time Value of Money Uses all cash flows- not just the cash flows to arrive at Payback Takes risks into consideration

Answer 294

Not as simple as the Accounting Rate of Return.

Answer 295

NPV includes Salvage Value because it is a future cash inflow. NPV does NOT include depreciation because it is non-cash. Exception - If a CPA Exam question says to include tax considerations- then you have to include depreciation because of income tax savings generated by depreciation.

Answer 296

The minimum rate of return is used.

Answer 297

It calculates a project's actual rate of return through the project's expected cash flows. IRR is the rate of return required for PV of future cash flows to EQUAL the investment. Investment / After Tax Annual Cash Inflow : PV Factor

Answer 298

Cash flows are re-invested at the rate of return earned by the original investment.

Answer 299

Rate of return for IRR is the rate earned by the investment. Rate of return for NPV is the minimum rate.

Answer 300

Strengths: Uses Time Value of Money- Cash Flow emphasis Weakness: Uneven cash flows lead to varied IRR

Answer 301

When the benefits are greater than the costs. IRR is greater than the Discount Rate

Answer 302

When Costs are greater than Benefits IRR is less than the Discount Rate

Answer 303

When benefits equal the Costs IRR : Discount Rate

Answer 304

It measures an investment in terms of how long it takes to recoup the initial investment via Annual Cash Inflow Investment / Annual Cash Inflow : Payback Method Compare to a targeted timeframe; if payback is shorter than target- it's a good investment. If payback is longer than target- it's a bad investment.

Answer 305

Takes risk into consideration 2 year payback is less risky than a 5 year payback

Answer 306

Ignores the Time Value of Money Exception: Discount payback method Ignores cash flow after the initial investment is paid back

Answer 307

An approximate rate of return on assets ARR : Net Income / Average Investment Compare to a targeted return rate; if ARR greater than target- good investment. If ARR less than target- bad investment.

Answer 308

Simple to use People understand easily

Answer 309

Can be skewed based on Depreciation method that is used. Ignores the Time Value of Money.

Answer 310

An approximate rate of return on assets.

Answer 311

To monitor management behavior.

Answer 312

Oversees the board Responsible for hiring new CEO

Answer 313

The audit committee appoints and oversees the external auditor.

Answer 314

The compensation committee handles the CEO's compensation package.

Answer 315

They require the board to be independent.

Answer 316

The package should ensure that the goals of management should match those of the shareholders.

Answer 317

Executive compensation should create an incentive for management to govern in a shareholder-friendly way that doesn't sacrifice the long-term success of the enterprise for short-term gain.

Answer 318

They range from internal (Board of Directors- Audit Committee- Internal Control) to external (Creditors- SEC- IRS) These influences should not be tainted by undue influence from management or have financial ties to management such as compensation-related duties

Answer 319

When management doesn't act in the best interest of shareholders. It can be alleviated by tying compensation to stock performance or company profit.

Answer 320

Management must submit a report on the effectiveness of Internal Control in the 10K. Management must disclose significant Internal Control deficiencies. CEO/CFO must certify that the financial statements comply with securities laws and fairly present the financial condition of the company.

Answer 321

Reliable financial reporting Effective and efficient operations Compliance

Answer 322

``` Integrity & Ethics Competence The Board of Directors & Audit Committee Management's Operating Style Organizational Structure Authority & Roles of Responsibilities HR Policies ```

Answer 323

A component of Internal Control that includes actions being taken to promote the control environment.

Answer 324

``` Control Environment Risk Assessment Control Activities Information and Communication Monitoring ```

Answer 325

Management must have access to relevant and timely information to make good decisions.

Answer 326

Internal Control activities must be constantly monitored and evaluated for effectiveness.

Answer 327

``` Identifies Risk Factors Promotes Risk Response Decisions Compares Management Risk vs. Shareholder Goals Aids in evaluating opportunities Promotes Quicker Capital movement ``` Does NOT eliminate all risk

Answer 328

Avoid or Reduce Share or Accept

Answer 329

Cost Accounting is a component of GAAP that records Ending Inventory on the Balance Sheet for o Direct Materials o Direct Labor o Work in Process o Finished Goods Cost Accounting also records for the Income Statement

Answer 330

Cost Accounting - External Focus- GAAP Managerial Accounting - Internal Focus- Not GAAP

Answer 331

Prime Costs Conversion Costs

Answer 332

Direct Material USED - Have become part of the product or had a direct impact on the product Direct Labor Used - Employees who worked on product and had direct impact

Answer 333

All factory costs except for DM and DL used in production- including Spoilage (except for abnormal spoilage- which is a period cost and not included in OH).

Answer 334

FFO : Estimated Costs / Normal Capacity Uses Normal Activity Examples of Fixed Factory OH: Depreciation (SL)- Utilities- Taxes Under/Over-applied Fixed OH always goes to COGS

Answer 335

VO : Estimated Activity / Actual Activity Uses Actual Activity Examples of Variable Factory OH: Deprecation (Units of Prod)- Indirect materials (supplies & insignificant items)- Indirect labor (factory foreman- janitors- machine maintenance)

Answer 336

If Immaterial - Goes to COGS If Material - Goes to WIP- Finished Goods- or COGS- based on their Ending Balance

Answer 337

It always goes to COGS

Answer 338

Under-applied overhead. If it's Fixed OH- under-applied goes to COGS. If it's Variable OH- under-applied goes to COGS if immaterial- but is allocated to WIP- FG or COGS based on ending balances.

Answer 339

A credit balance indicates over-applied overhead. If Fixed overhead- it is corrected from COGS. If Variable overhead- it is corrected through COGS if immaterial- but if material overage is allocated to WIP- FG or COGS based on ending balances.

Answer 340

Beginning Balance DR Net purchases (plus freight-in) CR Direct Materials Used : Ending balance (goes to BS)

Answer 341

Beginning Balance (End Bal of Previous WIP) DR Direct Materials Used DR Direct Labor Used (Conversion Cost) CR COGM DR Factory Overhead Applied (Conversion Cost) : Ending Balance (Goes to BS)

Answer 342

Beginning Balance DR COGM : COGAS (Cost of Goods Avail for Sale) CR COGS : Ending Balance (Goes to BS)

Answer 343

Inventory (Product) Cost Part of DM Purchases

Answer 344

Selling (Period) Cost Not part of inventory

Answer 345

Used when costs are easily connected to a specific product or product line Can also be applied to services Calculation is the same as normal cost accounting - just use your T Accounts - DM to WIP to FG to COGS - You're likely going to be solving for the last job in the queue

Answer 346

No services allocated between service departments- even if they serve each other. Only allocate to product(s)

Answer 347

Services can be allocated to both other service departments and the product(s)

Answer 348

Beginning Inventory + Units Started - Ending Inventory : No. Units Shipped

Answer 349

FIFO Weighted Average

Answer 350

Equivalent Units of Production

Answer 351

EFU FIFO will always be LESS than EFU Weighted Avg (unless Beginning Inventory is Zero)

Answer 352

Beginning Inventory + Current Costs / EFU WA

Answer 353

Beginning Inventory + Current Costs / EFU WA

Answer 354

Units Shipped + EI x % Complete DM : EFU (Weighted Average Method) - Beginning Inventory x % Complete : EFU (FIFO)

Answer 355

Units Shipped + EI x % Complete CC : EFU (Weighted Average) - Beginning Inventory x % Complete : EFU (FIFO)

Answer 356

Current Costs / EFU FIFO Note: FIFO method uses Current Period costs only and ignores Beginning Inventory

Answer 357

Current Costs / EFU FIFO FIFO method uses Current Period costs only and ignores Beginning Inventory

Answer 358

Beginning balance (DM- DL- OH) + Current Costs (DM- DL- OH) - COGM (Goes to Finished Goods) + DM EFU x Cost per DM EFU + CC EFU x Cost per CC EFU : Ending WIP

Answer 359

Net Sales - Product Costs : Gross Margin - Period Costs : Operating Income

Answer 360

Focuses on eliminating non-value-added activities for poor quality and inventory and things customers don't want or don't care about Inventory is expensive to store and storing something is not a value-added expenditure Uses Cost Pools - Different departments can have different OH rates Uses Several OH rates based on Activity - Cost Pool / Cost Driver

Answer 361

Cost Pools and Allocations increase compared to a traditional costing system

Answer 362

Connected to Just-in-Time Production- which is part of Activity-Based Costing and Total Quality Management (TQM) - Works backward to flush out COGS - Mostly GAAP

Answer 363

Usually immaterial and common costs aren't allocated to them Low Market Value Can be valued at NRV Can be treated as a contra expense and netted against COGS - Can be treated as a contra sale and netted against Sales Recognition rules are very flexible with valuing and classifying by-products

Answer 364

Measure how costs change relative to activity levels High-Low Method Change in Cost (High-Low pts) / Change in Activity (High-Low pts)

Answer 365

When the prices of an item increases supply increases- because more sellers are willing to sell.

Answer 366

When supply changes due to something other than price.

Answer 367

Supply increases at each price point Higher Equilibrium GDP Number of sellers increases - market can get flooded Examples: Government subsidies or technology improvements that decrease costs for suppliers

Answer 368

Supply decreases at each price point Lower Equilibrium GDP Cost of producing item increases Examples: Shortage of gold- so less gold watches are made; wars or crises in rice-producing countries means there is less rice on the market

Answer 369

When the prices of an item increases- demand for it decreases.

Answer 370

When demand changes due to something other than price.

Answer 371

When demand increases at each price point Price of substitutes go up - price of beef rises- so people buy more chicken Future price increase is expected - War in Middle East- people go out and buy gas Market expands - i.e. people get new free health care plan- demand at clinic rises Expansion - more spending increases equilibrium GDP

Answer 372

Demand decreases at each price point. Price of complement goes up - price of beef goes up- less demand for ketchup Boycott - Company commits social blunder- consumers boycott Consumer income rises - Demand for inferior goods drops as people have more money to spend Consumer tastes change Contraction - less spending decreases equilibrium GDP

Answer 373

How much you spend when your income increases Calculate: Change in Spending / Change in Income

Answer 374

How much you save when income increases Calculate: Change in Savings / Change in Income Also equals 1 - Marginal Propensity to Consume

Answer 375

(1 / 1-MPC) x Change in Spending

Answer 376

As spending by consumers or the government increases- the demand curve increases (shifts right).

Answer 377

The increase in demand ends up being larger than the amount of additional income spent in the economy due to the multiplier effect. One consumer spends money- which: *Increases the income of a business *Increases the income of a vendor *Increases income of employees *Increases tax revenue

Answer 378

% Change in Quantity Demand / % Change in Price

Answer 379

Price increases- Revenue decreases Price decreases- Revenue increases

Answer 380

Many substitutes (luxury items) Considered elastic if elasticity is greater than 1 10% drop in demand / 8% increase in price : 1.25 (Elastic) Price increases- Revenue decreases Price decreases- Revenue increases

Answer 381

Price increases- Revenue increases Price decreases- Revenue decreases

Answer 382

Few substitutes (groceries- gasoline) Considered inelastic if coefficient of elasticity is less than 1 5% drop in demand / 10% increase in price : .5 (inelastic) Price increases- Revenue increases Price decreases- Revenue decreases

Answer 383

Total revenue will remain the same if price is increased Considered unitary if coefficient of elasticity : 1

Answer 384

% Change Quantity Demanded / % Change in Income Normal goods greater than 1 (demand increases more than income) Inferior goods less than 1 (demand increases less than income)

Answer 385

Interest rates increase Reduced demand for loans Reduced demand for houses- autos- etc. Value of bonds and fixed income securities decrease Inferior good demand to increase Foreign goods more affordable than domestic Demand for domestic goods decrease

Answer 386

Overall spending increases Demand increases (shifts right) Market equilibrium price increases

Answer 387

Overall production costs increase Supply decreases (shifts left) Market equilibrium price increases Note: Demand-Pull and Cost-Push Inflation BOTH result in market equilibrium price to increase

Answer 388

The price where Quantity Supplied : Quantity Demanded

Answer 389

When Marginal Revenue : Marginal Cost

Answer 390

Causes a surplus if above equilibrium price.

Answer 391

The annual value of all goods and services produced domestically at current prices by consumers- businesses- the government- and foreign companies with domestic interests Included: Foreign company has US Factory Not included: US company has foreign factory

Answer 392

Sole Proprietor and Corp Income Passive Income Taxes Employee Salaries Foreign Income Adjustments Depreciation

Answer 393

Individual Consumption Private Investment Government Purchases Net Exports

Answer 394

Measures goods/services in current prices.

Answer 395

Used to convert GDP to Real GDP

Answer 396

Nominal GDP / GDP Deflator x 100

Answer 397

Like GDP; Swaps foreign production. US Firms overseas are included- Foreign firms domestically are not included

Answer 398

Price of goods relative to an earlier period of time- which is the benchmark. Year 1 : 1.0 ((CPI Current - CPI Last) / CPI Last) * 100

Answer 399

Personal Income - Personal Taxes

Answer 400

% Increase in output / % Increase in input Greater than 1 : Increasing returns to scale Less than 1 : Decreasing returns to scale

Answer 401

When GDP growth is negative for two consecutive quarters.

Answer 402

A prolonged- severe recession with high unemployment rates No requisite period of time for the economy to officially be in a depression

Answer 403

Peak (highest) Recession (decreasing) Trough (lowest) Recover (increasing) Expansion (higher again)

Answer 404

Conditions that occur before a recession or before a recovery Example: Stock Market or New Housing Starts

Answer 405

Conditions that occur after a recession or after a recovery Examples: Prime Interest Rates- Unemployment

Answer 406

Conditions that occur during a recession or during a recovery Example: Manufacturing output

Answer 407

Only people looking for jobs

Answer 408

GDP doesn't grow fast enough to employ all people who are looking for work Example: People are unemployed in 2010 because there aren't enough jobs available due to the economy

Answer 409

People are changing jobs or entering the work force. This is a normal aspect of full employment. Example: A recent college graduate is looking for a job

Answer 410

A worker's job skills do not match those necessary to get a job so they need education or training Example: A construction worker wants to work in an office- so they quit their job and get computer training

Answer 411

High Unemployment : Low Inflation (Vice Versa)

Answer 412

The rate a bank pays to borrow from the Fed.

Answer 413

The rate a bank charges their best customers on short-term borrowings.

Answer 414

Inflation-adjusted interest rate

Answer 415

Rate that uses current prices

Answer 416

Rate for a loan with 100% certainty of payback. Usually results in a lower rate. US Treasuries are an example.

Answer 417

Currency- Coins- and Deposits

Answer 418

Highly liquid assets other than currency- coins or deposits

Answer 419

Increased spending levels without increased tax revenue. Lower taxes without decrease in spending Gamble that the multiplier effect will take over and boost economy

Answer 420

By buying and selling the government's securities.

Answer 421

By adjusting the discount rate charged to banks

Answer 422

A tax on imported goods

Answer 423

A limit on the number of goods that can be imported

Answer 424

They are good for domestic producers. Demand curve shifts right Fewer substitutes They can charge higher prices

Answer 425

They are bad for foreign producers Demand curve shifts left Fewer buyers They must charge lower prices

Answer 426

They are good for foreign consumers Supply curve shifts right Goods purchased at lower prices in the foreign markets

Answer 427

They are bad for domestic consumers Supply curve shifts left Fewer goods bought due to higher prices

Answer 428

Explicit (Actual) cost of operating a business Implicit costs are opportunity costs

Answer 429

Revenue - Accounting Cost

Answer 430

Explicit + Implicit Cost

Answer 431

Revenue - Economic Cost

Answer 432

Managing inventory & receivables (current assets & liabilities)

Answer 433

NWC : Current Assets - Current Liabilities

Answer 434

Shorten the cash conversion cycle Don't negatively impact operations

Answer 435

Average time needed to convert materials into finished goods and sell them Average Inventory : (BI + E) / 2 Inventory Conversion Period : Average Inventory / Sales Per Day

Answer 436

Average time needed to collect A/R RCP : Average Receivables / Credit Sales Per Day

Answer 437

Average time between materials and labor purchase and their A/P payment Average Payables : (BP + EP) / 2 Payables Deferral Period : Average Payables / (COGS/365)

Answer 438

Amount of time it takes to receive a cash inflow (Customers) after making a cash outflow (Vendors) Inventory Conversion Period + Receivables Collection Period - Payables Deferral Period : Cash Conversion Cycle (Inventory Really (-Pays) Cash)

Answer 439

Liquid Safe

Answer 440

Used for importing goods. Issued by importer's bank.

Answer 441

No interest cost if paid timely.

Answer 442

Customer Payments are sent to a bank-managed PO box. Employees don't have access to cash. Deposits are more timely. Interest income from deposits should pay for the Lockbox fees (if they don't- lockbox is not beneficial)

Answer 443

Time it takes to mail a payment and have it clear your bank account Maximize float on cash payments Minimize float on cash receipts

Answer 444

Regional bank sends enough cash to cover daily checks Advantages: Checks take longer to clear -more float Low amounts of cash tied up for compensating (minimum) balances

Answer 445

Treasury Bills: Short term (less than one year) Think: $1 Bill Treasury Notes: Medium term (less than 10 years- more than 1) Treasury Bonds: Long term (greater than 10 years) Think: government is in long-term bondage to you; they owe you money

Answer 446

Similar to T-Bill- but issued by corporations instead of Government Greater than 9 Months Maturity Unsecured Issued by large firms

Answer 447

Advantages: Financing at less than Prime. No compensating balances required. Disadvantages: Unpredictability of markets. Credit crisis emerges and large insurance/investment companies aren't lending.

Answer 448

The order quantity that minimizes inventory costs. EOQ : Square Root of (2DO/C) D : Unit Demand (Annual) O : Order Cost C : Cost of Inventory

Answer 449

The cost of keeping inventory.

Answer 450

Cost of executing an order and starting product production.

Answer 451

How low inventory should get before it should be re-ordered. IOP : Average Daily Demand x Average Lead Time

Answer 452

Orders inventory so that you get it just in time for when it's needed JIT is valuable when Order Cost is low and Cost of Carrying Inventory is high

Answer 453

Receivables are sold to a financing company where they pay less than the value of the receivables due to a discount related to risk of non-collection

Answer 454

Buyer saves if paid early Example: 1/10 Net 30 1% Discount if paid within 10 days If not- bill is still due in 30 days

Answer 455

(Discount % x 365) / ((100% - Discount) x (Pay Period - Discount Period))

Answer 456

A benchmark used for lending only to the best customers Most customers will be charged Prime + 3%- for example If the lending institution and the customer are not in the same country- the LIBOR rate is often used

Answer 457

Interest rate stated on the face of a bond.

Answer 458

CY : Interest Payment / Bond Price

Answer 459

PV of Principle + Interest : Bond Price

Answer 460

No interest payments made Bond sold at a discount Interest reflected when Bond matures

Answer 461

High interest rate High default risk

Answer 462

Bonds unsecured by collateral

Answer 463

Debenture Bonds that will be repaid if any assets are left after liquidation of a company

Answer 464

Provision in Bond contract allows demand of Bond payment under certain circumstances

Answer 465

Borrower can pay off debt early

Answer 466

Lender can demand payment via company stock instead of money

Answer 467

Borrower deposits regular sums into an account that will eventually pay off the debt

Answer 468

Common Stock is more expensive to issue than debt. Why? Investors demand a greater ROI than debtors (bondholders)

Answer 469

Hold dividend priority over common stock

Answer 470

A company uses this to determine the true cost of their capital ``` Example: Debt costs 5%; 40% of Cap. Equity costs 12%; 60% of Cap. (5% x 40%) + (12% x 60%) WACC : 9.2% ```

Answer 471

A stock's expected performance is based on its beta (risk) compared to that of the stock market. More risk : more expected return.

Answer 472

(Interest Expense - Tax Benefit) / Carrying Value of Debt

Answer 473

Budget targeted for a specific segment of a company.

Answer 474

Budget targeted for the company as a whole Includes budgets for Operations and Cash Flows Includes set of budgeted Financial Statements

Answer 475

Costs independent of the level activity within the relevant range Property Tax is the same whether you produce 100-000 units or zero units However - Fixed Costs per unit vary given the amount of activity If you produce fewer units- fixed costs per unit will be greater than if you produce more units - i.e. less units to spread the cost over

Answer 476

The more Direct Materials or Direct Labor used- the more Variable Costs per unit However - Variable Costs per unit don't change with the level of activity like Fixed Costs per unit

Answer 477

SAM: Standard Material Costs - Actual Material Costs = Material Variance

Answer 478

SAL Standard Labor Costs - Actual Labor Costs = Labor Variance

Answer 479

OAT Overhead Applied - Actual Overhead Cost = Total Overhead Variance

Answer 480

Absorption Costing - External Use- Cost of Sales- Gross Profit- SG&A Variable Costing - Internal Use- Variable Costs- Contribution Margin- Fixed Costs

Answer 481

Sales Price (per unit) - Variable Cost (per unit) = Contribution Margin (per unit)

Answer 482

Total Fixed Costs / Contribution Margin (per unit) = Break-even Point Per Unit Assumption: Total Costs & Total Revenues are LINEAR

Answer 483

Management is concerned only with costs

Answer 484

Management is concerned with both costs and profits

Answer 485

Management is concerned with costs- profits- and assets

Answer 486

Forecasting technique where Data is collected and analyzed Requires judgement/consensus

Answer 487

A forecasting technique where Sales is the dependent variable. Simple Regression - One independent variable Multiple Regression - Multiple independent variables

Answer 488

Forecast sales using Economic Data

Answer 489

Very Simplistic | - Eyeball past trends and make an estimate

Answer 490

Both project estimates using average trends from recent periods Difference: Exponential Smoothing weighs recent data more heavily

Answer 491

Uses Relevant Costs Only Ignore Sunk Costs Opportunity Cost is a Must

Answer 492

Financial / Customer / Internal Business Processes / Learning and Growth

Answer 493

To measure Performance.

Answer 494

Diagrams of Strategic Cause and Effect Relationships.

Answer 495

A plan to achieve goals.

Answer 496

