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Flashcards in Basic Theory and Financial Reporting Deck (65):
1

Installment Sales

Selling goods on credit but you can't set up a bad debt expense account because you don't know the collectability of your receivables.

Revenue is recognized as cash is collected. Gross profit is deferred to future periods and recognized proportinonately to collection of the receivables.

2

Installment Sales Realized Income (Gross Profit) Formula

1. Cash Collections x Gross Profit % = realized income
Net Sales (Installment) -COGS (Installments)=Gross Profit.
Gross Profit/Net Sales= GP %

3

Installment Sales Deferred Income (Gross Profit) Formula

End AR x Gross Profit % = Deferred Income
Net Sales (Installment) -COGS (Installments)=Gross Profit.
Gross Profit/Net Sales= GP %
Beginning AR in Installment Sales - Installment sale collections = End AR

4

Cost recovery method of accounting

Gross profit on an installment sale is recognized after cash collections equal to the cost of sales is have been received.

5

Accrual Basis

Revenues are earned when they are earned. Expenses are recognized when they are incurred.

6

Accounting Standards Codification (ASC)

Replaced all previously issued non-SEC accounting literature. Codification did not change GAAP, it just restructured the existing accounting standards.

7

Statements of Financial Accounting Concepts SFAC

Not GAAP. The objectives and concepts for use in developing standards of financial accounting and reporting. (Used by FASB)

8

Materiality

An error or ommission which would affect the judgement of a reasonable person relying on the financial statements.

9

SFAC No. 8 Ch 3. Qualitative Characteristics (Fundamental)

Relevance:
-Predictive
-Confirmatory value
Fatihful Representation:
-Completeness
-Neutrality
-Free from error

10

SFAC No. 8 Ch 3. Qualitative Characteristics (Enhancing)

Comparability (also relates to faithful representation)
Verifiability - Direcect & Indirect
Timeliness
Understandability

11

Asset
Three part definition:

1. Obtain it or control it today
2. It will provide benefits in the future
3. It occurred as a result of a past transaction

Asset continues as an asset until collected
Valuation (contra asset) accounts are part of related assets.

12

Liability
Three part definition:

1. owe it as of today
2. you will sacrifice something in the future
3. it occurred as a result of a past transaction

Liability remains until settled or discharged
Valuation (contra liability) accounts are part of related liability.

13

Equity (Net Assets)

Owner's residual interest in the assets of an entity that remains after deducting liabilities.
A=L+SE
A-L=SE
Transactions or events that change owners' equity include revenues and expenses, gains and losses, investments by owners, distribution to owners, and changes within owners equity (does not change total amount).

14

Revenues

Increases in assets or decreases in liabilities (Unearned revenue when revenue is earned) during a period from delivering goods, rendering services, or other activities constituting the entity's major or central operations (ongoing operations).

15

Expenses

Decreases in assets or increases in liabilities during a period from delivery of goods, rendering of services, or other activities constituting the entity's major or central operations.

16

Gains (Losses)

Increases (Decreases) in equity from peripheral and incidnetal transactions. Not part of major or central operations.

17

Comprehensive Income SFAC no. 6

the change in equity of an entity during a period from transactions and other events of nonowner sources (all equity amount changes except investment by owners and distributions to owners).

18

Recognition

The process of reporting an item on the financial statements of an entity, according to FASB Conceptual framework.

19

Which accounting literature is included in in the FASB Accounting Standards Codification?

AICPA Statements of Position
FASB Statements
Accounting Research Bulletins

20

The expected cash flow (present value) approach
SFAC 7

Uses all expectations about possible cash flows instead of the single most-likely cash flow. Focuses on direct analysis of the CF in question and on explicit assumptions about the range of possible estimated CFs and their respective probabilities. (When you see the word expected - think "probability")

21

Multiple-Deliverable Revenue Arrangements

Exception to the general revenue recognition principles.
Must meet two conditions:
1. delivered item has a value on a stand-alone basis.
2. arrangement includes a right of return for the delivered item, the undelivered item must be substantially in control of the vendor.

22

Milestone Method

May be used in accounting for R&D Arrangements in which revenue (payments) to the vendor is contingent on achieving one or more substantive milestones related to deliverables or units of accounting.

23

Revenue Recognition IASB

Must meet all 5 components
1. significant risks and rewards of ownership of the goods are transferred to the buyer
2. entity does not retain either a continuing managerial involvement or control over the goods
3. the amount of revenue can be measured reliably
4. It is probable that economic benefits will flow to the entity from the transation, and
5. the cost incurred can be measured reliably.

24

Revenue Recognintion for Services IASB

Revenue can be recognized from rendering services when the outcome can be estimated reliably. (Percentage-of-completion method). Meet 4 criteria:
1. The amount of revenue can be measured reliably
2. it is probable that economic benefits will flow to entity
3. the stage of completion at the end of the reporting period can be measured reliably,
4. the costs incurred and the costs to complete the transaction can be measured reliably.
If these aren't met, should be recognized using the cost recovery method.

25

FASB SFAC 6 Elements of Financial Statements

10 elements
assets, liabilities, equity, investments by owners, distribution to owners, comprehensive income, revenues, expenses, gains, and losses.

26

IASB Framwork Elements of Financial Statements

only 5 elements (FASB SFAC 6 has 10 elements)
assets, liabilities, equity, income, and expenses.

