Advanced Concepts of Financial Accounting & Financial Statement Analysis Flashcards
(53 cards)
The two main types of pension plans are:
1) Defined Contribution plan
2) Defined benefit plan
Is a type of retirement plan to which an employer makes periodic contributions of assets to be se aside for employees’ future benefit
Pension plan
The employer’s only obligation is to make periodic deposits of the amounts defined by the plan’s formula in return for the services rendered by employees. Thus, the employer does not guarantee the amount of benefits that the employee will receive during retirement.
Defined contribution plan
Defines an amount of pension benefit to be provided to each employee. The employer is responsible for providing the agreed benefits and, therefore, bears actuarial risk and investment risk.
Defined benefit plan
Is the actuarial present value of all benefits attributed by the pension benefit formula to employee service rendered prior to that data.
Projected benefit obligation (PBO)
Is recognized in the employer’s year-end balance sheet if the PBO exceeds the fair value of plan assets.
Pension liability
Is recognized if the fair value of plan assets exceed the PBO
Pension asset
The lessee recognizes in its financial statements the leased asset and a leased liability at an amount equal to the present value of the minimum lease payments.
Capital lease
Accounted for as a long-term rental contract
Operating lease
A lease agreement transfers substantially all the benefits and risk of ownership of the asset of the lessee if at least one of the following criteria is met:
1) The lease provides for the transfer of ownership of the leased property
2) The lease contains a bargain purchase option (BPO)
3) The lease term is 75% or more of the estimated economic life of the leased property
4) The present value of the minimum lease payments is at least 90% of the fair value of the leased property.
Involves uncertainty as to possible loss or gain
Contingency
A contingent liability and a loss contingency are recognized when
A loss contingency is probable and can be reasonably estimated
A gain contingency is recognized in the financial statements
Only when it is realized
Foreign currency initial transaction measurement must be
In the reporting entity’s functional currency
A foreign currency transaction gain or loss results from a change in the exchange rate
1) Between the date the transaction was recognized,
2) The financial statements date, and
3) The date the transaction is settled.
Investment in common stock: when the investor has little or no influence over the investee (holds less than 20% of the voting interests), the investment is measured
At fair value
Investment in common stock: When the investor has significant influence over the investee (holds between 20% and 50% of the voting interests), the investment in equity securities is accounted for using
The equity method
Investment in common stock: When an acquirer obtains control of one or more business (acquires more than 50%of the voting interest), the transaction is a business combination and
The acquisition method must be used
Regardless of the percentages of ownership, when one entity (parent) controls another (subsidiary),
Consolidated financial statements must be issued by the parent
Contributed capital, treasury stock, retained earnings, and all items included in accumulated other comprehensive income are considered:
Equity accounts
Is an entity’s ability to pay its current obligations as they come due and remain in business in the short run.
Liquidity
Current assets minus Current liabilities
Working capital
Current assets divided by Current liabilities
Current ratio
( Cash and equivalents plus Marketable securities plus Net receivables) divided by Current liabilities
Quick (acid-test) ratio