``` Return on Investment Residual Income Spread Economic Value Added Free Cash Flow ```

Answer 497

ROI : Return / Investment Example: You Invest $100 to buy a machine that generates $60 in Operating Income $60 / $100 : 60% ROI

Answer 498

Operating Income - (Required Rate of Return x Invested Capital) : Residual Income

Answer 499

RROR is also called 'Cost of Capital'

Answer 500

Cost of Capital is the weighted average of the interest rates you pay for your Capital. Includes Debt and the Rate of Return your Equity Shareholders expect Example: 45% of your Capital is supported by debt and has an interest rate of 9%. 55% of your Capital is supported by equity and shareholders expect a ROR of 12% Your Cost of Capital is: (.45 x .09) + (.55 x .12) : 10.65%

Answer 501

Spread : ROI - Cost of Capital

Answer 502

Investments should exceed costs- with an emphasis on stockholder value. Economic Value Added : Operating Income After Tax - (Net Assets x WACC)

Answer 503

``` Operating Income After Tax + Depreciation & Amortization - Capital Expenditures - Change in Net Working Capital : Free Cash Flow ```

Answer 504

It measures a product versus its quality goal.

Answer 505

Sales / Average Assets

Answer 506

Can the company pay their short-term liabilities? Current Ratio : Current Assets / Current Liabilities

Answer 507

How is the company financing its capital? Debt to Equity Ratio : Total Debt / Total Equity

Answer 508

What proportions of the company's assets are encumbered with debt? Debt to Total Assets : Total Liabilities / Total Assets

Answer 509

How profitable is the product after COGS? Gross Margin : Gross Profit / Net Sales

Answer 510

How profitable is the product after all expenses (except interest and taxes)? Operating Profit Margin : Operating Profit / Net Sales

Answer 511

Can the company make their interest payments? Times Interest Earned : Earnings Before Tax & Interest / Interest Expense

Answer 512

What % return are the assets generating? Return on Assets : Net Income (net of interest & taxes) / Average Total Assets

Answer 513

Market Value of Common Stock / Book Value of Common Stock

Answer 514

How quickly does inventory get sold? Inventory Turnover : COGS / Average Inventory

Answer 515

It measures short-term liquidity- and only includes assets that are quickly available (i.e. not inventory) Quick Ratio : (Current Assets - Inventory) / Current Liabilities

Answer 516

How many days does it take the company to collect payment on A/R? Average Collection Period : Average AR / Average Sales Per Day

Answer 517

Products have quality defects- but are caught BEFORE they leave the warehouse.

Answer 518

Product reaches the customer- but they are not satisfied with the quality of the product. This includes recalls.

Answer 519

Quality control- testing & inspection costs.

Answer 520

The risk that a sluggish economy will affect the value of a debt instrument

Answer 521

The risk that an event in the investment's business sector will harm the investment For example- the banking sector is sluggish- so even stocks of healthy banks suffer

Answer 522

The risk that a debtor will be unable to make loan payments or pay back the principal

Answer 523

The risk that a change in interest rates will adversely affect the value of the note Example: Bond is for 10% but prevailing market rate is now 12%. If bondholder wants to sell it- they will have to sell it at a discount.

Answer 524

It measures the volatility of an investment.

Answer 525

Risk that impacts the entire market and can't be avoided or reduced through diversification Example: Wars

Answer 526

Relates to a particular industry or company Example: You own stocks in ethanol plants and an untimely freeze kills all of the corn in the Midwest

Answer 527

Beta measures how volatile the investment is relative to the rest of the market. In other words- how quickly (and in what amount) does the value of the stock change when the market sways?

Answer 528

It compares volatility of an investment to the market average. Factors include both Systematic and Unsystematic Risk.

Answer 529

An asset whose value is DERIVED from the value of another asset. Derivatives are measured at Fair Value.

Answer 530

Gives the buyer the option to buy or sell a financial derivative at a certain price Traders use them to speculate where they think the price will be at a certain point and make a profit Hedgers use them to offset risk

Answer 531

A Forward Contract with a future value. They are sold and traded on the futures market.

Answer 532

Forward Contract to swap payment agreements They are highly liquid and often valued using the Zero-Coupon method. Example: Steve pays Sally a fixed payment with a fixed interest rate. Sally pays Steve a variable payment tied to a benchmark such as LIBOR

Answer 533

Risk that a law or regulation will void the derivative

Answer 534

Hedge that protects against the value of an asset or liability changing. Changes in value are reported in earnings.

Answer 535

A hedge that protects against a set of future cash flows changing. Changes in value are reported in OCI.

Answer 536

A hedge that protects against the value of a foreign currency changing. For example- a foreign currency hedge might be used to protect against the following: If you have receivables denominated in a foreign currency and that currency dips in value - your receivables are worth less than before.

Answer 537

Retrospective Application: Prior Periods adjusted Retained Earnings adjusted Completed Contract to % Completion Ex: LIFO to FIFO

Answer 538

A change of principle. Applied retrospectively.

Answer 539

A change in accounting principle. Applied retrospectively.

Answer 540

A change in accounting estimate is applied prospectively (going forward). No backwards adjustment is made.

Answer 541

Change in depreciation method would be a change in accounting estimate. It is applied prospectively.

Answer 542

Cumulative effect of error gets adjusted to the beginning balances of assets and liabilities in the earliest period presented in the comparative statements. The correction of the error must be included in the footnotes.

Answer 543

Effect is Material Is identifiable in Prior Period Couldn't be estimated in Prior Periods

Answer 544

It is treated as a correction of an accounting error. Cumulative effect of error gets adjusted to the beginning balances of assets and liabilities in the earliest period presented in the comparative statements Correction of the error must be included in the footnotes

Answer 545

Effect on Ending Inventory : Effect on Net Income If one is overstated- both overstated. If one is understated- both understated. Misstating inventory corrects itself after TWO periods.

Answer 546

Applied retrospectively. All prior periods presented for comparative purposes must reflect the change Footnote disclosures must be made Changing to Consolidated Statements

Answer 547

Any bond that matures in installments

Answer 548

Any bond that matures on a single date

Answer 549

A bond not secured by any collateral

Answer 550

Cash is held in a sinking fund for repayment of bond at maturity 5 years of requirements and maturity details should be disclosed

Answer 551

Present Value of the principal payment at maturity + Present Value of Interest Payments made : Market Value of Bond Proceeds

Answer 552

Step 1: PV of $1 @ Yield Rate (not Stated Rate) x Bond Face Value PLUS Step 2: PV of an Ordinary Annuity of $1 for Term @Yield x (Stated Rate x Face)

Answer 553

Include Engraving; Printing; Legal; Underwriter; Registration Debited to a deferred charge account and amortized over life of Bond using S/L Bond Proceeds - Bond Issuance Costs : Net Bond Proceeds Time of amortization begins when issued

Answer 554

Reported at FMV with unreleased gains and losses being included in earnings

Answer 555

Both discount and premium amortization amounts increase each year

Answer 556

No gain or loss recognized APIC is the plug for the difference between the Bond's Book Value and the Par Value of the Common Stock

Answer 557

Rate on the face of the bond

Answer 558

Rate that bonds are currently selling for

Answer 559

Bond will need to sell at a discount in order for buyers to be interested. The difference in market rate vs. the stated is made up by the buyer purchasing the bond for less than par value

Answer 560

Bond will need to sell at a premium in order for buyers to be interested. The difference in market rate vs. the stated is made up by the buyer purchasing the bond for more than par value

Answer 561

The total cash that seller receives will be MORE than they normally would (set aside any considerations for premium or discount; they are irrelevant for this point). Basically; the purchaser of the bonds must give the bond issuer the amount of accrued interest up front.

Answer 562

When the bonds are issued

Answer 563

Cash for payment : Stated rate x Face amount

Answer 564

Interest expense : effective yield x carrying value Any difference between expense and cash payment is applied as amortization against premium/discount

Answer 565

Bonds that can be converted to stock Book value method used if no gain or loss Market value method used if there is a gain or loss

Answer 566

Gain or Loss is Ordinary Extraordinary if both unusual and infrequent

Answer 567

If terms are modified; and future payments are now less than the carrying amount of the debt; then a Gain is recognized

Answer 568

Gain recognized: Difference between cash paid and carrying amount of debt Difference between non-cash asset given and re-valued at FMV and debt carrying amount

Answer 569

If future cash flows discounted at loan's Effective Interest Rate are less than Carrying Value: Effective Rate calculated using original rate; not modified rate

Answer 570

20% Ownership or Less Accounted for as a purchase If amount paid is less than fair value; results in a gain in current period

Answer 571

Ownership 21% to 50% Gives significant influence Purchase Price - Par Value : Goodwill Dividends received from the investee reduce the investment account and are not income

Answer 572

Ownership of other company is greater than 50% Investment account is eliminated Only parent company prepares consolidated statements; not subsidiary. Acquired assets/liabilities are recorded at Fair Value on acquisition date. Eliminating entries for inter-company sales of inventory & PPE; also inter-company investments

Answer 573

Ownership less than 50% OR Majority owner does not control - i.e. bankruptcy or foreign bureaucracy

Answer 574

Acquirer held previous shares accounted for under Fair Value Method or Equity Method; and are now re-valued to Fair Value Results in a Gain or Loss in current period

Answer 575

Acquired companies continue to exist as a legal entity - their books are just consolidated with the parent company in the parent's financial statements Merged companies cease to exist and only the parent remains

Answer 576

Expensed in period incurred - i.e. NOT capitalized: Accounting; Legal; Valuation; Consulting; Professional Netted against stock proceeds: Stock registration and issuance costs

Answer 577

Cash plus other assets that are expected to be sold or converted to cash during the current operating cycle Includes: Demand deposits, cash equivalents, accounts receivable, inventory, pre-paids, and short-term investments

Answer 578

A liability expected to be paid within 12 months or less

Answer 579

(Cash + A/R + Trading Securities) / Current Liabilities

Answer 580

Currents Assets / Current Liabilities

Answer 581

Currents Assets - Current Liabilities

Answer 582

Credit Sales / Average A/R

Answer 583

COGS / Average Inventory

Answer 584

365 / Inventory Turnover

Answer 585

Average A/R / Average Sales per Day

Answer 586

They are NOT accrued due to Conservatism

Answer 587

If Probable - they are accrued (if estimable) and disclosed If Reasonably Possible - they are disclosed If Remote - don't accrue or disclose

Answer 588

GAAP says to recognize a revenue/expense in one period and tax laws say to recognize it in another Example: Dividends from a subsidiary accounted for using the Equity Method - tax income but not book income

Answer 589

Deduction will reduce future income taxes expense.

Answer 590

Income will be taxable in a future period and will increase future tax expense

Answer 591

The FUTURE enacted tax rate not the current one. It is never discounted to present value.

Answer 592

If it isprobable that not all of a Deferred Tax Asset (debit) will be realized then the Deferred Tax Asset account must be written down (credit) to reflect this

Answer 593

They have no tax impact. When calculating the total differences between book and tax income subtract the permanent differences from the total before applying a future enacted tax rate

Answer 594

The sum of Net Changes in Deferred Tax Assets and Deferred Tax Liabilities GAAP Method for calculating is theAsset and Liability Approach Note: IFRS uses the Liability approach only

Answer 595

Current Deferred Tax Assets and Liabilities will impact income tax expense within 12 months. All current amounts are netted and reported as a single amount on the Balance Sheet Non-Current Deferred Tax Assets and Liabilities will impact income tax expense 12 months or more fromt he Balance Sheet Date. All non-current amounts are netted and reported as a single amount on the Balance Sheet

Answer 596

At cost when acquired re-valued to fair value each period on Balance Sheet.

Answer 597

Recorded on income statement

Answer 598

They are included in Other Comprehensive Income.

Answer 599

Fair Value Hedge offsets exposure to changes in the value of a recognized asset/liability or of an unrecognized commitment Initially recorded on Balance Sheet at Fair Value Gains/Losses recorded on Income Statement

Answer 600

Cash flow hedges protect from exposure to fluctuations in cash flows. Initially recorded on Balance Sheet at Fair Value Gains/Losses going to OCI Example: A cereal company enters into a futures contract on grain purchases to offset the risk that grain will go up in price.

Answer 601

In Other Comprehensive Income (OCI)

Answer 602

Objectives and Strategies Context to help investor understand the instrument Risk Management Policies Complete List of Hedged Instruments

Answer 603

Fluctuations in that currency cause a gain or loss that must be recognized on the income statement as Income from Continuing Operations

Answer 604

The current translation rate as of the balance sheet date is used to report assets and liabilities.

Answer 605

Use the weighted average exchange rate for the current year.

Answer 606

Foreign Currency Financial Statements are remeasured into the Reporting Currency (Dollar) using the weighted-average exchange rate

Answer 607

On the income statement as Other Income.

Answer 608

To measure income

Answer 609

The FASB Codification All pronouncements fall under the Codification umbrella

Answer 610

Authoritative and Non-Authoritative

Answer 611

Managerial Accounting has a timeliness focus Managerial Accounting is not required to follow GAAP

Answer 612

Form 10K - Annual and Audited | Form 10Q - Quarterly and Reviewed

Answer 613

Focus is on the needs of users to help them make decisions and assessments about the company Does not make assessments of the economy

Answer 614

Cost vs. Benefit Materiality

Answer 615

Consistency - Year vs. Year Comparability - Company vs. Company

Answer 616

Relevance & Faithful Representation Relevance - Makes a difference to the user Includes: Predictive Value - Future Trends Confirming Value - Past Predictions Materiality - Could affect User Decisions Faithful Representation Includes: Completeness - Nothing omitted that would impact the decision-making of a user Neutrality - Information is presented is without bias Free from Error - No material errors or omissions

Answer 617

Comparability Verifiability Timeliness and Understandability Comparability - Allows users to compare different items among various periods Verifiability - Different people would reach a similar conclusion on the information presented Timeliness - Information is made available early enough to impact the decision making of users Understandability - Information is easy to understand

Answer 618

When an estimate is necessary due to uncertainty conservatism chooses the best option that won't overstate the financial position of the company

Answer 619

Earned (Revenue) or Incurred (Expense) but no Cash Receipt/Outlay yet

Answer 620

Cash Receipt/Outlay but not Earned (Revenue) or Incurred (Expense)

Answer 621

When an item is recorded and included in the financial statements

Answer 622

The price you would receive if you sold the asset Assumes asset is at its highest and best value Assumes asset is sold at its most advantageous market to get the best price possible

Answer 623

Buyer and Seller are not Related Buyer and Seller are Knowledgeable Buyer and Seller are able to transact - i.e. This isn't a hypothetical transaction for Fair Value measurement purposes. The buyer actually does have the $10M to purchase the asset you're trying to value at $10M Buyer and Seller are both motivated to buy/sell

Answer 624

Price quotes or market prices For example NYSE or NASDAQ

Answer 625

Interest rates Prime rate

Answer 626

Unobservable inputs such as assumptions or forecasts Lowest priority for valuation

Answer 627

Market approach - uses market transactions and prices to value the asset Income approach - uses present value discounts earnings Cost approach - uses replacement cost to value the asset

Answer 628

Cash Inventory or Assets expected to be converted or consumed during a business' operating cycle Deferred Gross Profit on Installment Sales (Contra Asset) Receivables expected to be collected in 12 months or less

Answer 629

Liabilities that will use current assets during the present operating cycle

Answer 630

Expense that has been incurred but not paid Example: rents payable

Answer 631

A type of current liability Payments that have been received but cannot be recorded as revenue yet Example: Tenant pre-pays rent - Landlord still must perform to earn it and is a liability until this happens

Answer 632

When they have been earned; i.e. company has performed

Answer 633

Increase in equity from an activity or event that is not central to the main activities of the business Can be operating or non-operating

Answer 634

Decrease in equity from an activity or event that is not central to the main activities of the business Can be operating or non-operating

Answer 635

Average time it takes to turn materials or services into Cash

Answer 636

Valuation method - the current value of a future amount of money using a specific interest rate

Answer 637

How much an asset cost - (net of depreciation and amortization)

Answer 638

How much it would cost to reacquire an asset today (Entrance Cost)

Answer 639

The sale price of an asset (Exit Cost)

Answer 640

Sale Price of an Asset - Selling/Disposal Fee

Answer 641

Recognized when earned If the royalty % is applied against net sales then subtract the estimated return amount from the gross sales first and then apply the royalty rate

Answer 642

Revenue recognized upon receipt of cash Only used when cash collection is uncertain

Answer 643

Gross Profit that can't be recognized until cash is received D.GP : Gross Profit % x Accounts Receivable Pay attention to the year if GP% varies

Answer 644

No revenue recognized until all costs are recovered from purchase of the asset Most conservative method of revenue recognition when collection of sale price is uncertain

Answer 645

Payment has been received but performance is not complete. As company performs revenue is recognized. Recorded as a Deferred Revenue (Liability) on Balance Sheet

Answer 646

Franchisor - Startup franchise fee revenue deferred until substantial performance Franchisee - Costs are deferred until corresponding revenue is recognized

Answer 647

Mnemonic: SPEAR-BAR Sales (i.e. Customer Payments) + Ending Accounts Receivable - Beginning Accounts Receivable : Sales Revenue on an Accrual Basis

Answer 648

Mnemonic: CRAP-I Cash Remitted (i.e. paid) +Increase in Accounts Payable -Increase in Inventory :COGS on an Accrual Basis

Answer 649

Reported Net of Tax after Continuing Operations but before Extraordinary Items Company decides to cease operating a segment of its business Includes Income (or loss) from the period plus the gain (or loss) from disposal

Answer 650

Both unusual AND infrequent Reported Net of Tax after Discontinued Operations Note: Usual *or* Infrequent Items are reported as part of Continuing Operations

Answer 651

Adjusts assets to reflect a consistent level of purchasing power due to inflation Uses the Consumer Price Index (CPI)

Answer 652

When they are incurred. Accrue if not yet paid.

Answer 653

Those incurred but not paid. Product costs - Expenses should be matched with associated revenues as they are recognized (sales commission on a used car sale) Period costs - Expenses amortized and recognized with the passage of time

Answer 654

Immediately.

Answer 655

Office staff salaries Office/building rent Office supplies Note: Sales staff salaries and portions of the building assigned to Sales should be allocated to Selling Expense not G&A

Answer 656

One-time costs for opening a new business Expensed as they are incurred

Answer 657

Interest on projects (software) for internal use is not expensed but is instead capitalized

Answer 658

Net Income + Other Comprehensive Income (OCI): Revenues/Expenses Gains/Losses Cumulative accounting adjustments Reclassifications adjustments Non-owner changes in equity

Answer 659

Foreign Currency Translation Adjustments Unrealized gains on AFS Securities Minimum Pension Liability adjustment for defined benefit plans

Answer 660

Avoids double counting items that were included in both Net Income and OCI Example: AFS Securities previously included in OCI are now sold at a loss and reported on the Income Statement

Answer 661

Reported in a Single or Combined Income Statement

Answer 662

Accounting Principles used Basis of Consolidation Inventory Pricing Methods Depreciation Method Amortization of Intangibles

Answer 663

Nature of Operations Use of Estimates and listing of Significant Estimates Concentration vulnerability

Answer 664

Statement of Financial Condition & Statement of Changes in Net Worth

Answer 665

Estimated current value

Answer 666

Presented on Statement of Financial Condition between Liabilities and Net Worth

Answer 667

Assets - Liabilities - Estimated taxes on assets sold : Net Worth

Answer 668

Only shown if there is cash surrender value It is shown net of loans against the policy

Answer 669

Business Interests that constitute a large percentage of total assets should be separated from other investments

Answer 670

Interim period is a separate accounting period - not GAAP Same accounting principles used for annual reporting should be used.

Answer 671

Interim period is a part of the annual period - GAAP Gross profit method may be used to estimate COGS and inventory Temporary declines in inventory aren't recognized

Answer 672

Aren't prorated Fully recognized in Interim Period as incurred If it occurs in Q3 - it's recognized in Q3

Answer 673

Reported as if they occurred in the first quarter

Answer 674

If inventory experiences a decline in value during an interim period - the loss is recognized in the interim period If the loss is expected to be only temporary - no loss is recognized

Answer 675

The matching principle gets messed up - Expenses incurred in one period may benefit future periods

Answer 676

Publicly traded companies

Answer 677

Revenue of segment is 10% or more of total Profit is 10% or more of total Segment assets are 10% or more of total 75% Test - All segment revenues must equal 75% of total external revenues

Answer 678

If 10% or more of enterprise revenue comes from one customer - the segment making the sales must be disclosed

Answer 679

They are expensed in the period incurred and are not capitalized.

Answer 680

All expenditures to get the building into working condition are ready for use

Answer 681

All expenditures to get the land ready for its intended use: Title & County Fees Clearing of Land - Dirt work etc. Demolition and removal of old buildings (minus any scrap or salvage) Note: capitalized land costs are not depreciated

Answer 682

If the cash flows from the assets exchanged are not significantly different no gain or loss is recognized on a non-monetary exchange as it lacks commercial substance. The new asset is recorded at the book value of the asset given up. The only gain that can be recognized is any boot (cash) received.

Answer 683

If resulting cash flows are significantly different then the transaction has commercial substance and a gain/loss is recorded on the exchange. The new asset is recorded at the FAIR VALUE of the assets given up unless the asset acquired has a fair value that is easier to determine.

Answer 684

Recorded at Fair Value + costs associated with getting the property into working condition for its designed purpose Exam Tip - Think of a charity holding afair and then donating the property which is then recorded atfair value

Answer 685

Recorded at Fair Value of asset given up. Gain or Loss is recorded.

Answer 686

1 / (Useful Life x 2 x Book Value) Ignore salvage value.

Answer 687

(Cost - Salvage Value) x (Remaining Useful Life / SYD) : Depreciation expense For example the depreciation factor for the third year of a 10-year asset would be: : 8 / (10+9+8+7+6+5+4+3+2+1) : 8/55 : 14.5% Remaining useful life : 8 SYD : 55

Answer 688

(Cost - Salvage Value) / Useful life : depreciation expense

Answer 689

When the un-discounted future cash flows are less than the carrying value of the asset. Carrying Value - Fair Value : Impairment Loss Note: impaired assets that recover their value can't be written back up once written down

Answer 690

If the patent is SUCCESSFULLY defended the legal fees are amortized over the patent's economic life. If unsuccessful they are expensed immediately.

Answer 691

Compare the CV to the FV. If FV is greater than CV no impairment exists you're done. If impairment appears to exist the assets and liabilities should be compared to the total value of the reporting unit. The difference is Goodwill. Compare this amount to the CV of the Goodwill and write it down accordingly.

Answer 692

Expenses prior to technological feasibility are expensed as R&D. After technological feasibility but prior to production costs are capitalized. Expenses incurred during production are charged to inventory. Expenses incurred training on internal use software are expensed.

Answer 693

All expenditures to get the asset into working condition and ready for use: ``` Purchase price + liabilities assumed Shipping Taxes Insurance Installation Testing Legal fees Construction loan interest ``` Any alterations to existing facilities or equipment necessary for the new purchase and installation that extend the life or increase the efficiency of these assets are capitalized.

Answer 694

Governmental, Proprietary, Fiduciary

Answer 695

Accrual basis - current economic resources focus (revenues recognized when earned) Modified accrual basis - current financial resources focus (revenues recognized when available and measurable)

Answer 696

The highest amount allowed for a particular expenditure under a budget.

Answer 697

Records purchase and reserves it for the encumbrance.

Answer 698

Dr Estimated Revenues Control Cr Appropriations Control Dr/Cr Budgetary Fund Balance (plug)

Answer 699

Dr Appropriations Control Dr/Cr Budgetary Fund Balance (plug) Cr Estimated Revenues Control

Answer 700

``` General Fund Special Revenue Fund Permanent Fund Capital Projects Fund Debt Service Fund ```

Answer 701

The operating fund of the governmental unit Records Significant Revenues: Taxes; Tickets; Fines; Licenses Records Significant Expenditures: Police; Education; Fire Dept

Answer 702

Restricted for a specific purpose such as street repair.