27

First-Time Adoption of IFRS
"date of transition to IFRS"

the beginning of the earliest period for which an entity presents full comparative information under IFRS in its first IFRS F/S

28

First-Time Adoption of IFRS
"first IFRS reporting period"

the latest reporting period covered by an entity's first IFRS financial Statements.

29

COGS Formula

Cash paid for purchases
+ Increases in AP
+ Decreases in inventory
= COGS

Cash payments to suppliers
+ Increase in AP
– Increase in inventory
Cost of Goods Sold

30

SFAC 6 Defines Allocation

The process of assigning or distributing an amount according to a plan or formula and amortization as an allocation process for accounting for prepayments and deferrals. Allocation is broader in scope and thus includes amortization. Specific examples of amortization include recognizing expenses for depletion, depreciation, and insurance, and recognizing earned subscription revenues.

31

Measurement bases included in Financial Accounting

Historical Cost
Current Market Value
Discounted Cash Flows
Replacement Cost

32

Revenue on a franchise agreement

Should be recognized when the franchisor has substantially performed all material services and conditions, and collectibility is reasonably assured. All services are performed and the refund period has expired.

33

Barter Goods

If the goods are similar in nature and value, then no income or expense is recognized.

34

SFAC 5 principle of immediate recognition

requires that items carried as assets in prior periods that are discovered to be impaired in value be charged to expense (e.g., a patent that is determined to be worthless).

35

SFAC 6 "Recognized"

SFAC 6 states that recognition is the process of formally recording or incorporating an item into the financial statements of an entity.

36

For an item to be recognized in the F/S (IFRS)

IFRS requires that it meets the definition of an element and can be measured reliably.

37

The FASB Accounting Standards Codification

Effective 7/1/09 Supersedes all previously issued standards and is the only source of US GAAP. (The most authoritative)

38

Identify the operating procedure for issuing new FASB statements

A new statement is issued after a majority vote of the members of FASB.

39

SFAC 8 states that information provided by financial reporting pertains to

Individual business enterprises rather than to industries or an economy as a whole or to members of society as consumers.

40

If Beginning Inventory is (under)/overstated

cost of sales will be going in the same direction as the beginning inventory

41

If Ending Inventory is (under)/overstated

cost of sales will be going in opposite direction as the beginning inventory

42

3 types of accounting changes

1. Changes in accounting principle
2. Changes in accounting estimate
3. Changes in reporting entity

43

Changes in accounting principle

Any change from one generally accepted accounting principle to another to another generally accepted accounting principle.
Ex. change of inventory flow method (FIFO, LIFO Weighted Avg/Moving Avg. )
*changes in depreciation, amortization and depletion are treated as changes in accounting estimates.

44

Double declining Depreciation method

1/life of the asset change to percentage and multiply by 2= double declining balance.

45

Restructuring charge

Unusual or infrequent item
A program that is planned and controlled by management and materially changes either the scope of the business undertaken by the company, or the manner in which that business is conducted.

46

Comparative Financial Statements

SEC requires that a 2 year comparative B/S and a 3 year comparative I/S and Statement of CF be presented.

47

Calculate Capital

Beginning Capital + Investments + Income - Drawings = Ending Capital

48

Error Corrections- IFRS overstated sales in PY

Restate the PY F/S presented for comparative purposes.

49

Prior period error under IFRS

Prior period errors include arithmetic mistakes; accounting policy application mistakes; and recognition, measurement, presentation, and disclosure mistakes.

50

Three criteria for a prior period adjustment

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

51

Change in Accounting Estimates under IFRS

Accounted for prospectively in the period of change and in future periods.

52

When the estimated useful life of the asset is revised.

The unamortized cost should be allocated over the remaining periods of the new useful life.

53

The effect of a change in accounting principle which is inseparable from the effect of a change in accounting estimate

Should be accounted for as a change in accounting estimate, accounted for in the period of change and also in any affected future periods.

54

Changes in accounting principle, IFRS

Changes in accounting principle may occur when the change is required by an IFRS or when it provides reliable and more relevant information.

55

Changes in accounting principle

Change from the use of one generally accepted accounting principle to another generally accepted accounting principle.

Retrospective application

56

Changes in estimates

Changes of estimated FS amount based on new information or experience.

Prospective

57

Changes in entity

Change that results in the financial statements representing a different entity.

Retrospective application

58

Restatement

The process of revising previously issued financial statements to correct an error.

59

Sum of the years Depreciation

n*(n+1)/2
n= useful life of the asset

ex. 4 year life, 10,000
4*(4+1)/2=10
4/10*10,000-salvage value

60

Voluntary change in accounting method, under IFRS

A voluntary change in accounting method is given retrospective application by applying the policy as if the new policy had always been applied.

60

Double Declining Balance

(2 x SL Rate) x Net book value at the beginning of each year
(Salvage value is not deducted from the depreciation base.)
Find SL depreciation amount per year, divide by the (HC-SV amount)
the percentage is x 2 for the DDB

61

Reclassification adjustment

Adjustment made to avoid double counting in comprehensive income items that are displayed as part of net income for a period that also had been displayed as part of other comprehensive income in that period or earlier periods.

62

SEC's regulation S-X

The form and content of F/S to be filed with the SEC.

63

IFRS, interest and dividends received

May be reported on the statement of cash flows as either operating or investing activities. Although an entity has reporting discretion, it must be reported consistently.

64

IFRS, interest and dividends received

May be reported on the statement of cash flows as either operating or investing activities. Although an entity has reporting discretion, it must be reported consistently.