Answer 703

Legally restricted fund; where only earnings can be used to fund programs. Principal remains intact.

Answer 704

Used to acquire and build facilities.

Answer 705

Handles repayment of long-term debt and related interest.

Answer 706

Balance Sheet Statement of Revenues; Expenditures; and Changes in Fund Balance

Answer 707

When it is BOTH available and measurable; regardless of when it is spent.

Answer 708

Money collected from people doing things: Sales tax (buying cars) or income tax (people working)

Answer 709

Tax assessed just because things exist Example: property tax on a car (even if it's never driven); real estate tax Recorded as a revenue when BUDGETED. Estimated uncollectible property tax revenues don't offset revenues; so don't net them.

Answer 710

Internal Service Funds - to serve the needs of other governmental units (i.e. motor pool) Enterprise Funds - provide goods or services to external users (i.e. post office)

Answer 711

``` Restricted - Restricted by Contributor Committed - Restricted by Government Assigned - Intended for a purpose Unassigned - Available to be spent Non-spendable - Not in a spendable state ```

Answer 712

Agency Fund - government acts as an agent or custodian Pension Trust Fund - Government is a trustee for a pension plan Investment Trust Fund - Government is a trustee over a series of investments Private Purpose Trust - Trust that benefits various individuals and entities

Answer 713

Assets (Current & Non-Current) Deferred Outflows of Resources Liabilities (Current & Non-Current) Deferred Inflows of Resources

Answer 714

They are shown net of debt Asset Cost - Accumulated Depreciation - Asset Liabilities : Net Assets

Answer 715

Modified approach: Reported at cost; no accumulated depreciation

Answer 716

Into Governmental Activities and Business Activities

Answer 717

They are divided by function If the activities of a component are distinguishable from the rest of the governmental entity; then discreet presentation is required If the activities of the component cannot be identified and separated from the rest of the governmental activities; then blended presentation is warranted. Component units are reported in the Entity-Wide Financial Statements and not the Fund Financial Statements.

Answer 718

To provide information that is useful and benefits a wide range of users including: Costs of services provided Sufficiency of revenues to cover costs Financial position of entity

Answer 719

Statement of Fiduciary Net Position and Statement of Changes in Fiduciary Net Position

Answer 720

Assets; Deferred Outfows; Liabilities; Deferred Outflows; Fiduciary Net Position

Answer 721

Additions (Contributions and Net Investment Income) - Deductions (Benefits Payments and Admin Expense) : Net Change in Fiduciary Net Position

Answer 722

Types of Benefits; Plan Member Classes; Board Information; Investment Policies and FV Determination

Answer 723

The International Accounting Standards Board (IASB)

Answer 724

The International Financial Reporting Standards (IFRS) issued by the IASB

Answer 725

The IASB Framework * The framework is NOT a standard itself * The framework does not supersede any standard's authority

Answer 726

To provide users with information on international accounting.

Answer 727

Entity is a Going Concern | Entity uses the accrual basis of accounting.

Answer 728

Relevance & Faithful Representation Relevance - Makes a difference to the user Includes: Predictive Value - Future Trends Confirming Value - Past Predictions Faithful Representation Includes: Completeness - Nothing omitted that would impact the decision-making of a user Neutrality - Information is presented is without bias Free from Error - No material errors or omissions

Answer 729

Comparability - Allows users to compare different items among various periods Verifiability - Different people would reach a similar conclusion on the information presented Timeliness - Information is made available early enough to impact the decision making of users Understandability - Information is easy to understand

Answer 730

Comparative information from prior year is required under IFRS. GAAP requires that if multiple years are presented they are consistently prepared however it doesn't require prior year comparative statements.

Answer 731

Cost vs. Benefit

Answer 732

``` Asset Liability Equity Income Expense ```

Answer 733

Probable future economic benefit Can be measured reliably If the value or outcome cannot be measured reliably IFRS requires the use of the Cost Recovery Method.

Answer 734

A full comparative statement using IFRS.

Answer 735

January 1 2011 because a full year of comparative statements is required from the previous year

Answer 736

The Fair Value election

Answer 737

In the entity's retained earnings or equity

Answer 738

Going Concern is an assumption under IFRS

Answer 739

IFRS doesn't allow extraordinary items.

Answer 740

Completed contract method is not allowed under IFRS.

Answer 741

IFRS does not allow LIFO.

Answer 742

Statement of Comprehensive Income Statement of Changes in Equity

Answer 743

Income is used instead of revenue and encompasses BOTH revenue and gains.

Answer 744

In IFRS the term profit is used instead of Net Income.

Answer 745

They are treated the same as revenue and are not separated on the financial statements.

Answer 746

In IFRS losses are treated the same as expenses but they ARE separated on the financial statements.

Answer 747

Under IFRS current liabilities can only be refinanced into a non-current liability if the refinance agreement is EXECUTED prior to the balance sheet date. GAAP requires only *intent* to refinance not actual execution.

Answer 748

Under GAAP there are three classifications of contingent liabilities - Probable Reasonably Possible and Remote. Under IFRS contingencies are uncertain future events and are classified as a provision if probable and measurable even if uncertain in timing or amount.

Answer 749

Bonds may be recorded on the Statement of Financial Position using one of two methods Fair Value through profit or loss * Liability revalued at the end of each period * Gain or Loss recognized in period Amortized Cost *Using Effective Interest Method

Answer 750

They use the liability method - all deferred tax liabilities must be reported but only probable deferred tax assets can be reported. They are non-current on the statement of financial position.

Answer 751

ONLY if they are related to the same country/taxing authority For example China Deferred Tax Assets can't offset Japan Deferred Tax Liabilities

Answer 752

The enacted rate or substantially enacted tax rate. | GAAP is the enacted tax rate only

Answer 753

``` Income Finance Costs Tax Expense Discontinued Ops Profit/Loss Non-controlling interest in Profit/Loss Net profit/loss attributable from equity ```

Answer 754

Recorded at cost Valued using either: Cost model - asset carried at cost less accumulated depreciation and impairment loss Revaluation model - asset adjusted to fair value less accumulated depreciation

Answer 755

Asset must be able to be reliably measured Must be applied to whole class of assets not just one asset No guidance on how often assets should be revalued under IFRS

Answer 756

Initially recorded at cost Revalued using either Fair Value model or Cost model

Answer 757

Recorded on the Income Statement Investment P/L : IS PP&E P/L : OCI

Answer 758

Carried at Cost minus Accumulated Depreciation Fair Value must still be disclosed in the notes to the financial statements

Answer 759

Operating Leases can be recorded as Investment Property if measured at Fair Value All other investment property must use Fair Value Model if one asset uses it

Answer 760

Using either the Cost Model (cost less Accumulated Depreciation and Impairment Loss) or the Revaluation Model (Fair Value less Accumulated Depreciation)

Answer 761

It is not recognized.

Answer 762

If asset has a finite life it is amortized over useful life. If asset has indefinite life it is not amortized but is tested for impairment at the reporting date.

Answer 763

If the substantial risks of ownership have passed to the Lessee then the Lease must be accounted for as a Finance Lease

Answer 764

Project-unit-credit method calculates the PV of the defined benefit obligation

Answer 765

They can be classified as either Operating or Financing Once a classification is chosen all future costs must be classified there

Answer 766

They must be included in the notes to the financial statements.

Answer 767

Purchases - Net of Discounts, Freight, Warehouse expenditures

Answer 768

FOB Shipping Point puts the inventory into the hands of the buyer from the loading dock

Answer 769

FOB Destination keeps the items in the seller's inventory until it reaches the buyer

Answer 770

Sales Commissions Interest on liabilities to vendors Shipping expense to customers

Answer 771

Under the gross method, discounts are recorded only when used.

Answer 772

Under the net method, discounts are recorded whether used or not. Unused discounts are allocated to financing expense.

Answer 773

Gross Margin : Sales - COGS (BI + P - EI)

Answer 774

Inventory is counted at certain times throughout the period Weighted-average cost flow method is used.

Answer 775

Inventory count continually updated Uses a moving-average cost flow method

Answer 776

Under the FIFO system, periodic and perpetual inventory methods will both have the same ending inventory.

Answer 777

COGS / Average Inventory

Answer 778

365 / Inventory Turnover

Answer 779

The CONSIGNOR holds the consigned items in their inventory count. The cost includes the shipping to the consignee.

Answer 780

No. Consignment goods are maintained in the inventory of the consignor, not the consignee.

Answer 781

Misstatement of beginning inventory does NOT have an effect on ending retained earnings. Misstatement of ENDING inventory does have an effect on retained earnings.

Answer 782

EI Over : COGS Under : ERE Over EI Under : COGS Over : ERE Under

Answer 783

The first (oldest) inventory you have in stock is the first inventory you record for COGS purposes. If your oldest inventory on the shelf cost you $1 when you bought it, COGS is $1 This is just for inventory pricing. It has nothing to do with physically selling the oldest item on the shelf - It is purely for accounting purposes

Answer 784

The last (newest) inventory you have in stock is the first inventory you record for COGS purposes. If your newest inventory on the shelf cost you $1.50 when you bought it, COGS is $1.50

Answer 785

COGAS / Total Units : Weighted Average Cost Per Unit

Answer 786

FIFO's relationship to COGS will be opposite LIFO's relationship to COGS in periods of falling/rising prices.

Answer 787

FIFO has the Lowest COGS FIFO is a cat that sees a mouse starts Low and is Rising If COGS is Low, that means EI is High

Answer 788

FIFO has the Highest COGS Remember: FIFO, that silly cat, got High from Catnip and is Falling off the couch If COGS is High, that means EI is Low

Answer 789

Market Ceiling : Net Realizable Value : Selling Price - Selling Costs Market : Replacement Cost Market Floor : Net Realizable Value - Normal Profit

Answer 790

At Fair value as either Current or Non-current assets.

Answer 791

Included in OCI (Other Comprehensive Income)

Answer 792

HTM - Stockholder's Equity / Trading Securities - Current Period.

Answer 793

Amortized cost as Current or Non-current assets. If reclassified as AFS - Unrealized G/L go to Stockholder's Equity If reclassified as Trading Securities - Unrealized G/L recognized in Current Period

Answer 794

Trick question - Unrealized gains or losses are not applicable because they are HTM

Answer 795

At Fair Value as a Current Asset Unrealized gains/losses are recorded on the Income Statement If they are reclassified as held-to-maturity or available-for-sale- there is no effect upon transfer.

Answer 796

Recorded on the Income Statement If they are reclassified as HTM or AFS - there is no effect upon transfer.

Answer 797

Capitalize at cost: Asset & Liability Recorded at Present Value of Future Lease Payments

Answer 798

Future minimum rental commitments By year - for 5 years All remaining years as a group

Answer 799

Same as for lessee (Title- BPO or Substance)- PLUS: Collectability of lease payments is predictable No uncertainties about the lessor reimbursing the lessee for costs incurred

Answer 800

Risk of ownership does NOT pass No asset or liability is recorded on the financial statements Leasehold improvements - capitalized and depreciated over the lesser of lease life or leasehold improvement's life.

Answer 801

Rent revenue recorded Leased property remains an asset and depreciated by lessor If payments fluctuate over the term of the lease- rent revenue recognized on a straight line basis

Answer 802

Interest Revenue (or expense for lessor) decreases with passage of time Principal amount increases with each payment Carrying amount of Lease decreases

Answer 803

Any profit on the sale is deferred and amortized Exception: If PV of lease payments is 10% or less of the asset's FMV- the gain is recognized If PV of lease payments is greater than 10% of FMV and the lease is operating- all of the gain is recognized except the amount of the PV of the lease payments

Answer 804

Payments begin at the start of the lease period Think: Rent/Mortgage payments are Due at the first of the month

Answer 805

Payments begin after the end of the first year Think: An annuity that pays you at the end of each year

Answer 806

Risk of ownership passes to lessee by: Title, Bargain Purchase Option (BPO), Substance - Lease is more than 75% of asset's useful life or PV of minimum lease payments are more than 90% of fair value

Answer 807

Statement of Financial Position Statement of Activities Statement of Cash Flows Statement of Functional Expense (Volunteer Health Organizations Only)

Answer 808

Similar to Balance Sheet: Assets Liabilities Net Assets Unrestricted Assets Permanently Restricted Assets Temporarily Restricted Assets

Answer 809

Similar to an Income Statement - organization - wide: Revenues Expenses - ONLY deducted from Unrestricted Revenues Gains and Losses Changes in Net Asset classes Unrestricted Permanently Restricted Temporarily Restricted

Answer 810

Both direct and indirect methods are OK Operating Activities - Unrestricted Revenues and Unrestricted Expenses Investing Activities Financing Activities - Endowments and restricted contributions

Answer 811

Volunteer Health Organizations

Answer 812

Balance Sheet Statement of Operations Statement of Changes in Net Assets Statement of Cash Flows Financial Statement Notes

Answer 813

Accrual basis of accounting is used Only external parties can restrict the use of assets (permanent or temporary) Assets earmarked internally by management are still classified as unrestricted

Answer 814

No restrictions or conditions placed on entity in order to use the resources Note: assets earmarked internally by management are still unrestricted

Answer 815

Revenues on contributions are recognized in the year received - not the year the contribution is spent and are recorded at Fair Value on the date received

Answer 816

If the organization would have otherwise paid for them or They increase the value of a non - monetary asset

Answer 817

NO. It is disclosed in the notes to the financial statements only.

Answer 818

Classified as revenue in the current year only - multi - year future contributions fall under Temporarily Restricted.

Answer 819

Expenses ONLY deducted from Unrestricted Revenues - not Temporary or Permanently Restricted Revenues/Assets

Answer 820

Use is restricted to a future time - which could then convert to unrestricted - Class: Temp. Restricted Revenue Unrestricted contributions promised (including multi - year contributions) - but not yet received are actually restricted by time and are therefore classified as Temporarily Restricted Assets - Multi - year contributions are recorded at the present value of the future contributions

Answer 821

Use of investment is restricted - but income from investment could be either restricted or unrestricted Must be under control of receiving entity (Quasi Endowment) in order to be recorded in unrestricted net assets Otherwise - a memo entry is recorded

Answer 822

Not recognized as assets or contribution revenue if they are held of display or education' or their sale results in the purchase of similar items

Answer 823

Temporarily restricted assets are used before Unrestricted assets.

Answer 824

Classified as a Liability Promise to contribute assets pending on certain conditions being met Becomes unconditional once the possibility that it won't happen is remote

Answer 825

Fair Value is mostly used Exception - Equity method used when significant influence exists

Answer 826

As a reduction of revenue - netted against college's tuition

Answer 827

Depreciation expense is allocated proportionately to various functions

Answer 828

Calculating the capital balance when property contributed has a mortgage results in the FV of the Asset being netted against the Liability

Answer 829

The bonus method: Old Partnership Equity + New Partner Contribution : New Partnership Equity x New Partner % : New Partner Equity Amount New Partner Contribution - New Partner Equity Amount : Bonus to Prior Partners using same allocation as P/L

Answer 830

Using the goodwill method: New Contribution / New Equity % : Partnership Value Implied Value of Partnership - Capital Accounts of all partners : Goodwill to Old Partners Under the Goodwill Method - the new Partner is paying an amount for a certain percentage stake in the partnership. For instance if they pay $1000 for a 25% stake - then it is assumed that the Partnership is worth $4 -000 ($1 -000/25%)

Answer 831

Fair Value for assets contributed. Present value of remaining cash flows for liabilities assumed.

Answer 832

Cash received from Customers- Interest & Dividends- Trading Securities Cash paid to Vendors- Suppliers- Interest- Taxes- Trading Securities

Answer 833

Cash received: Sale of PP&E- Sale of Investments- Loan Principle Cash paid: Loans- Acquisitions- AFS or HTM Securities- Taxes- Trading Securities

Answer 834

Cash received: Issuance of Stock- Issuance of Debt Cash paid: Dividends

Answer 835

Starts with Income from Continuing Operations Adjusts for changes in accounts like A/R- A/P- Inventory and non-cash revenues- expenses- gains- losses If used- the Indirect Method must also be shown

Answer 836

Starts with Net Income Adjusts for changes in accounts like A/R- A/P- Inventory and non-cash revenues- expenses- gains- losses

Answer 837

APIC for each is allocated by its respective % of the total FMV of the shares x the proceeds.

Answer 838

APIC increases on date subscription is recorded - not on the date paid for or issued

Answer 839

It will be restricted to the extent of the balance in the Treasury Stock account.

Answer 840

They are not accrued until declared.

Answer 841

If a year passes and no Cumulative Preferred Stock is declared- then the dividends in arrears are included as a disclosure - not an accrual in the Financial Statements.

Answer 842

The gain or loss is the difference between the FMV of the asset distributed at the date of distribution and its carry amount on the company's books

Answer 843

The effect on Retained Earnings is the Carrying Amount of the asset RE will be debited when the dividend is declared for the FMV of the asset- which is more (or less) than the carrying amount Gain/Loss recorded when the asset is distributed will offset the original effect of the debt to RE and will be a wash The net effect of the entry is that RE will decrease by the CV of the asset

Answer 844

When Stock Dividend is less than 25% of Common Stock outstanding

Answer 845

When Stock Dividend is greater than 25% of common stock outstanding

Answer 846

Stock dividends and stock splits both have no effect on Total Shareholder Equity

Answer 847

Stock splits only affect par value - APIC remains the same.

Answer 848

Compensation expense is recorded at the time of grant if options are exercisable immediately They are based on past service. Expense recognized : FV Stock Option x # of Shares

Answer 849

The risk-free interest rate

Answer 850

The settlement date.

Answer 851

Compensation costs for share-based payments classified as liabilities are measured by the change in the fair value of the instrument for each reporting period

Answer 852

Net increase to SHE : Gain on settlement of debt + Credit to SHE from stock issuance

Answer 853

To eliminate a deficit balance in RE by restating its assets to Fair Value It does not directly protect a company from its creditors

Answer 854

(Net Income - P/S Dividends) / Average Common Stockholders Equity Note: Average CSE : Common Stock + RE

Answer 855

Total Common Stock - Total Preferred Stock - P/S Dividends in Arrears - P/S Liquidation Premium :Total Book Value Book Value per Share : Total Book Value / Shares outstanding

Answer 856

Dividends per share / earnings per share

Answer 857

(Net Income - Preferred Dividends) / Average C/S Outstanding Note - If cumulative- subtract the P/S dividend regardless of whether or not they're declared.

Answer 858

For EPS purposes- treat C/S stock splits or stock dividends as if they occurred at the beginning of the year- regardless of when actually issued during the year

Answer 859

EPS is only required to be shown for Income from Continuing Operations and Net Income. All others (discontinued operations- extraordinary items) can be shown on the Financial Statements or in the notes

Answer 860

Only if they are dilutive. Their exercise price is LESS than the market value If not- you ignore them in the calculation

Answer 861

[Net Income + Bond Interest (Net of Tax)] / (Average Common Stock Shares + Convertible Equivalents) Bond interest is added back because if converted- there would be no bond interest expense Contingent Issue Agreements are included in Diluted EPS if contingency is met

Answer 862

Agency Law deals with someone's ability to bind you to a contract with a third party

Answer 863

Both parties must consent to the relationship and intend for an Agency relationship to exist Agent owes Principal fiduciary duty Principal doesn't owe Agent fiduciary duty A contract is NOT required and an Agency agreement is not based on Contract Law; Exception - If duties cannot be performed within a year; a signed writing is required

Answer 864

Actual Authority is what is expressly granted or is implied by the duties you expect the Agent to perform and is necessary to carry them out

Answer 865

When authority is expressly granted; it is implied that the agent has the authority to carry out the duties Does not include authority to sell or alter a business

Answer 866

Apparent Authority is based on the third party's perspective - they believe that the Agent has the authority to enter into a contract based on: * Prior dealings with agent * Agent's title leads the third party to believe they can enter into a contract * The Principal hires the Agent to carry out duties that normally carry with them the rights to enter into contracts

Answer 867

* Both Agent and Principal agree to terminate * Principal fires Agent * Agent fires Principal * Agent breaches their contract by doing something like violating their obligation to act as a fiduciary to Principal

Answer 868

* Let the public know * Let the people or entities that the Agent previously interacted with know * In cases of death; or Principal is otherwise not competent to contract; ALL authority is revoked

Answer 869

Agent acquires an ownership interest in the Agency Can only be terminated early (before the interest expiration date) by the Agent Unless the Agency has a specific time limit spelled out in a contract; the Agent's authority is irrevocable by the Principal

Answer 870

Employees are agents while acting within the scope of their duties. For employees who injure third parties while acting within the scope of their duties; both Employee and Employer are liable

Answer 871

Agents are liable for torts (civil wrongs) committed whether they had authority or not

Answer 872

Agents who act outside of their authority will be liable for the act Exception - Principal ratifies the contract which relieves Agent of liability In order to ratify; Principal must know all of the facts and must ratify before third party cancels agreement If Principal keeps the benefits of the contract; ratification is implied Contract must be 100% ratified or there is no contract

Answer 873

* Agent liable to third party even if acting within authority * Third party can sue both Principal and Agent if Principal becomes disclosed * Agent can then sue Principal

Answer 874

Must be in writing Must be signed by person granting the POA Ends upon death of Principal General POA - Agent authorized to handle all affairs Special POA - Agent authorized to handle only specific affairs

Answer 875

Bankruptcy gives creditors protection from their creditors and stops them from either permanently (Chapter 7) or temporarily (Chapter 11 or 13) collecting a debt. The filing halts collection activity; grants automatic stay (with certain exceptions), and stops creditors from suing debtor.

Answer 876

``` Student Loans Income taxes from previous 3 years Alimony & Child Support Debts/judgements resulting from drunk driving Pension obligations Debts relating to SOX violations Debts arising from illegal activities Debts not listed in the bankruptcy filing ```

Answer 877

It doesn't; because the corporation is a separate legal entity. Under bankruptcy; corporations are dissolved Under bankruptcy; individuals are discharged

Answer 878

If a debtor fails to keep good records or falsifies documents; a discharge will be denied

Answer 879

Discharges all non-exempt debt Can only be filed every 8 years from previous Chapter 7 filing Voluntary or involuntary filing Certain businesses are disallowed from Chapter 7 bankruptcies - Railroads; Banks; Insurance companies; Savings & loans (think: 7th inning RBIs)

Answer 880

Must pass means test Your income must be below the median income for your state (Note - median; i.e. middle; not mean; i.e. average) Credit card companies made it harder for people to declare Chapter 7 when they lobbied Congress in 2005

Answer 881

In some cases; your creditors can force you into Chapter 7 or Chapter 11 BK Creditors must be able to prove that they are not being paid on time (i.e. debtor is insolvent) or that within the past 120 days the debtor assigned a custodian of the secured property If 12+ unsecured creditors - at least 3 must file; claims must be in excess of $15325 If less than 12 unsecured creditors - only 1 must file; claim(s) must be in excess of $15325 Upon filing; a judge will declare an order for relief unless the debtor protests

Answer 882

Charities Farms

Answer 883

If the debtor pays the court-assigned bond to keep a property in an involuntary BK; they can reclaim possession of their property from the interim BK trustee

Answer 884

Allows a business a reprieve from creditors Creates a payment plan for the debt Business remains in operation At least 2/3 of each debt class of creditors must consent to reorganization Ch. 11 Involuntary petitions are allowed

Answer 885

Similar to Chapter 11; but for individuals Gives individuals a reprieve from creditors Creates a payment plan for the debt Ch. 13 Involuntary petitions are not allowed

Answer 886

Represents the bankruptcy estate Can sue or be sued Oversees bankruptcy and watches for preferential creditor payments Oversees priority transfer of assets to creditors

Answer 887

Optional - Creditors decide Can be elected by creditors or can be appointed by the court

Answer 888

Trustee can void payments on antecedent (past) debts that occur within 90 days of a BK filing A Trustee cannot void a payment made to a creditor that is an even swap (contemporaneous exchange) and for new value A voidable preference must be on an old debt where the debtor is basically picking and choosing which creditors they send money to (AKA a voidable preference)

Answer 889

Made within One Year of BK to insider - Corporate officers/directors; Partners; Relatives Made within 3 Months of BK non-insider Creditor receives larger payment than BK liquidation would have granted

Answer 890

Superior to claims of other types of creditors Can take either collateral or cash proceeds from the sale of an asset If collateral doesn't satisfy amount owed; Secured Creditors become a general creditor for the difference.

Answer 891

1. BK Trustee and Attorney fees get paid before all other unsecured credit cards 2. Salaries required to continue business once BK proceedings begin 3. Any claims filed resulting from business operations that occur after involuntary BK is filed 4. Wages owed to employees 5. Retirement contributions within last 6 months 6. Consumer deposits for undelivered goods 7. Child Support & Alimony 8. Taxes 9. Other general unsecured claims

Answer 892

The bankruptcy trustee can act in the best interest of the creditors and assign the leases under contract to the creditors The trustee has 60 days to assume leases on equipment after bankruptcy is granted or the leases will be rejected

Answer 893

The pool of assets available to creditors until liquidation

Answer 894

Social security Disability payments Unemployment; Child Support; Alimony; Wages; Pensions; Annuities to the extent that they provide reasonable support for debtor and dependents

Answer 895

Inheritance/Insurance payments received within 180 days of filing for a Chapter 7 bankruptcy become part of the BK Estate

Answer 896

Court allows a creditor to garnish or take a portion of the debtor's paycheck

Answer 897

Lien on real property to secure payment for a repair/improvement done to the house A contractor builds an addition to your house and you won't pay. They can't repo your house; so they get a Mechanics Lien that sticks until you sell your house and they get paid

Answer 898

Applies to personal property like a car If the dealership does $500 in repairs to your car; you don't get the car back until you pay

Answer 899

A third party agrees to be liable for a loan Example: A parent co-signs on their child's car loan

Answer 900

A surety is primarily liable Surety can be released from liability if the creditor behaves in a way that increases the risk that they initially agreed to Surety can be released from liability if the debtor changes the loan agreement in a way that materially increases the surety's risk

Answer 901

Two sureties are guaranteeing the same debt Proportionately liable - If one cosurety is released from their obligation; then the remaining cosureties have their proportionate share reduced by the released party's percentage If one surety pays more than their proportionate share of the risk; then the other sureties must compensate them for the difference; which is called Right of Contribution

Answer 902

Similar to surety; but a guarantor is secondarily liable

Answer 903

Basically - your creditors have the right to collect from you; but not abuse you or embarrass you The can't contact you once you're represented by an attorney They can call other people to find out where you are; but they cannot identify themselves as collectors They must stop calling you at work if you send them a certified letter that says my employer doesn't allow me to take calls at work. They must call you only at reasonable hours of the day - according to your time zone; not theirs

Answer 904

Must have two or more partners. Must intend to engage in business for profit. Life of partnership is of limited duration in most cases. Agency/fiduciary relationship is created. Partnership interest is always considered personal property.

Answer 905

Yes; corporations and other partnerships can become partners of a partnership

Answer 906

Agreement can be very informal - either ORAL; IMPLIED or WRITTEN Intent is to make a profit

Answer 907

Must be WRITTEN if partnership activity falls within Statute of Frauds: A. Can't be completed in 1 year B. Even if partners reside in different states; not necessary unless within Statute of Frauds C. Neither dollar amount of transactions nor purchasing of real estate has bearing on whether partnership agreement must be in writing

Answer 908

Profit sharing is equal by default A. Unless partnership agreement says otherwise B. Unless specified; sharing of losses follows same pattern as sharing of profits

Answer 909

Joint Liability - Partners are collectively liable for debts/torts Several Liability - Partners are individually liable for debts/torts

Answer 910

Creditors must go after partnership assets first before suing partners individually

Answer 911

General Partners have joint control over the management of the partnership and its affairs Unanimous vote needed to change the structure of the partnership Each partner has full right to inspect partnership accounting and business Partner has the authority to assign their interest to another partner

Answer 912

1. Other party gets that partner's share of the profits and/or capital contribution. 2. Does NOT give assignee authority to vote on partnership business 3. Assignee does NOT have right to inspect partnership books 4. Assignor still maintains liability 5. Partner does NOT have the right to assign their interest in partnership property or allow partner's creditors to attach a lien.

Answer 913

Has authority to bind the partners to a contract.

Answer 914

A third party reasonably believes partner has authority to bind partnership to contract Cannot use apparent authority to add a new partner Cannot use apparent authority to sell or bind partnership assets

Answer 915

Partner not liable assuming notice given. Notice must be given to nullify apparent authority People who had knowledge of their role must be personally notified Public must be notified

Answer 916

Old partners: Jointly and severally liable unless creditors grant novation New partners: Only capital account at risk on preceding debts. For subsequent debts; they are joint and severally liable.

Answer 917

Partner's estate gets share of partnership profits and capital account Estate does NOT get any partnership assets Remainder of partners own partnership assets Heirs of decedent are not added as partners unless remaining partners unanimously agree

Answer 918

1. Creditors get paid; Partners can also be creditors 2. Distributions in arrears get paid 3. Partners get return of Capital accounts 4. Any remaining distributions Note: NO documents need to be filed with state to dissolve general partnership.

Answer 919

Governed by state L.P. laws Must file L.P. certificate with Sec. of State Only General Partners must be listed Future additions or subtractions of G.P. require certificate to be updated with state

Answer 920

Unlike G.P.; L.P. profits/losses are split according to capital contributions by default

Answer 921

True. A Limited Partner; however; cannot also be a General Partner and maintain limited liability.

Answer 922

No. Limited Partners are do not have a fiduciary responsibility to Limited Partnership

Answer 923

1. Right to inspect records of the business. 2. Can still vote on partnership business without losing limited liability 3. Can consult and advise partnership without losing limited liability (assuming they don't actually make the decisions)

Answer 924

1. They have no authority as an agent to bind the partnership 2. They can't participate in management decisions and maintain limited liability.

Answer 925

Limited partners are liable to the extent of their capital contributions only Exception - A Limited Partner (who cannot participate in management decisions) becomes involved with management decisions Becomes liable to third parties *IF* they knew of their involvement

Answer 926

Automatically happens 1. Once final General Partner leaves 2. Time specified in certificate lapses 3. Event specified in certificate happens 4. Unanimous consent by partners 5. Illegal activity

Answer 927

1. Majority vote required to form LLP 2. Articles of LLP filed with Secretary of State 3. Governed by laws of that State 4. Limited Liability Partnership must be in name 5. No General Partners - each LLP partner has limited liability - Exception: Negligence of partner or those under partner's supervision

Answer 928

Members can participate in management and retain limited liability Members don't own any interest in LLC property Members can assign interest; but not transfer it Members divide profits equally unless otherwise stated

Answer 929

Similar to a General Partnership; except generally; a JV is for a single business activity Example: two companies promote a concert Ability to bind other JV partners is limited JV partners still have a fiduciary responsibility to JV No state filings or paperwork necessary

Answer 930

Shareholders have limited liability to the extent of their capital contribution C Corporations have a perpetual life and continue even after shareholder death Corporations are a separate legal entity from their owners and can own property; sue; be sued Corporations must file Articles of Incorporation in state of governance

Answer 931

Ability to raise capital Limited liability - unless actions occur that pierce the veil Ease of ownership transfer

Answer 932

Commingling of assets Fraud Under-capitalization

Answer 933

Board adopts Corporate Bylaws to govern company business

Answer 934

Name; purpose; powers of Corporation Name of registered agent & incorporators Stock share classes authorized; par values Name of corporate officers NOT required

Answer 935

Double taxation

Answer 936

Promoter issues prospectus; arranges capital; and is a fiduciary of the corporation. A promoter may profit from work performed if the corporation is aware of it.

Answer 937

Promoter personally liable unless third party agrees to a novation and releases Promoter from liability; UNLESS the corporation adopts.

Answer 938

Corporations are only incorporated in one state Become adomestic corp. in that state Become aforeign corp. in any other state they do business in

Answer 939

Dividends are NOT a shareholder right Once declared; dividends become a liability to corporation

Answer 940

No voting rights Get first rights to dividends and liquidation Cumulative Preferred Stock dividends that go undeclared accumulate and Corporation must pay it before issuing dividends to Common Stockholders Participating Preferred Stock gives shareholder right to dividends in addition to what they get as Preferred Stockholders

Answer 941

Valid consideration must be given for shares Cash; property; or services performed No promises to pay or perform services

Answer 942

No Gain/Loss recognized on Treasury stock Have no voting rights Can be re-purchased below par Cannot produce dividends

Answer 943

An offer to buy shares of stock Must be accepted by corporation to be valid Offer cannot be revoked for 6 months Subscriber becomes liable once accepted

Answer 944

If committed within the normal scope of the employee's job Even if they were disobeying orders Per respondeat superior

Answer 945

Appointed by the Board of Directors Act as Agents Owe a fiduciary duty to the corporation Can have legal fees paid by corporation for defense in lawsuit brought on them from carrying out their normal duties (exception- suit brought against officers by shareholders)

Answer 946

Elected by shareholders Owe fiduciary duty to corporation Must act in good faith to avoid being liable for bad judgment Good faith is NOT a defense for negligence

Answer 947

Corporation management acting beyond what the Articles of Incorporation allow Shareholders can sue for Ultra Vires

Answer 948

Shareholders can inspect Board minutes and records only if request is in good faith

Answer 949

Boards must approve Shareholders must approve by Majority Disapproving shareholders can get an appraisal and get their stock back at current market price Merger does NOT need creditor approval

Answer 950

Shares owned only by licensed professionals (CPAs; attorneys; etc.) Limited Liability for debts Personal Liability for negligence

Answer 951

CAN be owned by Estates; Trusts; and Individuals CANNOT be owned by a C-Corporation

Answer 952

Avoidance of Double Taxation

Answer 953

No more than 100 shareholders allowed One class of stock allowed Shareholders must be US Citizens/Residents

Answer 954

A promise to pay a specific amount. There are two parties involved - maker and a payee. It can reference other transactions without harming the instruments negotiability. Example: Bank Certificate of Deposit (CD)

Answer 955

A commercial paper involving three parties- a drawer; a payee and a drawee A drawer orders a sum to be paid to a payee by the drawee May be payable on demand or in the future

Answer 956

A check is a type of draft that is payable ON DEMAND; payable to order of drawer or bearer Drawer - person writing the check Payee - person being paid Drawee - the bank

Answer 957

A check is payable on demand; even if post-dated. A negotiable time draft is not payable until the date designated for payment.

Answer 958

Seller extends credit to Buyer Buyer agrees to pay Seller - Buyer has primary liability Seller is both Drawer and Payee - Seller has Secondary Liability

Answer 959

Transfers ownership to another party

Answer 960

Must be in writing Signed by drawer/maker Be without conditions for payment (other than limitations on payment sources) Amount of money must be stated Payable to order or bearer

Answer 961

An additional promise is stated in addition to the promise to pay (like the option to purchase Real Estate) The promise to pay occurs after some action by another party or an event; it cancels negotiability Cannot allow for an alternative such as payment or some other action by the maker Note: a stated amount of payment plus a stated % of interest is OK

Answer 962

Must have delivery and endorsement If paper is exchanged for value; transferor must give an UNQUALIFIED endorsement

Answer 963

Blank - Doesnt name a new payee; transforms into a bearer paper Special - Names a new payee; transforms into an order paper Restrictive - Adds restrictions; doesnt stop further negotiation Qualified - Payment not guaranteed; without recourse added to endorsement

Answer 964

Within 7 days

Answer 965

Written amount supersedes the numerical dollar amount. For example; if the words say One hundred dollars and the numerical amount states $1000.00; the value of the paper will be $100.00.

Answer 966

First in line to pay on the note/draft Maker of a Promissory Note has primary liability and must pay according to terms of the note With a Check; no party has Primary Liability Exception: Drawee (your bank) is primarily liable to pay if they certify - i.e. promise to pay

Answer 967

Drawers are Secondarily Liable if Drawee fails to pay a Draft Endorsers (the payee) are secondarily liable Holder in due course can hold Endorser liable Exception: Endorsed Without Recourse

Answer 968

Guarantees payment of a liability

Answer 969

Occurs when you negotiate commercial paper By signing; you warrant to all future parties By not signing; you warrant to current party only

Answer 970

Warranty of Title No defense will stand against it No material alteration No knowledge of bankruptcy proceedings All signatures are legitimate

Answer 971

Holding a negotiable instrument Taking instrument in Good Faith - Even if you buy a stolen note and you dont know that its stolen; youre still an HDC Having no knowledge of defenses again instrument; i.e. problems with the instrument Giving a *present value* for the instrument (a future value doesnt count)

Answer 972

An HDC takes an instrument free of Personal Defenses (LOSE vs. HDC) Lack of consideration/value given Breach of contract/warranty Duplicate payments Fraud (in the inducement only) Voidable contracts

Answer 973

A holder in due course takes an instrument subject to Real Defenses (WIN vs. HDC) Material alterations to the instrument Forgery Bankruptcy Maker not competent to Contract Fraud in the execution

Answer 974

Offer, Acceptance, Consideration, Proper form (oral or written), Legal subject matter, 2 Competent parties

Answer 975

Can be written or oral Must be in the form/method required by offeror Must be mirror image - i.e. no changes in terms

Answer 976

Must be accepted by intended party (offeree) Acceptance can only be made by a party who knows an offer has been made and has all of the facts - AKA a meeting of the minds They must intend to accept

Answer 977

It is not acceptance; but instead becomes a counter-offer and the original offeror is now the offeree

Answer 978

When they RECEIVE the acceptance. If the offeree rejects; then accepts - whatever gets to the offeror first is what is binding.

Answer 979

If offeror dies or becomes insane before acceptance; offer is void. Contract is binding if acceptance occurs before death/insanity.

Answer 980

Offeror revokes and offeree receives revocation Offeree finds out prior to acceptance that offeror has sold the item In the case of an Option; offeror cannot revoke until the time of the option has elapsed Initial rejection by offeree doesn't void the option.

Answer 981

Some amount of consideration (like money) is put forth by offeror to keep the offer open for a stated period of time

Answer 982

These are contracts where someone becomes the exclusive provider of something in exchange for consideration Companies can't get locked in to one and then have market conditions force them to sell something at what has become an unreasonable price

Answer 983

Promises to donate are legally enforceable Basically; you can't tell a charity; Hey; if you buy this $100;000 piece of land; I'll pay for the building that will go on it; and then renege on your promise

Answer 984

Fraud in the execution Formed under extreme duress - extreme Illegal

Answer 985

Fraud in the inducement Party not competent to contract Formed under SIMPLE duress Undue influence

Answer 986

The contract is unenforceable. Example: Person signs a contract to pay $500.00 to have their lawn re-seeded but due to clerical error; it actually reads $5000.00

Answer 987

They must be in writing.

Answer 988

o Cannot be completed within one year o Involves the purchase of real estate o $500+ Sale of Goods o Co-signing and guaranteeing the debt of another

Answer 989

Prevents one party to a written contract from coming in after the fact and claiming that a certain conversation took place that conflicts with what is agreed upon in the written contract It also prevents using an oral argument to read into the meaning of what is written on paper If it's on paper; it trumps what was agreed-upon orally prior to the written contract Note: does not negate oral agreements made AFTER the contract or disallow oral words from clarifying ambiguous contract language.

Answer 990

Contracts are assignable to a third party beneficiary; but must be done so in good faith Obligations may be assignable- Assignor is still liable Assignor may be released from liability if other party grants a novation

Answer 991

Party under contract is bankrupt Party under contract dies or is incapacitated Party cannot physically complete the contract (i.e. They are in prison so can't finish building your house)

Answer 992

The Dodd-Frank Wall Street Reform Act of 2010

Answer 993

Banking Institutions maintain healthy capitalization ratios

Answer 994

Limits banking institutions from owning more than 3% of a hedge fund's total ownership interest Limits banking institutions from owning interests in hedge funds that exceed 3% of their Tier 1 Capital (Common Stock + Retained Earnings + non-redeemable; non-cumulative Preferred Stock)

Answer 995

Relationships with hedge funds must be fully disclosed to regulators

Answer 996

An employer-paid tax. Must file return and pay even if only one employee works there. Deductible to company - Not deductible by the employee. Allows employers to credit the FUTA liability by the amount of State Unemployment Tax (SUTA) they pay.

Answer 997

Paid by Employer AND Employee - Employer withholds from employee's paycheck and must pay tax matching employee's withholding If employer under-withholds; they are required to make up the difference Self-employed individuals must pay both the employer and the employee share; which is Self Employment Tax People drawing Social Security may have their benefits reduced if they go back to work and earn an income

Answer 998

Employees injured on the job get protection; even if they messed up and caused the injury themselves Exception: If the employee intentionally harmed themselves; there is no Workman's Compensation

Answer 999

They protect people ages 40 and above at companies where at least 20 people are employed

Answer 1000

Employers should promote a safe workplace and environment for their employees to work in Injury records must be kept Penalties can be both o Civil - $1;000 fine per day o Criminal - Could include imprisonment Employer can require a search warrant for OSHA to investigate their facilities

Answer 1001

Sex Race Religion National Origin

Answer 1002

EPA has the power to assess civil penalties for violating environmental laws like the Clean Air Act The EPA can sue violators Citizens can sue violators States can sue violators Citizens can even sue the EPA to force enforcement For hazardous waste sites: owners; operators; transporters; and lenders associated with the site can be held liable

Answer 1003

Governs Initial Public Offerings (not subsequent sales). Covers registration statements and accompanying information filed with SEC. Information must include audited financial statements & a prospectus. Note: Even if a company is exempt from registering under the 1934 Act; they still must adhere to the anti-fraud provisions of the Act

Answer 1004

Banks; Commercial Paper; Farmers; Co-ops; Charities; Governments Also exempt: Securities sold in ONE state; where investors are residents; 80% of business done in one state; and resales can't occur within 9 months to interstate parties.

Answer 1005

Issuer can issue $50M of securities per year and be exempt if they file a notice with the SEC Non-issuers (AKA a private individual) can sell $1.5M per year and be exempt

Answer 1006

Rule 504- Max Amount per year: $1M; Max Investors: Unlimited Rule 505 - Max Amount per year: $5M; Max Investors: 35 Unaccredited or Unlimited Accredited Rule 506 - Max Amount per year: Unlimited; Same as 505; but Unaccredited investors must be sophisticated

Answer 1007

S-1 - Long Form or S-2 and S-3 - Less Detailed and preferred by issuers

Answer 1008

``` Stocks Stock Options Stock Warrants Limited Partnership Interests - General Partnerships not allowed Bonds ```

Answer 1009

Purchasers of securities only

Answer 1010

Damages & Material Misstatements Only o Reliance on financial statements are not a requirement unless purchased more than a year after the security is registered Proving negligence is not a requirement

Answer 1011

Accountant used Due Diligence Accountant followed GAAP Damages weren't caused by accountant's work Plaintiff knew of the material misstatements

Answer 1012

The trading/selling of securities after the IPO

Answer 1013

Form 10-K Annual Report - Must be audited Form 10-Q Quarterly Report - Must be reviewed; but not audited Form 8-K - A notice of a material event; Must be filed within 4 days of event

Answer 1014

Purchases and Sellers of Securities

Answer 1015

Damages Material Misstatements Reliance on financial statements Scienter or reckless disregard for the truth

Answer 1016

Accountant must have procedures in place to: Determine if Going Concern is an issue Determine if any material related party transactions occurred Determine if material illegal acts occurred

Answer 1017

Officers; Directors and 10% Owners

Answer 1018

Proxy must give shareholders audited balance sheets from 2 most recent years o Requirement holds true even if one class of stock

Answer 1019

$1 Billion

Answer 1020

General Solicitation and Advertising now allowed

Answer 1021

Reg. A Capital ceiling raised from $5M to $50M

Answer 1022

Land, Buildings fixed to the land, and Property under/above the land.

Answer 1023

``` Must be in writing Signed Description of Property Delivered Recorded ```

Answer 1024

Must be in writing Signed Description of property Delivered

Answer 1025

No writing required if < 1 year Warranty of habitability is implied Death does not terminate a lease Sale of property does not terminate a lease

Answer 1026

Tangible property; such as cars; equipment; etc. Intangible property such as patents; trademarks; copyrights; etc.

Answer 1027

Intent for it to be a gift Delivery of the gift Acceptance of the gift

Answer 1028

Lost property - Finder's rights to property are less than Owner's Abandoned property - Finder's rights to property are greater than Owner's

Answer 1029

Undivided interest in a portion of the property Upon death; property goes to decedent's heirs

Answer 1030

Undivided interest in entire property Upon death; property goes to other joint tenants

Answer 1031

Only sales of goods are covered under the UCC.

Answer 1032

Offer - You offer to sell something at a price Acceptance - the other party accepts Consideration - Something of value has been exchanged for the goods Note: The UCC only covers sales of goods.

Answer 1033

You offer to sell something at a price and keep that offer open for a set period of time 3 months max Only merchants can make firm offers Must be in writing and signed

Answer 1034

If value of goods sold is > $500; sales contract must be in writing Exceptions: Merchants can enter into oral contracts for > $500 items. Oral contracts are binding for special or uniquely-made items (i.e. custom cabinets or custom furniture that could not be sold if buyer reneged)

Answer 1035

If terms are: FOB shipping point: Title transfers at point of shipment (i.e. when loaded on truck) FOB destination: Title and risk transfers once item is delivered

Answer 1036

The seller has the right to sell the good and no one else can stake claim to that good

Answer 1037

This good will do its intended purpose Can be disclaimed

Answer 1038

This good is the right choice for you based on the seller's expert opinion Can be disclaimed

Answer 1039

Manufacturers of goods cannot disclaim that their products will be safe Can be liable if negligent

Answer 1040

Buyer can reject some or all of the shipment if the seller didn't perform as agreed and ship what was expected Must give notice Must give seller a chance to remedy the situation

Answer 1041

Buyer must sue to recover damages within 4 years.

Answer 1042

Secured interest must be supported by consideration given. Debtor must actually own the rights to the collateral or have possession. Secured interest much be recorded

Answer 1043

Gets higher priority over others claiming rights to collateral after the perfection takes place Attachment must take place BEFORE perfection

Answer 1044

By filing a financing statement By possessing the collateral

Answer 1045

Store sells a consumer good on credit - Store retains security interest A bank finances the purchase of a consumer good - Bank retains security interest

Answer 1046

If two parties are perfected; then the first one to file wins If neither party is perfected; then the first one to attach wins

Answer 1047

Creditor holds priority over claims to collateral vs. unperfected security interests Beats perfected security interests filed after lien attachment Exceptions: Purchase money security interest; which has a 10 day grace period to be filed Buyers purchasing in the ordinary course of business are immune from security interests held by merchants

Answer 1048

Adjusted basis of property transferred + Gain recognized (if less than 80% ownership) - Boot received = Shareholder basis. If shareholders have 80% control after a property transfer, no taxable event occurs. If liabilities exceed basis on contributed property to a Corporation, a gain is recognized.

Answer 1049

Transferor's basis + Gain recognized by shareholder = Basis OR FMV of Corporate Interest - Adjusted basis of property = Gain

Answer 1050

They both use ADJUSTED BASIS, NOT FMV of property.

Answer 1051

A loss on worthless stock is an ordinary loss.

Answer 1052

Taxpayer must be original stock owner, and either an individual or partnership $50k (single) or $100k (MFJ) limit - remainder is a capital loss Must have been issued in exchange for money or property (not exchanged for services) Shareholder equity must not be in excess of $1 million Both common and preferred stock is allowed

Answer 1053

Return is due regardless of income level Return is due 3/15 if on a calendar year basis, or 2 1/2 months after end of fiscal year An automatic six-month extension is available

Answer 1054

Required if more than $500 in tax liability expected, or 100% current year liability 100% previous year liability Note: If Corporation had more than $1 Million in revenue the previous year, the first estimated payment must be based on the previous year and the remainder based on the current year.

Answer 1055

``` Taxable Income +Tax Preference Items +/- Adjustments = Pre-ACE +/- ACE Adjustments = AMTI - 40,000 Exemption = Tax Base x 20% = Tentative Minimum Tax - Regular Tax Liability = AMT ```

Answer 1056

Real Estate purchased between 1986 and 1999 using Straight Line Depreciation must depreciate over a useful life of 40 years Personal Property - use 150% MACRS, not 200% Construction must use % completion method

Answer 1057

Municipal Bond Interest Life Insurance Proceeds 70% Dividends Received Deduction Organizational Expenditures must be capitalized, not amortized Note: AMT paid gets carried forward indefinitely, but never carried back

Answer 1058

In year one In year two, if year one gross receipts were less than $5 Million In year three, if the average gross receipts for years 1 and 2 were less than $7.5 Million In year four and beyond, if the average from the previous 3 years is less than $7.5 Million

Answer 1059

Corporations have no gain/(loss) from transactions involving their own stock, including Treasury Stock. If Corporation gets property in exchange for stock, there is no gain/(loss) on the transaction.

Answer 1060

Amortization of costs begin the month the Corporation commences business activity If the Corporation doesn't amortize organization costs in year one, they can never be amortized Costs associated with offerings are neither deductible nor amortized

Answer 1061

Sales -COGS= Gross Profit Gross Profit + Rent, Royalties, Gross Dividends, Capital Gains =Total Income Total Income - Deductions (No charitable contributions, Dividends Received Deductions (DRD), or NOL Carrybacks allowed) - NOL Carryforwards =Taxable Income before charitable contributions, DRD, NOL Carrybacks x 10% =Deductible Charitable Contributions

Answer 1062

Excess charitable contributions get carried forward 5 consecutive years (No Carryback)

Answer 1063

The Board of Directors can authorized charitable contributions up to 3/15 and have them count in the previous tax year

Answer 1064

80% Interest = 100% DRD 20-79% = 80% DRD less than 20% = 70% DRD Only allowed if no consolidated return is filed. Qualified dividends from domestic Corporations only.

Answer 1065

Only take DRD % x Taxable Income Note: If DRD brings a loss situation, then you can take the full DRD If Taxable Income remains after DRD, only a partial DRD (T.I.. x DRD %) is allowed

Answer 1066

A loss on a sale to a Corporation where taxpayer owns a 50% or more interest is disallowed

Answer 1067

Capital Losses are deductible only to the extent of Capital Gains

Answer 1068

Net Short Term Capital Gains are taxed at ordinary income rates

Answer 1069

Corporations can carry back losses 3 years and carry forward losses 5 years as a Short Term Capital Loss

Answer 1070

Bad debt losses are classified as ordinary

Answer 1071

No floor on Corporate casualty loss like there is with an individual taxpayer If destroyed, the loss is the property's basis (minus proceeds) Calculation: Adjusted basis - Proceeds from Insurance = Loss If partially destroyed, take the lesser of FMV or adjusted basis reduction (minus proceeds)

Answer 1072

If loss includes NOL Carryforward, reduce the loss (add back the amount) to get the loss without the Carryforward Then, carry back the NOL 2 years starting with the earliest year and reduce the taxable income there and then move to the most recent year Any leftover NOL = This year's NOL

Answer 1073

Unlike individual taxation, investment interest expense is not limited to investment income. Investment interest on tax-free investments are NOT deductible.

Answer 1074

Schedule M-1 reconciles book to tax income before Net Operating Loss/Dividend Received Deduction Includes permanent differences (such as tax-exempt interest and non-deductible expenses) and temporary differences (accelerated depreciated tax depreciation, straight-line, etc.)

Answer 1075

Reconciles beginning to ending retained earnings Beginning Unappropriated Retained Earnings + Net Income + Other Increases - Dividends paid - Other decreases = Ending Unappropriated Retained Earnings

Answer 1076

Like M1, but for Corporations with $10M+ in assets

Answer 1077

Consolidation election is binding going forward Dividends between them are eliminated, Advantage- Gains are deferred, Disadvantage- losses are deferred. One AMT exemption One accumulated earnings tax allowed Note: In order to consolidate, the parent must have 80% voting power and own 80% of the stock value

Answer 1078

Distribution is a dividend to the extent of current accumulated earnings and profits (ordinary income) Then, remainder (if any) is a return of basis. Then, add'l remainder (if any) is a Capital Gain Distribution amount = FMV of Property + Cash - Liability Assumed Shareholder basis = FMV of Property + Cash received (basis not reduced by the attached liability)

Answer 1079

1. Distribution is a dividend to the extent of current and accumulated earnings and profits 2. Shareholder basis is then exhausted 3. Remainder, if any, is a Capital Gain

Answer 1080

Beginning Accumulated Earnings and Profits + Net Income + Gain on Distribution (if not already in book income) - Distribution (but cannot create a deficit) - NOL of prior years = Ending Accumulated Earnings and Profits

Answer 1081

If Capital Property, then Capital Gain If Non-Capital Property, then Ordinary Income Gain characterization is the same for both the Corporation and the shareholder

Answer 1082

Corporation: Depends on if property is capital in nature, otherwise ordinary loss Individual: capital loss only

Answer 1083

No G/L to parent company

Answer 1084

Consented by the Board of Directors but not yet paid Treat as if distributed by the end of the year

Answer 1085

No banks or financial institutions can be PHCs 5 or fewer individuals own more than 50% of the stock 60% of the PHC's income must be from passive means PHC tax is self-assessing - 20% tax rate on undistributed PHC Income

Answer 1086

Not Self-Assessing like a PHC

Answer 1087

Take greater of $250,000 ($150,000 for Service Corps) or the legitimate balance based on future needs (i.e. purchasing a building)

Answer 1088

Only individuals, estates and trusts can be shareholders Domestic only, no international S-corps or foreign shareholders Up to 100 shareholders allowed, and only one class of stock allowed Calendar tax year only

Answer 1089

Election for S Corp status must be made by 3/15 and counts as being an S Corp since the beginning of the year To make election, 100% of the shareholders must consent

Answer 1090

To terminate election, 50% of the shareholders must consent No S Corp election allowed for 5 years after termination S Corp termination effective immediately following an act that terminates status

Answer 1091

These items are included on Schedule K, not in ordinary income: ``` Foreign Taxes paid deduction No Investment Interest expense Section 179 Deduction 1231 Gain or Loss Charitable Contributions Portfolio Income (dividends or interest) ```

Answer 1092

Beginning Basis +Share of Income Items (including non-taxable income!) -Distributions (cash or property) -Non-deductible expenses -Ordinary Losses (but don't take income below zero) = Ending basis

Answer 1093

FMV of Assets @ S-Corp Election Date - Adjust. Basis of Assets = Built-in Gain x 35% Corporate Rate

Answer 1094

Property transferred while taxpayer is living

Answer 1095

$14,000 per year per spouse to each individual In order to get the exclusion, the recipient must immediately acquire a present interest in the property and get unrestricted access to the property and all of its benefits

Answer 1096

If the Gift is an annuity, use Present Value to determine the gross Gift

Answer 1097

Gross Gifts - 1/2 of Gifts (treated as given by spouse) - Total # of donees x $14,000 exclusion = Taxable Gift

Answer 1098

Recipient must gain ownership and all rights to property to get the annual exclusion. If recipient merely gains a future ownership, then the present value of the Gift is 100% taxable to donor and cannot exclude from Gift tax calc

Answer 1099

Tuition and medical expenses paid directly to the provider organization (note: NOT books or dorm fees) Political contributions Charitable Gifts Unlimited Gifts to spouse

Answer 1100

If a loss on sale, basis is FMV on the date of the Gift If a gain on sale, basis is same as donor's basis No G/L if donor basis is less than sales price, and sales price is less than FMV @ Gift date

Answer 1101

Calendar-year basis only Due April 15

Answer 1102

Income distributions are optional Accumulation of income ok Charitable contributions ok Contributions using tax-exempt income are not deductible Allowed personal exemption of $100 Key Point: Distribution of Trust corpus (principal) ok

Answer 1103

Income distributions mandatory Accumulation of income disallowed No charitable contributions Distribution of Trust corpus DISALLOWED Allowed personal exemption of $300

Answer 1104

Trusts can have a Net Operating Loss Any unused NOL flows through to the beneficiaries

Answer 1105

Expenses and fees from tax-exempt income are not deductible for either a Complex or Simple Trust

Answer 1106

After the death of the donor

Answer 1107

The First $5,250,000 is exempt with a 40% tax on amount above that

Answer 1108

Medical expenses paid after death, but incurred within 1 year of death go on decedents personal tax return

Answer 1109

Estates can have a Net Operating Loss Any unused NOL flows through to the beneficiaries

Answer 1110

Cash and Property FMV at death, or alternate valuation.

Answer 1111

When two non-spouses jointly own property FMV at death X % Ownership = Amount in Estate

Answer 1112

1/2 of marital assets go to deceased spouses Estate

Answer 1113

A, B, and C own property If A dies, FMV of As share goes to heirs

Answer 1114

Property received through inheritance not income to recipient Property value is FMV at date of death or 6 months later If property is sold prior to 6 month date and the alternative date is used, FMV at date of sale is used to value property Basis in property automatically assumes LT holding period

Answer 1115

DNI = Taxable Income Expenses (from income production) Trust beneficiaries only pay tax if earnings are distributed Estate beneficiaries pay tax on DNI, regardless if distributed

Answer 1116

If a tax exempt organization has more than $1,000 of UBI, it must file a Form 990-T

Answer 1117

Organized and Operated exclusively for exempt purposes No earnings can benefit an individual or private shareholder Cant attempt to influence legislation as a major part of its activities Cant campaign politically

Answer 1118

Cash Basis. Note: This basis is NOT allowed for Corporations, Partnerships with a C-Corp partner, or for inventories.

Answer 1119

*MSA/HSA contributions *Investment penalties for early withdrawal *Self-employed medical insurance premiums *Self-Employment Tax (approx. 50%) *IRA Contributions *Student loan interest (can't be another taxpayer's dependent) *Moving expenses *Alimony *Attorney fees in discrimination lawsuit

Answer 1120

Investment interest expense in excess of investment income Charitable contributions Excess Section 179 Capital losses AMT Paid Passive Activity Losses

Answer 1121

No carryback Can carry forward indefinitely

Answer 1122

Carry forward to next year. Use in any year is limited to taxable income.

Answer 1123

Indefinitely.

Answer 1124

Can be carried forward 5 years.

Answer 1125

It can be carried forward indefinitely. It may be applied against future *regular* income tax, but not against future AMT tax liability.

Answer 1126

$3,000 net capital loss can be taken in each year, the rest is carried forward indefinitely. The loss retains its character (STCL or LTCL).

Answer 1127

Corporate capital loss carryovers may be carried back 3 years and forward 5 years. Individual capital losses are carried forward indefinitely. Individual capital loss carryovers retain their character (STCL or LTCL). Corporate loss carryovers are carried forward as STCL only.

Answer 1128

Gross Profit / Contract Price

Answer 1129

Contract Price = Sales Price - Liability assumed by buyer

Answer 1130

$1,000,000

Answer 1131

$25 per person for gifts Service awards up to $400

Answer 1132

They may only offset active business income. Note: W2 wages are considered active business income.

Answer 1133

Only passive income such as rental income or limited partnership income. Note: Wages are ACTIVE (cannot be offset by passive) and Interest/Dividends are PORTFOLIO (cannot be offset by passive)

Answer 1134

Neither. They are portfolio income.

Answer 1135

Mid-year/Mid-quarter

Answer 1136

For depreciation when 40% or more of all purchases occur in 4th quarter.

Answer 1137

15 year straight line (S/L)

Answer 1138

Up to $5,000 Amortized over 180 months Reduced dollar-for-dollar by amount over $50,000

Answer 1139

On Schedule A: Amounts in excess of 10% of AGI may be deducted

Answer 1140

Accident or disability insurance premiums are not deductible.

Answer 1141

Must be a citizen of North America Must live with you, or if they do not, must be mother/father or a relative closer than a cousin. Benefactor must provide more than 50% support to the beneficiary.

Answer 1142

Foreign INCOME and REAL ESTATE taxes are deductible. Foreign personal property taxes are NOT deductible. Foreign tax assessments are not deductible- they are added to the basis.

Answer 1143

Gross investment income - investment expense in excess of 2% of AGI = net investment income Investment interest expense in excess of net investment income is deductible.

Answer 1144

Investment interest expense on tax-free securities is not deductible.

Answer 1145

They are deductible if they represent prepaid interest on purchase of a new home or improving a home. Refinance points are amortized over the life of the mortgage.

Answer 1146

Deducted at fair market value (FMV), up to 30% of AGI

Answer 1147

Deduction is taken for adjusted basis in the property, up to 50% of AGI.

Answer 1148

No. It decreases the fair market value (FMV) of the property.

Answer 1149

Take the lower of either A) Decrease in FMV or B) Basis in property (call this number GROSS LOSS) GROSS LOSS - insurance proceeds received - $100 - 10% of AGI = Deductible casualty loss

Answer 1150

Deductible in excess of 2% of AGI Continuing Education - if required to keep your job Business travel 50% Meals and entertainment Union Dues Tax prep fees Legal fees to collect alimony Appraisal fees to value casualty loss of charitable contributions

Answer 1151

Medical Casualty Gambling Investment Interest Expense

Answer 1152

Must be resident of North America Under age 19, or under age 24 if a student

Answer 1153

Must be citizen of North America Must live with you, unless mother/father or relative closer than a cousin You must provide more than 50% support to the individual

Answer 1154

Child's unearned income - early withdrawal penalties - $1,000 - Greater than $1,000 or child's itemized deduction related to unearned income = Amount taxed at parents' rate

Answer 1155

Yes, if they each own a small business. All non-business income is cash basis.

Answer 1156

15.3% of net earnings from self-employment (Note: executor of an estate is NOT self-employment income)

Answer 1157

A tax credit which takes the taxpayer's tax owed on the return below zero, resulting in a refund to the taxpayer. Earned Income Credit (EIC), American Opportunity Credit and the Additional Child Tax credit. Note: the REGULAR child tax credit is NOT refundable.

Answer 1158

American Opportunity Credit - per student Lifetime Learning Credit - per taxpayer Note: The American Opportunity Credit is refundable.

Answer 1159

The lesser of: 90% of current year's total tax 100% of prior year's total tax 110% of prior year's total tax (if AGI is $150,000 or more)

Answer 1160

Deductible: Costs incurred to PRESERVE soil/water Non-deductible: Costs incurred to drain wetlands or prep for irrigation (i.e. improve land)

Answer 1161

3 years, generally 6 years if 25% or more of gross income was omitted The clock starts on the LATER of the due date or the filing date of the return. There is NO STATUTE OF LIMITATIONS for either fraud or failure to file a required return.

Answer 1162

It is treated as a STCL

Answer 1163

Refunds must be claimed within 3 years of the return due date or within 2 years of being paid, whichever is later.

Answer 1164

Premiums paid by an employer for coverage in excess of $50,000 per employee are includable in income.

Answer 1165

When they are not in return for services rendered, AND The money is used *only* for tuition and books Note: Scholarships for room and board are includable in income.

Answer 1166

State & municipal bond interest US EE Savings Bond interest (note: HH bond interest is taxable)

Answer 1167

S-corporation (actually distributions) Life insurance

Answer 1168

Payments made to make you whole are NOT taxable (i.e. to pay for losses of property, body parts or earning ability) Any payments for punitive damages ARE taxable.

Answer 1169

No - similar to an award for damage to make a person whole.

Answer 1170

Alimony IS taxable. Child support and divorce property settlements are NOT taxable.

Answer 1171

NO, they are not deductible. However tax benefits are available through the adoption CREDIT.

Answer 1172

2nd Year: (3rd year - 2nd year - $15,000) 1st Year: 1st Year Alimony Paid - Avg alimony paid in 2nd & 3rd years - $15,000 - Recapture from 2nd year =1st Year Alimony Recapture Total Recapture = 1st Year Recapture + 2nd Year Recapture

Answer 1173

Can be carried back 2 years If any left, can be carried forward 20 years.

Answer 1174

Traditional IRA = deductible Roth IRA = not deductible

Answer 1175

They must be married at the end of the year. If one spouse dies, they must be married at the end of the year.

Answer 1176

Must have a dependent child Must provide more than 50% of the child's support Must live with them more than 50% of the year

Answer 1177

Must have a dependent child. Essentially gets MFJ status for the year of death + 2 tax years

Answer 1178

Restricts a state's authority to tax interstate commerce

Answer 1179

A state can't collect income tax on sales within its borders as long as the orders are filled and shipped outside of the state Applies to tangible property only Does not protect a Corporation in the state where incorporated Does not protect from taxes using metrics other than income (Ex: Sales Tax)

Answer 1180

Uniform criteria for determining taxable income of multi-state corporations Also known as the Multi-State Tax Compact

Answer 1181

Designed to ensure a company is not taxed more than once on its income Forces a corporation to segregate Business Income from Non-Business Income

Answer 1182

Part of the corporation's regular course of business Includes acquisition of tangible and intangible property if such activities are part of the regular trade or business

Answer 1183

False. Income and expenses flow through to the partner to be taxed via a Form K-1.

Answer 1184

Neither gain nor loss is recognized in an exchange of property for a partnership interest. It is a non-taxable event.

Answer 1185

Initial basis for partnership property is the basis of the property that was contributed or exchanged for the partnership interest.

Answer 1186

It is a taxable event; treated the same as compensation for the services. The taxable income equals the % of partnership interest received times the FMV of the partnership. i.e. the FMV of the interest received is the taxable income for the service provider.

Answer 1187

The basis in the partnership interest is the amount of taxable service revenue provided by service provider.

Answer 1188

The partnership inherits the holding period of the asset contributed. The exception of inventory- the holding period begins when contributed.

Answer 1189

Tax treatment is the same as that of an individual taxpayer. However syndication fees are not deductible or amortized.

Answer 1190

COGS Wages - except for partners Guaranteed payments to partners Business bad debt (if on accrual basis) Interest paid Depreciation (except section 179) Amortization (Startup costs; goodwill; etc)

Answer 1191

Losses cannot be taken beyond a partner's basis in the partnership Losses in excess of basis are carried forward until basis is available

Answer 1192

They appear in partner's income during the year in which the partnership's fiscal year CLOSES.

Answer 1193

Health insurance; life insurance and other benefits paid on behalf of the partner are treated as guaranteed payments and are includable as self-employment income.

Answer 1194

Partner's % share of ordinary income from partner's K-1 + Guaranteed payments - Partner's % share of section 179 expense from K-1 = Self-employment income (subject to SE tax)

Answer 1195

Partner's basis is basis of goods exchanged or for services exchanged is FMV of partnership interest received. If purchased; purchase price less liabilities incurred = basis. For a gifted interest in a partnership; gift basis rules apply.

Answer 1196

Foreign tax paid Investment interest expense Section 179 expense Charitable contributions Mnemonic: IFC179

Answer 1197

Passive Income Portfolio Income 1231 Gain or Loss Mnemonic: PP1231

Answer 1198

Beginning partnership basis + Capital contributions + Share of ordinary partnership income + Capital gains + Tax-exempt partnership income (DON'T FORGET!) = Ending partnership basis

Answer 1199

Money distributed Adjusted basis of property distributed Partners's share of ordinary losses Partnership is relieved of a liability (considered a distribution)

Answer 1200

Partnership getting a loan Capital contributions Ordinary income Capital gains Tax-exempt income

Answer 1201

If the partnership gets a loan; this INCREASES basis. If partnership is relieved of a liability; this DECREASES basis.

Answer 1202

They do not affect basis- they are already included in ordinary income; which affects basis.

Answer 1203

1. Increase basis (all items; including tax-exempt income) 2. Distributions 3. Losses (limited to basis)

Answer 1204

It must be the same as 50% of the partners and use the same tax year for 3 years once adopted.

Answer 1205

The taxable year closes with respect to the decedent partner's interest ONLY.

Answer 1206

1. They have inventories 2. Partnership is a tax shelter 3. Has a corporate partner 4. Gross receipts are $5 Million or more Exception: If gross receipts are $1 Million or LESS and Partnership maintains inventories; Cash method is ok.

Answer 1207

When there is less than 2 partners (only one partner) When 50% of the partnership interests sell within a 12 month period- partnership IMMEDIATELY terminates.

Answer 1208

Gain or Loss = Amount realized on sale - basis in partnership interest

Answer 1209

Basis = Capital account + Liabilities assumed

Answer 1210

As ordinary gain/loss. Items that fall into non-capital category would be unrealized receivables; appreciated inventory; and similar.

Answer 1211

FMV of Assets (non-capital) - Adjusted basis of assets = Ordinary gain x Partner's % interest = Partner's share of gain Note: No gain or loss will be recognized by a partnership upon distribution of property.

Answer 1212

1. Money distributed 2. Adjusted basis of unrealized receivables and inventory 3. Adjusted basis of other property Note: Only MONEY distributions will trigger a gain in a partnership distribution.

Answer 1213

Only in a liquidating distribution.

Answer 1214

1. Money was distributed 2. Unrealized receivables were distributed 3. Appreciated inventories were distributed Otherwise; no loss recognized.

Answer 1215

Cost of property + Purchase expenses + Debt assumed + Back taxes and interest paid = Basis. Note: taxes and interest related to time when a taxpayer did not own the property are not deductible - they are added to basis.

Answer 1216

Sold at a gain: use donor's basis Sold at a loss: use lesser of donor's basis or FMV at time of distribution Sold in between donor's basis and FMV: No gain or loss

Answer 1217

FMV at date of death or alternate valuation date (6 months later) If alternate date is elected by property is sold before 6 month window; use FMV at date of death. Property inherited is LTCG property regardless of how long it is held by the recipient.

Answer 1218

Holding period of new stock received from a dividend takes on the holding period of the original stock

Answer 1219

Real for real or personal for personal business property only US property only

Answer 1220

Cash received + unlike property received + liability passed to other party

Answer 1221

DO NOT subtract the boot paid amount from the cash received Ignore the boot paid amount from the mortgage completely

Answer 1222

Occurs when you receive money for a property involuntarily converted There is no gain if you reinvest the proceeds completely If proceeds not completely reinvested; gain is LESSER of realized gain or amount not reinvested.

Answer 1223

Must live there 2 out of 5 years Loss on sale of home is NOT deductible

Answer 1224

30 Day rule applies Disallowed loss adds to basis of new stock New stock takes on date of acquisition of old stock

Answer 1225

Ancestors; siblings; spouse; descendants; corporation or partnership where you're a 50% shareholder Seller cannot take a loss on sale to a related party; but gain is always recognized. Related party gets to use the disallowed loss when they sell. Related party's holding period begins when they acquire the property. In-laws are NOT related parties.

Answer 1226

capital losses only offset capital gains Carryback 3 years - if you elect NOT to carryback; you lost the option in the future Carry forward 5 years - only as STCL

Answer 1227

Inventory; Business interest; Accounts Receivable; Covenant not to compete Goodwill IS a capital asset

Answer 1228

Net all STCG and STCL Net all LTCG and LTCL Add together Deduct $3;000

Answer 1229

$3;000 per year. Unused is carried forward and taken $3;000 each year. No carryback is allowed.

Answer 1230

Real or Personal Business Property held more than a year Inventory is never 1231 Property

Answer 1231

Casualty Losses on 1231 Property - Net the losses * Net Loss = Ordinary Loss * Net Gain = Combine with other 1231 Gains 1231 Net Loss - If 1231 Losses exceed gains; treat as Ordinary Loss 1231 Net Gain - If 1231 Gains exceed losses; treat at LTCG 1231 Gain = LTCG 1231 Loss = Ordinary Loss

Answer 1232

To the extent of depreciation; treat as ordinary gain Remainder is 1231 gain; which is LTCG - There are no 1245 Losses 1231 Gain = LTCG 1245 Gain = Ordinary Casualty Gain = LTCG 1231 Loss = Ordinary 1245 Loss = N/A Casualty Loss = Ordinary

Answer 1233

1250 property is Real Estate that is not 1231 Property Use 1250 for Gain only. For losses; use 1231 Individuals: Post-1986 property with a gain is 1231 LTCG If Straight Line depreciation is used; don't use 1250 - Entire gain is 1231 Corps: Section 291 requires 20% of depreciation classified as ordinary gain Remainder is 1231 LTCG

Answer 1234

When the asset is held less than one year.

accounting auditing Flashcards

(1267 cards)